Upslope Capital recently released its Q4 2020 Investor Letter, a copy of which you can download here. The Fund returned 7.9% net of fees for the fourth quarter, as compared to the 24.4% return of the S&P Midcap 400 ETF and 7.8% return of the HFRX Equity Hedge Index. You should check out Upslope Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of 2021.
In the Q4 2020 Investor Letter, Upslope Capital highlighted a few stocks and Cboe Global Markets Inc. (NASDAQ:CBOE) is one of them. Cboe Global Markets Inc. (NASDAQ:CBOE) operates as a exchange holding company. Here is what Upslope Capital said:
“We added significantly to our CBOE exposure during the quarter. The company is facing near-term challenges (e.g. intense competition in cash equities, “cyclical” pressures in VIX (volatility) complex, regulatory noise around data). However, I continue to maintain that the core of the business is not impaired. Importantly, an original part of our thesis involved the prospect of an eventual sale of the company under the right conditions. Acknowledging that the odds of any public company being sold are always remote, I believe those conditions are clearly present today, as discussed below:
1) ‘Cyclical’ trough in VIX trading – following the unprecedented spike in the VIX in 2020 (see below), many traders/investors exited the VIX market entirely. Open interest, a leading indicator for volumes, plunged ~50% to levels seen as early as 2011. Was this due to invalidation of the product itself? Certainly not, I’d argue. Instead, it became temporarily too challenging and expensive to trade, given a persistently elevated and volatile VIX. As VIX normalizes further – as it always has following market shocks – traders should re-enter the market more aggressively (open interest has indeed stabilized and slowly started to rebound). For a potential acquiror, the prospect of missing a temporary, cyclical trough should add a sense of urgency.
2) Second-tier management + unique/valuable assets = attractive M&A target. In mid-2019, CBOE lost one of its top operating executives, Chris Concannon (a logical successor to the current CEO), to a competitor. Since then, the prevailing view of management has deteriorated markedly, in my view. New product development has floundered, the company has made a number of uninspired acquisitions, its buyback program has underwhelmed despite a conservative balance sheet and attractive valuation, and management has appeared to lack any sense of urgency in addressing the stock’s sharp underperformance (vs. peers and the broader market).
Despite under-management, CBOE really does have unique and valuable assets. In addition to leading positions in single-stock and proprietary index options, CBOE has a virtual monopoly on the trading of volatility (VIX) products, an extremely useful tool for investors in most market conditions. VIX is the biggest reason most investors own the stock. It’s also a product that competitor CME has shown interest in of late. Just last year CME launched its own volatilityrelated product; it’s gotten negligible traction to date. Bottom-line: CBOE is an attractive business that could likely be managed far better by another owner with a more aggressive management team and complementary products.
3) Current valuation is in-line with precedent transactions. CBOE currently trades for 14x 2021e EBITDA. Precedent transactions (a blend of diversified and derivative-focused exchange deals) have typically occurred in the high-teens to mid-20s EBITDA range. A 19x multiple would represent a more than 35% premium, which is also in-line with most precedents.
4) All-time high valuation discount vs. CME (a logical buyer) and other competitors. A wide relative valuation discount makes the financing and financial rationale for a deal much easier and more attractive for potential acquirers.
Finally, even if there isn’t an actual sale (again, always a long-shot call), most of the above factors should represent an attractive set-up for owning CBOE shares on a stand-alone basis. Valuation is attractive (6% free cash flow yield), the business is highly profitable (near-70% EBITDA margins), the balance sheet is under-levered (1x net), and cash flows are likely to grow at least modestly over the long-run.”
In Q3 2020, the number of bullish hedge fund positions on Cboe Global Markets Inc. (NASDAQ:CBOE) stock increased by about 3% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in CBOE’s growth potential. Our calculations showed that Cboe Global Markets Inc. (NASDAQ:CBOE) isn’t ranked among the 30 most popular stocks among hedge funds.
The top 10 stocks among hedge funds returned 216% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 121 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.