HC2 Holdings (HCHC) is a diversified holding company that seeks opportunities to acquire and grow businesses that can generate long-term sustainable free cash flow and attractive returns, asserts low-priced stock expert Faris Sleem, editor of The Bowser Report.

The company was founded in 1994 and currently has 4,119 employees. HC2 is an asset-rich company that has fallen to an appealing share price.

Its largest operating subsidiaries include DBM Global Inc., a family of companies providing fully-integrated structural and steel construction services, and Global Marine Systems Limited, a leading provider of engineering and underwater services on submarine cables.

We’re currently most optimistic about the Construction and Life Sciences segments based on the most recent financial results. Regardless, HC2 is likely to sell some of these businesses and continue to focus on value creation rather than individual segment growth.

The Life Sciences segment added value following the sale of portfolio company, BeneVir Biopharm, to Janssen Biotech in early May 2018. Aside from the value added to the company from the upfront cash payment, HC2 is elegible to receive up to $512.2 million from potential milestone payments. These payments could add up to $11 revenue per share, which will dramatically increase book value.

Book value recently jumped above $7 per share, for a price/book (P/B) ratio of 0.32.  This shows an undervaluation in relation to its competitors, which have an average P/B ratio of 2.5. All in all, HC2 is deeply undervalued by almost every metric and has long-term value creation prospects lined up.

Institutional investors currently own 62% of the shares outstanding, which is no surprise as value investments with multiple revenue channels are usually safer in the long run. Despite the drop in share price, institutions are accumulating more shares.

Insiders have also been buying on the pullback, including CEO Philip Falcone. Falcone recently bought another 20,000 shares in March 2019. Insiders now hold 14% of the shares outstanding.

The short interest of 15% shows that there are a lot of investors betting against the company. Nevertheless, we believe that HCHC is undervalued individually and in relation to its industry, sector and major index.

Multiple stable revenue streams and the potential to create even more value outweigh the debt risk. HCHC is trading at an appealing price which means the recognition of just over 60% of its book value would result in a 100% gain for shareholders.

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