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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

Wednesday, November 9, 2016

FTLF and An Investment Manager's Responsibility to Their Clients

On November 1, I sent an email to a friend ...

"I have concerns about FTLF 3Q and shorter term traders should likely lock in gains"

... and I sold shares for clients. The genesis of the caution was my review of GNC's 3Q16 10Q, which stated ...

"[GNC's] Domestic franchise revenue decreased $2.4 million to $85.8 million in the current quarter compared with $88.2 million in the prior year quarter primarily due to lower wholesale sales associated with lower retail same store sales of our franchisees as well as the earlier timing of our annual franchise convention, which resulted in $6.3 million of lower sales in the current quarter as compared with the prior year quarter."

... if GNC domestic franchise sales were impacted by the timing of the convention at the end of June, it made me wonder how much of FTLF's astounding $8.7M in 2Q16 sales were pulled forward as a result of the convention.

So I looked at the timing of the convention in prior years and it didn't take long to see a trend ...



... hard to know precisely how much the "convention bump" impacts sales, but I know that 1Q tends to be the seasonally strongest (b/c of new year's resolutions) and it tapers from there. So I just combined 2Q & 3Q together to get a sense of the typical two-quarter figure relative to seasonally peak 1Q sales.

I saw that in a "normal" year (whatever that means) 2Q + 3Q sales ~ 1.6x to 1.8x of 1Q sales. I used those multiples to back into a presumed 3Q16 sales figure in FTLF and at the high end, it inferred $5M in 3Q16 sales.

My stomach dropped at that moment, about as much as the stock dropped when FTLF preannounced 3Q16 sales of $5.3M.

This being the first time such a "surprise" has happened while managing outside money, it got me wondering about how much information of this information I should share. I decided to do nothing, but it seemed like there was no right answer.

Ideas are the lifeblood of an investment manager. It is their passion, their purse and their intellectual capital. That I have been sharing some of them freely has been a function of my own interest in having an open diary into my thoughts, growth and maturation as an investment adviser managing outside capital.

But as I've grown my AUM and client base - and having just struggled with this uncomfortable situation - maybe it is time to rethink that model and morph towards something different, either a paid subscription / advisory or simply quarterly and annual letters for clients, as others investment mgrs do.

I'm not sure how this will change aspects of what I write about in the future, but over time, all things evolve and I imagine this blog will as well so as to avoid this situation in the future.

Either way, my sole commitment - my fiduciary responsibility - will always be first and foremost to my clients.

-- END --

All rights reserved. This blog is not a solicitation for business nor a recommendation to buy or sell securities. This blog is for entertainment purposes only. I am under no obligation to provide any updates on any position I write about here.

4 comments:

  1. Hi,

    Absolutely love the blog. A little puzzled by this post though. You mentioned selling the stock for clients but doesn't this look like something the market is just overreacting to? Is that the info that you weren't sure if you should share? If so why the sale.

    Anyway, the blog is great and if you switch over I'll be your first customer!

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    Replies
    1. Please forgive my hasty comment. I get it. Thanks for the blog.

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    2. Hi Steve -

      On FTLF, I sold it for clients after reading the GNC 3Q transcript, which referenced weakness in the quarter due to the timing of the convention. So there was ample read through to FTLF and they preannounced a few days later.

      Today with the stock at $0.60, it's trading at a slight premium to working capital + lt debt of ~$0.45 / share. But last year I had some informational advantages by visiting stores talking to store mgrs etc and there was a disconnect b/t the price and the growth.

      When I visit stores now, they all still love / sell the FTLF product, but none of them know what's happening to their businesses, if they're going to be around in a year, etc. That's some legitimate uncertainty that until it's resolved keeps my away from revisiting the stock despite the valuation.

      Not sure what you mean by "switching over" but I like your enthusiasm!! cheers / Avi

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    3. Hi Avi,

      Funny, I first thought you meant that the GNC convention was a clearly explainable factor and that none of the fundamentals have changed. Oops.

      Spoke with IR yesterday and ISatori is bleeding money (lost 500K 3Q) and doesn't look like much has changed. It seems the whole business model is up for grabs, which kind of makes it a pass for me.

      Thanks again for the blog (the Klarman and Burry don't give a shit about post slayed me) and just meant while I hope you keep it as is, if you ever switched over to a newsletter/subscription I'd be in. Ok, I'll shut up now.

      Have a great night.

      Steven

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