I never thought I would travel to Los Angeles to obtain superior air quality to New York, but these are truly weird times. As the sell-appointed "hype man" for the LD Micro conference hosted by Chris Lahiji and his team, I will tell you that innovation -- and capital formation -- are indeed alive and well in the aftermath of SVB's collapse.
So many great conversations, so many old friends. The emerging economy is just fine, thank you. That said, higher short-term interest rates are a very real inhibiting factor to the operation of a smaller company. That is real. I would never sugarcoat that.
What I seek are companies that are self-funding and looking to use that cash flow to expand. Companies that are dependent on constant equity issuance to fund growth are really hammered by the financial markets. I don't predict that will change until the Fed starts cutting -- not "stops raisng" -- rates. That will not happen until 2024, in my opinion
So, selectivity is key when adding microcap names in this environment. Here are the highlights from my meetings:
CorEnergy Infrastructure Trust (CORR) : I have mentioned CORR and its preferreds, (CORR-A) , in my RM column several times. So, it was great to finally meet CORR's CFO, Robert Waldron, at LD Micro. It was a very detailed. I have not sold a single share of CORR-A . Meeting with Robert only increased my conviction to hold the security.
CORR management expects a rapid closing of the recently announced divestiture of CORR's Missouri natural gas assets to Spire. Fast closing, multi-billion transaction and a great valuation. As I have noted in my column before, though, the sale of its Missouri natural gas assets only saves CORR from balance sheet hell. In terms of resumption of the preferred dividends on CORR-A, that will depend on cash flows from CORR's remaining business, its California crude oil pipelines.
These issues will not be resolved overnight, but I expect CORR to release a very detailed "This is the new CORR" statement shortly after the natgas transaction closes, which I expect to be in mid-July. Until then we wait, as CORR-A's preferred dividends are accruing to us in arrears. It's not a simple story, but securities that trade at 29 cents on the dollar, as CORR-A does, rarely, feature those.
NewtekOne (NEWT) : I spoke to other old friends at the conference, including Barry Sloane, CEO of NewtekOne. Sloane is an extremely straight shooter. He noted that the macro environment is, as you may have gleaned, not currently great for financial holding companies, as NewtekOne is in its new incarnation. But NEWT is still chugging along and making loans. Honestly, I think the Great Bank Run of 2023 has ended. Therefore the downside for NEWT, its publicly-traded bonds, (NEWTZ) , and, by implication, prefereds issued by other banks, like ExCap stalwart VLYPO, is just overrated.
Freedom Holding (FRHC) : The final name for today is Freedom Holding, which is not a microcap, as it sports a $4.9 billion valuation. FRHC occupied a place of honor at the conference, as it now owns, LD Micro as well as Maxim Capital. I sat down privately with FRHC's US CEO, Rob Wotczak, and other members of the Freedom Holding executive team.
At the corporate level, Freedom is based in Almaty, Kazakhstan and, yes, management has heard all the Borat jokes, including my lame ones. The reality, though, is that the entity listed on Nasdaq, FRHC, is a Nevada-registered corporation with financial auditing performed by Deloitte. That makes FRHC "investable," but one still has to determine whether to invest.
The business opportunity facing Wotczak and his team is, in my opinion, IMMENSE. As someone who writes research on small-caps, I necessarily READ quite a bit of sell-side research, and in the microcap space it is almost universally horrible.
Jon Rogers, FRHC's director of equity research and an old (friendly) competitor of mine from the sell-side autos research jungle of the 1990s, has a huge opportunity to add value for FRHC's large, mainly Eastern European client base. FRHC has leveraged that client base to do equity deals, including a recent one for medical diagnostics company, VolitionRx (VNRX) , whose management I have met at past LDMicro conferences..
The big boys -- I think I have made my disdain for Morgan Stanley and other "bulge bracket" firms quite clear in my columns -- just don't touch companies the size of VNRX. Therein lies the opportunity for Freedom Holdings.
So, I walked out of my meeting with FRHC thinking, "Man, Freedom Holdings is 1990s DLJ all over again." We DLJ'ers (Barry Sloane from NEWT is an alum, as well) beat the hell out of the Big Boys every day, and I was a part of that effort on two continents. Credit Suisse took over DLJ and ended that party in 2000. It truly warms my heart that things turned out so well for CS.
LDMicro reminded me once again, that opportunity knocks for emerging growth companies. Even the feckless Fed can't kill that.
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider this stock to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)
