About Me

My photo
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

Monday, November 27, 2017

on telling the difference between the exceptional and the everyday ($QRHC and $SIFY)

I apologize in advance for taking a moment to talk about religion but its part of my life and there's something I've been reflecting on that ties a bit into investing. So ...

... I spent the last summer running the woodworking shop at a sleepaway camp - a Jewish sleepaway camp - where I was engaged with religion pretty intensely for the first time in ~25 years. (I grew up in an observant home but there's too much good food to eat in the world; once I went off to college I started eating it).

Ritualized religion isn't my preferred version of practice - investing, music, exercise and woodworking probably top my list - but with the perspective of age / experience / worldly travels / comparative religion as my guides, I could at least re-engage with it for a few weeks, and in doing so, reflect on its meaning and meaningfulness.

I'd summarize my experience as similar to that of a visitor to Montreal eating poutine; with some interest but more an avid curiosity about why everyone else does it? All of which is to say, it's not my jam.

However, there's one short prayer that really resonated with me and I continue to think about it quite a bit. It's the last and final prayer of the Sabbath (and every Jewish holiday): "Praise God [...] who distinguishes between the holy and the everyday."

Obviously, it's a fundamental premise of all religion that such things exist that are "holy" and "not-holy", so this struck me as a foundational prayer. But at the same time, it didn't sit well with me as it it conflicts with something I've observed in my life during whatever fleeting spiritual encounters I've had - perhaps others have as well - where we are occasionally endowed with a feeling of oneness, wholeness and completeness.

In short, I was troubled by this gratitude of separation when it seems preferable to want to experience everything as "holy".

I struggled with this for awhile then eventually inverted it: What would life be like if we didn't know the difference b/t the exceptional and the everyday? This question answers itself. If we couldn't distinguish between joyous events (having a baby) and everyday events (telling that child 10-years later to clean their room, flush the toilet, wash their hands, etc.) we would lose out on a large part of our emotional selves.

... Most assuredly, and bringing this back to the subject of this blog, how different would investing be if we didn't know the difference b/t a good company and a not so good company, or a good investment and a not-so-good investment.

My initial take on this was tongue in cheek; that passive investing, which does NOT distinguish between good companies and bad companies, is - cue Dana Carvey - the work of ... Satan?! (That sorry humor aside, we should recognize that passive investing's isn't simply about avoiding the "how to pick a stock" problem as it is avoiding the "how to pick an investment manager" problem.)

It's not here for me to describe all the attributes of a good investment. I think at the very least a good business should solve a tangible problem for a customer at a price that's reasonable to pay with a quality of service that makes the customer not want to look elsewhere. (I discuss one such possible idea below.)

Whatever attributes you want to assign to a "exceptional investment" vs an "everyday investment" it is our job as investors to know the difference and be comfortable with that process so we can endure whatever happens with the stock price (ie the market telling you you're wrong) until it figures out what you've known all along^^.

Finally, in wrapping this up, lest there's any confusion, I must emphasize that while both religion and investing deal with unknowns (the future is unknowable despite what you hear on TV), the foundation of one is faith and the other is facts and if anything should be separated it should be these.

I even observe a weird irony or contradiction around this:

Investing is an outcomes based business - the outcome is everything - yet when we make an investment, we don't really know what the outcome will be b/c the future is unknowable. In absence of this foresight, we have to be supported by our facilities to reason and weigh a full set of probabilities - including failure - such that the imbalance leans heavily towards the variety of favorable outcomes that will benefit shareholders. When we believe we've found them, we should buy them in large enough numbers to be meaningful to the portfolio.

In contrast, with religion, daily faith supports its believers despite the fact that the outcome is the same for everyone. Praying harder won't change that. Investors in contrast need to be comfortable with the discomforting limits of our own certainty.

***

^^ I'm thinking here about QRHC, a stock I've been painfully buying all the way down, and had expected to buy more after what I'd anticipated would be a quarter negatively impacted by hurricanes in TX and FL. Instead 3Q became the quarter of "holy shit they just guided to 2x the EBITDA I expected" (ie $6M-$7M)

I don't put much credence in guidance b/c nobody knows the future.

I think its reasonable they will do +$6M in EBITDA at some point in the near future. But why narrow the time set to 12-consecutive months? The calendar year is an ancient concept. Even the seasonal years are changing.

So rather than excitement this guidance causes me concern. Part of this is the high expectations. If they only do $4M on the year, what would previously have been a strong step in the right direction will be considered missed expectations. That this risk was created by the aggressive guidance eats at me. This risk did not exist before.

The other part of my concern is b/c the earnings growth that drives the guidance is from new markets, customers and industries. Whatever the business, new lines present risks. Industry expansions always worries me.

In this case, the company is ramping up its exposure to the construction waste business. Just let that sink in a minute. Does anyone associate "construction waste" with "GAAP accounting"? I do not.

Did they leave themselves wiggle room to learn this new market? I do not know. It is impossible to know how much of an adjustment period "wiggle room" exists in the guidance. Mgmt has delivered on everything else it's said it would do, but I would hate for this to be the case sticking one's neck out only to have their head cut off.

***

I have been spending a lot of time on a new idea that I think might be an exceptional investment. The company is SIFY Technologies (SIFY), an Indian "Information and Communications Technology" ICT company.

I'm attracted to the company by its recent financial performance, its valuation, its adherence to a vision laid out - and somewhat reviled - nearly seven years ago, the business acumen / success of its Chairman who I think is the strategist behind the vision, and finally its (theoretic) access to a potentially robust market for long-term technology expansion.

Here's the financial performance summary in USD.



I observe growth in revenues, stable margins, and cash flow generation over time. The company is also comparatively underlevered vs many larger ICT's likely more familiar to investors like CenturyLink (CTL) in the US or even Reliance Communications in India (NSE:RCOM) both of which have 1.6x Debt / Equity ratios.

Concurrently I observe a valuation of around 7x - 8x EBITDA.


I'm going to submit a longer write up on this for a contest on SumZero so this will simply be a brief take but allow me to at least elaborate on one aspect of this:

If it's such a good idea, why is it so cheap? I view this predominantly as a fallen / forgotten turnaround that has several strikes against it.

Before delving any deeper, the best place to start is this absolutely brilliant and prescient short report on SIFY from the VIC in February 2012. It is a must read to understand the historical background and the evolution to where they are today.

My take on reading it is ... look how far they've come! The company's investment decisions that generated ridicule back then now generate cash and profit. And yes, while they were in pretty bad shape back then, something had to change for them to remain in business. Also, back then it was trading at a 60x EBITDA while today on a total outstanding share basis (178M) they trade at a not unreasonable multiple for a growing cash flow generating company.

But then one must consider the following strikes against it ...

1. It's in India. There is a lack of proximity, knowledge and clarity to Indian investments.

2. As the short report mentioned, 5-10 years ago there were a series of insider transactions that severely diluted shareholders. People with long institutional memories will be wary.

3. It's been a pretty low ROA and ROE business.

4. DSO's are absurdly high

5. The company admits this is "Version 3" of the company.

... digging more deeply into it reveals that since the recapitalization, share count has remained pretty stable, that ROA and ROE are growing (thought still too low), that trade DSO's have been historically pretty stable, and that Versions 1 & 2 were carried out under prior management.

The briefst summary here is that I see an owner / operator business that's undergone an attractive l/t evolution finally bearing fruit. This owner / operator is Chairman Raju Vegesna who owns 85% of the company. Vegesna is a former Motorla engineer and chip designer. He has two mentions on the page "Who are the Computer Architects?" associated with developing workstation processors.

He's also founded and sold two companies ...

ServerWorks, sold to the semiconductor company Broadcom for $1.8B in January 2001. He then worked at Broadcom for two years until 2003 and apparently lead a highly successful division before he was pushed out. (Broadcom was acquired by Avago in January 2016)

ServerEngines to Emulex for $225M EV in June 2010. (Emulex was acquired by Avago in 2015).

... I think it's fair to say he's smart. There's an old article about him from 2011 that highlights his interesting background (here's the link but the website isn't secure).

I'll add more details on this in the future. As always, do your own homework.

-- 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.