About Me

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I'm a former reporter, private investigator and institutional equity analyst who digs deep to find niche undervalued and undiscovered securities. I manage money for individuals, institutions and family offices via my business Long Cast Advisers. This blog is part decision-diary, part investment observations and part general musings about Philadelphia sports. It is for entertainment only and should not be viewed as a solicitation for business or a recommendation to buy or sell securities.

Thursday, February 14, 2019

On the yin / yan of hope and frustration

For all the sources of frustration evident in a visit to Ikea, I believe it to be one of the most optimistic places in the world. Look around, past the arguments, past the annoyed and puzzled looks and you'll see there new roommates, new families, new renovations all planning for a new and brighter future. Life's improvement is just an allen key away.

I mention this b/c with investing and many other things, where everyone else sees frustration I often see hope, and when everyone else sees hope I often see frustration. It is a tendency that bugs the shit out of wife.

I've been thinking about all of this following the NBA draft deadline when my Philadelphia 76ers* made a blockbuster "win now" trade that sent four draft picks and a highly promising (and much beloved in our house) rookie from Wichita State named Landry Shamet to the Clippers for a "near all-star" on an expiring contract Tobias Harris.

They also swapped bench players, unloaded their 2017 #1 pick (don't get me started), and earlier in the year traded two starters for a talented but crotchety one in Jimmy Butler.

The widespread response in the Philly sports world was pretty optimistic, as if we should already crown them Eastern Conference finalists.

I always get a chuckle whenever I read about "blockbuster trades" and dream teams and other "sure bets" like this b/c they are rife examples of the yin / yan of our existence: hope and frustration. The one thing I'm certain of with the Sixers is that that "the process" is over.

I'm not enough of an "inside basketball" type to assess the players' talents but I do see in this trade, analogs - as there often are - between sports and investing.

The first analog is in the form of "utility." Now, when I took economics in college with this guy** I was put off by my erroneous conflation of "utility" with profit. It wasn't until more recently that I learned that Bernoulli purposefully used the vague term "utility" to simply mean "betterness" as it relates to different people under different scenarios.

Without even knowing how well each participant in the trade increased their teams "betterness", we can at least assess their "betterness" goals.

In pulling forward the future - in giving up a bunch of draft picks and younger/lesser talent for two older, more experienced and statistically more talented players - the Sixers made clear their "betterness" is to win now. Meanwhile, the Clippers moves revealed a "betterness effort" to have options for tomorrow.

The second analog is in understanding the discount rates used by each team. The Sixers use a low discount rate and value the present more highly. The Clippers use a high discount rate and see the assets they've accumulated today as worth much more tomorrow.

I have observed over my years some investors making all sort of near constant adjustments to their portfolios, trading around and around again, to dial in some perceived idea of the "perfect portfolio today". On the other extreme, I've observed other investors - Polen and Lyrical come to mind - that simply buy a handful of stocks that fit very specific parameters, and they wait.

I follow this latter profile b/c investing isn't about today, it is about the future. The more patient one can be, the more capable they are of making decisions that can pay off over time, the more opportunities they'll have at generating returns that are different from the indexes. And if they are good at recognizing the few times these opportunities come their way, then those differences might be substantially better than the indices.

As a concentrated small cap focused investor, most of the companies I own would appear to others more "prospects" relative to other larger companies.  However, many of the companies I own actually have long operating histories (INS, PSSR, DAIO) or management teams with significant operating experience within their industries (QRHC, CTEK). While they are small and growing, they are far from unknown quantities.

I am, as the name of this blog suggests, a patient investor. Today's money is cheap relative to tomorrow's opportunity. And I tend to find distasteful the kind of impatience revealed by the Sixers management in this trade. I like durable growth with downside protection. I like wide opportunity pathways and narrow gutters. By giving away youth and draft picks, the Sixers traded away optionality. I'd argue they've not so much widened the opportunity pathway as much as widened their gutter.

I can't project how well the Sixers new players fit. As a long time fan, I'll root for them to win. But woe be the market participant who invests for the same reasons they watch sports!

I'm not above the yin / yan of "hope and frustration" but I rely on facts and knowledge to support me so I'm not whipsawed by the emotional roller coaster of the market. I find it better to understand the actual opportunity pathways towards success, and equally as important, the width of the gutter, than to rely on hope, which is simply not an investable thesis.

And the best part is, my season is as long as I want it to be. At least through Long Cast Advisers' first three years, the record indicates some success with these efforts.

-- END --

* I don't actually own them, I'm just a lifelong fan

** One of the things I learned from that guy was the impact post-manhattan project physics had on modern portfolio theory

ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.

Wednesday, January 16, 2019

In closing 2018 (LCA Year End Letter: $PSSR, $INS, et al)

I started this blog to write about investment ideas and other investment related thoughts. "An open book" as I called it.

The thing is, I now have an actual book of business. It's small and humble, but growing and I want to dedicate my time and efforts to it. It's called Long Cast Advisers ...

http://www.longcastadvisers.com/

... I recently posted on my firm's website my presentation on $INS for the MOI 2019 Online Conference. That presentation includes information about my firm in general and about that idea specifically. I think it's a fascinating business.

I've also just recently posted our 2018 "year end letter". It's also on the website (see "links & letters" page).

I'm most likely to continue to post primary ideas on my business website rather than here as this is a blog and I am not a blogger. When I started writing this in 2012, I was a former sell-side analyst trying to figure out what to do next, and I was impressed (maybe floored is the right word) by what oddballstocks, otcadventures and countless others were doing with off-street research.

Now, I'm a sole business owner of a one-person investment management firm. If I can simplify for anyone what I've learned in my first three years, I'd say this: If you like researching stocks, don't start an investment management firm b/c it's far more complicated then just picking the right stocks ...

you gotta pick the right stocks
you gotta own them at the right weighting
you gotta find clients who appreciate your worldview
you gotta have enough assets to make it all meaningful
and you gotta manage the administrative burden with an eye on time and costs

... it's complicated but the effort to get it right is enervating and presents an array of constant professional challenges besides the obvious "finding good stocks and owning them at the right concentration."

When it's done right, there are tangible benefits to my clients. When it's done wrong ... oooph, in this business you live with your mistakes a long time. That's where patience comes in. Or as they say in the kitchen, "make it right or make it twice" (at least that's what was said back when).

It's been a most unexpected pleasure forging relationships here through this forum and even deeper relationships with my clients through my business. I aim to focus on that going forward, so I can continue the endeavor of increasing mine and their prosperity.

If it interests you as well, please drop me a line.

-- END --

ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.

Thursday, November 22, 2018

On thanksgiving

I've liked this poem "Desiderata" by Max Ehrmann since I first saw it in college in Baltimore. I know it's a bit sentimental and cliched, and I realize it wasn't really discovered in a church but whatever, most origin stories are BS. It doesn't take anything away from the experience.

Another sentimental cliche is that this is the time of year when family gets together and fight. We seem to do that everyday in our household. But I've never had the seemingly most cliched Thanksgiving experience of arguing radical politics or having the "crazy uncle" thing. I adore my uncles, though sadly I lost one this year. Even then, I'm grateful that I knew him. He was an outlier in many ways. At his funeral my aunt, herself a published author, read something from his journal about a simple question frequently asked in his younger days "could we ... ? " evolving with time and experience to "should we ... ?"

It seems relevant to reflect on this question in an era of fast paced technological change (crspr, AI, self driving cars, drones and weaponry, etc.). Should we have left fire in the domain of nature? Of course not. I think we should ... as responsibly as possible ... understanding that there's a learning curve and we're likely to burn ourselves early on.

***

I write here not about technology but with Thanksgiving and "gratitude" in mind. However, it would be disingenuous to honor those virtues without acknowledging the range of other emotions that seep into investing life when expectations aren't met: Anger, impatience and fear.

In thinking about both gratitude and anger, I acknowledge posts I've written here (as well as other "Dear Chairman" letters I haven't) that were written with too much of the latter and not enough of the former. In some cases I regret it and have apologized. In other cases, sharp words can help hold executives accountable to their shareholders when they hide their failures and lies behind silence.

But it would be ridiculous to not acknowledge the gratitude as well. I'm grateful for clients. I'm grateful for the returns. I'm grateful for the executives who manage our companies wisely and with integrity to enable those returns, and those who acknowledge their shortcomings and adapt when they are wrong, because course correction is always an option. I'm even grateful for the mistakes that I've learned from, as humbling as they can be.

Today should be a reminder that a little gratitude can help us all aim more accurately towards equanimity, to help make better decisions, to improve process, to better steward ours' and our clients' capital and to compound the value of investments for the long term. These attributes will enable business longevity and durability, two things I want, along with growing my client base and continuing to compound returns.

As the poem reminds us, "... many fears are born of fatigue." That and days when the indexes are down 500 points or large holdings decline 20%. At the very least we can be grateful to have a place to sleep, so we can wake refreshed and prepared for tomorrow, whatever it brings.

-- END --

ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.

Thursday, November 15, 2018

QRHC decision tree, b/c making decisions while frustrated is bad

If QRHC had never issued '18 guidance and reported $2M-$2.5M in EBITDA this year, investors would have been happy. B/c let's not forget first and foremost, this company has done a really good job to date turning this business profitable.

However, they did issue guidance and they've fumbled in their own end zone mismanaging "the street". Here's a brief history of guidance ...

11/14/17 (3Q17 report) >> "Based on the aforementioned, we expect revenue growth for 2018 to be between 10% and 15%, driving positive net income with estimated GAAP earnings between $2 million and $3 million, or GAAP earnings per share between $0.13 and $0.20, and estimated non-GAAP Adjusted EBITDA between $6 million and $7 million, or non-GAAP Adjusted EBITDA per share between $0.39 and $0.46.  Per share estimates are based upon the issued and outstanding common shares as of September 30, 2017.  Before the full effect of our strategic shift is reflected commencing in 2018, we anticipate that earnings for the transitional fourth quarter of 2017 will be relatively flat with the third quarter.”

4/2/18 (4Q17 report) >> "Quest currently expects positive net income during 2018 with estimated GAAP earnings between $500,000 and $3 million, or GAAP earnings per share between $0.03 and $0.20, and estimated non-GAAP Adjusted EBITDA between $4 million and $7 million, or non-GAAP Adjusted EBITDA per share between $0.26 and $0.46.  Per share estimates are based upon the issued and outstanding common shares as of December 31, 2017." 

5/13/18 (1Q18 report) >> ""First quarter results were in line with our expectations, and the previously delayed customer implementations are beginning to ramp and contribute to sequential revenue and earnings growth.” said S. Ray Hatch, President and Chief Executive Officer. “We are building a significant pipeline of new business and expect new innovative programs, such as the one we announced with Shell, to provide significant growth opportunities.  We have made progress toward our annual targets and expect to show improvement throughout the year.” ... on the call it was added ... "We're on track to meet our goals for 2018 which I'll remind everyone is an adjusted EBITDA of $4 million to $7 million."

8/14/18 (2Q18 report) >> "In addition, we have built a significant pipeline of new business that we expect will lead to significant incremental growth during the second half of the year. Based on the continuing ramp of business with existing customers, our expanding pipeline of new business, and the earnings leverage in our business, we believe that we are on target to reach $4 million in Adjusted EBITDA for 2018.”

And then on the call ... "Although, it looks like we’ll have a ways to go to meet the lower end of the $4 million EBITDA number on our target, we showed significant progress towards that target in the second quarter, and are definitely moving in the right direction when it comes to showing sustainable improvement in our financial performance ... We’ve also built a significant pipeline during the first half that gives us visibility to continue sequential growth in the second half of 2018 and lays the groundwork for double-digit growth in 2019."

Plus the CFO says ... "I don’t remember ever putting out $3 million on the net income." (??!)

11/13/18 (3Q18 report) >> "We now expect Adjusted EBITDA will be approximately $2.0 million to $2.5 million for the year 2018, which would represent a substantial increase of 150% to 200% over last year and set a new record for annual operating performance." 

... and here we are, frustrated and disappointed, two feelings that generally lead to poor decisions. What information can we derive from this guidance fiasco?

The generous view:
They just don't understand the ebbs / flows of new customer ramps
They aren't experienced as pubco execs and don't understand how to "manage the street"

The less generous view:
They have no visibility into their business b/c their IT platform doesn't enable them to access real time invoice management
Chairman (or some other shareholder) encouraged them to state absurd stupid guidance so they could sell

The least generous view: 
They are liars and will say anything 
They are clueless

I lean most towards the lack of visibility due to weak IT platform, b/c that's what my due diligence tells me, and its reinforced by the fact that halfway through the quarter, they have no sense of whether sequential EBITDA is going to be up or down.

It's not a problem to not know tech, but it's a problem to not fix it. 

You want to succeed in life? Acknowledge your weaknesses and work to fix them. Find people who pay attention who can provide honest critical feedback and then work towards fixing it. Everything is solvable. But if you don't acknowledge what you're bad at, you'll never ever overcome it.

So what do investors do now?

Either you can assume the Chairman who owns a lot of this company wants to make money, is reasonable, will start asking questions and invest in a solution. Properly implemented and utilized, the right tech platform would enable this company to scale significantly and generate fcf with little required re-investment.  

Or you can not waste your time b/c you're not getting water from a rock, especially the one the Chairman lives beneath. 

Regardless of what happens to the stock over the next year, you have to be able to look back and say "I made the right choice with all the information available." 

I'm sure that if they'd never opened their mouths on guidance, we'd never be here and all this speculation would be unnecessary. But here we are, on the clock, mgmt has gnawed it's credibility to zero and this is now a "show don't tell" story. Investors must choose their own adventure.

-- END -- 

ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN. 

Wednesday, November 7, 2018

LCA 3Q18 Letter

Returns rebounded in 3Q18. My letter to clients is posted on my website here. It includes thoughts on existing positions and two new ones towards which we've allocated some of the proceeds on the sale of IVTY.

I briefly mentioned towards the end of the letter how helpful it's been for me to re-read Chapter 8 of the Psychology of Intelligence Analysis, by Richards J. Heuer, Jr. That chapter deals with "Analysis of Competing Hypotheses" and lays out such a simple but deep method for assessing such things. The whole book is an amazing read.

-- END --

ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.

Saturday, October 20, 2018

Not so revolutionary thinking (RVLT)

Revolution Lighting was on my radar in 2016 when I was lucky enough to pass on the stock. I did some due diligence, talked to a lighting expert (babysitter's dad) and then after speaking with the Chairman's son, I wrote this email (or at least this is how it started) but never sent it b/c it wasn't worth my time polishing a message for a company that didn't interest me and certainly wouldn't have been worth their time reading it ...



... etc. Now here we are two years on with a bit of strangeness around a company run by an extremely seasoned mgmt team that's well versed in the capital markets but isn't called Sears.

Last week this closely owned company pre-announced 3Q18 results and the Chairman disclosed a takeunder offer at $2. The stock closed that day ~$1.50, where it remains. On Friday, they offered "clarity" on the pre-announcement: Blamed timing, but it's also having internal shipping issues; disclosed a pretty minor SEC investigation into revenue recognition practices; and elaborated on cash flow needs that will get it through the year.

I write here not to dig into the company but to organize and explore my thinking around a potential investment decision. It strikes me as a wonderful and simple little puzzle, an investment koan. To tee it up, we're talking about investing in a not so great business whose stock trades at $1.50 with a presumably legitimate $2 takeout on the table.

1. "Life's Too Short". I've been working on my checklist and that's item #1. So I'll put it at #1 here too. This means two things. First, do I want to spend my time on this at all? (Apparently I can't help myself.) Secondly ... well, I'll add that below.

2. Are they scientologists? Who uses the term "clarity"? Would a business run on the principles of scientology create value for shareholders?

2. What's the business worth? On paper, its got a ~$100M EV ($40M mkt cap / $60M net debt owed to Chairman) and trades at ~2x gross profits vs +3x gross profits two years ago when investors still had faith and confidence in the LaPentas.

What do other deals in the space go for? What has RVLT paid for its acquisitions? What would a private company reasonably pay for the distribution business and the gov't contracts? Who can I talk with to help me quickly get the pulse of those multiples?

3. What are my assumptions and how reasonable are they? What are the potential outcomes and how probable are they?

4. I should add to my checklist something etched into the wall of an old bklyn heights bank: "Society is based on faith and confidence in one another's integrity". I think of faith and confidence as non-balance sheet assets. Here they've been fully impaired, but over time and under different mgmt could be restored. 

5. How would I feel buying the stock if the deal is pulled? How can I weigh that against the feeling I'd have not buying the stock and the deal goes through? I know we're supposed to table our feelings but it's on my mind. The behaviorists must have a term for this.

6. Maybe the solution is to buy a small position. But then, why bother with small positions? That's something to think about some other time.

7. Finally, getting back to "Life's Too Short", Robert LaPenta, the Chairman & CEO of the company, was deathly ill in Spring '18. Maybe he's come to the same conclusion? Maybe he wants out and the takeunder implies he will accept any offer over $2? I find this the most compelling explanation for all of this behavior. I wonder if is is their most desired outcome?

I think this encompasses most of my thinking. I've spent enough time on this and likely so have you. "Life's Too Short!"

-- END --

ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.

Monday, September 17, 2018

CTEK: Letter to Management

Over the weekend, I mailed a letter to CTEK management asking them to please consider selling the MPS business so that they can focus on the high return IT Consulting / Cybersecurity business. The math on the two businesses just doesn't make sense for a company this small and undercapitalized and the MPS returns are too low to justify any incremental spend; they should spend all incremental capital growing their IT business.

Then a press release came to my attention that might indicate a willing buyer. If a sale could draw $25M, basically what the pure play MPS was worth a few years back, and the proceeds are allocated towards debt paydown, it would leave investors with a high margin, FCF generating pure play IT consulting / cybersecurity business trading for less than 6x EBITDA.

This is why I think CTEK increasingly looks like a “good co / bad co” situation, with the legacy MPS business hiding the value of the smaller- and faster-growth IT Cybersecurity business.

With a sale of the MPS business, management would have optionality, and the next best thing to $0.50 on the $1 is optionality. They can grow organically, by slow acquisition or via a reverse merger with a larger private company with pubco ready executives who want to roll up in this fragmented industry. I think the last option offers the best opportunity for investors, customers and employees, especially given the need to manage succession planning at CTEK as well.

I know I prefer investments where I can own the stock and never have to think about it again, but my attention gets focused when our holdings underperform their own expectations. When a reasonable and probable solution exists, I will always fight for mine and my clients' capital.

Here is the full text of the letter to the Chairman, JD Abouchar ...

Dear JD:

I am the owner, for myself and clients, of 100,000 shares of Cynergistek stock. I own these shares because I believe the market significantly undervalues the fast growing, high margin IT Security business that is over shadowed by its larger MPS cousin.

I write to urge the Board to maximize the valuation of the enterprise, and to ensure a strong, durable foundation for long term profitable growth, by selling the MPS business and expanding the pure play IT Security business through a reverse merger with a larger, highly regarded competitor.

I believe these steps would offer shareholders the potential for material value recognition, would provide customers the most focused service solutions and would ensure employees a more stable work environment within a fast growing high margin business.

I come to this conclusion upon the realization of three issues:

Despite the best intentions of holding both MPS and IT Security under one-roof, we are too small and under-capitalized to invest in both concurrently.

Every dollar we invest in IT returns substantially more than an investment in MPS so it makes no sense to allocate incremental capital into the low return, slower growth business.

Mac, our CEO, who built, grew and has already sold his business once, wants to retire. We need to find a dynamic pubco ready, lights out CEO to shepherd the business through its next leg of growth.

The good news is, we have assets and optionality, and immediate value could be realized by selling the MPS business. In 2015, as a standalone pureplay MPS, “Auxilio” had a $25M mkt cap on $60M revenues and $1.6M EBITDA. Today, that business, still around the same size but freed from public company expense, would be worth roughly the same to a strategic or a financial buyer.

Assuming a sale in that price range with the proceeds allocated to debt paydown, shareholders would be left with a fast growing, standalone IT Security / Consulting / Staffing business, with ~$5M in EBITDA, trading at less than 6x Enterprise Value, undoubtedly on the low end of the valuation range for a company with strong FCF potential.



From this foundation, I see three ways to grow our IT Cybersecurity / Consulting business into a larger pure play entity, providing broader solutions to more customers, potentially in allied verticals such as academia and government.

Via slow, patient and organic growth
Via a handful of “bolt on” acquisitions
Via a reverse merger with larger well-respected competitor with an existing management team intent on consolidating the mid-sized market and benefitting from capital markets exposure.

All scenarios require thorough due diligence and carry risk, but I believe the last offers the most expedient way to satisfy growth, durability and succession planning.

I don’t imagine I am telling you anything new. I came to these conclusions simply by contemplating the business and considering the best paths forward. I imagine the Board regularly does the same.

Whatever choice is made, I urge members of the Board to individually invest in the decided outcome with their own personal capital. We outside shareholders who endow our faith in Board decisions fairly deserve to see such mutual faith abided.

Sincerely ...

-- END --

ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.