Greenhaven Road Capital - Clarus: A Potential Cherry On Top At Sub-7X EBITDA
Summary
- The 2022 price chart for Clarus looks a bit unusual.
- The short interest in Clarus exploded, as did trading volumes.
- Our purchase prices were around $8 per share.
- In the end, fundamentals matter, and I think they are on our side with Clarus.
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The following segment was excerpted from this fund letter.
CLARUS (NASDAQ:CLAR)
The 2022 price chart for Clarus (CLAR) looks a bit unusual, bouncing around $20 per share for most of the year, spiking up to $28, and then plummeting to less than $8, a level not seen since 2019. The short interest in Clarus exploded, as did trading volumes. There were approximately 37.3M shares outstanding in July 2022.
In August, 87M shares traded - 20 times what traded in several previous months. In the last 4 days of August, more than 37M shares traded hands on no obvious news. It's typically an enormous waste of time to try to explain short-term moves in stocks, but here we can find some breadcrumbs. A Brazilian hedge fund seems to have blown up and a large quantitative options fund seems to have inadvertently acquired enough shares of stock (4.3M) and call options (3.9M) by the end of July that fully exercising them would have resulted in the firm owning 21.9% of the company.
By the end of August, that firm sold all but 300k shares but grew its options position to 11.8M which, if fully exercised, would have resulted in 32.4% ownership. We will come back to this massive options position, but the main point here is that a large portion of the buyers and sellers were one fund being margin called (seller) and a fund that quickly acquired and divested a disproportionately large exposure to Clarus.
Our purchase prices were around $8 per share, which implies a market capitalization of roughly $300M. The company does have debt, which should have been approximately $135M as of year-end, and also should have ended the year with $100M+ of inventory. What does Clarus do? I suspect that the options firm had no idea, but this is how Clarus describes itself:
"Clarus Corporation is a global leading designer, developer, manufacturer and distributor of best-in-class outdoor equipment and lifestyle products focused on the outdoor and consumer enthusiast markets. Our mission is to identify, acquire and grow outdoor 'super fan' brands through our unique 'innovate and accelerate' strategy. We define a 'super fan' brand as a brand that creates the world's pre-eminent, performance-defining product that the best-in-class user cannot live without."
Clarus has been built by Warren Kanders, who owns approximately 15% of the company. He has allocated capital well and has pursued a buy-and-build strategy of improving underlying brands through better distribution and availability of capital. His first acquisition and highest profile brand is Black Diamond, a leading brand for rock climbers. Most recently, Clarus purchased an Australian company, Rhino Rack, which builds roof racks for SUVs for off-road adventures (think Thule on steroids).
In round numbers, Clarus' $300M + debt is substantially less than the prices paid to acquire Black Diamond ($90M), Sierra ($79M), Barnes ($31M), and Rhino Rack ($197M). The valuation also appears quite reasonable relative to the $60M+ in EBITDA I expect the company to generate in 2023. There is a "better" case scenario three or four years out where supply chain issues moderate, valuation multiples revert to closer to historical levels, and the stock becomes a three-or four-bagger.
Coming back to the options firm that acquired exposure to 32% of Clarus - in the U.S., if an entity acquires more than 10% of a company, they must hold those shares for at least six months. If not, the company (or, if the company refuses, its shareholders) can sue for the profits under the "short swing profit rule." There are also exceptions for market makers and arbitragers, both of which have been invoked by the firm in question.
This is also not my area of expertise but, in my opinion, the short swing profits, could easily be $2 per share or >25% of the prices we were paying. The company has filed suit. This potential windfall does not appear on the company's balance sheet nor is it discussed or valued in the marketplace, as far as I can tell. The short swing profit opportunity is not the reason to buy the shares, but at sub-7X EBITDA that should be growing, it is a potential cherry on top.
In the end, fundamentals matter and I think they are on our side with Clarus.
Dan Roller, a manager in which Greenhaven Road's Partners Fund is invested, has been very helpful getting comfortable with the long-term opportunity for Clarus.
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