180 DEGREE CAPITAL CORP. ISSUES UPDATE LETTER TO SHAREHOLDERS
March 24 2020 - 9:32AM
180 Degree Capital Corp. (NASDAQ:TURN) (“180” and the “Company”),
today published the following letter to shareholders.
Fellow 180 Shareholders,
To say this has been a trying month may be the
understatement of the century. The COVID-19 pandemic has led to
worldwide economic dislocation with quarantines essentially
shutting down business as we know it. My first hope is that
our shareholders are being safe, vigilant, and are listening to the
advice of the world’s healthcare experts. As for TURN, we
believe we are well equipped to weather the storm and come out on
the other side.
To be clear, it is our view that despite the
recent drastic fiscal and monetary stimulus, this crisis will not
end until the virus is contained. While the fiscal and monetary
stimulus will help, I view it not as a solution, but as a bridge to
the containment of the virus. This situation didn’t start as a
financial crisis. This is a healthcare crisis for which we simply
weren’t prepared. I refresh the following website about 100
times a day: https://www.worldometers.info/coronavirus/.
China, which was two months ahead of us, is presently seeing life
slowly returning to normal as the number of new infections has
dropped dramatically. This trend came only after the curve of the
rate of new infections flattened. The questions we face now
are will we be able to contain the virus in the United States, and
if so, how long will it take? It is certainly easier to contain a
disease when you are a state run government and can order people
home. China did that. Free flowing democracies have not only taken
longer to acknowledge the severity of the crisis, but also to limit
the movements of its citizens. I am not telling you anything
you don’t know. I just wanted to make sure you understand that our
view is there will continue to be economic duress, stock market
dislocation, and heightened volatility until we contain
COVID-19.
In the near term, Let me offer a few thoughts on
what we have been doing and some general views we have of our
company.
- Other than one person, which for now happens to be me, we are
all working from home and communicating as frequently as we would
if we were all in the office together. In fact, the lessons of 9/11
prompted Wall Street to make it possible to be fully functioning at
home. Bloomberg Terminals work from anywhere, and we have the
ability to trade without limitations no matter where we are
physically located. If you add in text, email, video conferencing,
and cell phones, communication is free flowing.
- It is important to remember that TURN has permanent capital.
While other funds have to sell due to redemptions or other factors,
we do not. We started the year with $51 million in cash and
public company securities, and $12 million of that amount in cash.
As you can imagine, we have been adding to certain select names.
The adds, however, have been on the margin. We mentioned
COVID-19 as a risk in our fourth quarter letter and we have waited
a bit to add to our equity exposure. Today, our cash position is
more than 10% of our combined cash and public company securities.
- This meltdown is real, and the economic ramifications of
worldwide quarantines are yet to be fully felt. During this
time, we are less preoccupied with TURN’s stock price and what our
transitory book value is going to be at the end of this quarter.
There is no doubt in my mind that this wipeout will end with
companies going out of business. We have spent the last few
weeks stress testing our financial models for each of our holdings
for potential revenue declines of 50 percent or more for a period
of quarters. We’re actively assessing what each of our
holdings have to do on the cost side to conserve cash, protect its
balance sheets, and get to the other side of this crisis. As
a general overview, the majority of our holdings do not have
significant or outsized financial leverage. Many have net
cash. But like the rest of the world, they have the
uncertainty of a complete collapse in their revenues. Just
because a company isn’t tripping debt covenants doesn’t mean that
the company won’t face a cash crunch. We have been spending
time with our holdings, hearing their action plans for this crisis
and providing our perspectives on these plans. We are stress
testing our own models to assess how long a company can survive
this downturn. We have told every one of our companies that
their job right now is to: 1) preserve cash and protect the balance
sheet, and 2) challenge themselves to learn how to operate and
survive with revenues down 50 percent. As one very smart
friend of mine told me, “you aren’t serving your employees if you
drive the bus off the cliff.”You have entrusted us with your
investment in TURN, and we entrust management teams with TURN’s
capital. We expect our management teams to maneuver through
changing environments. Our companies are not going to sit on
their hands and do nothing. They are going to proactively
manage their business. Nothing is static. We like our
holdings, we like our management teams, and we expect them to do
whatever is necessary to ensure viability. Although I am
certainty not a Pollyannaish person, I do think we have a good
collection of assets. If we felt otherwise, we would sell and
move on.
- On the private side, one can also expect some degree of
dislocation as many of our holdings rely on continuous funding to
keep going. Our board of directors formally values our private
holdings at the end of each quarter. That said, based on the
information available as of the date of this letter, we currently
estimate that potential writedowns of the private portfolio equate
to roughly half of the decline Russell Microcap Index on a relative
percentage basis.
- As for where our NAV shakes out this quarter, first let me say
the quarter still has a few more days left. We usually spend
the first few days after the quarter has ended going through our
formal process for valuing the private portfolio. My point is all
of this can change for the better, or for the worse. Our
public portfolio companies have thus far performed better than the
indices and we currently estimate that our private portfolio has
performed better than our public portfolio. These two data
points mean that we currently believe our NAV has not declined by
the same 40% decline of the Russell Microcap Index or the 44%
decline of the Russell Microcap Value Index. And yet, our
stock price has collapsed by 48% to a lower price than what it was
when we took over an incredibly broken Harris & Harris Group.
- As for our own stock price, I am deeply disappointed by the
decline, although I understand the indiscriminate selling that
comes with redemptions and margin calls. Clearly, I think the
valuation is absurd. Our management team bought stock today
in addition to multiple purchases throughout March. We will
continue to add to it as we are now nearly trading at our cash and
public holdings. We are not thinking about where our share price
will be in a week, but rather do we think it can be materially
higher sometime down the road.
How long will this last? Much depends on
our own behaviors. Today, World Health Organization
Director-General Tedros Adhanom Ghebreyesus said the following
about the rising COVID-19 cases, “We are not prisoners to
statistics. We're not helpless bystanders. We can change the
trajectory of this pandemic.” Taking short-term pain by
quarantining and trying not to infect others will flatten the curve
and help bring an end to this crisis. Or we can ignore the
call from scientists and health organizations by continuing to pile
on to beaches and throw social distancing to the curb. The
actions taken over the upcoming days, weeks and months will
determine our economic and social path forward.
All that said, TURN is weathering the
storm. While by no means are we immune from the impact of
rapidly declining markets, we will get through this. I am confident
in our strategy. I believe our tried and true value
discipline will win out over what we hope is a very temporary
dislocation.
It was important for me to put pen to
paper. We have no debt and we have permanent capital.
We are here today, and we will be here tomorrow. We are
always here to answer any questions you have. I hope you all
are safe and sound.
Best Regards,
Kevin M. RendinoChairman and Chief Executive Officer
About 180 Degree Capital
Corp.
180 Degree Capital Corp. is a publicly traded
registered closed-end fund focused on investing in and providing
value-added assistance through constructive activism to what we
believe are substantially undervalued small, publicly traded
companies that have potential for significant turnarounds.
Our goal is that the result of our constructive activism leads to a
reversal in direction for the share price of these investee
companies, i.e., a 180-degree turn. Detailed information
about 180 and its holdings can be found on its website at
www.180degreecapital.com.
Press Contact:Daniel B. Wolfe180 Degree Capital
Corp.973-746-4500
Forward-Looking Statements
This press release may contain statements of a
forward-looking nature relating to future events. These
forward-looking statements are subject to the inherent
uncertainties in predicting future results and conditions. These
statements reflect the Company's current beliefs, and a number of
important factors could cause actual results to differ materially
from those expressed in this press release. Please see the
Company's securities filings filed with the Securities and Exchange
Commission for a more detailed discussion of the risks and
uncertainties associated with the Company's business and other
significant factors that could affect the Company's actual results.
Except as otherwise required by Federal securities laws, the
Company undertakes no obligation to update or revise these
forward-looking statements to reflect new events or uncertainties.
The reference and link to the website www.180degreecapital.com has
been provided as a convenience, and the information contained on
such website is not incorporated by reference into this press
release. 180 is not responsible for the contents of third-party
websites.
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