3 Interesting Catalyst-Driven Plays (Part 1)
There are a handful of interesting plays I currently own a position in that have the potential to re-rate in the very near term. I'd like to briefly discuss them now to put on your radars and then, hopefully down the line, I'll write another post to discuss them in more detail as the story develops.
The 3 tickers are: WELX, PEGY, and TURN.
Let's start with WELX.
Winland Electronics (WELX) is a temperature monitoring and servicing business with a strategic mining and crypto claims business. The temperature monitoring business is roughly cash flow break even, but the crux of the value comes from the mining operation and crypto claims.
To make a long story short, WELX owns roughly 70 Bitcoin and will likely own around 85 Bitcoin by the end of the year depending on the network difficulty. If you believe in the long-term value proposition of Bitcoin, then WELX is a compelling investment.
The current market cap at a $2.30 share price is roughly $10.5MM. They have about $2MM in current assets less all liabilities so on day one you are really paying about $8.5MM for the temperature monitoring business, Bitcoin holdings, on-going mining operation, and crypto claims. Take out the Bitcoin holdings at roughly $25,000 a coin and you get a value of roughly $6.5MM.
So, where is the catalyst? The Mt. Gox crypto claims.
Mt. Gox was a large crypto exchange that went bankrupt nearly 10 years ago. Now, after a long drawn out process, claimants are preparing to receive a portion of their long lost Bitcoin holdings that have been locked away in Japanese bankruptcy court. According to legal filings, the trust is set to release roughly 135,000 Bitcoins back to the market starting this month.
There is a tremendous amount of chatter on Twitter, Reddit, and other sources about what will happen to Bitcoin when these coins are released into circulation. Truthfully, no one knows, but I personally believe not much will happen.
Yes, some claimants who have been waiting many years to liquidate their holdings will finally exit and walk away as somewhat happy campers. But, many claimants are in it for the long run and will likely just hold on to their holdings and hope that Bitcoin moves back to all time highs. Regardless, not all 135,000 coins will be released at once.
So, where does this leave WELX?
WELX (through an affiliate entity) purchased many of these Mt. Gox claims many years ago.
Murray Stahl (the brains behind WELX who is an incredible investor with a long-term track record of success) has noted in earnings calls with FRMO shareholders (FRMO is another public company controlled by Stahl that owns roughly 30% of WELX) that the claims are likely worth about $600,000 on a conservative basis.
On the WELX's balance sheet, however, they are valued at just $350,000.
But, if you ask me (which no one has, but that's okay :) ) I think they could be worth a hell of a lot more.
Here is my thought process.
Stahl has mentioned to FRMO shareholders that they will be very pleased with the results of the WELX crypto claims. As of February 2022, WELX made up less than 5% of FRMO's equity investments. I don't think $600,000 of value would make FRMO shareholders tremendously pleased. It's nice, but FRMO is worth well over $100MM. I think Stahl's conservative assessment might be extremely conservative.
WELX bought the claims in the heart of the Bitcoin bear market. Based on my search through the Mt. Gox Reddit community, many people have stated that 507 Capital (presumably through WELX as well) bought the claims when Bitcoin was closer to the $1,000 - $5,000 range. If the $350,000 value is valued at costs then WELX shareholders could be looking at 70 Bitcoins ($350,000 / $5,000) on the low end or 350 Bitcoins on the high end. At today's market price of roughly $25,000 that equates to $1.75MM - $8.75MM.
Granted, Stahl has mentioned that WELX will have to share some of the upside with the original claimants - so they won't actually be getting all of that upside. Not to mention the 20% performance fee they also have to pay 507 Capital for their work purchasing the claims.
Nevertheless, this situation is akin to one of Mohnish Pabrai's limited downside and unknown exponential upside scenarios.
WELX is well capitalized with an operating business that allows its mining subsidiary to stay open through crypto winters. It has claims to a massive Bitcoin exchange bankruptcy that could double its Bitcoin holdings literally overnight. And, if we see Bitcoin retest all time highs, the value proposition gets even more attractive. Not to mention they have net operating loss carry forwards that will continue to shield the company from paying taxes for a couple more years to come.
When Bitcoin hit $60,000, WELX traded at around $7/share. If their holdings double through these Mt. Gox claims and Bitcoin hits $60,000 again, who is to say the market won't ascribe a $14/share value?
That's a 7x return if Bitcoin goes up 2.5x. I'm down for that!
I currently own shares of WELX at roughly $4/share (so I'm down quite a bit at the moment), but I'm excited to see what Stahl and Co. have in store.
Please keep in mind that this is an extremely illiquid nano cap security. Plenty of risk here and always do your own due diligence.
Next post I'll discuss some of the other catalyst-driven stocks I mentioned early.
Until next time,