EP129: Turmoil Creates Opportunity
Stock Ideas From Investment Professionals
Welcome, subscribers!
We’ve combed through another big batch of Q1 investor letters and are excited to share 7 actionable ideas with you. A clear theme this week: high-quality businesses temporarily mispriced due to fear, complexity, or transition.
If you know someone who enjoys investor letters and discovering new ideas, feel free to forward. 📬
Seven ideas, each with a clear angle. Here’s what stood out this week:
A merger-driven offshore play where balance sheet repair could unlock significant equity upside
A mission-critical fintech quietly re-rating after AI fears cut its multiple in half
A beaten-down healthcare services name after a 40% drawdown driven by a technical issue, not fundamentals
A “toll booth” financial data giant mispriced on disruption fears that may actually fuel demand
A top-tier alternative asset manager being repurchased after a 30% drawdown; same playbook, better price
A multi-part break-up story with hidden asset value
A tiny defense and space supplier with decades-long contracts and exposure to fastest growing parts of next-gen warfare
Disclaimer: Nothing here constitutes professional and/or financial advice. You alone assume any risk with the use of any information contained herein. We may own positions in the securities listed. Please do your own due diligence.
To the investment managers who read this, you can send us your letters at elevatorpitches@substack.com or on Twitter (and Threads!) if you’d like to be included in a future issue.
Let’s get to it.
Open Square Capital is leaning into a high-conviction offshore drilling bet through Valaris (VAL), using it as a vehicle to gain exposure to a transformed Transocean (RIG). The thesis hinges on a merger-driven reset, combining scale, improving balance sheets, and tighter industry supply to unlock stronger pricing power and cash flow. If execution follows, the combined company could offer asymmetric upside with a clearer path to deleveraging.
As we discussed in our last letter, we began redeploying our MEG Energy proceeds this quarter. With that, we welcome our newest positions, Valaris (“VAL”). VAL is a US company that owns and leases out 15 drillship and 31 jackups to energy producers worldwide. Think of these platforms as giant floating drilling machines that sail or are towed out to and parked over a client deepwater oil fields. Once positioned, they’ll begin to drill in the ocean floor to tap the underground reservoirs. The lease contracts vary in length, and the business is dependent on the capital expenditures of major oil companies.
Our purpose for purchasing VAL is to really own Transocean (“RIG”), VAL’s closest competitor in the sector, which also owns and leases ultra-deepwater and harsh environment floaters (27 in total).
RIG itself came out of COVID heavily indebted, and with the threat of insolvency the shares cratered to around $2.13/share. By 2025, drillship owners had idled or retired enough vessels that the market became better balanced. Utilization rates and eventually day rates began to stabilize and then rise. In turn, cash flows improved, and as bankruptcy risk subsided the stock doubled to ~$5/share. Despite the company’s improving fortunes, debt loads and liquidity concerns still dominated. With an annual cash flow of $700M in 2025, the prospect of repaying $5.2B of loans without continuing share dilution was unlikely. The shares became a call option on the long-term price of oil if producers eventually increase capex budgets for developing their off-shore fields. Nonetheless, because of its heavy debt load, there was a high chance that shareholders would be diluted as each tranche of debt matured in the interim.
This all changed, however, when RIG announced the transformative acquisition of VAL on February 9th. Under the proposed transaction, VAL shareholders will receive 15.235 RIG shares for every share of VAL. When the dust settles, existing RIG owners will own 53% of the combined company and VAL shareholders 47%. The transaction essentially slams two similarly sized companies together, one highly indebted (RIG), but with more valuable and advanced drillship that command higher rents, with a lightly indebted company (VAL) with fewer drillship and cheaper/cash flowing jackups.
The acquisition will effectively deleverage RIG, and the surviving entity will be on much better financial footing. RIG comes into the marriage with ~$5B of net debt and ~$700M in FCF last year, whereas VAL brings only $0.5B of net debt and ~$340M of FCF. In total, we’re looking at a $13B market cap company, with $5.5B in net debt. New-RIG is also projected to earn $1.4B in FCF after certain internal cost savings and synergies are achieved, giving shareholders a 11% FCF to market cap yield. The balance sheet delevers significantly as Net Debt to Adjusted EBITDA falls from 3.7x to 2.6x. RIG anticipates paying debt down further using its reinvigorated cash flow to pay debt down even further, and expects to a achieve a 1.5x ratio in 24 months.
The drillship are the key to this transaction. By further consolidating the drillship space, the company should have more control over pricing and utilization. VAL historically was known to prioritize utilization and not pricing. Once RIG closes the transaction, it can better control the economics of the larger fleet and attempt to raise prices as producers increase production following the war. Gaining market leverage should improve RIG’s profitability, utilization, day rates, and overall fleet metrics as offshore capex spend is projected to grow.
The US/Iran war will undoubtedly cause some near-term hiccups. Some of VAL’s jackups are rented to a joint venture with Saudi ARAMCO (“ARO”) under long-term joint venture agreements. The agreements include force majeure clauses that allow ARAMCO or ARO to pause or terminate the contracts when a war breaks out. We’ve seen reports that ARAMCO has suspended offshore drilling operations, and that will have ripple effects on VAL’s cash flow for 2026. Still this is likely a temporary blip, and we think the merger will conclude without an adjustment to the purchase price given the benefits post-merger greatly outweighs the short-term uncertainty.
The merger is expected to close in H2 2026, and since VAL stock was trading at a slight discount to RIG (but will eventually be converted to RIG shares), we’ve acquired the VAL stock in anticipation that the merger will happen. We acquired the shares on February 9th at an average price of $81.10/share. Given the 15.235 exchange ratio, we’ve effectively bought RIG at $5.32/share once the merger closes. We also acquired some VAL warrants that allow us to leverage the position slightly. The warrants have an expiration date in April 2028, and once converted to RIG warrants allows us to buy RIG at $8.65/share.
We have 6 more ideas below for paid subscribers, including a dominant fintech quietly re-rating after AI fears cut its multiple in half, a mispriced healthcare services name with a temporary accounting overhang and significant backlog, and a best-in-class data “toll booth” business benefiting from the very disruption investors fear. We also highlight a top-tier alternative asset manager being repurchased after a sharp drawdown and a pair of underfollowed industrial and defense-linked businesses with clear catalysts for value realization.
If you find value in seeing how professional investors frame new ideas, upgrade to keep reading and get the full archive.
Need a nudge? Many subscribers work in asset management, research, or corporate finance and expense it as a research tool. Here’s a quick script you can use.
Hi [Manager’s Name],
I’d like to expense a subscription to Elevator Pitches, a newsletter that curates stock ideas from professional investor letters, often highlighting overlooked opportunities and special situations.
With a paid subscription, I’d receive full access to every stock write-up they publish each week, which would support my ongoing market research and idea generation.
The cost is $90 for the full year. Given the depth and frequency of the analysis, I think it’s a cost-effective addition to my research toolkit.
Please let me know if this works.
Best,
[Your Name]