Steel City Capital, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio net return of 3.2% was recorded by the fund for the second quarter of 2021. Year-to-date, the Partnership gained 11.1%, net. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Steel City Capital, the fund mentioned Liberated Syndication Inc. (NYSE: LSYN), and discussed its stance on the firm. Liberated Syndication Inc. is a Pittsburgh, Pennsylvania-based IT service management company, that currently has a $92.2 million market capitalization. LSYN delivered a -36.21% return since the beginning of the year, while its 12-month returns are up by 21.33%. The stock closed at $3.47 per share on July 26, 2021.
Here is what Steel City Capital has to say about Liberated Syndication Inc. in its Q2 2021 investor letter:
"Our position in Liberated Syndication (LSYN) continues to prove frustrating. Last quarter I reported that shares “have stalled out, and probably deservedly so.” Since then, LSYN’s shares have retreated – down roughly 30% since the start of 2Q’21 – and once again, the move was well deserved. Shortly after announcing its inability to timely file financial statements pending (another) restatement, LSYN’s CFO announced he was stepping down. LSYN is now a rudderless ship, operating without a CEO or CFO. This is concerning given the rapid pace of change in the podcasting industry and the company’s ongoing integration of two recent acquisitions.
In addition, the inability to timely file financial statements has earned the company an OTC Pink designation which brings with it decreased liquidity. In fact, it is my understanding that several major brokerages will restrict trading of its shares outright beginning in October. It wouldn’t surprise me if some (but not all) of the recent selling reflects some shareholders rushing for the exit before the door closes. From a glass-half-full perspective, this type of selling is non-fundamental in nature, at least giving me the peace of mind to stand pat despite the share price decline.
Also on the bright side, the company has moved closer to putting legacy issues to bed once and for all. LSYN finalized its estimates of unpaid sales, VAT, and other taxes, with the unpaid tab coming in at an annoying – but far from fatal – ~$5 million dollars. In June it entered into a settlement with former CFO Busshaus that included a one-time cash payment to Busshaus of ~$1.7 million and Busshaus’s forfeiture of 1.06 million shares. Finally, the lawsuit against legacy FAB Universal shareholders is beginning to bear fruit, with the potential cancellation of several million shares awaiting judicial approval.
The company should be able to come current on its financials (my best guess is by year-end) which should reduce the overhang caused by the lack of liquidity. I continue to believe the most likely path forward will either be an exchange uplisting or a sale of the platform. Pro-forma for all of the recent activity (share issuance & cancellation, acquisitions, tax and Busshaus settlements), I peg valuation at a P/FCF multiple of roughly 16x – certainly not as cheap as when the Partnership established a position, but sufficiently cheap to support further upside and continued ownership."
Based on our calculations, Liberated Syndication Inc. (NYSE: LSYN) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. Liberated Syndication Inc. (NYSE: LSYN) delivered a -28.89% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.