THE MILLEGAN MEMO: MARCH 2025
Brought to you by The Woodworth Contrarian Fund
Volatility is back and it’s provided more buying opportunities than capital - we highlighted RAIL and KSS which have interesting stories and are at even more interesting price levels with some insight into our investment process and contrarian philosophy.
- Managing Partners Drew Millegan & Quinn Millegan
“Opportunity arises when the gap between reality and perception becomes significant.”
SMOKE, FIRE, AND STOCKS ON SALE - OUR FAVORITE KIND OF MONDAY
Market volatility is up. March saw the highest measurement of market volatility in the VIX Index (a measurement of the market’s expectations of volatility based on S&P 500 futures) since August 2024. The measurement declined into the end of the month, but just this last week started ticking up again, in what many market watchers are labeling a concerning trend. Uncertain policies from the current US presidential administration make it hard for US firms to plan for the next four months, let alone the next four years. Furthermore, many are now predicting that the US will slip into recession at some point this year, as haphazard and unclear policy changes continue to impact investment sentiment. Though the most recent measurements of the underlying economy continue to be relatively robust, some policy watchers have publicly stated that the current government administration policies appear tailor-made to induce a recession, and for its part the Trump administration appears to be leaning into this narrative.
Investor panic is being fueled by recession fears and policy uncertainty, but ignore underlying fundamentals. What is of particular interest to our firm are US equity market capital flows, which have seen massive outflows into international markets. This could indicate a sort of “flight to certainty” as investors make the conscious effort to preserve capital in markets where future policy is less volatile, however this also presents potential opportunities. Because flows out of entire markets tend to be indiscriminate as to individual companies, many individual companies within broader sectors are now greatly undervalued when considering their fundamental positioning. As investors sell both good companies and bad and valuation multiples drop, it becomes easier to profit off of potential long-term investment misallocations. As value investors - we love a good fire sale when there’s more buying opportunities than capital to purchase it all. Unfortunately this means that some of our current holdings are trading at a discount - however, and fortunately for investors, it means that now, more than ever, is a great time to invest in the Woodworth Contrarian Fund as we are also ‘trading’ at a discount.
ALL ABOARD THE VALUE TRAIN: WHY $RAIL MIGHT BE HEADED NORTH - FREIGHTCAR AMERICA
Freightcar America continues to deliver on operational results. Freightcar America, which despite the name has no actual manufacturing operations in the US, reported its four quarter and full year 2024 earnings results earlier this March. Freightcar recently completed expansion and capital investment into its railcar manufacturing facility at Castaños in northern Mexico. With a capacity for around 5,000 units per year and potential capacity of upwards of 6,000 if the situation demanded it, and being located physically close to steel plants that provide the facility with low-cost raw materials in addition to lower-cost Mexican labor, Railcar has positioned itself as a behemoth in the North American railcar sector, but not without taking some substantial risk along the way. Freightcar began the journey to its current facility after winding down its operations in the US back in 2021, and spent several years with next to no revenues as it built a funding bridge out of a combination of equity, warrants, and creative financing from funds and individuals to get the Castaños facility fully built. Now that the facility is finished, the company is operationally profitable with healthy 15.3% gross margins, and begins the process of fully cleaning up its balance sheet of various equity instruments and refinancing of higher-interest notes and debt into longer-term dollar-denominated facilities. For instance, the company just announced the opening of a $35 million line of credit through Bank of America, in addition to refinancing its preferred shares, along with a non-dilutive cashless exercise of outstanding warrants held by PIMCO.
Competitive among manufacturers and insensitive to tariffs. Despite growing tariff charges levied on US importers by the Trump administration, rail cars are relatively insensitive to foreign import sales taxes. The US itself, though it is a large market, also only has freight car producers with capacity numbering in the hundreds per year compared to RAIL’s production of thousands, and what capacity exists domestically in the US is typically high-cost and primarily concentrated in specialty orders. This should mean that tariffs as they currently exist will have negligible short-run impacts on freight car orders for Mexican-produced stock. In addition to this, the US market is highly dependent on its overland rail cargo network and cannot simply stop buying railcars, even in the event of a slowdown, meaning that the company already has gained and expects to continue to gain market share from competing manufacturers, who are mostly also located in Mexico. Finally, freight car manufacturers act as a sort of middleman in the land-based rail cargo shipping industry, meaning that their profit margins are largely dependent on overall freight car consumption volumes, with the railroads that consume the cars tending to bear the higher end costs of tariffs, which they then pass on to their customers. In the past, freight car orders have remained relatively reliable even in cases where the actual materials being shipped by the railroads, such as steel and coal, have fluctuated wildly in price, in part due to the proportion of orders driven by predictable rail car replacement schedules.
Coupled with general capital flight to safety in the market, Freightcar America’s pricing has been affected by confusing messaging resulting from non-cash liabilities still present on the books from their long term transition and ramp up to Mexican production. What remains clear is that, not only are they the lowest cost producer, but they are eating market share from their competitors with additional capacity available on-demand. With their operational ramp-up in capex now over, the company consistently operationally profitable, and the company clearing their balance sheet of non-cash warrant liabilities from PIMCO coming off the books, we expect the balance sheet outlook to become much simplified in coming quarters. In our view based on our rigorous fundamental and technical analysis, this stock, currently trading around $5.53, is easily a $30-40 stock long term with the risks of transition having virtually evaporated. Needless to say - RAIL would seem to be a gem thrown out with the trash during this period of negative market sentiment.
Please note that the Woodworth Contrarian Stock & Bond Fund, LP, of which the Millegan Brothers manage and are invested in, currently holds a position of RAIL as of the publication date of this article.
KOHL’S HARD CASH: DIGGING UP VALUE IN $KSS
Kohl’s continues to drop despite a relatively rosy reported earnings and balance sheet. In what appears to be an overreaction to broader uncertainties in the US economy, consumer sentiment, and possibly disappointing performance of certain internal segments, Kohl’s has declined over 30% since it reported earnings earlier this month. The name is now trading around 65% below the price it was at just a year ago. Total market capitalization has dropped solidly below $1 Billion, despite nearly $8 Billion in real estate assets and long-term debt of just over $1.1 Billion. The company, which continues to report sizable free cash flows and declining debt, is now effectively priced as though the street expects it to go bankrupt. Kohl’s also announced a cut to their dividend and downward revisions to forward expectations for full-year 2025.
Won’t somebody buy my dollar for a quarter? The recent drop in price mirrors drops in other retail names in response to tariff threats and recession expectations, however Kohl’s in particular is now far below even its liquidation value. Speculation of bankruptcy seems poorly supported at best, and investors may be actively misinterpreting underlying financials at worst. Short interest in the company has been floating around 50% - this is likely aiding in the price drop, but those short sellers will quite literally have to eat their shorts if this company comes anywhere near even 50% of fair value. It is not an exaggeration to say that the cost of Kohl’s taking itself private at these levels would be less than the cost of going through the bankruptcy process, which makes the prospect of Kohl’s going out of business in any sort of near-term somewhat irrational. Investors have made hay over store closures when, in reality, management is trimming the fat with their remaining stores (over 1,100) nearly all profitable. Most Americans still live within 15 miles of a Kohl’s store. There has also been speculation that some investors are misinterpreting Kohl’s lease liabilities, which in fairness is contributing to bottom-line net debt picked up by typical reporting outlets to the tune of over $5 Billion. However, it strains credulity to treat such leases in the same manner as traditional debt obligations, as leases can be typically renegotiated with relative ease in the event that the company becomes distressed, and furthermore obscures the underlying equity that Kohl’s can still draw on in the form of actual real estate for collateral and potential refinancings. We at the fund continue to view Kohl’s as a strong buy and current pricing as an excellent entry point for any interested investors. Currently trading below $8.30, even at a conservative historical valuation we see Kohl’s worth north of $20 per share, and optimistically more than double that long-term with a current book value alone above $34. Who knows, there could even be a buyout or privatization down the road at these discounted levels.
Please note that the Woodworth Contrarian Stock & Bond Fund, LP, of which the Millegan Brothers manage and are invested in, currently holds a position of KSS as of the publication date of this article.
DEEP ROOTS. STUBBORN GROWTH. OREGON-BASED.
Now is a great time to diversify your portfolio with an investment into an award-winning fund. Call us or visit our website to inquire on an investment today in the Woodworth Contrarian Fund as an accredited investor.
(800) 651-1996 - info@woodworth.fund - www.Woodworth.Fund
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Drew Millegan (left) & Quinn Millegan (right) in front of the Charging Bull in New York City.
About the Managers: Brothers Drew Millegan and Quinn Millegan manage the Woodworth Contrarian Stock & Bond Fund, a hedge fund based in McMinnville, Oregon. They grew up in the finance world, and specialize in contrarian investment strategies in the US Public and Private markets.
Something missing from your portfolio may be a diversification into the Woodworth Contrarian Fund for accredited investors. Now is a great time to diversify your portfolio with an investment into a multi-award-winning fund. An exposure to a value-based contrarian strategy is a unique opportunity for your long term capital that you’re seeking aggressive returns for. With eight years of the Woodworth Fund under management, the Millegan Brothers are trained stock-pickers and experienced venture capital investors with a proven track record. Give us a call today to discuss a liquid investment with independent administration and independently audited monthly statements and a personal relationship.
