Arquitos Capital recently released its Q2 2020 Investor Letter, a copy of which you can download here. The fund posted a return of -7.6% for the second quarter (net of fees), underperforming its benchmark, the S&P 500 Index which returned 20.5% in the same quarter. You should check out Arquitos Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.
In the said letter, Arquitos Capital highlighted a few stocks and MMA Capital Holdings Inc. (NASDAQ:MMAC) is one of them. MMA Capital Holdings Inc. (NASDAQ:MMAC) is a portfolio management company. Year-to-date, MMA Capital Holdings Inc. (NASDAQ:MMAC) stock lost 21.9% and on August 19th it had a closing price of $24.56. Here is what Arquitos Capital said:
“MMA ended the second quarter trading at $23.12. This is a similar price to where shares traded in March 2017.
The company itself has created a tremendous amount of value for shareholders over that time period. Book value stands at $37.59 per share if the company’s tax assets are removed. With the tax assets, book value is $47.82 per share. Book value was $20.75 in March 2017. So, book value has grown by 81%, but shares have not moved at all. And the company was not overvalued in March 2017.
Given the nature of the company’s operations, book value can be a proxy for liquidation value. In fact, the company continues to hold some off-balance-sheet assets that would likely make its liquidation value even higher if it ever went that route. Of course, it would be a mistake for the company to actually pursue liquidation given the success of its solar lending portfolio, the strong partnerships it has built over the years, the skill of its management team, and its tax assets. The actual value of the company is greater than its book value, but this disconnect demonstrates just how extreme the company’s undervaluation is.
This is why MMA has been 40% of the portfolio for several years now. It is an extremely low-risk position given its undervaluation, but it has required patience to hold over the last three and a half years.
The company is currently taking a cautious approach because of COVID. They have not reported any defaults in their loan portfolio, but it remains to be seen how the rest of the year turns out. Even if they do incur some quotational losses in the portfolio, the tax benefits, collateral, high interest rates charged, fees, and short-term duration of the loans should offer significant protection. We’ll know more details when the company reports their second-quarter earnings in August.
Even in today’s difficult environment—and conservatively accounting for portfolio losses—fair value for the company is at least $35.00 per share, or more than a 50% gain from here. Again, considering that this is 40% of our portfolio, we have considerable potential for significant overall gains in this position alone.
While the short-term stock performance is unknown, I would expect additional clarity from their secondquarter earnings release in August. That release should demonstrate the resiliency of the company to other investors.”
This isn’t the first time Arquitos Capital talked about MMA Capital Holdings Inc. (NASDAQ:MMAC) favorably either. The investment firm has been a long time MMA Capital Holdings Inc. (NASDAQ:MMAC) bull. In April 2019, we shared Arquitos Capital’s bullish MMA Capital Holdings Inc. (NASDAQ:MMAC) thesis in this article.
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