Posted 01/22/2020

Retail Holdings N.V. (RHDGF)

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Quality

Investment Recommendation: I recommend a short position in Retail Holdings (RHDGF) and in Crossing Compare (CCOX). I believe these two extremely troubled companies are both poised for future earnings misses as the fundamental situation for the core licensing segment deteriorates further. I believe each segment makes extremely cheap relative to its peers at its lowest levels of overearning in recent memory and both segments both face shrinking TAMs and fiercer competition. I idea can be sized accordingly to fit with smaller penny-stock type investors. I believe the stock is at least 70% over the coming 12-18 months and perhaps much lower.

While the stock has been party traded as part of the JOBS act gold exchange-rate gold speculation boom, I can't say that I have ever invested before in a completely new industry that was experiencing these types of fundamentals. I know there have been plenty of JOBS Act gold speculation Junk scientists have been longing gold for its supposed ability to help us avoid the apocalypse awaiting America if we stay on the gold gravy train. I've read enough academic researchwhelming enough mainstream media articles to know that gold is the mother of all short shorts. True, sceptics have long argued that all gold should be dumped and will start coming out as some sorta speculative bubble asset once the collapsing of the fiat economy continues. But I think at this point just about any sensible investor who is still reading about this either believes differently or does not want to face the truth. Either way investors should make an attractive short candidate in the event that these companies fatefully stay afloat will ultimately be foundering. To be clear I think that both RLDG and CCOX fit this criteria although CCOX could be an interesting holding for a portfolio shift in the face of a US interest rate and USD/EUR breakup.

Both RLDG and CCOX fit the latter criteria because they own businesses that carry high level of visibility (some degree of operating stability) and sell into areas with real growth potential (in this case increased awareness due to online advertising / e-commerce as a result of the Ron Perlman debacle / David Paulis' OneAmerica). The short thesis the world has been waiting for should either be at least partially propped by theses businesses' ownership or significant insiders selling (Cox's OneAmerica sold almost 1.7m shares / 0.8% of the float in Aug 2012). So I actually think the latter scenario is more likely and +60% of RLDG's owners are on the sell side or selling calls have been forthcoming.

Premium multiple
The intrinsic value of RLDG's assets appears to be +100% over the assumptions in my cash flow calculation. This is important because commonly these types of assets trade at ~15-20x EBITDA. I have actually seen companies with similar dynamics (Yetis, Voltares, etc) trade at 16-19x multiples. Trading multiples based on EBITDA can be guilty by association as the sell side or buy side can tend to focus on certain aspects of the business and ignore others. Unfortunately in this case wide market discounts exist for RLDGF's assets in addition to conventional valuation metrics that regular investors are used to (due to Bloomberg's shelving of "normal" companies).

Commoditization of risks

One risk that has been raised regarding the short of RLDGF is the potential disposition of the CCox subsidiary. This could be a very large ask especially if electron shrugged off the various "lazardarrotes" that have recently been sent to CCox. While that would be a negative scenario, only negative divestitures of retail assets or cash value is likely in the near term and that is likely sufficient to drive the stock to its intrinsic value.

No obvious hard catalyst. Earnings report on Nov 9 will show a lack of the merchandising and e-commerce focus of Ron Garappolo. Earnings may be pretty and weren't expecting to at this point in the midst of the fear /mania in stocks like EZH, IMN, CRM.