Stelco, Clarke: Two Canadian Small-Caps at Discount

Curtis Jensen of Robotti & Company presented his in-depth investment theses on Stelco Holdings (Canada: STLC) and Clarke (Canada: CKI) at Best Ideas 2020.

Thesis summary:

Stelco Holdings is an integrated steel producer with two production facilities, including the Hamilton works and the Lake Erie Works. The company shipped 2.6 million tons in 2018, of which three-quarters was hot rolled coil, with coated and cold-rolled products making up the balance. Lake Erie is the newest greenfield integrated facility in North America and management believes it is one of the lowest cost producers in North America.

Stelco declared bankruptcy in 2014, was reorganized and emerged debt-free with an IPO in 2017. The reorganization enabled Stelco to limit its legacy liabilities and created one of the strongest balance sheets among peers. The company’s cash flow and financial flexibility are enhanced by ~C$800 million of NOLs, while significant real estate holdings open up further opportunities for value creation.

In a reasonable economic environment, the company ought to earn C$1.50-2.00, suggesting a fair value of roughly C$20 per share as a going concern and potentially higher in a change of control. Hoping to regain market share lost under prior management, Stelco’s management has made internal investments a priority, suggesting additional earning power in future periods. Bedrock Industries, which helped to reorganize Stelco, and Fairfax Financial own more than 60% of the common stock.

Clarke (Canada: CKI) is an investment company trading at a discount to the sum of its parts, which include both publicly-listed stocks and private assets. The company’s holdings include a limited service hotel chain, whose portfolio is being optimized, a deeply discounted, but well-managed energy services company and a growing manufacturer of oil and gas storage and processing equipment, currently under-earning its potential.

Clarke and its holdings are conservatively financed and management strives to engage constructively with all investees. Book value, adjusted for cumulative dividend payments, has compounded at 13% over the past fifteen years; management has repurchased 40% of shares during that period. The Armoyan family and Clarke executives own more than 50% of the common stock.

Listen to this session:

slide presentation audio recording

About the instructor:

Curtis Jensen is the portfolio manager of the Ossia Partners Fund. Ossia Partners employs a fundamentals-based strategy, grounded in primary research, to identify securities whose public market prices diverge significantly from a conservative estimate of intrinsic or economic value. Prior to joining Robotti & Company Advisors in 2016, Curtis was employed by Third Avenue Management in various roles from 1995 to 2014. Curtis oversaw that firm’s Small-Cap strategy and, from 2003 until 2009, he also served as Co-Chief Investment Officer, along with the firm’s founder, Martin Whitman, until being named sole CIO in January of 2010. Curtis was a member of the firm’s management and risk committees and oversaw the recruiting and mentoring of the firm’s research team. During his tenure at Third Avenue Curtis was a member of the nominating committee of the Board of Directors at Investor AB, Sweden’s leading industrial holding company. Curtis holds a BA in Economics from Williams College and an MBA from Yale University School of Management.