Differentiating Toxic Waste and Spinoff Deep Dives with Rich Howe – The Special Situations Report Episode #19

Episode Summary

Executive Summary: Episode 19 features a wide-ranging conversation with spin-off investor Rich Howe, covering his investing background, why spin-offs and microcaps attract him, lessons from both a winning coal spin-off and a failed energy-services idea, and how he sources ideas. The discussion also dives into two current situations—Lionsgate/Starz and CompoSecure/Resolute—highlighting catalysts, activist involvement, strategic value, and the importance of judgment, sizing, and debt analysis.

Main Topics: Rich Howe’s investing origin and edge-seeking mindset (Priority: 5/5): Rich explains that growing up in an investing household shaped his interest early, and that he is drawn to markets because they are intellectually and emotionally energizing. He emphasizes a preference for less efficient areas like microcaps and spin-offs where he believes investors can gain an edge. Why spin-offs are attractive and how catalysts matter (Priority: 5/5): Rich details the core mechanics of spin-offs: parent shareholders receive shares they did not actively choose, often causing indiscriminate selling. He looks for catalysts such as dividend policies, buybacks, and insider buying to help a stock re-rate after separation. Winning idea: Thungela Resources and the importance of position sizing (Priority: 5/5): He describes an Anglo-American coal spin-off that worked quickly because coal prices surged and the company had a compelling dividend policy and no debt. The key lesson was not just the return, but that a very large position can distort judgment and lead to selling too early. Failed idea: KLX Energy Services and the danger of toxic waste (Priority: 5/5): Rich reflects on a pre-COVID energy-services spin-off that looked attractive on paper but proved much worse than expected. He uses it to stress that microcaps can go to zero, high interest rates are a red flag, and classic Greenblatt-style heuristics are useful but not foolproof. Current setup: Lionsgate Studios and Starz (Priority: 5/5): The hosts and Rich discuss the upcoming separation of Lionsgate Studios and the remaining Starz business. The case rests on strategic value, activist ownership, possible index inclusion, and the potential for acquisition rumors once the split is complete. Unusual spin-off: CompoSecure and Resolute Holdings (Priority: 4/5): Rich examines Resolute, a spin-off that monetizes management/operating advisory economics tied to CompoSecure, and questions how it may evolve. He frames it as an unusual quasi-asset-management model whose value depends heavily on future acquisition growth and possible expansion of the advisory concept. Idea sourcing, research habits, and personal development (Priority: 3/5): Rich explains how he tracks Form 10s, uses Google Alerts, network ideas, and even sell-side research to find opportunities. He also shares books, podcasts, mentors, and a personal bucket-list goal of skiing in Utah, giving a broader view of his routine and influences.

Key Arguments: Spin-offs often create mispricing because shareholders receive shares passively and sell indiscriminately, creating opportunity for patient investors. Dividend policies can act as a powerful catalyst, especially when a spin-off’s projected yield becomes noticeable relative to peers. Share repurchases and insider buying can reinforce the thesis by signaling management confidence and capital return discipline. Microcaps have far more downside than many investors assume; in small, levered, cyclical names, downside can effectively be near-total. Debt must be analyzed carefully, including the interest rate on new borrowing, because expensive debt can reveal poor business quality. Position sizing matters as much as stock selection; oversized positions can cloud judgment and cause investors to exit too early. Lionsgate has meaningful strategic value because large media/tech buyers want content and comparable transactions have shown high EBITDA multiples. Activist ownership and low float can serve as catalysts for rerating in special situations like Lionsgate/Starz. Resolute’s value depends on whether CompoSecure can scale through acquisitions, since Resolute’s economics rise with CompoSecure EBITDA. Not all Greenblatt-style “toxic waste” spin-offs are avoidable; judgment is required to distinguish ugly but attractive situations from genuine disasters.

Data Points: Episode: 19 - This is episode 19 of the Special Situations Report podcast. Thungela dividend policy: 50% of free cash flow - Thungela announced it would return half of free cash flow to investors as a dividend. Thungela projected dividend yield: about 25% at initiation - Rich estimated the initial dividend would translate into roughly a 25% yield. Thungela return: about 100% quickly; later up another 5x - Rich says he made around 100% before selling, then the stock rose several multiples more. KLX initial upside estimate: about 40% upside - Rich’s original write-up suggested meaningful upside for KLX Energy Services. KLX downside estimate: about 30% downside - He initially modeled only modest downside in a recession scenario, later calling that unrealistic. Debt interest rate on KLX acquisition: 13% / 12% range - Rich cites mind-blowingly expensive debt used for an acquisition as a warning sign. Havas dividend: 5%–6% annual dividend - Rich says Havas’ announced dividend translated to roughly a mid-single-digit yield. Havas buyback authorization: 10% of shares outstanding - Havas also announced a repurchase authorization as an additional catalyst. Starz subscribers: about 20 million - Rich describes Starz as an independent streamer with roughly 20 million subscribers. Lionsgate Studios ownership: 87.2% - Lionsgate Entertainment owns 87.2% of Lionsgate Studios before the planned separation. Lionsgate Studios ticker: LION - The studio business is expected to trade as LION after the spin-off. Starz ticker: STRZ - The remaining parent business is expected to be renamed Starz and trade as STRZ. Lionsgate Studios market cap: about $2 billion - Rich notes the company is around a $2B market cap and may fit index criteria. SP 600 average market cap: about $2 billion - He compares Lionsgate’s size to the average market cap of an S&P 600 company. Free float / index issue: low float due to dual-class shares - Rich says Lionsgate Studios currently isn’t really in indexes because of float and share-class structure. CompoSecure economics to Resolute: 2.5% of trailing 12-month EBITDA quarterly - This is the fee-like arrangement that feeds Resolute’s revenue stream. Resolute revenue from that arrangement: about $15 million - Rich estimates the 2.5% EBITDA share translates to around $15M of revenue currently. Resolute cost base: about $15 million - He says the company currently has about $15M of costs, leaving it near breakeven. Illustrative future Resolute revenue: $100 million - If CompoSecure scaled to $1B of EBITDA, 10% would flow to Resolute as revenue. Illustrative future Resolute margin: about 85% - Under a larger EBITDA scenario, Rich suggests Resolute could have extremely high margins. User/peer market cap comparison: about $200 million market cap - Rich references Thomas Knott leading Resolute at a small-cap valuation despite Goldman background.

Pivotal Quotes: "the most interesting thing in the world and it's the most exciting thing in the world" — Rich Howe: He describes why investing energizes him during the discussion of his background and passion. "micro caps can go to zero. There's way more downside than you think there is." — Rich Howe: A key lesson from the failed KLX Energy Services investment about risk in tiny, levered companies. "what's the million-dollar question" — Rich Howe: He says judging whether a spin-off is truly toxic waste or just looks ugly is the central challenge.

Implications: The episode reinforces that special situations reward discipline, catalyst awareness, and rigorous downside analysis. For listeners, the biggest takeaways are to respect leverage, use position sizing wisely, and look for structural catalysts that can force market attention.