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Hennessy Advisors Inc.

The tidal flow of money into passive investment strategies tracking index funds, particularly the S&P 500 has dented the active money management business. Hennessy Advisors Inc (HA) operates 16 open-ended mutual funds of which only one tracks an index. HA earns money via investment advisory fees, and shareholder service fees. Investment advisory fees range between 0.75% and 1.25% of the assets under management (AUM) and shareholder service fees (which includes administrative services for redemptions/change of fund options, etc.) amounts to a flat 0.1% of AUM. Management of six of the sixteen funds are outsourced to sub-advisers who charge between 0.27% and 0.42% of AUM. Most of the funds are divided between quantitative strategies and actively managed portfolios. Every fund, except for HA’s Japan fund and Focus fund have lagged their relevant benchmarks and indices over 3, 5, and 10-year terms. These two outperformers contributed 42% and 12% of HA’s revenues. The third hi

Renewable Energy Group Inc

We’ve covered several bargain stocks from climate-unfriendly industries such as coal and oil. This stock is from the opposite end of the spectrum. Renewable Energy Group (REG) is the largest manufacturer of biomass-based diesel (biodiesel) in North America. Biodiesel is used primarily as transportation fuel and reduces carbon emissions. It has capacity to manufacture 505mn gallons of product annually. REG is highly dependent on government regulation for its economics. The cost of manufacturing biodiesel is higher than petroleum-based products. The attractiveness of the product lies in regulation requiring petroleum refiners and importers to purchase mandatory quantities of biodiesel, which earns them renewable identification number (RIN) credits. Each gallon of biodiesel generates 1.5-1.7 RINs. However, no purchase obligations have been set for 2023 and beyond when it’ll be under the discretion of the EPA. The company is also dependent on biodiesel excise mixture tax cr

Alliance Resource Partners LP

Here’s another stock from the declining coal industry. The share of coal in US electricity production has fallen from 53% in 2000 to 24% today. Natural gas poses the greatest cost-effective threat to coal, without counting the threat from government mandates for using renewable sources. Alliance Resource Partners LP (ARP) is a limited partnership listed on the NASDAQ that mines coal from the Illinois basin and Appalachia totaling seven coal mining complexes in the eastern United States. It is the second largest coal miner in the Eastern US. It supplies 79% of its output to domestic US electric utilities, 18% outside the US, and the balance to brokers and industrial companies. ARP also earns royalties by leasing oil acreage it owns. In 2019, this amounted to only $52m. ARP generated $1.96 billion in sales in 2019 and ‘adjusted’ ebitda of $600m that excludes several one-off items. Operating cash flows amounted to $517m and management indicate maintenance capex of $260m leav

Ciner Resources LP

One of the gripes against most stocks is the lack of 100% payouts of earnings. The reinvested profits are left in the hands of management, and this very often fails to materialize in market value. Limited partnerships are a breath of fresh air in that regard. However, there are specific attributes of limited partnerships, which foreign investors should beware – though distributions are generous, ALL partnership income is taxable – and withheld by the partnership at the highest effective tax rate, currently 37%. Further, partnerships can dilute existing partners by issuing additional units. Ciner Resources LP (Ciner) is one of those limited partnerships listed on the NYSE. It is the world’s largest natural soda ash manufacturer (as opposed to synthetic). Its primary competitive advantage is the low cost of production from the Green river basin in Wyoming. The company’s ultimate parent is based in the UK and owned by Turkish interests. It owns 51% of Ciner Wyoming, which co

RMR Group Inc.

RMR Group Inc. (Company) owns a 52.1% economic interest in RMR LLC (RMR), which provides services to various REITS and real-estate businesses. It services assets of $32bn across 2,100 properties. The non-controlling interest is held by ABP Trust – controlled by Adam D. Portnoy. RMR provides management services to four publicly listed REITs – ILPT, OPI, SNH, and SVC – in the industrial, office, senior housing, and hospitality sectors. It also provides services to three real-estate related operating companies, one real estate securities mutual fund, and one firm specializing in commercial real estate finance. It earns fees in the form of base management fees (ranging from 0.6% to 1.7% of asset values), incentive business management fees (for beating the REIT benchmarks), and advisory fees. These are incorporated in 20-year agreements with the REITs. The company has generated average underlying pre-tax earnings, excluding incentive management fees, of $100-120m. Incentive

CONSOL Coal Resources LP

Coal, the energy source that’s the bane of climate activists everywhere, is still one of the cheapest sources of electricity. Natural gas-powered plants are the closest cost substitutes; otherwise, the key risk to this industry comes from government mandates on sourcing renewable energy. Consol Coal Resources (CCR) is a master limited partnership listed on the NYSE that holds a 25% interest in the Pennsylvania mining complex that includes three coal mines: Bailey, Enlow Fork, and Harvey, along with a centralized coal processing facility. The balance 75% is owned by Consol Energy (CE). CE is also the parent of CCR - owning 60.8%. The public float is 17.6% and doesn’t have much say in governance matters. This situation will also prevent the manifestation of any takeover premium for this stock. The three mines have coal reserves of 767m tons with a life of 23.5 years at current production rates. CCR sells 66% of coal to US electricity generators, 1% to other domestic pur

Hollysys Automation Technologies Ltd.

Here’s another company that does most of its business in China and is relatively unloved by the market. Hollysys Automation Technologies is headquartered in Singapore and manufactures integrated automation systems for the a) Industrial b) Railway Transport and c) Mechanical and Electrical solutions segments. It generated 85% of its revenues from China with the balance from other markets in South East Asia and the Middle East. It reported sales of $575m in 2019, ebitda (a proxy for cash earnings) of $107m , and net income of $117m. Other income comprised interest income from cash balances, rental income from certain properties in Beijing with 10 to 15-year leases, and dividends from an investee company (disposed during the year and gains of $5.8m recorded). Normal ebitda has ranged between $100-140m in the recent past. Capital expenditures have been relatively negligible at less than $10m per year. Good free cash flow generation has enabled the company to virtually wipe out i