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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

Saturday, October 20, 2018

Not so revolutionary thinking (RVLT)

Revolution Lighting was on my radar in 2016 when I was lucky enough to pass on the stock. I did some due diligence, talked to a lighting expert (babysitter's dad) and then after speaking with the Chairman's son, I wrote this email (or at least this is how it started) but never sent it b/c it wasn't worth my time polishing a message for a company that didn't interest me and certainly wouldn't have been worth their time reading it ...



... etc. Now here we are two years on with a bit of strangeness around a company run by an extremely seasoned mgmt team that's well versed in the capital markets but isn't called Sears.

Last week this closely owned company pre-announced 3Q18 results and the Chairman disclosed a takeunder offer at $2. The stock closed that day ~$1.50, where it remains. On Friday, they offered "clarity" on the pre-announcement: Blamed timing, but it's also having internal shipping issues; disclosed a pretty minor SEC investigation into revenue recognition practices; and elaborated on cash flow needs that will get it through the year.

I write here not to dig into the company but to organize and explore my thinking around a potential investment decision. It strikes me as a wonderful and simple little puzzle, an investment koan. To tee it up, we're talking about investing in a not so great business whose stock trades at $1.50 with a presumably legitimate $2 takeout on the table.

1. "Life's Too Short". I've been working on my checklist and that's item #1. So I'll put it at #1 here too. This means two things. First, do I want to spend my time on this at all? (Apparently I can't help myself.) Secondly ... well, I'll add that below.

2. Are they scientologists? Who uses the term "clarity"? Would a business run on the principles of scientology create value for shareholders?

2. What's the business worth? On paper, its got a ~$100M EV ($40M mkt cap / $60M net debt owed to Chairman) and trades at ~2x gross profits vs +3x gross profits two years ago when investors still had faith and confidence in the LaPentas.

What do other deals in the space go for? What has RVLT paid for its acquisitions? What would a private company reasonably pay for the distribution business and the gov't contracts? Who can I talk with to help me quickly get the pulse of those multiples?

3. What are my assumptions and how reasonable are they? What are the potential outcomes and how probable are they?

4. I should add to my checklist something etched into the wall of an old bklyn heights bank: "Society is based on faith and confidence in one another's integrity". I think of faith and confidence as non-balance sheet assets. Here they've been fully impaired, but over time and under different mgmt could be restored. 

5. How would I feel buying the stock if the deal is pulled? How can I weigh that against the feeling I'd have not buying the stock and the deal goes through? I know we're supposed to table our feelings but it's on my mind. The behaviorists must have a term for this.

6. Maybe the solution is to buy a small position. But then, why bother with small positions? That's something to think about some other time.

7. Finally, getting back to "Life's Too Short", Robert LaPenta, the Chairman & CEO of the company, was deathly ill in Spring '18. Maybe he's come to the same conclusion? Maybe he wants out and the takeunder implies he will accept any offer over $2? I find this the most compelling explanation for all of this behavior. I wonder if is is their most desired outcome?

I think this encompasses most of my thinking. I've spent enough time on this and likely so have you. "Life's Too Short!"

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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, WHICH I MAY OWN.