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Holley Inc. (HLLY) – Wall Street’s Best Digest Daily Alert – 8/4/21

The shares of this car parts manufacturer are rated ‘Strong Buy’ by two analysts and ‘Buy’ by one analyst. Wall Street expects the company to earn $80,240,000 in 2021.

The shares of this car parts manufacturer are rated ‘Strong Buy’ by two analysts and ‘Buy’ by one analyst. Wall Street expects the company to earn $80,240,000 in 2021.

Holley Inc. (HLLY)
From Cabot Turnaround Letter

Once obscure, SPACs are all the rage in the market. So far this year, over 375 special purpose acquisition companies have completed their IPOs, raising nearly $115 billion. These seven-month totals have surpassed the full-year total for 2020, itself by far a record year. SPACs have clearly captured an iconic place in the current zeitgeist. So, why is the Cabot Turnaround Letter even thinking about this group?

As contrarians, we hunt for bargains among stocks that investors have discarded. The recent downturn in SPAC stocks, partly driven by tighter SEC disclosure regulations, has had a throw-the-baby-out-with-the-bathwater effect on the overall group. In our search, we looked for quality companies at discounted prices and for stocks heavily sold yet have attractive risk/return traits.

SPACs, of course, complete their IPOs as merely shell companies, usually at $10/share. Investing in these shells requires considerable faith, as the SPAC management has a blank check to later buy whatever company it wants. Such acquisitions typically provide a private company with a less-regulated way to go public compared to a traditional IPO, yet this process bypasses important shareholder protections. Also, the SPAC IPO game is heavily played by savvy sponsors and highly skilled hedge funds who may leave private investors holding the bag. Another problem arises from the two-year time limit that SPACs typically have to complete an acquisition without losing some very favorable financial incentives, including discounted warrants. This exerts pressure on the SPAC to complete a deal at any price – which usually means unfavorable terms for the SPAC and its shareholders. The recent deluge of new SPACs, combined with a shrinking number of private companies that want to do a combination, only exacerbates this pressure.

Investing after a company merges with a SPAC can reduce investors’ risks. By waiting, investors have the opportunity to understand the underlying (acquired) company, explore regulatory filings, select the more promising ones while avoiding those with speculative or suspect business models, and then wait for an attractive entry price.

Holley, Inc. was founded in 1903. The company is the iconic manufacturer of high-performance after-market car parts, which is an attractive growth industry. After eight sizeable acquisitions in the past seven years, the company has a portfolio of 60 brands across all major categories of parts, with many of its brands holding the #1 market share position. Holley’s revenues are nearly triple its nearest competitor, a significant advantage that it is extending by acquiring companies in the otherwise fragmented industry.

Holley is also an innovator, with 40% of its sales coming from new products introduced over the past five years, including a growing roster of high-performance electric vehicle parts. And, unlike original car manufacturing, which will migrate to electric vehicles, there will likely be enduring long-term demand for high-performance gas-powered vehicle after-market parts. Holley is also expanding its online distribution platform which should build its brand value. Holley has attractive margins, generates solid free cash flow, and has a reasonable debt load. At about 10.8x projected 2022 EBITDA, the shares of this high-quality company sell at a large discount to peers.

Bruce Kaser, Cabot Turnaround Letter,, 978-745-5532, July 28, 2021