Release the Kraken! Activist Investors May Finally Unlock the Hidden Value at LSB Industries
I love companies that are undervalues on a sum-of-the-parts basis. I absolutely gobble up investment cases that I come across that talk about companies' SOTP valuations (this acronym seems to be much more widely used abroad than it is here in the U.S. for some reason). The problem with investing in companies just because they are undervalued like this that they can often stay like this for a loooooong time. That's why I look for undervalued companies that have some sort of catalyst that will help to unlock that hidden value. The entrance of a successful activist investor into the picture can be one such catalyst. That's exactly what's happening with a company that I invested in both in real-life and in CAPS back in April called LSB Industries (LXU). At the time I made the following brief statement next to my pick here: "The activist firm Starboard finally got its people onto the board at LSB. This is a bet that they will make changes that will continue to improve its share price."
Release the Kraken!
LSB is a mini-conglomerate that has two main yet completely unrelated business segments, chemicals (mainly fertilizer) and climate control. The thesis here is that Starboard will unlock value by convincing LSB to split up its two divisions, which currently trade at a discount to independent peers. Additional value could be unlocked by the conversion of the fertilizer assets into a more tax-efficient MLP, which yield-hungry investors are gobbling up and paying high multiples for.
Barron's excellent small cap column did a great write-up on LSB in this week's issue. The column has actually featured a number of companies that I own there recently, which means that I'm either on the right track and am about to unleash some serious outperformance on Mr. Market in the coming months and years, or that we're both idiots :). At least I have some great confirmation bias.
SIZING UP SMALL CAPS
A Mini-Conglomerate With Huge Upside
Activists have been agitating for a breakup of the small conglomerate, which makes fertilizers.
In addition to my original reasons for buying he stock that I mentioned earlier, the column talks about the plant expansion that LSB's chemical division is undertaking and how it should help it to significantly improve its results going forward. The article also provides more of a timeline for when a breakup of the company could potentially happen, looking at its debt maturities.
An analyst from Avondale Partners who is quoted in the article sees 60% to 100% upside in the stock if some of the initiatives hat I mentioned are taken. Even if they take a year or two to unfold, he sees 15% upside in LSB over the next year as a result of operational improvements.
I already own an average size position in LSB and I will likely add to it at one point in the future. Of course, the good old Barron's pop has caused LXU to rise 8% already today. Hopefully it comes back to Earth so that I can add to my position in the future before these corporate actions take place.
Thanks for reading everyone. Have a great day!