Investors that missed an opportunity to invest in companies like Amazon (AMZN), Apple (AAPL), Costco (COST), and Chipotle Mexican Grill (CMG) are always on the lookout for the next Amazon or the next Chipotle. Every once in a while they find a company like MercadoLibre (MELI) that turns out to be the Amazon of Latin America but more often than not, they run into a Jumia Technologies (JMIA) or Potbelly (PBPB). To paraphrase a quote I heard a while ago, “more money has been lost trying to find the next Amazon; than made by investors in Amazon”.
While considering candidates for our Buyback Wednesdays article this week, I came across a $100 million share repurchase announcement by a company called dLocal Limited (DLO). The size of the purchase in relation to the company’s market cap was not significant (2.57% of market cap at announcement) but dLocal appeared to be a fast-growing FinTech company with amazing margins. The company facilitates payments in Latin America and several other countries across the globe. This was beginning to sound like another MercadoLibre or better yet, the “PayPal of Latin America”.
I noticed that the company was headquartered in Montevideo, Uruguay, and reached out to a subscriber from Uruguay who has discussed investment ideas with me several times over email. Despite it being the holiday season, he was kind enough to get back to me promptly and gave me a quick background on the company and more importantly mentioned that the company’s stock had taken a big hit recently after a short-seller report. The buyback announcement also includes the company’s rebuttal to the short-seller report.
I found Muddy Waters’ November 16, 2022 report on dLocal and it turned out to be a fascinating 46 page report. You can download the report here. If you have been following short-sellers like Muddy Waters Research, Hinderburg Research, Citron Research, Jim Chanos and Mark Cohodes, you would realize that Muddy Waters not only has an excellent long-term track record but they also stand out for the quality of their work.
Short-selling is inherently difficult (going against the tide) and while many short-sellers write reports after taking a position in the subject of their reports, it is no different than a long investors talking up their book. Unless done with malicious intent, they serve a useful function in capital markets and are often first to uncover signs of fraud.
The Muddy Waters report’s allegations run the gamut from irregularities in financial statements to issues with operating controls where a $1 billion+ fintech company is running its back-end payment processing systems on spreadsheets. The report mentions the company’s IPO primarily benefiting insiders that sold more than $1 billion worth of stock in the IPO and a secondary offering. It also calls into question the company’s revenue recognition practices and the string of recent management departures. Muddy Waters raises concerns about the company’s auditors, both in Argentina and the UK, as well as related party transactions, including loans to the company’s CEO and its President.
DLocal lost nearly half its value in a single day after the report came out. The stock declined from $21.22 to $10.46 before rebounding to the current $15 level over the next few weeks. The company’s response to the short report came out more than a month later and briefly addressed some of the key concerns including the mixing of client funds and company funds (a big issue in the recent collapse of cryptocurrency firm FTX) and the loan to executives but the response did not seem commiserate to the level of detail provided in the Muddy Waters report.
I encourage you to read both the report and the rebuttal to draw your own conclusions. Insiders and companies sometimes purchase stock to signal the market and we saw a cluster of insider purchases in wood pellet producer Enviva (EVA) after a short-seller report by Blue Orca as discussed in this Insider Weekends article in October. The various strategies we follow at Inside Arbitrage are an amazing engine for idea generation but there is no substitute to deep due diligence in determining which ideas are worthy of investment, which ones need to be added to a watchlist for further monitoring and which ones go straight to the rejection pile. In this case dLocal heads to the rejection pile with the full realization that we will commit errors of omission and will sometimes be wrong despite all the due diligence.
Welcome to edition 39 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap stocks with a market cap below $2 billion.
Top 5 Stock Buyback Announcements
1. BM Technologies, Inc. (BMTX): $5.67
On December 23, 2022, the Board of Directors of this financial technology company approved a new share repurchase program authorizing the company to repurchase up to $10 million of its class A common stock equal to nearly 14% of its market cap at announcement.
|Market Cap: $69.40M||Avg. Daily Volume (30 days): 65,044||Revenue (TTM): $93.46M|
|Net Income Margin (TTM): 2.20%||ROE (TTM): 4.75%||Net Cash: $26.43M|
|P/E: 32.61||Forward P/E: N/A||EV/EBITDA (TTM): 241.41|
2. ReWalk Robotics Ltd. (RWLK): $0.74
On December 22, 2022, the Board of Directors of this medical device company approved an additional share repurchase program authorizing the company to repurchase up to $5.8 million of its class A common stock, equal to around 13% of its market cap at announcement.
|Market Cap: $45.71M||Avg. Daily Volume (30 days): 273,336||Revenue (TTM): $4.57M|
|Net Income Margin (TTM):N/A||ROE (TTM): -21.49%||Net Cash: $73.34M|
|P/E: N/A||Forward P/E: N/A||EV/EBITDA (TTM): 1.56|
3. First Internet Bancorp (INBK): $24.41
On December 20, 2022, the Board of Directors of this bank approved a new share repurchase program authorizing the company to repurchase up to $25 million of its class A common stock equal to nearly 12% of its market cap at announcement.
|Market Cap: $225.55M||Avg. Daily Volume (30 days): 46,917||Revenue (TTM): $120.94M|
|Net Income Margin (TTM): 34.45%||ROE (TTM): 11.4%||Net Debt: $463.73M|
|P/E: 5.86||Forward P/E: 12||Price/Tang.book: 0.64|
4. Great Southern Bancorp, Inc. (GSBC): $59.88
On December 21, 2022, the Board of Directors of this financial holding company approved a new share repurchase program authorizing the company to repurchase up to 1 million additional shares of its class A common stock, representing nearly 8.2% of its market cap at announcement.
|Market Cap: $731.43M||Avg. Daily Volume (30 days): 28,339||Revenue (TTM): $221.28M|
|Net Income Margin (TTM): 31.01%||ROE (TTM): 12.08%||Net Debt: $174.94M|
|P/E: 11.31||Forward P/E: 9.61||Price/Tang.book: 1.47|
5. MediaCo Holding Inc. (MDIA): $1.18
On December 21, 2022, the Board of Directors of this radio broadcasting media company approved a new share repurchase program authorizing the company to repurchase up to $2 million of its class A common stock equal to nearly 7.5% of its market cap at the announcement.
|Market Cap: 25.54M||Avg. Daily Volume (30 days): 420,440||Revenue (TTM): 53.07M|
|Net Income Margin (TTM): -23.43%||ROE (TTM): -57.49%||Net Debt: $84.31M|
|P/E: 3.81||Forward P/E: N/A||EV/EBITDA(TTM): 37.58|
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