Greystone Capital Management, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A return of +45.7% was delivered by the fund’s median account for the Q1 of 2021, ahead of its S&P 500 and Russell 2000 benchmarks that delivered a 6.2% and 12.7% returns respectively for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Greystone Capital Management, in their Q1 2021 investor letter, mentioned Rimini Street, Inc. (NASDAQ: RMNI) and shared their insights on the company. Rimini Street, Inc. is a Las Vegas, Nevada-based software company that currently has a $705.9 million market capitalization. Since the beginning of the year, RMNI delivered an 86.91% return, extending its 12-month gains to 95.74%. As of April 26, 2021, the stock closed at $8.35 per share.
Here is what Greystone Capital Management has to say about Rimini Street, Inc. in their Q1 2021 investor letter:
“During the quarter I significantly added to client holdings in Rimini Street which has now become a top four position due to both additional purchases and share price appreciation from our initial cost basis. The reasoning behind the purchases, especially at prices 70-100% above where we initially started buying include information gleaned from management during the company’s February investor day event, as well as what I believe to be the business hitting an operational inflection point. I wrote about Rimini Street in the Q3 2020 letter, but things have progressed quickly in a positive way and there have now emerged what I believe to be multiple paths to achieve a very favorable return moving forward with a strong risk/reward profile.
With a clear valuation disconnect in place from an EV/ARR or EV/Gross Profit basis, Rimini Street is currently one of the cheapest profitable SaaS related stocks among a universe of inferior software companies. While I can point to some clear reasons for the undervaluation (which I believe will be transitory), the valuation discrepancy compared to lower quality businesses trading at high multiples of revenue does not make sense to me. Furthermore, as discussed below, I believe the company is taking the necessary steps to clean up the story which will have the effect of shining a light on the strength of
the business and competitive position.In a recent industry report, Gartner estimated the size of the third-party software support industry will increase by nearly 3x within the next three years (from $300mm to $1.0B) and has highlighted Rimini as the clear leader in the space with greater than 80% market share. Rimini backed up those estimates by issuing for the first time their five-year strategic plan to reach $1 billion in revenues and 20-25% operating margins by 2026. While estimates five years out should always be taken with a few grains of salt, conversations with industry experts reveal this target to at least be credible. And I believe credible is all that is needed here. In my view, this represents a situation where I believe one does not have to be precise in order for the investment to work. In fact, failing to meet the above targets for growth and margins laid out above should still result in a stock price significantly higher than the current price of $8.20/share. This is a stock that could increase 50-100% JUST to trade closer in line with slower growing, lower margin comps, and still be considered very cheap. If I am even partially correct about the prospects for the company, I believe shares could be worth multiples of the current trading price, which would represent perfect example of my investment strategy playing out – find wide mispricings and hold until the mispricings correct.
In addition to the core business hitting what I believe to be an operational inflection point, Rimini is now beginning to cross sell their Application Management Services (AMS) into the existing client base. The company has stated a potential $1B revenue opportunity just by executing on this front, not to mention that each AMS contract cross-sold will help drive an ARPU increase from the core support business that is multiples above current levels.
Lastly, there remains what I believe to be two catalysts that will hopefully improve the market’s perception of the business, and one of which that will help clean up the capital structure. The company has completed two capital raises in the last six months and has begun purchasing (to retire) their Series A Preferred Stock, which comes at a hefty price of 13% dividend payments per year, or around $18mm in interest on a $154mm balance. I believe the company is positioning itself to repurchase the preferred stock by July of this year, which will reduce cash outlays for interest, lower their cost of capital and clean up the capital structure. In addition, before or during 2022, investors should finally receive some clarity surrounding the company’s trial with Oracle (Oracle vs. Rimini II), where I believe courts will rule in Rimini’s favor and cause the lawsuit overhang to disappear further saving more money in litigation expenses. Rimini has been able to continue to execute in a big way despite these two overhangs, and the elimination of them, while independent of the actual business execution should help clean up the story and move the shares higher in the short term.”
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Our calculations show that Rimini Street, Inc. (NASDAQ: RMNI) 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, Rimini Street, Inc. was in 11 hedge fund portfolios, compared to 9 funds in the third quarter. RMNI delivered an 8.80% 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.
