Nierenberg’s D3 — Growth Darling Recovering?

Special Value Investing Congress Notes for the Irregulars

David Nierenberg founded the D3 family of investment funds, which is a focused small cap and micro cap investment group. They profiled one of their interesting ideas this morning to launch the Value Investing Congress, and like many of the stocks they pick it’s a stock that they think gives growth at a discounted price.

They profiled Rosetta Stone (RST), which you might remember being a heavily touted David Gardner stock a couple years ago — though to their credit, I suppose, they also heavily re-teased it when it was substantially cheaper last Summer. That was back when the first CEO was throwing money at expansion and the stock collapsed quickly after the IPO when it became clear they were investing too much. There are risks, particularly from competition in the online learning space — including from online course offerings like Khan Academy and MOOCs and from low-cost or free online language learning apps.

Nierenberg’s team has a target of $28 on the stock over the next couple years, they’re still in a turnaround mode (more than a year into the turnaround now) but thinks that if they are able to really ramp up the valuation with continuing growth and strong margins there’s an upside possibility of about $60 if they achieve a Blackboard-like valuation in several years. They think the downside is about $12, based on the hugely valuable brand and their large cash pile on the balance sheet.

The opportunity for really huge cash flow in the out years as they control costs is huge — the new management team has already made a huge difference in driving up earnings and cutting costs.

They are likely to have a weak quarter next time they report (on May 8, just a couple days away), partly because they cut back on the huge overinvestment in expansion, and the venture capital backers who own about 40% of the company are signaling (by leaving the board, in one case) that they may be selling down their stake. That may well bring a nice buying opportunity, which is nice because it’s really tough to convince yourself to buy a stock that has doubled from last year’s lows.

This is the first time I’ve looked at RST in a while, but Nierenberg made a good case and I’m always interested to see what they recommend — it’s compelling to ...

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