Welcome to trade ideas
I'm Jake Merle sitting down with John Jay neurone editor-in-chief of IPO edge John great to have you back on the show. Thanks Jake
So let's get right into it today. What's your trade idea?
So my idea today is a special purpose acquisition company or a SPAC and it is acquiring a company called KL discovery
KL discovery does something that happens all the time, but we probably don't think that much about it
They're basically doing data discovery when there's civil lawsuits. So that's about, you know, four-fifths of the business
So this is a huge huge thing that that's going on these days, you know
If you go if you go back to the 90s, there's all this paper
Right, but now the amount of data and all of our different devices
It's just dispersed in so many different places that it takes some real firepower to collect it quickly
So John how exactly does this company work? Let's say for example if I'm suing someone and I need their information
Do I hire this company? How exactly does it work? Yes
So what happens when there's a civil lawsuit and most is that most of this business is in civil lawsuits?
one party will get to have discovery of a whole lot of information from the other party and
What happens you know or what used to happen 25 years ago is you just get access to a bunch of file cabinets, right?
But the world's changed dramatically, so we're not just talking about email. We're talking social media. What's on my iPhone?
iPad
BlackBerry servers whatever and it takes a lot of firepower to collect this stuff quickly so law firms and
Major companies will both hire KL discovery or aura or one of their competitors to do this
They don't have the capability to do it internally. So overall it seems like a great opportunity
But why specifically do you like this company?
well
I think that these guys are head and shoulders above the competition in terms of their growth prospects because they're very very good at doing
Acquisitions, so these aren't always you know
Game-changing acquisitions. Some of them are tuck-ins, but they're adding on all this technology. That's that's built them up
so they're able to offer way more than the other competitors do and
By the way, you know, this is a SPAC
so there's a merger that's gonna happen here with a sponsor and
The sponsor is being run is run by a guy named John ledecky who is basically a legend and rolling up companies
This is what he does
So it's a real match made in heaven, I think and so in terms of fundamentals, what does the valuation look like right now?
So it's priced I think quite fairly
I mean, I think that you know when you do these specs, you know
People have started starting to learn that they needed to be they need to be priced that they're gonna they're gonna go up. So
you know, it's a it's a it's a little bit under I'm 11 x 2019 yada and
You know that's considerably less than some of the competitors
So if you look at list of competitors or cops, I should say so SS and C is a good one
It's you know, it trades about 20% higher than that
So I think there's a real good amount of upside there and how much upside are you expecting?
well, I mean, I think you know, I don't want to put too high of a target on it, but I think
25% is pretty good and that could happen fast. I think within a year or so
I mean if people just start to start to see the company, you know knock out some a couple good quarters
I think the stock should rise. I mean it could happen faster
I mean sometimes these facts as we've discussed in the past will trade, you know
They'll start to trade way up even before the deals approve. People are sight enough about it
So are you looking to trade only the specific spec or also the warrants as well?
You know, I looked at the warrants Jake and in this case, I think I would just go with a common stock
I mean when we looked at some of these others like Thunder bridge, I mean that was a really unusual
Situation where the warrants were just being ignored and they were very cheap
But in this case, you know, they're trading about where others do so, there's another one Leo Holdings, which is Chuckie Cheese
Which we talked about these warrants were trading around the same price
so I mean if you want the extra juice sure, but I don't think there's an
Exceptional value there, like there was with under bridge in over. What time horizon do you expect this 25 percent upside potential?
I mean I think within a year, you know, but again, I would not be surprised if it happened faster
I don't know that this is gonna rally before the deal gets approved
But my guess is that after the deal gets done. This trades very well
And you know, you can look at some of the other very successful deals recently one spa world, which we may have talked about
I mean that one's up 50 percent in just six months
So, you know this if these things are done, right the returns can be fantastic
And what would you say is the biggest risk to this trade?
you know, I think that the biggest risk here is competition, you know, if you know
I you know when I looked at this I thought you know
What's the moat and there are two big competitors?
and by the way
one of their competitors was taken out at a
higher multiple a couple years ago - so that's another reason to think there's upside but you know
if one of the competitors starts getting very aggressive, maybe they make a smart acquisition, you know, that could be troubling but again,
I would go back to the fact that we've got a CEO at the company who is a very proven track record
And then the sponsor John ledecky who is also a master at doing roll ups
So I think it's gonna be tough to compete with those guys and in terms of defining your risk
Where would you put your stop-loss?
I mean, you know if I started to see something again again, this would be because of a competitive threat
I mean, I wouldn't want to lose more than 20% on this. But remember, this is a SPAC
So if you buy this now, right you you know, this is the downside is really ten dollars
The deal doesn't get approved. You know, you get your money back
But in the event that it's approved and you know something bad happened that's that's where I get scared and you know
What else packs don't you know perform great one waiter Holdings has been a disappointment and you know
So I'm not I'm not saying, you know, I don't wanna be a cheerleader for every SPAC you got to pick your battles
Well, John, we'll see how it plays out. Thanks so much for joining us. Thanks logic
So John is bullish on pivotal acquisition specifically, he likes buying ticker symbol pvt at current levels
He sees downside risk as low as ten dollars with 25 percent upside potential over the next year
That was John Jay neurone of IPO edge and four-wheel vision. I'm Jake Morrell
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