Theme of the Week
Reflexivity Going in Reverse
Let’s think back to the 2010’s. The FED had just introduced ZIRP, and TINA (there is no alternative) was the talk of the town. In search of yield, wealth managers shifted their bond allocation to blue-chip dividend stocks. In contrast, traditional dividend investors moved up the risk curve to anything that offered a safe, juicy yield.
Wall Street responded as it always does: by introducing highly financial-engineered products on which it could charge investment banking fees. More specifically, capital-intensive companies were encouraged to split off their stabilized, FCF-generating assets in a YieldCo, which would trade at a higher multiple simply because it offered a (hopefully) safe dividend yield.
With that in mind, let’s circle back to today.
Today’s companies, like any others in history, aspire to grow. And growth requires capital. Looking at today’s market with a strongly simplified view, we’ve got asset-heavy companies that funded their growth ambitions the old-fashioned way: with debt, and we’ve got an increasing number of asset-light companies whose investments run through the P&L as they increase their headcount.
Kuppy’s Tweet of the Week
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Kliff Note of the Week
Spin Monitor: FedEx Freight (FDXF) completed its spin recently. Last reminder: FDXF is guiding for 10-12% operating income growth pa over the medium term and to more than $1bn in FCF at >90% conversion.
Demand conditions remain soft, and let’s not forget the still relatively high costs (like diesel). But this is one of the largest players in North America, with significant scale and pricing power.
Old Dominion Freight Line (ODFL) is trading at 27x forward EV/EBITDA. Not fully comparable, but still.
Cluster Buying Monitor: The insider buying at Comstock (LODE) just keeps going. The CEO and other insiders spent millions buying the stock over the past few weeks. What an interesting sit.
There’s so much hate from past behavior that this stock is quickly becoming one of the most polarizing stocks in our universe.
A reminder that Comstock should be close to completing a big transformation from a mining to a clean‑energy and recycling platform, selling mining and real‑estate assets for substantial cash and at the same time ramping its solar panel recycling business. Big upside IF it works.
Investor Day Monitor: Honeywell Aerospace (HON, HONA) hosted its Investor Day on June 3 ahead of the Q3 spin, targeting 6-8% organic growth through 2030, with EBIT and FCF growing faster than revenue.
The business combines leading OEM positions with a large aftermarket franchise, including the #1 position in APUs (~65% share) and the #2 position in avionics. Management highlighted $90bn+ of wins since 2022 and a backlog exceeding one year of revenue.
HONA ties in with our aerospace aftermarket thesis, with a large installed base generating decades of high-margin MRO, spares, software, and RMU revenue. 18x EV / EBIT vs aero peers at ~38x and automation peers at >22x.
Completed SPAC Monitor: We previously called recent de-SPAC Merlin Labs (MRLN) a powder keg, and you now might see why. Merlin is a high-risk but potentially very high reward play on AI ‘co-pilot’ software for existing airplanes.
The pipeline is full, and the potential is huge. Recently, Merlin announced that it completed the Critical Design Review for its C-130J autonomy program with USSOCOM. In short, this could open the way to >$1bn in annual revenue from their pipeline.
Short interest is pretty damn high considering the relatively low float and the AI angle, which is just stupid.
Strategic Alternatives Monitor: Great flag from a reader. Nuvera Communications (NUVR) just saw a shareholder proposal to pursue a sale pass by a wide margin.
The company is a former local CLEC that has spent years building out fiber infrastructure across exurban and rural Minnesota, with the heavy capex phase now largely complete.
Multiple strategic buyers are circling, and deal comps for similar rural‑fiber assets imply valuations in the $40-75 p/s range. This is (much) more than 100% above the current stock price.
Other Interesting ED Action: Crazy activity over at Abivax (ABVX) over the past few days. Abivax released its long-awaited Ph3 UC maintenance data, which showed unprecedentedly strong results well above the bullish case.
BUT, the 50mg patient cohort (the higher dose) showed cancer cases. That is how a stock opens +35% but closes down -40%. The question now is: is this noise or drug-induced? Management clearly confirmed these cases are noise and intends to release additional data on this over the next weeks.
The weird part is that, even if it isn’t noise, it’s still damn good! In other words, we could see the shares snapping back strongly over the next weeks.
