Is Pendrell Corp (PCOA) a Smart Long-term Buy?

Cedar Creek Partners recently released its Q3 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 5.4% in the third quarter of 2020, underperforming its benchmark, the S&P 500 which returned 9.0% in the same period. You should check out Cedar Creek Partners’ top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.

In the said letter, Cedar Creek Partners highlighted a few stocks and Pendrell Corp (NYSE:PCOA) is one of them. Pendrell Corp (NYSE:PCOA) is engaged in the business of licensing and selling intellectual property rights to others. Year-to-date, Pendrell Corp (NYSE:PCOA) stock lost 36.7%. Here is what Cedar Creek Partners said:

“Pendrell (PCOA) is an interesting company we purchased shares in during the second quarter. It is controlled by Craig McCaw. In our second quarter letter we gave an overview of Pendrell’s history (link). A significant event occurred in the third quarter that we want to update you on. Before that, we will briefly walk through the valuation when we purchased.

Pendrell’s last publicly filed annual report for the year ended December 31, 2017 showed equity of $199 million, with $184 million of cash and $20 million of receivables, and, adjusted for subsequent reverse splits, a total share count of 968 shares. By spring of 2020 we knew there were only 793 shares outstanding. Our estimate of book value, which we believed was mostly cash and investments, was $160 to $170 million, or $200,000 to $215,000 per share. We had not seen any mention of an acquisition on the company’s website, so we acted on the assumption that the balance sheet was still mostly cash and investments. In May we purchased shares for $75,000 per share, which was less than 40% of our estimate of book value. We assumed minimal cash burn of a few million dollars per year.

Subsequent to our purchase we saw on that the share count as of May 31, 2020 was down to 757 shares. We confirmed this amount with Pendrell. We don’t know if Pendrell had been one of the buyers at $75,000 to $85,000 per share or not, but if so, that was a great deal for shareholders when book value was over $200,000 per share.

Then things got even more exciting than just a simple deep value play. A fellow fund manager informed us that Pendrell was sponsoring a special purpose acquisition company (SPAC). The company, named holicity (HOLU) sold 27.5 million shares for $10 each. A SPAC, or blank check company, is a company created and funded with cash that then seeks to find an acquisition. Once the SPAC finds one it is presented to shareholders for approval. Shareholders who do not like the acquisition can choose to get their original investment back with interest, if any has been earned.

What is interesting is how SPAC’s are structured and that Pendrell shareholders get to participate. The sponsor of the SPAC gets an incredible deal. The sponsor gets what are called “founder’s shares.” Instead of the normal IPO price of say $10 per share, the sponsor pays pennies. It is assumed the sponsor is getting paid to source the acquisition and make a smart deal. For the founders shares to retain full allotment an attractive deal must be presented, which results in a minimal number of shares choosing to have their investment refunded. Obviously due to the low price for founder’s shares, it is by the most lucrative piece in a SPAC. Pendrell is the first time we had seen a way for the public to participate on the opportunity for founders shares in a SPAC.3

Pendrell’s SPAC, holicity, sold 27.5 million shares to the public for $10 each. Pendrell, as the sponsor, received roughly 8 million shares for $25,000 total, or roughly 3 cents per share. Pendrell distributed about 800,000 of the shares to directors and management of holicity but over 7 million are still owned by Pendrell. If holicity fails to complete an acquisition the shares are forfeited, but if they do, they should initially be worth $10 per share, or over $71 million to Pendrell. That works out to over $94,000 per Pendrell share. In addition, Pendrell purchased 5.5 million warrants with a $11.50 strike price for $7 million.

The current bid and ask for Pendrell is $110,000 and $149,000. We believe the odds are favorable that holicity makes an acquisition, and that eventually Pendrell’s shares can trade at 80 to 100% of book value. If they do, the fund will have a 3 to 4x return on our investment. If they can make an attractive acquisition, the warrants could be in the money making our Pendrell shares worth even more. Recent examples of successful SPAC’s are Nikola (NKLA), WillScot Mobile Mini Holdings (WSC), Virgin Galactic (SPCE), and Restaurant Brands (QSR). We think the “free option” Pendrell shareholders are getting via holicity is a rare opportunity for a low risk/high reward opportunity that due to Pendrell’s unusually high share price and lack of public financials has not been discovered by the market.”

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Our calculations showed that Pendrell Corp (NYSE:PCOA) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 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.