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, October 10, 2017

A Brief Thought Experiment (+ 3Q Results)

A brief thought experiment: Imagine a company that sells snow to eskimos. Now imagine it's growing and profitable and generates cash ...

... then maybe you start to rationalize it. Maybe they have a brand that's so powerful customers want to pay for something they don't need. And that brand creates a moat. Maybe its the greatest company in the world! Or not? "Climate change will kill them! Climate change will create more demand!?" You can follow any line of reasoning your mind takes.

Maybe this is a sign of brain damage but this idea has been on my mind a lot lately.

Companies whose products we don't need and are only differentiated by some perception-of-differentiation or services sold well in the man-hour impression are selling snow to eskimos. EVen outside the consumer space there are more of these than one cares to think and some may be considered excellent investments b/c they are so darn good at selling.

This is not a ground breaking observation nor a suggestion to buy a small company ahead of an eventual product or brand development or new service hire, just to recognize the power of the sales function. It's something we miss at times. Maybe an unwillingness to acknowledge that differences are matters of perception and perceptions are pliant and easily manipulated.

Which is where a good salesperson or a good sales experience comes in. I know it sounds antiquated but in less modern terms anything that eases a transaction forward - or enables a bias or emotion - is a good salesman. It is invaluable at differentiating. A "like" on the great confirmation bias machine. These are hard to generate but scale well across a network.

I'm not stupid enough to compare Jobs' Apple with a waste brokerage business or any other small services companies LCA owns, but a handful are growing their costs / expenses / expenditures towards selling / marketing / product improvement with the expectation that revenues will follow.

The market sees shrinking profitability and cash flow. Short term thinking by "the market" is part of the opportunity set for patient investors. At the right multiple, not much needs to go right. I see companies that have in the past generated returns on their investments, indicating a business where history and management show up. A long growth history in BVPS is more valuable than most recent BVPS.

If the market considered a return on investment likely or probable, these stocks would trade at higher multiples in anticipation of the eventual rebound in earnings. Neither me nor the market knows the future but we are anticipating different outcomes. 

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Long Cast Advisers recently published it's 3Q17 letter:

"3Q17 was our eight quarter in business. Cumulative returns on accounts managed by Long Cast Advisers increased 8% in 3Q17, net of applicable fees. This was better than the various indices against which we benchmark ourselves. YTD returns through the end of 3Q17 are 21% net of fees. Since inception, we have returned a cumulative 57% net of fees, materially ahead of our benchmarks."

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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. I MAY OWN POSITIONS IN T

Tuesday, October 3, 2017

On obfuscation and the cynicism of investor stupidity ($EVI)

A short seller's presentation on $EVI was published yesterday. It is a long read. IMHO readers would be better off reading EVI's just published 10-K for 2017 and for 2015 as well. Go straight to the source.

But time is short and relative. "Should I read this or that?" The report's author hacks this concept of constrained time - as do many other media - to tell us an abbreviated version of things from their perspective.

It succeeded in serving its purpose, as it often does in the info/business/complex, but failed to adequately inform, as as it also often does in the info/business/complex. We the audience should expect more lest we fall to the level of stupidity expected in its consumption.

This was a valuation / technical short dressed up as fundamental analysis with absurd allegations, self serving drivel and a misunderstanding of the industry served. It reflects a cynicism about investors' intelligence, assuming people will believe it since it comes from a source that's been reinforced by the authority shaping mechanism of the info/business/media. I don't buy it.

For example, of a main allegation, that the company is "teetering on a covenant breach":

"Per the terms of its credit agreement, EVI must maintain quarterly profitability or risk a covenant breach. Q4'17 earnings of just $0.5m means that EVI is already teetering on a covenant breach"

The record shows that in the last 5-years quarterly and 15 years annually the company has never reported a loss. The report should include that information if it considers a quarterly loss a risk.

One can argue valuation until they're blue in the face. I'll frame up the short case a bit more simply quoting my backgammon opponent of last night, himself a former aerospace analyst: "Paying 20x pro forma EBITDA for a cyclical company is insane. We're mid-cycle for godsakes! When the cycle turns, you're going to get creamed. You should sell! You're buying into the cult of personality with this CEO!"

That's the short case: Valuation on a cyclical company.

Don't believe what anyone says about laundry being non-cyclical; capital goods are cyclical. EVI is cyclical. But, the record indicates that EVI is a late cycle play, that additional exposure to maintenance CAPEX mitigates some of the extremes of the cyclicality as does current and future geographic + product diversity.

Which gets to the bigger point on why I and others are bulls despite the nose-bleed NTM valuation. Investing is a business of probabilities. I see a high probability that EVI can continue to expand its growth, within and beyond the traditional capital laundry equipment into water reuse, remediation, perhaps even chemicals (the CEO's former business) and into add'l areas serving a client base that now stretches across the US and into Mexico, Central America and the Caribbean. (PS: All those wiped out resorts will need new equipment soon).

The point is, what's important is simply the company's effectiveness at  continuing to achieve it's "buy and build" expansion in the future.

So if you believe (as I do) that this company will report $16M or $24M in EBITDA in the future, than arbitrarily narrowing the opportunity set for that growth to a 12-month time horizon "b/c that's how we value things" is meaningless.

I also believe that the CEO is a rare and unusual talent and as I commented elsewhere, shorting this thing b/c 4Q17 margins are weak is like shorting Doc Gooden in '84 after he lost two games in a row, in August.

Obviously, one should only expand their comfort zone when using knowledge and information as a guide. Unfortunately, the short report contained neither. I actually expected more.

There's no harm in waiting for another pitch elsewhere. For me, I think EVI solves the problem of allocating capital b/c it allows me to buy a well run business that should grow significantly / materially over time. When the law of larger numbers starts to catch up, that's when the multiple will shrink, but at that point I suspect this will be a more expensive stock.

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ALL RIGHTS RESERVED. 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. I MAY OWN POSITIONS IN THE COMPANIES MENTIONED HERE.