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Is Turning Point Brands (TPB) a Smart Long-term Buy?

Maran Capital recently released its Q2 2020 Investor Letter, a copy of which you can download here. The fund returned approximately 5.4% net in the second quarter and approximately -13.1% for year-to-date. Over the past three years, Maran Partners Fund is up 28% net while the Russell 2000 total return index is up just 6% during the same period. You should check out Maran 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, Maran Capital highlighted a few stocks and Turning Point Brands Inc. (NYSE:TPB) is one of them. Turning Point Brands Inc. (NYSE:TPB) is a tobacco company. Year-to-date, Turning Point Brands Inc. (NYSE:TPB) stock gained 3.3% and on August 12th it had a closing price of $29.97. Here is what Maran Capital said:

“Turning Point Brands is once again a core top-five position in the fund. We previously owned TPB from 1Q 2017 through October 2018, exiting only when it reached our estimate of fair value at that time. We revisited the company and its parent, Standard Diversified, over the last eight months, following reductions in the share prices of each, continued growth in the fair value of TPB, and, importantly, the announcement that the two would merge (which I believed would simplify the structure, increase liquidity, and reduce a perceived overhang).

Our path to a core, unhedged, net long position in TPB was somewhat circuitous. There have been times since last November at which we were taking advantage of what I called the “parent-daughter arbitrage” opportunity between SDI and TPB, and therefore owned one or the other, depending on which was cheaper (considering they essentially constituted economic ownership in the same underlying business).

I laid out my case in my last two partner letters as to why I thought the TPB/SDI merger had a high certainty of closing (and therefore the risk of the arbitrage was small). As the following chart illustrates, 4 there have been meaningful opportunities on both sides of this trade at various points in time since the transaction was announced last November.

The merger was successfully completed in mid-July, leaving behind a cleaned-up structure, no controlling shareholder, a lower TPB share count, greater liquidity, and a significant amount of momentum in the underlying business.

We first invested in Turning Point Brands (TPB) shortly after its IPO. At the time, I underwrote the business at around $13/sh, based on ~$1.30/sh of FCF. I liked the idea of paying just 10x free cash flow for a business with both a very stable core and significant growth potential.

We once again own the business at a single-digit multiple of free cash flow, and the growth prospects of the business are just as good, if not better, than they were three years ago. Turning Point Brands is assetlight, has high returns on capital, and has a stable core with numerous organic and inorganic growth opportunities.

I believe the noise of the merger with SDI overshadowed some of the positive developments at TPB over the past few months, including an accretive acquisition (a low-risk $7mm of EBITDA purchased for $46mm) and significant acceleration in the business in 2Q. As part of the transaction with SDI, TPB “repurchased” ~1.5% of their shares for $0. Now that the transaction is complete, I believe that investors may take a fresh look at TPB and like what they see.”

Cheapest Cigarette Brands in 2018

MeskPhotography/Shutterstock.com

In Q1 2020, the number of bullish hedge fund positions on Turning Point Brands Inc. (NYSE:TPB) stock decreased by about 13% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with Turning Point Brands’ growth potential. Our calculations showed that Turning Point Brands Inc. (NYSE:TPB) 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.