About Me

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Avram Fisher, Founder & Portfolio Manager of Long Cast Advisers, is a former equity analyst at CSFB and BMO covering industrials and business services. He has prior experience in private equity; as a corporate governance analyst; as a writer; reporter and private investigator; and as a lifeguard and busboy (I still clear plates when my kids don't). This blog is an open book of ideas about patient investing and about starting up a small-cap focused RIA. It is part decision-diary, part investment observations and part general musings. Nothing on this blog is a solicitation for business nor a recommendation to buy or sell securities. It is simply a way to organize and share thoughts with an expanding audience of independent, patient and talented small cap investors. www.longcastadvisers.com

Tuesday, September 15, 2015

$FTLF: Positive reflections on an initial (small sample) channel check

I have been looking at $FTLF as an investment idea and posted my initial thoughts here >> http://goo.gl/UnuzIs << but i've been struggling with an internal conflict b/t the investment thesis, which looks good to me on paper, and the product, which makes me feel uneasy.

So I recently visited two corporate GNC stores and three local franchise stores to check in and hear what they had to say about $FTLF and $IFIT products. This is an insanely irrelevant sample size. GNC has ~3,500 domestic corporate owned stores and ~1,100 domestic franchise stores and I've visited 0.10% of them.

Still, with the risk of spreading the contagion of availability bias, here's what I learned from visiting 0.10% of GNC stores in a small sample channel check.

Corporate stores (2): 
Both stores had a small section of iSatori bio-gro and hyper-gro on hand.

At one store, a bit run-down and poorly lit, the dipshit kid who helped me said they wouldn't recommend the iSatori product "... b/c nobody buys it".  uh ...

He couldn't tell me anything about it.

The other store was clean and well lighted and the dude working there was insanely nice, very knowledgeable and totally jazzed about the iSatori bio-gro. "I'm a biology major so i try to understand how these products work ... it's an IGF4 stimulator ... the only product like it on the market ... the only way to get the same effect is with a much more expensive growth hormone."

He says he was not trained or paid to say that.

My takeaway is that IFIT's bio-gro has a good product, but they pay way too much to market it through the "traditional" advertising channels of meathead spokespeople (ie CT Fletcher's "I COMMAND YOU TO GRO!").

IFIT pays $0.24 / dollar of revenue on sales & marketing and generates the same 2x sales / total assets as FTLF, which spends only spends $0.12 / dollar in revenue. No wonder FTLF has ~20% ROA. Now imagine for a minute the same product sold through FTLF's channels at 2x the margin.

It was a little disappointing that the MetisNutrition line hadn't yet reached the GNC corporate stores, but the product just launched.

Franchise stores 
I happened to arrive at a franchise store while the owner was there and he owns three of them in the area, so these comments refer to all three stores.

I was told that musclepharm, BSN, Optimum and Cellucor all pay for their wall space and are in corporate and franchise stores equally.

FitLife products (NDS, PMD and SirenLabs) were all in the middle aisle, facing the wall, a less prominent position. (I think they called it a camel shelf, or something?)

The manager at the store raved about the product. He loved it for a variety of reasons:

1. it sells well and there are "zero returns, none!" apparently returns are a huge hassle.
2. the brands are consistent and have longevity. they don't change around the ingredients and they don't continually introduce new brands that are confusing to the sales people.
3. the product works, he said.

a few other tidbits ...

1. he said the brands reminded him of cellucor from a few years ago when cellucor was called nutrabolt, started out as a small business, grew through product development and word of mouth, and now is a GNC anchor product. but today's cellucor is different than the past, with too many new brand intros and a lot of returns.
2. he of alluded to musclepharm being a joke
3. on the distribution transition, they used to order direct from FTLF maybe a pallet every quarter. Now that they order via corporate GNC every two weeks and since they don't have to stock up, the orders are about 5%-10% less volume. but its steadier.
4. the product is now more expensive to them since they buy from GNC with a markup.

this final point highlights a negative aspects of the change in distribution channel and also a risk for $FTLF

  • the product price to the franchise has increased and could cut into the franchise owner's margins. the owner I spoke said it is still a high margin product, but that's narrowed. FTLF mgmt says the higher prices are offset by a termination of shipping costs and credit card fees, so on their end the impact is a wash. 
  • the risk is that GNC can pretty much do whatever it wants. while i'd assume there is a contract b/t GNC and FTLF on frequency and size of price increases let's face it, GNC controls the distribution channel ... and therefore can do whatever it wants. 

5. post summer is the slowest seasonal period for the business. everyone met their summer goals. it picks up again in January.

... my takeaway, from the franchise stores is that FTLF is punching above its weight, outperforming other products in the sports nutrition business without wall access space or end caps or expensive advertising.

Again, small sample, but exciting for me to hear and its developing some trust in the product. I called it "snake oil" in the prior post and I think that was overly harsh. I will amend that. 

Finally, "Sudbury Capital Fund" recently filed a 13G on the stock, representing a 5% position (432k shares) >> http://goo.gl/G8osCL << The fund has another disclosed position in RLJ Entertainment, so I'd guess this fund is going after small value.

Not sure how they acquired so many shares without moving the stock so probably acquired from another large holder. The fund is run by Dayton Judd >> http://goo.gl/s6bW7n << I google mapped his office in Texas just to get a sense of where it is. It's located - the cliche of Texas - roughly equidistant from a gospel church, a gun store, a bbq pit and a DQ.

All this is to conclude that I'm getting over my fear of the product and there will be more store visits in the future.

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ALL RIGHTS RESERVED THIS IS NOT A SOLICITATION NOR A RECOMMENDATION TO BUY OR SELL SECURITIES LCALLC MAY OWN SHARES OF STOCKS MENTIONED.

Friday, September 11, 2015

Rubbing My Nose in My Own Mistakes

As I transitioned in 2014 from sell side research (ie analyzing companies, industries, valuations, etc on behalf of hedge fund and mutual clients) to investing professionally with mine and other people's money, I made a handful of mistakes.

That will happen.

The important thing is burying my noses in them so I understand where my process failed and they don't happen again.

Here are some observations from rubbing my nose in my own mistakes with brief mentions of $OLED, $FHCO and $STLY. (Adding $CCJ, which I totally forgot to mention). All of this happened in the fall of 2014.

1) Overcoming the sense that "I need to be doing something." 

ALL mistakes I've made this past-year ultimately flowed from this one.

On the sell side analysts are not allowed to own the companies they cover and know best. So the stocks I bought for myself had to be super interesting and well researched for me to squeeze the extra work into a 60 hour / week day job.

There was enforced patience. I only bought things that were the most interesting and highest conviction and then I simply waited. A lot of great returns were generated this way.

Fast forward to professional investing and there was this initial compulsion to be "doing something". It's an unusual experience to sit around and read, talk to people, follow leads, learn new markets and industries, read some more, and then ... do nothing

But the source of my success in the past was - slightly tongue in cheek - doing as little as possible, finding, researching and waiting only for the most interesting ideas. Hewing to this model will help avoid this simple mistake in the future.

2) Buying before completing my research.

My equity research relies heavily on the work I did as a reporter and private investigator many years ago bridged with more traditional financial analysis. So in addition to the basic equity research of ...

reading into the company
the competitors
the industry
building a historical model and thinking about drivers of the business
making assumptions on growth rates
flexing the valuation

... there's also a lot of researching the CEO and CFO to get a sense of what makes them tick, what motivates their roles, what are their strengths and weaknesses, capital allocation capabilities, and any other tidbits I can find.

And then there's also thinking about two additional points
i) what needs to go right for the stock to work
ii) and especially what are the risks to owning it

there are no short cuts to any of these areas. Three mistakes I've made in the past year were made from buying a stock before completing my research.

3) Going against my gut. 

I have a pretty good sense of what interests me and what doesn't. Not everything that interests me is a good investment and not everything that's a good investment interests me, but I only want to spend my time on businesses I understand that appear undervalued and / or mis-priced.

When I go outside my circle of competence, it's an uncomfortable feeling.

These three case studies converged all around the same time and combine all three mistakes. 

Case study: OLED. I wrote about it here >> http://thepatientinvestors.blogspot.com/2014/06/oled-my-gut-says-overlooked-value-but.html << Everything about it looked interesting but I didn't understand the business and I didn't have the stomach for the volatility. So I avoided it ... but then emotion got the better of me and bought it on the way up and sold it on the way down. Then the stock took off. Absolute amateur hour. I rub my nose in it everyday.

Case study: STLY. My first impression was this is a shitty business with god-awful management. And nothing has changed. But a value investor friend owns it and I allowed myself to be talked into it even though it's a shitty business with god-awful management. I've come to learn that value recognition is possible from an engaged activist investor who is likely to take over the company at some point in the not too distant future, so I continue to own it. But I bought it feeling the need to be doing something, going against my gut and without finishing all my research.

Case study: FHCO. It's the kind of interesting and weird business I like. I bought it after it cratered to ~$4 / share when they cancelled their dividend. I'd seen that Brian Bares owned it, and I've read his book and like his style. I didn't mind that the product is essentially irrelevant in the US, b/c most of the business is in Africa and S. America. I could deal with the fact that their monopoly was broken b/c they average EBITDA of ~$0.15 / unit and they are still profitable at $0.10 / unit. Plus if there's a competitor it only affirms the market.

But it did not take too many conversations to lose trust, faith and confidence in [prior] management. I won't go into all the details of their ineptitude but had I talked with them more substantively ahead of time I would have seen it quickly. So I sold it at a loss. Interestingly, prior management is now gone and I've revisited the stock at ~$1.40 / share. It is a cash flow machine.

Case study: CCJ. Again, this was around the time I'd just decided to start my own firm and felt the need to be doing something. It's just absolute insanity. I was thinking about uranium, china's desire to build 120 nuclear power plants, the collapse of mining markets in general, my expectation that the decline in mining markets / oil sands production might improve labor rates at the Cigar Lake mine and in general just had uranium and CCJ on my mind when I saw a Barron's article that mentioned a fund buying the stock and I bought some before I'd even cracked a filing.

Then only after buying it, I read about it, learned about the Canadian tax revenue issue, the incredible capital intensity of the refining operations, the trading operations, etc. etc. etc. I'm reminded of a lesson I learned a long time ago; "think before you speak". Do some research before you buy a stock!

***

It's painful to recollect all this stupidity / absence of judgement / willful avoidance of the simple processes I'd used with prior successes. But the lesson was to reflect on what's worked in the past - I've fortunately had a lot of experience with successful investments - and to not change what's worked simply by virtue of transitioning from a hobby to a profession.

So it's been a short but steep learning curve.

Looking ahead, all patient investors should realize that investing is deeply personal and one of the most differentiated enterprises out there. No one does what you do. Your intellectual capital is your edge. There is no comfort in crowds. In the absence of "consensus" you have to find your own evidence. Understanding this has been a big step in the learning process for me, and I hope to always be learning. That's one of the big draws of this business.

Finally, of course I will make mistakes in the future. Anyone whose not afraid to own them, acknowledge them, honestly assess what went wrong and learn from them should do well. Rubbing ones nose in them isn't such a bad idea either, at least to make sure you don't do them again.

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ALL RIGHTS RESERVED. THIS IS NOT A SOLICITATION FOR BUSINESS OR A RECOMMENDATION TO BUY OR SELL SECURITIES. STOCKS MENTIONED IN THE POST MAY BE OWNED BY LCALLC

Tuesday, September 8, 2015

$ARIS: Response from CEO on letter sent earlier this summer

Earlier this summer I sent a letter to the CEO and board of $ARIS regarding my optimism with the forward outlook for the company, tempered with my concerns about continued share dilution.

http://goo.gl/FYzx89

As the letter indicated, the company had grown substantially over the last seven years but on a per share basis - the only metric that matters to shareholders - growth was negligible and I'd hoped they would stop the dilution going forward.

I received the reply just below. Talk is cheap of course and no commitments were made, but if mgmt and the board are aware of and equally burdened by the dilution, then there's potential for behavioral change going forward. My takeaway is that access to less expensive debt is more likely to provide growth capital going forward, nothing that hasn't already been publicly disclosed.

As a small investor with a nascent investment management firm, I enjoy focusing on smaller companies for three primary reasons ...

1) offers opportunities to compound growth faster, not available with larger companies due to "the law of large numbers"
2) offers opportunities to engage with mgmt, which due to scale is not available with larger companies
3) tends to be less efficient. since size and liquidity govern AUM causing otherwise intelligent investors to seek alternative markets. a patient investor can benefit from inefficiency on the purchase and reap rewards on the eventual harvest, or simply own great businesses forever.

... I believe $ARIS exemplifies all three attributes of smaller market companies and I hope to own it for a long time.

***

Thank you for your letter of August 11th. We have forwarded your letter to the Board of Directors and appreciate you taking the time to share your perspective.

When I became CEO of ARI in 2008 it was clear to me that ARI’s lack of “scale” was a driver of the then share price of under $0.50 and a market cap of under $5M. We recognized that we needed to grow the business and that our overall objective of growing shareholder value could not be obtained in the markets we served, with the two products we offered. As a result, we began executing a plan to grow the total addressable market we served both organically and through acquisitions. We also undertook an initiative to increase the number of recurring revenue products that we could offer to those markets while also looking for products that had a higher price point. In summary, our plan was to increase the total addressable market, increase the number of products we offered into those markets, and increase the average recurring revenue per dealer for those offerings organically and via acquisitions.

From a financial perspective, early on it was difficult to drive acquisitive growth using debt as our overall EBITDA levels were low and our lending relationships were such that to increase our debt levels would come with a significantly higher interest rate and more restrictive loan covenants. In addition, we took advantage of a unique opportunity to purchase 50 Below out of bankruptcy and had to finance that acquisition knowing it would take some time to generate positive EBITDA. As you know, we have completed several acquisitions and two capital raises in recent years. In addition, in the last 15 months we have experienced a significant increase in our EBITDA. I believe that these events have put the company in a much better position to finance acquisitions with debt than we were just a few years ago. Our ability to obtain that debt is primarily tied to our ability to generate EBITDA. Our current banking relationship has expressed comfort in allowing us to borrow up to three times our adjusted EBITDA with an interest rate that caps out under 5%. We are now realistically within striking distance of $50M in sales and have seen EBITDA improve by over 50% on a trailing twelve months basis compared to our prior fiscal year. With our scale, we are now generating more EBITDA than we have in the past and this dramatically improves our ability to complete acquisitions using senior debt. For example, if ARI generated $7.5M in EBITDA we could then borrow up to $22.5M in addition to 3x the target's EBITDA. This gives us a great deal of capacity to complete acquisitions without raising equity capital and it is our intention to take advantage of this capacity in the future. We have also adjusted our acquisition criteria to look for businesses that are immediately, or in a short time, accretive to the company’s EBITDA results. As the business scales and we continue to improve our operating results I believe the EPS will also improve. I do agree that the key to this is scaling the business from here without significant dilution.

We do plan on improving our subscriber reporting, starting with our Q1 FY16 results and appreciate your feedback on that item.

We continue to promote buying to our board and executive team and we will continue to encourage our management team and board to invest in the company using their own funds. As you know we did have 3 board members purchase another 49,000 shares on the open market in our last trading window (July 15). While I did not purchase in July I own over 150,000 shares the majority of which I purchased on the open market (these are outside the stock options or the restricted stock I have).

Again, thank you for taking the time to share your views with the board and me. We take your feedback seriously and we will carefully consider your comments as we grow ARI to the next level. We all agree, it is an exciting time to be an ARIS shareholder!


If you have any questions please feel free to contact me anytime. 

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ALL RIGHTS RESERVED BY LONG CAST ADVISERS LLC. THIS IS NOT A RECOMMENDATION TO BUY OR SELL SECURITIES NOR AN ADVERTISEMENT OR SOLICITATION. LCALLC / ITS FOUNDER OWNS SHARES OF $ARIS IN ITS BUSINESS AND/OR PERSONAL ACCOUNT