If you are looking for the best ideas for your portfolio you may want to consider some of Laughing Water Capital’s top stock picks. Laughing Water Capital, an investment management firm, is bullish on Iteris Inc. (NASDAQ:ITI) stock. In its Q2 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on Iteris Inc. (NASDAQ:ITI) stock. Iteris Inc. (NASDAQ:ITI) is a technology company.
In July 2019, Laughing Water Capital had released its Q2 2019 investor letter. The investment firm said that Iteris Inc. (NASDAQ:ITI) was one of the top five positions in Q2 2019. Iteris Inc. (NASDAQ:ITI) stock has posted a return of -28.7% in the trailing one year period, underperforming fund’s benchmark the S&P 500 Index which returned 13.3% in the same period. This suggests that the investment firm was wrong in its decision. On a year-to-date basis, Iteris Inc. (NASDAQ:ITI) stock has fallen by 12.2%.
Laughing Water Capital fund posted a return of 10.3% in the second quarter of 2019, outperforming fund’s benchmark the S&P 500 Index which returned 4.30% in the same period. Let’s take a look at comments made by Laughing Water Capital about Iteris Inc. (NASDAQ:ITI) stock in the Q2 2019 investor letter.
“Iteris (ITI) – Iteris, our traffic management business, has been a strong performer year to date as it is clear the company has moved past the temporary headwinds it faced last year, including the fact that the estate of the previously largest shareholder has fully exited its position. However, more important than any stock price movements is the beginning of a new chapter for the company. In June Iteris made a bolt-on acquisition in the traffic space, which will allow the company to cross sell its software into new geographies. Pro forma for the acquisition, shares presently trade at a mid teens multiple of my estimate of the free cash flow that the traffic business generates, which is cheap on an absolute basis, while the company remains extremely cheap vs. its strategic value, as demonstrated by recent transactions. I believe there is a long runway for continued success here, and the fact that CEO Joe Bergera is a veteran of Roper Technology (ROP) suggests that the future could be very bright.
Roper went public in 1992, and since that time the stock has compounded at over 20% a year by executing a strategy that is tied to outstanding capital allocation and disciplined M&A in niche verticals. I believe that Iteris is an excellent platform from which to run the Roper playbook, and I believe Bergera and CFO Andy Schmidt are well suited to quarterback as they pursue additional bolt on M&A.
On the negative side, it is not clear to me that the board of directors outside Bergera has a sophisticated understanding of how per share value creation works. At this time, it is abundantly clear that the traffic business is a gem, but the market has difficulty fully valuing it because consolidated GAAP financials are polluted by a money losing Agriculture business. As a long term focused partnership we have the luxury of generally not caring about stock prices day to day, but if the board begins to use equity as currency, then valuation becomes all important because long term per share value will be directly tied to today’s dilution.
I am absolutely positive that on a probability weighted basis Traffic is a much better business than Ag, and 99.9% certain that Traffic is a much better business on an absolute basis. It is thus disappointing that we sold 18% of Traffic and 18% of Ag rather than just selling 100% of Ag. In my view by continuing to fund the Ag business the board is behaving like an over indulgent parent that raids their child’s college fund to pay for acting lessons. There is a chance that the child might be the next Tom Cruise just as the venture stage Ag business might be very valuable to the right buyer at some point. However, to date it is increasingly clear that following some early success the Ag business and its mounting losses is more like an understudy in a high school production. At a time when there is massive strategic interest in Traffic and competitors are aggressively funding R&D, we risk losing our ticket to college by chasing a dream. Any good parent should encourage and support varied interests, but there comes a time when you have to face reality and focus. Over the past year I have had multiple conversations with management and board members trying to illustrate the above and more properly align incentives with long term per share value creation. Simultaneously, I have told potential activists that their time would be better spent elsewhere. I am now less certain, although I remain hopeful that the board will institute policies that align long term incentive comp with measures such as total shareholder return and some measure of capital efficiency of their own volition.
To be clear, I think this transaction makes sense, and increases per share value, but on a long time line, simply increasing per share value is less attractive than increasing per share value in the most efficient way. Given the size of the capital raise, the pro forma cash balance, and the fact that the company should be imminently cash flow positive I think the risk of additional dilution is minimal, and there are likely to be additional acquisitions in the not too distant future. Combined with organic growth, these acquisitions should lead to high teens revenue growth, and significant operating leverage, which when combined with long term contracts and a cheap valuation indicate a continued bright future for Iteris.”
Last month, we published an article revealing Laughing Water Capital’s bullish investment thesis on Iteris Inc. (NASDAQ:ITI) stock in its Q2 2020 investor letter. This suggests that the investment firm has been bullish for a long time on Iteris Inc. (NASDAQ:ITI).
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