Steel City Capital recently released its Q3 2020 Investor Letter, a copy of which you can download here. During the third quarter of 2020, the fund returned 1.6% net of fees, while the S&P 500 Index was up 8.5%. You should check out Steel City Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.
In the said letter, Steel City Capital highlighted a few stocks and eBay Inc (NASDAQ:EBAY) is one of them. eBay Inc (NASDAQ:EBAY) is an e-commerce company. Year-to-date, eBay Inc (NASDAQ:EBAY) stock gained 48.3% and on October 27th it had a closing price of $53.55. Here is what Steel City Capital said:
“EBAY (Long): The Partnership has taken some profits in EBAY although our position remains sizeable at 10% of capital. A substantial portion of the investment thesis has played out, namely that activist-owner Elliot Management would instigate the sale of both StubHub and EBAY’s portfolio of classified businesses. The sale of StubHub was completed in early 2020 for net cash proceeds of ~$3.1 billion, and in the third quarter, the company announced it had entered into an agreement to sell the classifieds portfolio to Adevinta (ADE) for $2.0 billion of net cash and ~$6.7 billion worth of shares. The market responded positively to ADE’s acquisition and today the share-based consideration is worth ~$9.0 billion.
With a key component of the thesis realized, why not completely exit the position? The answer is what remains – the core EBAY marketplace – continues to trade at a modest price relative to its cash generating capacity. At the shares’ current price of $53, EBAY’s market capitalization is $37.5 billion. This includes $5.8 billion of cash and investments, implying a value net of cash of $31.7 billion. The company should generate an additional $1.25 billion of free cash flow in the second half of the year, receive $2.0 billion in net cash proceeds from ADE, and shares in ADE worth another $9.0 billion at current prices. Backing out these additional items results in a clean market cap of $19.5 million for EBAY’s core marketplace.
By 2022, EBAY’s managed payments initiative should more or less offset the cash flow the company will lose as a result of the sale of the classifieds portfolio. Steady state free cash flow should remain in the realm of $2.0 billion. To this end, I believe we are paying an effective 10x P/FCF multiple for the core marketplace business. Say what you want about EBAY, but this is hardly a demanding valuation for a capital-light (a positive in an inflationary world) ecommerce operator (a positive in a pandemic-stricken world).”
In Q2 2020, the number of bullish hedge fund positions on eBay Inc (NASDAQ:EBAY) stock increased by about 12% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in eBay’s growth potential. Our calculations showed that eBay Inc (NASDAQ:EBAY) isn’t ranked among the 30 most popular stocks among hedge funds.
The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 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. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.
