WHAT YOU MISSED FROM GEOINVESTING LAST MONTH
March 2023, Volume 3, Issue 3
A Foray Into Successful Chapter 11 Exits
In light of the volatile market conditions we are facing, we have been focusing on topics such as:
- Recession Resistant Stocks.
- Company Turnarounds.
- Boring but Slow Growing Companies.
- Microcaps with Big Cap Revenue.
For this month’s Geowire, we are focusing on successful Chapter 11 exits – companies that have weathered through high debt burdens and operational inefficiencies to emerge from bankruptcy proceedings as stronger companies. Subsequently, their stocks acheived multibagger returns.
I am no stranger to investing in and studying Chapter 11 exit restructurings and the opportunities they provide. Before I launched GeoInvesting in 2007, I had already invested in stocks after they emerged from Chapter 11.
My journey into researching this genre of special situation investing started with Storage Technology (STK) in 1987, during my last semester in high school. Later, while in college, I actually end up buying the stock. As a matter of fact, this was my first foray into real investing.
A few years later, I bought shares of paging company MetroCall (MTOH), one of many casualties of the dot com bust and related telecom bubble. The stock ended up turning into a Chapter 11 exit multibagger.
Before Monster Beverage Corporation (NASDAQ:MNST) was the energy drink we all know today, it went through a Chapter 11 bankruptcy under the name Hansen Natural Foods. I captured a tiny piece of its multibagger history, selling the stock right before its energy drink business started to take off!
In the last 15 years, while at Geo, I also took stabs at Charter Communications, Inc. (NASDAQ:CHTR) and Spectrum Brands Holdings, Inc. (NYSE:SPB), after they exited Chapter 11. At their exit highs, they logged peak returns of 2285% and 182%, respectively.
Because of my history of successfully investing in Chapter 11 exits, our team is highly focused on tracking that universe during this current weak economic environment that could increase the propensity of bankruptcies. We are also looking for service companies that actually benefit from this environment.
In fact, one of our premium members with a great investing track record (top ranked hedge fund manager) is about to share his newest stock pitch with Geoinvesting that embodies the Chapter 11 theme.
Get updates on the timing of this event if you’re interested in attending the live event or receiving a recording.
You will notice from the stories below that successful Chapter 11 exits tend to have several things in common, such as:
- An Improved Business Plan: Companies that successfully emerge from bankruptcy have a clear and viable plan for how they will operate and generate revenue going forward. This plan typically includes strategies for approaching new markets, increasing revenue, and improving efficiencies .
- Cost Reduction Practices: In all these cases we studied, companies were able to lower operating costs through various means such as reducing their workforces, consolidating production locations, renegotiating contracts, and closing down unprofitable divisions. By lowering their operating costs and reducing debt, cash flow and profitability increased.
- Support from Creditors: In all cases discussed below, creditors were willing to work with the companies to restructure debt and operations.
MONTHLY HIGHLIGHT – CHAPTER 11 EXITS
1. Storage Technology Corporation (STK, formerly STC)
Storage Technology and its significance to my investing journey is both ironic and serendipitous. It all began in my high school economics class when my teacher organized an investment contest for the class, and STK caught my attention. Although I was intrigued by the company’s disk storage business, I didn’t delve much into the stock before pouring all of my theoretical money into it. Unfortunately, I wasn’t aware that the company was undergoing a Chapter 11 process, and subsequently, all the shares were canceled. As a result, I landed in the last place of the competition.
However, a few years later, when I had saved up some funds in college, I decided to purchase STK’s shares in the actual market after noticing that the company had successfully exited Chapter 11 bankruptcy proceedings. To my pleasant surprise, I managed to make a quick profit of around 60%, marking my first-ever successful experience with investing despite starting with a restructuring Chapter 11 firm.
Now, back to its bankruptcy.
In October 1984, the company faced financial difficulties and filed for Chapter 11 bankruptcy in order to continue operating while it worked on a plan to reorganize its finances and operations. The company’s significant investment in developing an IBM compatible mainframe ultimately led to its bankruptcy, as the project failed to materialize. During the bankruptcy process, the company sold some of its non-core businesses to raise funds and focus on its core storage solutions business. In addition, STK negotiated with its creditors to restructure its debt and reduce its financial obligations.
In June 1987, STK announced that it had successfully completed its reorganization plan and emerged from bankruptcy as a newly restructured and financially stable company. As part of the reorganization plan, the company issued new shares of common stock to its creditors in exchange for the cancellation of their claims against the company.
After exiting bankruptcy, the company continued to operate as a storage solutions provider and was eventually acquired by Sun Microsystems in 2005 for $4.1 billion in cash. Sun Microsystems was then acquired by Oracle in 2010. STK’s product line still exists under Oracle today as “Oracle Storagetek”.
2. Hansen Natural Corporation, now doing business as Monster Beverage Corporation (NASDAQ: Monster Beverage Corporation (NASDAQ:MNST), formerly HANS)
Hansen is now known as Monster Beverage Corporation (NASDAQ:MNST). The popular energy drink company filed for Chapter 11 bankruptcy in 1988. At that time, the company sold various lines of juices.
The company’s sales were insufficient to repay financing for its new factory in California, which resulted in its entry into Chapter 11.
During the bankruptcy process, the company implemented a series of cost-cutting measures, including the reduction of its workforce and consolidating its manufacturing facilities.
As a result, the company emerged from bankruptcy in June 1992 with a reorganized business structure and a significantly improved financial position, thanks to the investment group, and eyes set on the energy drink market.
An investment group led by South African businessman Rodney Sacks, who would become CEO, bought the company on July 27, 1992.
The investors believed that the brand’s reputation and long-term viability were worth investing in and that its specific market segment was only beginning to emerge.
Soon after that, the company experienced a turnaround. Its revenues reached $21.3 million in 1992 compared to $13.7 million in 1990. Also in 1992, Hansen Natural Corporation listed on the Nasdaq exchange under the symbol HANS, after completing its initial public offering.
Today, Monster Beverage Corporation is a multi-billion dollar company that is one of the largest energy drink manufacturers in the world, and is the best performing stock of the century.
MNST’s stock is worth $52 today, greater than 173,000% over its price of $0.03 upon exiting bankruptcy. The company’s current annual revenue is $6.31 billion.
3. Delta Airlines (NYSE: Delta Air Lines, Inc. (NYSE:DAL))
The story of Delta Airlines is one of the most famous cases of Chapter 11 exits. In 2005, Delta Air Lines filed for Chapter 11 bankruptcy protection due to rising fuel costs, intense competition, and high labor and pension expenses.
To address these challenges, the company went through a major restructuring that involved reducing its workforce, renegotiating labor contracts, and cutting costs across its operations, while under court protection.
The company also worked to improve its customer service and upgrade its fleet of planes, while investing in new technology and more fuel-efficient aircraft.
One of the key factors in Delta Air Lines’ successful exit from Chapter 11 bankruptcy was its ability to negotiate new labor contracts with its employees. The company worked closely with its labor unions to reach agreements that would help reduce costs and improve its overall financial position.
It also streamlined its operations, consolidating some of its routes and reducing its overall capacity. This helped the company reduce its expenses and focus on its most profitable routes.
It emerged from bankruptcy in April 2007 after a 19-month restructuring period with a stronger financial position and a more competitive business model. This Included securing a $2.5 billion loan to pay back lenders that helped it operate during its bankruptcy period.
Today, Delta Air Lines is one of the largest and most successful airlines in the world.. While DAL stock is currently worth $33, only 165% of its price of $20 upon exiting bankruptcy, it peaked in 2019 at $60, a 200% increase from its price on exit.
4. Metrocall Inc (MTOH, formerly MCLL):
In the late 1990’s, Metrocall Inc was the second-largest paging company in the United States, with about 5.5 million customers. It was continuously losing business as most consumers switched to cellular networks and it failed to attract new investment. So, it was unable to continue to make interest payments to its creditors in March 2001 and filed for bankruptcy in June of 2002, in order to eliminate more than $700 million in debt.
It was one of many telecom stock casualties from the telecom/internet bubble which began in March 2000.
The story of Metrocall’s route to bankruptcy was typical in the paging industry, as it was unable to provide products that competed with cell phones and other devices that offered better services.
The company entered into Chapter 11 in May 2001, with $937 million in liabilities and only $189 million in assets.
“We quite frankly lost business to cellular and PCS carriers who cut prices,” said Vincent D. Kelly, Chief Financial Officer for Metrocall. “In 1999, our revenues were $571 million, and down to $477 million last year, which means [revenue fell by] $94 million.”
During the bankruptcy process, the Virginia based company faced a number of challenges, including ongoing legal disputes with its creditors and intense competition from the wireless communications industry. Shares of Metrocall fell to 1 cent in over-the-counter trading.
Despite these difficulties, the company survived the process by reducing operating costs and restructuring its debt, emerging from bankruptcy in June of 2002, trading under a new symbol, MTOH (pre-chapter 11 shareholder interests were canceled). It reduced its operating expense by downsizing its workforce by 30% and closing some of its locations in the US. The company was then able to negotiate a successful restructuring plan with its creditors that would help it become profitable once again.
Metrocall merged with Arch Wireless in 2004 to form USA Mobility, which then acquired Amcom Software in 2011 to later on become a wireless communications provider focused on the healthcare industry.
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5. Charter Communications (Charter Communications, Inc. (NASDAQ:CHTR))
Charter Communications, a past Model Portfolio stock previously covered by GeoInvesting, is a telecommunications company that provides cable TV, internet, and phone services to customers in the United States. We added the stock to the Model Portfolio shortly after the company exited chapter 11 bankruptcy.
The company was founded in 1993 and quickly became one of the largest cable operators in the country. However, the company encountered a long period of financial difficulties, which resulted in it amassing over $21 billion in debt.
In March 2009, the company filed for Chapter 11 protection, and during the bankruptcy period it worked with its creditors to develop a plan which involved securing new financing and reducing the company’s debt by $8 billion, 40% of its overall debt exposure of $21 billion.
The company also invested in upgrading its technology, such as expanding its high-speed internet services and offering new products, like video-on-demand.
After several months, the company emerged from bankruptcy in November 2009. CHTR’s stock is worth $335 today, almost 1000% over its price of $34 upon exiting bankruptcy.
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Analyst Pitches in 2023
- March Analyst Pitch– “New Canadian Company Entering Phase 2 Of Its Turnaround”
- February Analyst Pitch – “You won’t believe the industry we’re targeting in today’s fireside chat”
- January Analyst Pitch – “Profitable Microcap that Pays a Big Dividend to be Guest on Upcoming Fireside Chat”
- December Analyst Pitch – “Today’s Highly Anticipated Morning Briefing with Microcap Company Management”
PROGRESS, FEBRUARY 2023
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PROGRESS, YEAR TO DATE
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WHAT YOU MAY HAVE MISSED THIS MONTH
Weekly Wrap Up Highlights, Education and More
I was reflecting on a past GeoWire Weekly post from November 2022 where I addressed some factors that made Ufp Technologies, Inc. (NASDAQ:UFPT) a standout case study in what can happen when company management values maintaining the integrity of capital structure while growing revenue and EPS organically and through acquisitions – UFPT, a designer and custom manufacturer of components, subassemblies, products and packaging utilizing highly specialized foams, films, and plastics primarily for the medical market, made eight acquisitions since 1993. The company relied on its strong balance sheet to minimally increase its share count as EPS trended higher from 2004, when its bottom line went positive, to 2022, the first time its adjusted EPS broke $3 per share.
As Silicon Valley Bank Failure Story Unfolds, We Are Staying Focused On What We Do Best [GeoWire Weekly No. 75]
In this Weekly Wrapup, we’re taking a break from our usual subject matter to bring you some material on the Silicon Valley Bank failure debacle to help you understand some different perspectives related to the developing story. “Silicon Valley Bank structured its loans with the understanding that startups do not earn revenue immediately, managing risk based on their business model. The bank’s main strategy was collecting deposits from businesses financed through venture capital.” In the end, this event is just another unwinding of the 15 year speculative bubble that will give more credence to stock picking taking precedence over a buy anything strategy. We continue to be very bullish on buying traditional boring growth plus value microcap stock set-ups. Yesterday night, financial regulators declared that depositors of Silicon Valley Bank, which failed on Friday, will be able to access their full deposits beginning on March 13th. They also unveiled new measures to ensure that deposit withdrawals can be backed up throughout the banking system, in response to concerns about contagion following SVB’s unexpected collapse last week.
I no longer avoid investing in Canada based companies. When you screen for stocks to buy, you might have a desired set of criteria on a quantitative, qualitative and geographical basis. If you isolate your screen to Canada, natural resource companies will dominate your list. If you love to invest in these types of companies, many of which are in the early stages of development and specialize in mineral and oil exploration and extraction, you’d be in luck. Canada is one of the most resource-rich countries in the world as the global leader in potash production and a top five global producer of diamonds, gemstones, gold, indium, niobium, platinum group metals, titanium concentrate and uranium. Canada is also the world’s fourth-largest primary aluminum producer, and has the third-largest oil deposits after Venezuela and Saudi Arabia.
As far back as I can remember, I put an outsized focus on special situation stock investing because I knew that in some instances, the rewards I could reap from certain outlier circumstances would be worth the research. And it just made investing more fun than a standard value investing approach. I originally used a written list that laid out a framework for what I was looking for on a daily basis across press releases and Security Exchange Commission (SEC) filings at SEC.gov. Yes, written… Remember I am old! Later, when I started Geoinvesting, each member of my team had a physical printout of the list so it could be readily visible as an outsized 8.5 x 11 inch post-it note. Regardless of what position one held at Geo, I made sure that each team member was exposed to the our research process to some degree, with the aid of checklists, even if the list became pinned underneath a paperweight, taped to one of the many whiteboards I had floating on each wall when we used to work in “offices”, or handed back and forth between my colleagues if one went missing prior to a new printout.
When you think of individuals such Carl Icahn, Ronald O. Perelman and Nelson Peltz, you might think of their knack for business acumen, successful fund management and even philanthropy. However, there is one aspect of these personalities’ exploits that might get overshadowed by the overarching themes of their achievements – a specialty in turning businesses around. The reason it is a specialty is because not everyone has the means or frankly, the guts, to put plans in place to take a failing company and turn it around. Last week’s foray into the world of executives and portfolio managers at activist fund 180 Degree Capital Corp. (NASDAQ:TURN), Kevin Rendino (CEO) and Daniel Wolfe (President), touched on the reasons why companies consider and ultimately agree to shift the innards of their businesses around. In the end, it really comes down to making them attractive enough for investors to put their money into. We’d suggest that you catch up with that column after reading what we have lined up today. So, speaking of turnaround specialists, we wanted to bring attention to a few famous ones who excelled at buying or taking a stake in underperforming or struggling companies to help them achieve profitability in various ways. We’ll touch upon notable investments made by the turnaround specialist investors above.