How Snowball Research Works.
Snowball Research helps you with your idea generation process. We focus exclusively on shareholder activism, management change and audit analytics.
Here’s how:
Spotting Ideas in Management Change Screen:
Uncover exceptional CEOs
Every year, hundreds of new CEOs are appointed. CEOs who have an A+ track record are often hidden among others. You can identify companies managed by these CEOs. Snowball Research focus on stocks with a market capitalization of less than $2 billion.
Regional Management Corp.
Summary: A micro-cap bank, Regional Management has appointed a former CEO of Citibank North America as its new CEO. During his tenure with Citibank North America, he oversaw a $130 billion balance sheet. In comparison, the total assets of Regional Management Corp. is approximately $610 million. Attracting such top-talent is a major positive for this micro-cap company.
Identify red flags
We’ll alert you if a company has appointed a new CEO with a questionable track record.
Nobilis Health
Summary: The questionable track record of Mr. Fleming, new CEO: (a) As per the company’s (Nobilis Health) announcement on January 06, 2015, the financial statements for the year ended December 31, 2014, should no longer be relied upon. During that period, Mr. Fleming served as CFO. Instead of terminating him, the company has now promoted him as CEO. (b) During his tenure as CEO of Acro Energy, the company’s stock price tumbled by more than half, and within one year of his exit, the company filed for bankruptcy.
Spotting Ideas in activist shareholder filings
Majority Board change
By tracking companies that underwent major board changes after an activist showed up, investors can increase their odds of success.
Ariad Pharmaceuticals
In 2014 and 2015, Sarissa Capital secured a board seat in each year. In May 2016, two new directors were appointed to the board. After a few weeks, four incumbent directors agreed to resign and the board size was reduced from 11 to 7. As of May 2016, the board members were comprised of two Sarissa nominees and two new board members i.e., 4 out of 7. In February 2017, the company was acquired by Takeda Pharmaceutical for $24.00 per share in cash.
Post activist changes
Avadel Pharmaceuticals
In December 2018, Broadfin Capital’s founder, Kevin Kotler, joined the board. In the next month, the company hired an interim CEO and CFO. In February 2019, the company announced a restructuring plan – salient points: i) the company expects to cut its workforce by 50%; ii) voluntary bankruptcy of its subsidiary, which is not expected to materially impact any other aspect of the company’s business; iii) the company expects to realize $70 to $75 million in cost reductions in 2019; and iv) intends to focus its resources on other product development activities, in particular, the company’s ongoing Phase III clinical trial of its FT218 product.
Notable settlement agreements
Settlement agreements that hint at potential sale, spin-off, or formation of a strategic committee are flagged.
The Advisory Board Company
In February 2017, the company announced its decision to explore strategic alternatives. In March 2017, Elliott Management and Advisory Group entered into a standstill agreement.
The settlement agreement contained a unique term; “expiry of settlement terms”.
The expiry of the standstill agreement is just 6 months, or if the company announces its decision to halt the strategic alternative process. In other words, the settlement agreement expires if the company suspends its strategic alternative initiative, or by the end of the 6th month. In our opinion, this “condition” puts the right type of pressure on the management to explore strategic alternatives. If the company decides to halt it, the board knows that the settlement with Elliott is terminated, and Elliott may come back knocking on the door.
Outcome: The Advisory Board was acquired in August, 2017.
Multiple activists
In December 2017, Papa Murphy entered into a cooperation agreement with MFP Investors (13.7%) and Misada Capital Holdings (9.2%). Together, the activist investors owned roughly 23%. In May 2019, MTY Food Group completed the acquisition of Papa Murphy’s Holdings.
Xerium Technologies
In 2018, Wynnefield Partners and Barington Capital Group pushed for strategic alternatives. In October 2018, Andritz completed the acquisition of Xerium Technologies, Inc.
Top portfolio
A10 Networks, Inc.
Significant portfolio of VIEX Capital: The company accounts for 26.5% of VIEX Capital’s portfolio – the fund’s performance is therefore heavily tied to the performance of the company.
Valuation Insight
Knowles Corporation
Caligan, Patriot Global Management and Falcon Edge noted: “We believe that Knowles can achieve a value of at least $28 per share by the end of 2019 (a 70% premium to current trading levels), prior to any premium associated with a strategic transaction.”
Enzo Biochem, Inc.
Roumell Asset Management noted: “Excluding any consideration for the hard-to-determine value of AmpiProbe, the therapeutics business and pending litigation settlements, the company’s two principal assets (lab footprint and products business), combined with its net cash of $59 million, sums up to $244 million, or roughly $5.20 per share.”
Spotting ideas in NT and restatement filings:
Emerging from accounting problem
Snowball Research flag companies that emerge from annual/quarterly filing delay and restatements.
Ormat Technologies, Inc.
In March 2018, the company announced that it would delay its 10-K for the FY 2017, since the company had identified a material weakness related to its risk assessment of its accounting for income taxes. In May 2018, the company announced that it would delay 10-Q for the quarter ended March 2018. Moreover, in May 2018, the company concluded that it would restate its second, third and fourth quarter financial statements and its full-year 2017 financial statements. The restatement is expected to impact the “income tax (provision) benefit” line item in the company’s statements of operations, with associated impacts to net income and earnings per share, and the “deferred income taxes” line items on its balance sheet. On June 19, 2018, the company filed its restated filings and pending 10-Q (quarter ended March 31, 2018). During the entire period, the company’s stock price slumped 15%, from $61.73 on February 28, 2018, to $52.23 per share on June 19, 2018.
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