Merion Road Capital Management recently released its Q3 2020 Investor Letter, a copy of which you can download here. The Long Only portfolio posted a return of 14.9% for the third quarter (net of fees), outperforming its benchmark, the S&P 500 Index which returned 9.0% in the same quarter. You should check out Merion Road Capital Management’s top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.
In the said letter, Merion Road Capital Management highlighted a few stocks and Tuesday Morning Corp (NYSE:TUESQ) is one of them. Tuesday Morning Corp (NYSE:TUESQ) is a retail company. Year-to-date, Tuesday Morning Corp (NYSE:TUESQ) stock lost 45.4% and on November 17th it had a closing price of $1. Here is what Merion Road Capital Management said:
“In July I began researching Tuesday Morning (“TUESQ”), an off‐price retailer of home goods that entered bankruptcy in May. While I do not invest in many bankruptcies, what piqued my interest was the strong Q2 performance reported by similar companies as they benefited from the lifting of lock‐downs and pent up consumer demand. My initial review of TUESQ was encouraging. Prior to entering bankruptcy, the company had $3.00/share in tangible book value. They reported strong July monthly operating numbers with cash generation from both positive EBITDA and inventory unwind. At that point they were in the process of exiting about 20% of their underperforming stores and were in negotiations with their landlords on another 15%. What kept me on the sideline, however, was the fact that the judge had denied the formation of an equity committee, despite multiple requests. An equity committee is critical as it ensures that someone is at the table fighting for the rights of equity holders.
This all changed at the end of September as the judge changed his ruling based on recent developments. Notably, the creditors committee had received multiple acquisition offers during the months of July and August and at least one proposal would result in an “extremely favorable” return for unsecured creditors. Given this interest, the company had begun a sales process in which 40 potential acquirors had signed an NDA. According to the judge, the interest shown and quality of offers made, prior to any formal process, gave him greater confidence that there is “a substantial likelihood that equity will receive a meaningful distribution in these cases.” Having already done the work on the name I was able to digest this information quickly and acquire the bulk of our holdings below $0.50.
Since then the company reported another good month of performance and provided a three‐year operating forecast, with EBITDA growing from $41mm to $53mm. While it is logical to question this figure since it is more than double the level reported in prior years, there are a few reasons to be optimistic. Firstly, the company is exiting about 30% of its underperforming stores which could have been loss making. Secondly, they are in the process of amending the leases on almost 80% of the remaining store base which could bring down lease expense even further. For instance, in Q1 they reported $30mm of lease expense which equates to $10.0mm a month. In August that figure was just $5.4mm, a 46% reduction. Lastly, these figures will likely be used for future incentive hurdles; it would be in management’s best interest not to be too aggressive. The situation is still very fluid as the company is in the middle of its sales process, lease negotiations, and a potential capital raise. But balancing the various puts and takes, I believe the risk / return profile remains attractive.”
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Our calculations showed that Tuesday Morning Corp (NYSE:TUESQ) 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.