180 Degree Capital Corp. (TURN): Navigating a Challenging Environment with Activism and Patience

180 Degree Capital Corp. (NASDAQ:TURN) has navigated a challenging market environment in the first quarter of 2024, posting a 3% increase in its net asset value (NAV) despite the broader market volatility. The company's cash and public securities rose 5.4% in the quarter, showcasing its ability to weather the storm.

Market Environment

The first quarter was a tale of two halves, with a strong start to the year giving way to a late-quarter rout for the Microcap Index as a risk-off environment took hold. Investors grappled with the prospect of higher interest rates for longer, as employment numbers remained strong and inflation levels stayed above the Federal Reserve's 2% target.

Portfolio Performance

Despite the market headwinds, 180 Degree Capital's portfolio companies delivered mixed results:

Potbelly Corporation (NASDAQ:PBPB):

Continued its strong performance, with a $2.5 million, or $0.25 per share, increase in value during the quarter. The company preannounced another strong quarter, with 6.4% growth in same-store sales and average weekly sales exceeding estimates, driven primarily by traffic growth. Potbelly also noted 192 new shop commitments as part of the pre-announcement, which was later expanded to 202 when the company reported full results in March 2024.

Synchronoss Technologies, Inc. (NASDAQ:SNCR):

Saw a significant increase, rising from $6.21 to $8.35 per share. In February, Synchronoss reported that it had completed its post-divestiture cost removals, resulting in annual savings of approximately $15 million. The company also noted that it expected to report revenue and adjusted EBITDA for the fourth quarter of 2024 that met or exceeded the upper end of its original guidance. The stock price doubled after this announcement before retreating through the remainder of the quarter.

Lantronix, Inc. (NASDAQ:LTRX):

Declined from $5.86 to $3.56 per share. The company reported results for the second quarter of 2024 that met expectations, but delays in one of its compute programs and weakness in the distribution sales channels led to a lowering of full-year guidance. The new CEO's cautious tone and work selection made Lantronix appear more like a turnaround story than a strong business, putting pressure on the stock.

Arena Group Holdings, Inc. (NYSE:AREN):

Faced challenges, defaulting on its contractual payments to ABG related to its Sports Illustrated license. This resulted in ABG giving Arena notice that it was canceling the license. Subsequent to the end of the first quarter, ABG signed a new agreement to run Sports Illustrated with Minute Media. Arena was also served with lawsuits from ABG and former management, and the stock declined 27% during the quarter.

ComScore, Inc. (NASDAQ:SCOR):

Declined 7.8% in the quarter, missing top-line estimates and exceeding EBITDA targets for the fourth quarter of 2023. The company then provided guidance for 2024 that indicated expected revenue growth but an inability to maintain or exceed 15% EBITDA margins for the year. ComScore was also unable to reach a conclusion on outstanding negotiations with Charter to resolve data licensing issues and with the preferred stockholders to resolve outstanding capital structure issues.

Recent Developments

During the quarter, 180 Degree Capital received a $1.3 million payment from the acquisition of its private portfolio company, TARA Biosystems, Inc. This payment is part of the company's ongoing transformation from a closed-end fund focused on venture capital investments to its current strategy of investing in public companies.

Market Analysis

The broader market environment has been challenging, with the Microcap Index down 30% from its highs despite many companies performing relatively well. 180 Degree Capital believes that the pendulum has swung too far to the pessimistic side, with concerns about higher interest rates and a potential recession overshadowing the resilience of the economy.

The company's analysis shows that over the past 60 years, the economy has grown in 84% of the years when the Federal Funds rate was 4.9% or greater, with an average growth rate of 3.3% in those years. Additionally, the Russell 2000 Index has been up in approximately equal numbers of years when the Federal Funds rate was above or below 4.9%.

While 180 Degree Capital acknowledges that there are valid concerns, it believes the market has become overly pessimistic, creating opportunities for the company's unique investment approach. The company's portfolio of 10 to 15 companies, with a focus on microcap stocks and an activist investment strategy, has delivered gross total returns in the top decile of its Lipper Peer Group since inception.

Discount Management Program

To address the current discount between 180 Degree Capital's NAV and its stock price, the company's Board of Directors has implemented a discount management program. The program will evaluate the average discount between the company's estimated daily NAV and its closing stock price during two management periods: January 1, 2024, to December 31, 2024, and January 1, 2025, to June 30, 2025. If the average discount exceeds 12% during either of these periods, the Board will consider options such as a significant expansion of the current stock buyback program, cash distributions reflecting a return of capital to shareholders, or a tender offer.

Financials

In the first quarter of 2024, 180 Degree Capital reported an annual net loss of $13,671,591, annual revenue of $5,640,401, annual operating cash flow of -$2,203,763, and annual free cash flow of -$2,207,486. On a quarterly basis, the company posted a 3% increase in its NAV, with its cash and public securities rising 5.4% during the period.

Outlook

Looking ahead, 180 Degree Capital remains focused on its activist approach and patient investment strategy. The company believes that its differentiated approach, combined with the current market environment, presents significant opportunities for value creation in its portfolio companies. As the company continues to navigate the challenges, it remains committed to delivering long-term value for its shareholders.