About Me

My photo
This is written with serious investors in mind, though sometimes they're just drafts in progress. 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 should not be viewed as a solicitation for business or a recommendation to buy or sell securities.

Thursday, June 18, 2015

Companies I met with at IDEAS conference: $ARIS, $FTLF, $SGC, $MOCO, $CLIR, $EYES, $IIIN, $TTOO

Earlier in June I attended the Boston IDEAS conference ...


... I'll lead by saying three cons things about investor conferences ...

1. of course executives have an agenda to make everything seem great. in this regard, conferences are terrible places to look for ideas.
2. other investors talking their books creates even more noise about "good ideas"
3. therefore without a skeptical mind, everything will seem like a good idea.

... but let's not dismiss three great things about investor conferences that make them worthwhile ...

1. they're GREAT places to learn about what's going on in the world. executives have first hand knowledge (or should, be wary if they don't) about how various trends affect their operations and profitability well before these trends show up in the newspapers.
2. occasionally, you get to sit across from incredible capital allocators and pick their brains about whatever the hell you want for 45 minutes. That's an unbelievable privilege.
3. if you want to hear the negative view about something you own, talk to their competitors.

... so, on balance, if you can't learn something new at an investor conference, the problem might not be the conference.

I attended the conference primarily to see mgmt of a company I already own (ARIS), and while few ideas jumped out at me ahead of time, I left with a lot of homework I'm continuing to dig into. Since I haven't done all the homework - my time being absorbed with administrative burdens and trying to raise money - here's only some initial thoughts on the ideas that I will research over time.

ARIS. $3.08 per share / $52M mkt cap / $60M EV / 16.9M shares outstanding. I'll start with this since I already own it. My key question for mgmt heading into the meeting was to help me understand the attraction to the "wheel and tire space," where they've allocated $6M in capital for acquisitions in the last 9-mos. That's about 10% of their bodyweight (ie EV).

The company traditionally serves dealers of big ticket ATV's and RV's, and in a cycle where ATV's and RV's are popular, I like owning a company that serves rich clients. But the avg ticket for a "wheel and tire" dealer is a fraction of the value of an ATV dealer.

Basically they said that since "wheel and tire" dealer's tickers are smaller, they need to do more volume and this therefore justifies the spend for advertising / marketing software mgmt services that ARI (and its recent acquisitions) sells.

With our meeting less than a week before earnings there was little they could say on operations but post earnings here's a company getting back to mid-teens ROA and high 20's ROE, expanding EBITDA margins, incremental margins above core margins, etc.

Stock is trading at 11% FCF yield on a proforma basis (ie using post quarter close share count adjusted for the most recent share offering) and a 10x EV / EBITDA multiple, again proforma. It generates cash. I still like where it's going and still see opportunity for the stock to work, but would appreciate an end to the share dilution. Maybe a letter to the board will get that message across.

FTLF. $1.60 per share / $12.9M mkt cap / $10.9M EV / 8M shares outstanding / 12M shares proforma after iSatori deal. Pills and powders for weightlifters. I completely dismissed it ahead of time but then thought the better. If they have the right brand package, it should be a high margin, high return business.

So I met with CFO Mike Abrams, a former investment banker who saw opportunity in the business. My meeting with him and the follow up research has piqued my interest about the whole industry.

The company itself has several brands that it packages and sells but the biggest channel for them is GNC, the largest retail distributor of pills and powders and it runs the business like a mafia. Furthermore, GNC is transitioning from sport and diet to health and nutrition. On top of that - and I don't want to be susceptible to my own availability biases - but I've never seen anyone in a GNC store.

In my few days of research I found a lot of weirdness about the whole industry - why people use certain things, what trends drives it, what marketing drives it, increasing FDA and CA prop 65 regulations - which all makes it interesting to follow.

Plus there are financial issues specific t the company that makes the stock potentially hairy and cheap. And then there's the previously announced iSatori acquisition, though I'm not certain who is buying who since iSatori will end up as that majority shareholder.

Based on what I've seen, iSatori mgmt is actually run by people who lift weights and are missionaries for their products - and they are less exposed to the GNC distribution mafia - so I can see an avenue of success depending on the structure of the company at the outcome of the deal. I need to do a whole lot more work on the company and industry before I come to any conclusions but it's in the hopper.

MOCO. $16.09 per share / $92M mkt cap / $90.7M EV / 5.7M shares outstanding. One thing I love about investing is discovering industries and companies that nobody really thinks about but are critical to the infrastructure of our world. Here's a company based in Minnesota (and you can do well simply buying Minnesota-based companies) that makes testing equipment used in food processing, pharma manufacturing and wellhead gas analysis. I was interested to see if they make equipment for rail car headspace analysis, which unfortunately they don't, though it appears they could.

What they are known for is "permeability testing". That packaged meat on the supermarket shelf? If it was packaged at an industrial abattoir than it is sitting in an inert gas with very specific mixture of CO2 and O and wrapped in a plastic that will ensure no permeability. The company is on my radar. It seems like a safe and sleepy investment - profitable and generates cash - that may be acquired someday but not sure what it's worth yet and if the returns at these prices justifies an investment now.

SGC. $17 per share / $232M mkt cap / $255M EV / 13.7M shares outstanding. Great company. Loved the mgmt team. Family business. Owner / operator. It's the kind of business I would want to own but at 10x EBITDA and after a 100% rise, probably not at these prices.

CLIR. $5.38 per share. $68M mkt cap / $53M EV / 12.8M shares outstanding. I sort of feel bad for these guys. They have a neat technology used for gas combustion in industrial boilers (ie petchem and refineries) that they said would save 4% of the input costs, but who's building or expanding refineries right now? And cheap NG seems a headwind for the sales cycle.

Also, their G&A costs seem high relative to their R&D and sales. So smart people doing interesting stuff but ... not interesting to me as an investment.

EYES. $15.23 per share / $539M mkt cap / $505M EV / 35M shares outstanding. I know two people with RP in different stages of macular degeneration so wanted to meet with CEO about the product availability. He's a lovely guy, maybe the smartest person at the conference (BME at Duke, JHU med school), who's pursuing a fantasy he realized while an undergrad 25+ yrs ago watching a locally anesthisized patient experience "sight" simply by having the neurons behind his eyes excited by an electric charge.

The company has a procedure and a product that allows people with RP / MD to "see". The procedure involves inserting a chip behind the eye in an operation that - I'm told - is similar to a routine one for any good eye surgeon. The product is a camera mounted on glasses that sends a wireless signal to the chip, which excites the neurons, etc. The image is still fairly crude with some lag, but the software and technology will doubtless improve over time and the whole thing is covered by insurance. They've installed hundreds of these. Very very neat stuff, but not the kind of thing I tend to invest in.

IIIN. $18.62 per share / $343M mkt cap / $347M EV / 18.4M shares outstanding. In a commodity business, if you're not a low cost producer and don't have scale, what's the point? Maybe they can achieve scale and lower costs but it doesn't interest me enough to spend the time figuring it out. Maybe someone else can and let us know?

TTOO. $18.71 per share / $379M mkt cap / $334M EV / 20M shares outstanding. I sat in on a presentation b/c an investor I met said I had to. They have created a device that enables testing of blood cells much more rapidly and more accurately than cultures using magnetic resonance. Seems like a need. I still don't understand what the machines cost, how many units they need to sell, how they sell the testing slides, how they train, etc. I'm not a big bio-tech / med device investor (ie why I'm passing on EYES too). In fact, my antiquated and out of touch image of hospital administrators begins and ends with Monty Python's "The Meaning Life" ("Oh, the machine that goes ping!").  Not in my bailiwick but neat technology.


Would love to hear if anyone else has any experiences or analysis of these companies. I'll write more on FTLF as I get deeper into my analysis and if it indeed strikes me as worthwhile.

Tuesday, June 16, 2015

The most difficult part of investing

Everyone has their own process, whether articulated or not, that leads to a decision and this pertains to all decisions in all aspects of life, from what shoes to buy, to who to marry, what to eat for dinner or when to start the war. Even a random choice is a form of decision making, albeit with the most indefinite input. 

Factors that drive decisions varies by individual and let's not forget the external pressures people face making them. Twenty years ago, the truth I held dear that most others disagreed with was absurdity of the underlying concept of classical economics, that we all strive to make optimal decisions. The growing acceptance of behavioral economics has finally disabused that ridiculous notion. Few people articulate their goals clearly enough to to make "optimal" decisions and even when they do, the process can still be rife with error.  

What complicates but also inspires decisions may be the most human aspects of our experiences. 

Investment decisions are no different from life decisions, though the stakes and results are more easily quantified. 

Inputs to investment decisions varies by type of investor and may include the analysis of charts, historical earnings and cash flow, forecast earnings and cash flow, valuation, management expertise, perceived corporate strengths / weaknesses ... or no analysis at all. 

By "no analysis" I mean that for the last two years while largely focused on small cap investing, I have bought and sold no more than 15 stocks based on various levels of research, but I could have bought an ETF with 1,400 stocks in it, a most undifferentiated approach. And of the stocks I've bought and sold, some friends have bought them too, based only on my recommendation. A deeply differentiated approach with zero analysis on their part. 

While the inputs to an investment decision is a key differentiating factor between investment managers, the inputs to the inputs matters as well (how many years back were earnings analyzed? how many industry experts did you speak to?) as do the weights assigned to the inputs (how important was that incremental piece of information you just received?).

I have come to the understanding since moving from the sell side to the buy side that investment decisions are really the only decisions in all of corporate america - from small business to wall street - that matters and by nature the decision experience is exceedingly personal. Put another way, if good capital allocation could be taught, we'd all be rich.  

To a novice, all of these factors add complexity to investment decisions. To a quantitative investor, they are noise from which a signal may bear fruit. To a fundamental investor, they are the background beat of the work. 

But to all forms of investors that try to differentiate themselves from the market, the investment decision is the most difficult aspect, even if Tom Petty says "the waiting is the hardest part". That's the second.