Bumbershoot Holdings LP, an investment management firm, published its fourth quarter 2020 investor letter – a copy of which can be downloaded here. Bumbershoot Holdings L.P. generated a negative gross return of -6.61% for the full-year 2020, while its S&P 500 benchmark delivered a 16.26% return in the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Bumbershoot Holdings LP, in their Q4 2020 investor letter, mentioned Charles & Colvard, Ltd. (NASDAQ: CTHR) and shared their insights on the company. Charles & Colvard, Ltd. is a Morrisville, North Carolina-based jewelry company that currently has a $93.4 million market capitalization. Since the beginning of the year, CTHR delivered a 160.16% return, impressively extending its 12-month gains to 380.99%. As of April 07, 2021, the stock closed at $3.20 per share.
Here is what Bumbershoot Holdings LP has to say about Charles & Colvard, Ltd. in their Q4 2020 investor letter:
“Next up is Charles & Colvard (CTHR:NCM), which along with PFB (PFB:TSX), the subject of last year’s “case study,” represent the two largest positions from within our Micro strategy.
Charles & Colvard is a jewelry business.
More specifically it is a moissanite jeweler; and even more than that it is a small, direct-to-consumer (DTC) brand that is targeting to become the market leader in sustainable, lab created gems & fine jewelry.
The company has a neat history. The important thing to recognize about it, is that C&C was developed from within LED light manufacturer, Cree (CREE:NGS) in the mid-90s. Cree had long been associated with the use of silicon carbide as its substrate of choice. What it discovered, however, was that clear, low impurity, silicon carbide crystals could also be cut into synthetic gemstones known as Moissanite–a rare, but naturally occurring crystalline discovered by French chemist, Henri Moissan.
Armed with substantial technical knowhow, as well as patent protections, Cree spun out the business in 1997 to let it survive on its own, mostly as a wholesaler of loose moissanite gemstones.
In recent years this shifted to a DTC model, as C&C’s corporate history has blended with powerful trends in e-commerce & better acceptance of lab-created gems. It launched the core Forever One brand in 2015; and then started its Caydia brand for lab-grown diamonds this past year.
It now stands at the edge of a significant opportunity, with a legitimate chance to transcend into the leading brand for sustainable, lab-created jewelry; and a shot at a potential “20x bagger” in the process. “Brand equity matters.”
— Don O’Connell, CTHR CEO FQ2’21 Conference Call
The “upside” case isn’t just about hoping to sell more moissanite. It is about building into a next generation brand within the emerging area of lab-created jewelry. Not every company could become this brand. DeBeers can’t. Tiffany can’t. At least not in any way that could authentically resonate with consumers. This narrative only has minimal resemblance to the current business generating ~$40m per year in sales and few $mil OP. Look out a few years though and it isn’t difficult to see a shift in the number of people accepting/preferring a lab-created stone as an engagement piece, etc. Jewelry as fashion, but also as a statement. Not necessarily as a show of wealth, but as a sign of sustainability/value. Doesn’t need a big shift to drive significant growth in the business. Even a 1% shift in the market… would be enormous. Tidal wave. As the size of the total market for engagement rings measures in the $10-$15b range.
5-years of 20% growth would see the business grow to $100m+ of sales. At 50%+ gross margins with $20m+ of SG&A spend and held at a 35% tax rate, this could get to ~$20m in FCF. Apply a 25x multiple for a nicely growing business and it’d drive a $500m market cap— 20x our initial starting point of ~$25m in size.
A rosy projection to be sure… but not unreasonable.
Extrapolate out just another couple of years and it gets sillier still. Drawing nearer to that point, it would also likely become increasingly desirable to the “old-guard” strategic brands looking to pivot & reposition around (not just) “Millennial generation” core values such as sustainability, etc. It could also attract interest from a more naturally aligned company looking to push in a new direction, like our past core portfolio position in Urban Outfitters (URBN:NGS). Could see it being a perfect fit to complement the BHLDN brand-within-a-brand concept of Anthropologie.
While this may be getting way ahead of the company, it is still important to think about because if/when that growth narrative truly takes hold, it can immediately be discounted back to today. The most difficult part of the “upside” scenario is just holding on. Ultimately, as long as the thesis remains intact, I plan to hold until it becomes uncomfortably large.
Of course, it may not all work out quite as envisioned. The “downside” case is if that narrative never catches on. The company is not destined to be the brand in lab grown gemstones. Moissanite isn’t having a moment in the melting ice cube of a $300b global jewelry market. What happens then? Well in that case, it would likely just continue on its current path forward. Attempting to grow the brand. Trying to educate the market on the benefits of moissanite and lab created stones… but never transcending; and in effect, would basically look quite similar to how it does today. Maybe $40m-$50m in sales with a few $mil operating profit, which based on a reasonable multiple of earnings in a zero-rates environment would bring it fairly close to the value it is trading at currently, excluding any benefit for cash.
It is simply too early to know which narrative is going to take hold. The truth will only come in time. But just looking at the two cases… the asymmetric skew is not something easy to find. Downside is modest with solid fundamental support even to levels slightly above the current price. Upside is yolo. WSB/Reddit-style to-damoon growth narrative; and while I’m not sure that it
is acceptable to put a rocketship emoji into a year-end letter… the reality is that kind of risk-reward is special. It usually involves being early and then waiting.Bumbershoot initiated a bookmark position on CTHR in early 2018. This was expanded later in the year and into early 2019, before trading out of the majority of it after the stock ran up. The position was re-established in 2019 after the offering and then increased in size in 2020 after the stock dropped, first due to a slight miss on earnings and then due to COVID. The position was then significantly expanded in the late Summer-Fall following the management change. All told, we built a 250bps position at cost at an average of ~$1.01/share. Along with PFB this makes up the bulk of our current Micro portfolio in terms of value.
While the stock has soared to start 2021, I believe the best is yet to come.”
Copyright: NejroN / 123RF Stock Photo
Our calculations show that Charles & Colvard, Ltd. (NASDAQ: CTHR) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Charles & Colvard, Ltd. was in 2 hedge fund portfolios, compared to 1 fund in the third quarter. CTHR delivered a -0.84% return in the past 3 months.
The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
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Disclosure: None. This article is originally published at Insider Monkey.
