Key Takeaways

• We provide an update on the Mudrick Capital/Topps SPAC (MUDS)
  
• We provide an update on Real Networks (RNWK)
  
• We provide an update on EOG Resource (EOG 0.59% )
  
• We provide an update on Alibaba (BABA 1.13% )
  
• We provide an update on Alaska Airlines (ALK 0.83% )

We have received feedback from our subscribers to provide periodic updates on some of the stocks we have highlighted in our Signal From Noise column and wanted to be responsive within reason. We have selected thirty different stocks or ETFs for the column this year, so we wanted to focus on the five worst-performing names and whether or not we still recommend them. Of course, at the end, we will also discuss some of the columns’ winners.

This particular research product is not intended to ‘cover’ stocks in the way a sell-side analyst would. Instead, we are exploring our macro research themes through individual stocks’ stories and highlighting timely high-alpha opportunities for our subscribers. We mix between sectors and provide names up and down the cap scale. There is no unifying theme per se; however, we have some recurring themes like an outsized focus on Epicenter names who have done more with less in the face of an extraordinary shock.

Our Signal From Noise column highlights individual stocks or ETFs that we find to be attractive opportunities from several different vantage points. Ultimately, we are trying to find good ideas derived from our wider macro analysis. We love to find overlooked stocks or those whose prospects have been underestimated by the consensus.

We sometimes pick larger-cap stocks with safe, competitive moats and strong demonstrated revenue growth, and we also sometimes include smaller-cap stocks with high-risk, high-reward opportunities. We believe we have outlined some great opportunities for our clients. Still, we also wanted to update our clients on those selections that have performed the worst in terms of price since their selection and let you know whether we still stand behind our initial bullish analysis.

Please never over-concentrate yourself in any one stock or asset. One principle of investing that is timeless is that diversification can prevent ruinous outcomes. The first name we highlight is an excellent example of how unforeseen developments can quickly change the picture to the detriment of investors, even with heavy hitters like Michael Eisner guiding the deal. A seemingly intertwined brand relationship going back 70 years was suddenly kaput.

MUDS – Mudrick Capital/Topps SPAC

The only SPAC we have covered in this column has unfortunately fallen apart, as the company’s 70-year plus relationship with Major League Baseball was suddenly and without warning severed. Officially, Topps will still produce cards under the existing contract until 2025. However, after that, Fanatics will become the official partner of MLB in the future. Topps derived about 55% of its revenue from the sports section and was valued at around $1.2 bn in the transaction.

Apparently, Michael Eisner, Topps management, and the people at Mudrick Capital had no foresight of the crucial contract being lost and were not invited to submit a counter proposal. We recommended the deal because of Topps, and now that the deal is defunct, we no longer advise purchasing MUDS.A few months back, Eisner had been specifically asked about the possibility of losing the contract, and he dismissed the possibility citing the long historical relationship and the intertwined nature of the two brands. When we focused on the risks to this firm, we thought it might be that NFTs wouldn’t take off. Instead, Fanatics appears to have gotten the contract in part because it has gone all-in to the space.

Topps pitched its incredibly low CAPEX as a strength, but it seems that the lack of investment relative to peers doomed the would-be public company, which is now planning to stay private. In hindsight, Topps may have been more aggressive, but the Blitzkrieg-like action of Fanatics is probably the more likely culprit. Fortunately, this deal with Fanatics happened before the Topps merger was finalized.

The company has diverse revenue streams, including a confectionary business and a gift cards business, but absent the capital coming from the SPAC deal. It received a credit downgrade after the adverse developments on the MLB contract.

Due to these unforeseen events, we are no longer recommending this name. It would be hard to do so, given that if Mudrick Capital finds a new potential merger target, we would have to completely re-evaluate the deal and its prospects for success before recommending it to our subscribers.

The firm will either return capital to shareholders (in which case there may be cents of upside per share since they’ll cash out at $10) or will find a new project to allocate the capital to. However, this is less likely as Mudrick Capital has a significant financial incentive to find a new deal. If any subscribers are interested in hanging on until/if a new deal is announced, we will likely provide another update at that time.

It is perhaps fortunate that the downside has been mitigated by the fact it is a SPAC. There was much reason to be positive based on the earnings that Topps had reported over the preceding periods. Nonetheless, this outcome shows you that there are often outsized and unanticipated risks that can emerge in specialty or small-cap names. The next one we’ll focus on is a small-cap as well. Always make sure your positions in smaller-sized stocks aren’t overly concentrated.

RNWK – Real Networks

Real Networks (RNWK) is down 46.20% since we recommended the name on February 19th, making it the worst performer of the column. We believe that this management has handled things less than optimally and is more insular. Nonetheless, we see them executing on strategically orienting their assets and direction to support their AI growth initiatives, SAFR and KONTXT. The combined growth rate of the initiatives was 101%, although there was a significant differential with SAFR well above 250% and KONTXT at only 15%.

We want to say about KONTXT, after more carefully examining the project, that it may be subject to a rapid increase in revenue because the primary way such a product would get revenue is from a major mobile carrier. In addition to everything we’ve said about Real Networks in the past, we’d also like to point out that they have pre-existing relationships with a global network of mobile carriers. This has proven valuable in recent developments with a major carrier. This could present a future cross-selling opportunity for the KONTXT product.

The company also has valuable and industry-leading partners in the AI space. The ability of the SAFR facial recognition process to be fully embedded onto devices (and thus, no network connection is necessary for functionality). The company recently proved that the embedded version was just as fast as versions attached to networks. This gives the company a wide variety of use-cases that wouldn’t be otherwise available. Real Networks is also leveraging a connected, global sales force to generate revenue in its growth initiatives.

Scener, another product developed in the Real Networks ecosystem, was spun off as an independently controlled entity. However, RNWK still maintains a 40% interest in what has become financially self-sufficient. This product allows people to watch digital media together remotely. The use of this novel product took off during the pandemic and has since remained elevated. Digital watching parties are a trend that will stay with us, which is another source of future shareholder value.

The bottom line is this: the management of Real Networks is a bit insular, but they do keep moving the ball forward on their strategic vision of pivoting toward becoming an AI company. The lack of coverage and extremely small market cap have been a source of consternation for those who own this stock. There may be a ‘show-me’ sentiment amongst investors, and this could therefore be dead money for the short to medium term.

Nonetheless, we see management repeatedly advancing SAFR, and we think even if it has been clunky, the company is undergoing a genuine pivot into lucrative growth areas that will prove fruitful if you have the time to wait. Management anticipates seeing significant revenue growth in the double digits fueled by the growth initiatives in 2022 and 2023.

EOG 0.59%  – EOG Resources

We continue to think the EOG Resources is a leader in the Energy industry and has disciplined and shareholder-friendly management that enjoys an enormous technical advantage and a lot of the premium shale real estate available. We recommended the stock on June 4th when it was $85.91, and it closed on Wednesday, September 1st at $66.36. We understand the price action has been brutal, and it has largely tracked the supply concerns around the Delta variant. The company is a free-cashflow generating machine, and it is forecast to significantly increase that ability in the coming years. It has regularly rewarded shareholders with special dividends when times are good in addition to its normal dividend.

We stand behind what we wrote in EOG: The Death of A ‘Shalesman’ and think the company continues to look more attractive than peers on many metrics. The firm has very low leverage and a wide footprint of premier shale assets that competitors have a hard time matching. It will likely continue gobbling up smaller quality projects in the near term as M&A in the space remains subdued. Nonetheless, we believe this company continues to execute a strategy that will prove fruitful for shareholders.

The firm was able to shrug off the restrictions for drilling on Federal land due to its prodigious and enviable footprint. Its capital discipline and consistent cash rewards for shareholders are likely a leading example of what the post-COVID upstream E&G business model is becoming. We believe the management team will continue to increase its technological advantages and remain one of the leading players for the foreseeable future.

EOG’s advantage isn’t just technological. It maintains capital discipline as we predicted it would in our previous article, rather than chasing output like the old salesman would have. The focus on accumulating premium locations is a significant competitive advantage as well. The firm can probably produce a very impressive after-tax return of 60% at $40 WTI, which is well below the current prices. This company has discipline, and if oil prices rise even further, the profitability and free cash flow should be quite appetizing to a wide range of investors.

The other thing about this company that might be particularly surprising to some is that it is a leader in sustainability amongst its Energy industry peers, particularly the shale industry. We believe that this company is very ahead of the curve in balance sheet quality and ESG credentials than many of its peers. We believe that, due to the continued excellence in execution and ‘cream of the crop’ nature of this company, it should be held despite the adverse price activity. Also, keep in mind a company with as strong a track record on dividends as this one will always have adverse price action mitigated by the cash paid directly to shareholders.

BABA 1.13%  – Alibaba

We featured Alibaba in our column on July 1, 2021 when the stock was $221.87, and it closed on Wednesday at $173.28. We focused our article on the fact that we believed the specter of Chinese political risk was exaggerated, and subsequent events may have proven that assumption premature. Since our article, the CCP has expanded its crackdown across various sectors of the economy. There have also been some indications that the CCP is not going in a fully Maoist direction and would still like to retain as much foreign direct investment and competitive prowess of its national industry as possible while still asserting ultimate authority.

There has been some recent intrigue around both a Chinese actress and a local political official rumored to potentially involve ties to Alibaba. However, this is unsubstantiated. One thing that this has all been a reminder of is that China is not a capitalist country despite many common features. In the end, it is the rule of the Chinese Communist Party, not the rule of law. This will always be an acute risk to investing in Chinese equities, but we did select BABA because we believe it is amongst the strongest you could have exposure to from a fundamental standpoint. Still, we think this is the case.

As you can see, the company has a mature business and very much is a major artery of the broader Chinese economy. The network effects and growth of the company are awe-inspiring, and it also generates a lot of FCF. It is in a duopoly that controls the lion’s share of Chinese venture investment and also has credible efforts to diversify its revenue internationally.

The political risk certainly remains severe and, to a degree, will always be unpredictable. Chinese regulators have eroded Ant Financials’ competitive advantage by forcing it to share its credit models with state-owned banks. Alibaba’s fine so far has been the worst and changed an otherwise profitable quarter into a loss. Nonetheless, we see Alibaba’s main e-commerce competitors (Vipshop, JD.com, and Pinduodo) as likely having to incur higher costs as they attempt customer acquisition. Alibaba’s already paid the highest fine, and as we said, the worst-case scenario happened for it. Alibaba’s more mature user base means the effects of regulation on growth compared to its peers will likely be muted.

Competitors are more dependent on new customers to maintain growth. In contrast, Alibaba is more dependent on international expansion plans and enhances profitability and monetization of newer promising segments.

There have also been some events that may have been lost in cultural translation. Xi gave a speech about the ‘common prosperity’ that many took to be more anti-entrepreneurial than it probably was. Several times throughout the speech, Xi spoke about wanting to augment the ability of the average Chinese citizen to prosper.

Look, if you are a more conservative investor who doesn’t want to worry about Chinese political risk, then no worries, we completely understand that. We wouldn’t say the coast is clear by any means with regards to political risk. Still, the fundamentals and ubiquitous role of Alibaba within the world’s second-largest economy makes us think for those with the time to wait, you are getting growth at a pretty reasonable price. Alibaba looks cheap on a variety of metrics.

There is always the outside chance the Xi and the CCP have sinister and dark plans for China that will swat out the previously thriving private sector in that country. However, we notice that the Chinese Communist Party, while purporting to stand for an all-encompassing communist political ideology, is nonetheless always looking out for number one and always trying to get the best deal possible. Therefore, those looking at the problems of Alibaba through a binary lens of communism versus capitalism are likely analyzing the situation across the wrong vector. The Chinese communist party does not want more communism than capitalism, and it wants to have as much of both as possible.

In other words, we still essentially stand behind our original article on Alibaba with the admission that we preliminarily estimated when the Chinese Communist Party’s tirade would be over. The uncertainty that comes about in a country with no rule of law will always be problematic for shareholders. However, for the time being, the CCP has thawed some of its positions. It clearly is trying to extend an olive branch to foreign capital in some ways. Today Beijing announced it would be opening a stock exchange. Few serious analysts think Beijing will actually take the extreme step of stiffing foreign investors from their claims on profits, and Alibaba’s status as a high-growth commercial Titan can’t be undone easily, even by an autocratic political authority.

That being said, Chinese equities are subject to a lot of risks that American equities are not subject to. If you are not comfortable with these risks and don’t have the time to wait for the cussedness of Xi and his comrades to blow over, then you might feel safer in American technology name instead. We do not deny there is a high amount of risk in this name, but we also think there could be a high reward as well.

ALK 0.83%  – Alaska Airlines

We covered Alaska Airlines on April 4th, 2021, when it was $72.69, and the stock closed on Wednesday, September 1st, 2021, at $57.23. When we published the article, the stock was high on a wave of vaccine optimism, and the world was not yet so well acquainted with the highly virulent Delta variant of the coronavirus that has again brought TSA traffic to its lowest level since May.

Our article was titled Fortune Favors The Strongest Balance Sheet, and we still like Alaska along this logic. Not only did Alaska not do any additional equity raises when many other airlines did, but it is also the only major American legacy airline to have never gone bankrupt, which should count for a gold star in shareholders’ eyes, particularly in a bankruptcy prone industry. We liked Alaska because of its heavily domestic profile, and it has continued to increase its mix of leisure destinations and passengers and to reduce costs.

Airlines are amongst the worst affected of Epicenter industries. They weren’t particularly profitable as a group, to begin with, with many prone to bankruptcy and poor returns. The highly regulated environment they operate in is also very high-cost, and many larger airlines, in particular, were overly exposed to international and business travel. One other appealing feature is that a third of revenue is derived from cargo, which is more stable than business travel.

Alaska has a much stronger balance sheet than many of its competitors. It has been leaning into a short- and medium-haul focus, coupled with aggressive cost-cutting that has made it competitive with many low-cost airlines. Because of its stronger balance sheet, Alaska has a higher chance of avoiding the fate that will likely befall many airlines strapped with crisis debt, accumulating negative retained earnings, and trying to outgrow the high costs. Luckily, ALK has some of the lowest borrowing costs in the industry. The airline recently just entered an alliance with American as well, which should help it maintain its current competitive edge over many domestic competitors. The airline’s $4bn of cash makes it likely to be one of the survivors even if the pandemic continues to wreak havoc in the broader industry.

We recently also highlighted JBLU in a Signal and articulated that we thought the profile of the company’s routes was better situated compared to peers due to the evolving COVID-19 reality. The longer international takes to return, the more it hurts the long-haul oriented carriers. Alaska’s profile is very similar to JBLU’s, and its domestic short- and medium-haul focus should prove superior to competitors for the same reasons.

Indeed, Alaska’s momentum seems to be reversing already, and we believe that once the Delta variant passes and TSA throughput goes back up, positive momentum will continue. ALK reported Q2 earnings that marked the first profitable quarter and an industry-leading one in many respects since 2019. The company exited the quarter with healthy double-digit margins at 14%, increasing productivity, strong free-cashflow, and the company continues to de-lever.

All and all, we continue to recommend Alaska Airlines for the same reasons we initially did. We think this is among the stronger airlines. Even though it is technically a legacy, full-service carrier, the management has proven that they can leverage some of the tricks and brand strong points of their low-cost competitors. We believe that the leisure first recovery and delayed return of business and international travel will continue to favor domestically oriented carriers with strong domestic and near-domestic leisure destinations.

What About the Signal From Noise All-Stars?

We wanted to give an update on our picks that have struggled the most since we highlighted them to you. However, we also wanted to single out some of our best performers. Cleveland Cliffs (CLF -0.20% ) has gone up nearly 40% since we recommended the stock on April 29th, 2021. ASML 0.29% , which we think has one of the most important and impressive competitive advantages on Earth and also happens to hold the key to Moore’s Law, has been our second-best performer gaining over 30% since we highlighted it on April 15th 2021. Madison Square Garden Entertainment (MSGE 0.71% ), Nvidia (NVDA 0.14% ), Ford (F -0.08% ), and DexCom (DXCM 1.70% ) have also been amongst the top performers. We are confident that given more time and progress on the healthcare situation, many of the subjects of our Signals will continue to experience price appreciation.