Theme of the Week
Short Reports
While short sellers have been around since Jesse Livermore shorted the railroads in the early 1900s, short positions were only discussed publicly more recently. Some notable shorts this century include Chanos’ calling out Enron as a Fraud, or David Einhorn testifying before Congress against Allied Capital.
The practice of publishing in-depth research on a short position began around the time Muddy Waters published its short thesis on Sino Forest in 2011.
To come up with their short thesis, Carson Block would rent a house in China for a month, where they bunched up with a couple of analysts and private investigators. Only when the smell of beer and chips in their man cave became unbearable did they publish a 39-page research report that concluded that Sino Forest did not, in fact, own any forest.
Kliff Note of the Week
Spin-off Monitor: The Magnum Ice Cream company (MICC NA) spun out of Unilever in December, grew by +25% in a few months, and has dropped back over the past few weeks, already missing earnings. And while certainly not a Fallen Angel in our book, we think there’s a good chance this one might make that list in the future.
MICC guided that its turnaround won’t meaningfully lift volumes or margins until 2027-28, as extra transition and ingredient costs won’t be passed through, hence the decision to protect volumes; the goal is to keep organic growth at 3-5%, but this will, of course, limit margin gains.
So operational leverage is delayed, 2026 is another ‘reset’ year, and current 2027 EPS expectations already look too high. Oh, and there’s the whole healthier eating / GLP-1 thing going on. Why should this trade at 16x forward PE??
Announced Buyback Monitor: Omnicom (OMC) is stepping up capital returns and cost cuts. The company dropped a $5bn buyback (~20% of the market cap), with $2.5bn already committed through accelerated repurchases.
And with the Interpublic deal closed in Q4, Omnicom raised its synergy targets to $1.5bn, of which $900m are already expected in 2026. Add to that $1bn in labor costs cuts as integration moves forward.
Roughly 6x EV/EBITDA with over 50% free cash flow conversion on c. $5bn EBITDA; that implies a declining business, while we doubt that will be the case here. An interesting near-term catalyst might be the upcoming March 12 investor day.
Announced Buyback Monitor: Select Medical (SEM) popped a $1bn buyback, equal to roughly half its ~$2bn market cap, extended through 2027. In November, Chairman Ortenzio (also co-founder) made an offer to take the company private at $16.00-$16.20 p/s, or just +15% premium. The buyback coming relatively soon after the bid is interesting. It feels like we’re going to see more action here.
13D Monitor: Palogic sent a blunt letter to Pebblebrook Hotel Trust (PEB) urging it to expedite closing the REIT’s large discount to NAV. It welcomed the board refresh and withdrew its own director nominees but said the core problems remain: slow and inconsistent buybacks, weak capital allocation, and excessive executive pay. The activists want the company to consider asset sales, more aggressive repurchases, and even a full sale if public markets continue to undervalue the portfolio.
M&A Monitor: Priority Technology Holdings (PRTH) recently popped onto our screens due to the interesting action. CEO Priore offered $6.00-$6.15 per share just days after a very weak Q3 print knocked the stock from above $7.00 to roughly $5.50 today.
Priore already controls ~62% (with his brother). The company’s mix of Merchant, Payables, and high‑margin Treasury Solutions should lead to strong growth, high margins, and decent free cash flow generation, translating into a (far) higher valuation in our view.
Activists Steamboat and Buckley apparently agree, calling the offer opportunistic, with Buckley arguing for $17-$19 per share. That said, we think there’s a good chance this one will go for roughly $6.15, which would make for a decent, low-risk IRR. And who knows, maybe we’ll see more.
Other Interesting ED Action: We flagged 2CRSi (AL2SI FP) a few months ago for two reasons: 1. It has a surprisingly ugly name and an even worse ticker, and 2. It screens like a very interesting AI play. Fast forward a bit, and 2CRSi is up 100% YTD. We’re obviously happy with the performance, but the thing remains cheap, and might be an even better risk/reward today given a much-derisked thesis.
KEDM Event Driven Monitor scans over 20 corporate events for market moving information and distills them into our propietary “Kliff Notes.” One profitable trade should more than cover an annual subscription and access to the Event Driven chatroom!