$STRP Short - Solid Kerrisdale Capital Report

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We were pleased to see Kerrisdale Capital's work and diligence on their STRP Short report this morning.

Disclosure: We are short Straight Path.

We have followed Straight Path since their spin out from IDT Telecom. Indeed, we were long IDT in anticipation of the spectrum and IP business separation. For IDT, it did well, doubling in 2013, 6 months after we sent our analysis to our investors.

For Straight Path, we retained our long position as we evaluated the potential for spectrum use as the company focused on this effort. At best, the IP licensing and litigation division would bring in small wins to support the low cost of running the business as the small team explored ways to monetize their spectrum. In the end, we could not get comfortable with the monetization for use of the spectrum. Others however, became excited about a potential billion dollar valuation.

On the spinout, we received the stock at around $5. It went up 4 x and we sold it at $20. We have since tracked it as it has doubled again to $40. The bull thesis was simple: buy in at a $200m valuation for a potential $2b business, or 1:10 risk to reward ratio; that was worth a slice in your portfolio.

We could not get comfortable, hence this excerpt from our 2014 Year End Letter:
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Our biggest gain, Straight Path, went up nearly four fold.

For Straight Path, the IDT spinoff has done well, nearly doubling in the first half. The company reported litigation wins against strong companies. Additionally, the company partnered with an NYU spectrum think-tank that will pair them with the end customers. This partnership will help to provide long-term solutions, which may lead to some great upside as the companies learn how to leverage spectrum, of which Straight Path owns a large portfolio.

Since then, the position again doubled. At $20, near our exit point, the company was highly overvalued from the current fundamentals. The main reason for the quick rise in value is the speculation of the spectrum segment. The Company owns a large portion of both 28 and 39 GHz portfolios, and the FCC published a Notice of Inquiry regarding the use of frequencies above 24 GHz. Theoretically, this could lead to a billion dollar valuation. However, we currently see too many variables that would need to line up, which turns this into a speculative play. We were thankful for the exuberance, and stepped out of the position. There maybe more to the story, but it will require a much deeper understanding prior to re-entering.
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This month we started to dig deeper, but this time into a short position for Straight Path. As we dug in, we applied a position to the downside.

This morning, Kerrisdale Capital, a highly regarded value fund, published a report on this speculative investment. We were pleased to see their report.

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