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This is written with serious investors in mind. I'm a former reporter, private investigator and institutional equity analyst who digs deep to find niche undervalued and undiscovered securities. I manage money for individuals, institutions and family offices via my business Long Cast Advisers. This blog is part decision-diary, part investment observations and part general musings about Philadelphia sports. It should not be viewed as a solicitation for business or a recommendation to buy or sell securities.

Monday, March 18, 2019

Friday Filings Portend Potential Positives at QRHC

As I was digesting QRHC's 2018 results last week, I thought: "you know, the CEO deserves a lot of credit." He's taken QRHC from ($1.8M) EBITDA to +$2.3M in EBITDA in two years, partially by shrinking revenues 45%. There's cash flow and bvps growth, and they've done it patiently, in a brutally competitive business.

A patient investor has to admire this.

If QRHC can grow topline, this asset lite business (in theory) has a lot of operating leverage. But after purposefully "un-revenue-ing" in favor of higher gross margin business, the company has been slow to turn the corner to growth; easy comps should yield y/y growth in '19, but it's fair for investors to expect some sequential growth off the bottom.

With 10 days left in the quarter, I'm perplexed why mgmt didn't have the visibility to talk about sequential growth in the year end conference call. It's long been my theory that lack of good technology hinders visibility and scale. It's a solvable problem, but one that management has been frustratingly slow to acknowledge or address.

Cue the "deux ex machina"

A bunch of "Friday Filings" indicate a potential and potentially positive change on the QRHC Board and in ownership, that could help unlock value in the company. If all goes right, Daniel Friedberg of Hampstead Park Capital (formerly of Sagard Capital) will acquire +10% of outstanding shares at $2 and replace Mitch Saltz as Chairman. That would be a very welcome change. It even bears some resemblances to when Nahmad took over at EVI.

There are a lot of moving parts and multiple parties involved, but as I understand it from the public filings ...

Saltz (current Chairman) will sell Freidberg 1.7M shares @ $2 / share via put / call stock agreement

... on the condition that ...

Saltz + 2 co-founders Brian Dick & Jeff Forte can first sell combined 4.3M shares in a secondary offering (at a not unreasonable price, one would presume); Saltz + Forte resign from the board to be replaced by Freidberg's folks; and Freidberg will take over as Chairman

... meaning at the end of all this, if it happens as planned ...

New board
New ownership partially at $2 / share
Saltz will continue to own 11%, Forte 8%, Dick 0%

... which begs the question "is this good, or just different???"

I think this could be very good. There are a few things to love about this ...

I love what I've heard about Freidberg from colleagues and managers he's worked with in the past
I love that this guy is paying $2 / share for at least some of his stake
I love the potential that larger institutional shareholders have the opportunity to get involved
I love that the ownership will be less concentrated in the hands of Saltz and Co.
Yet, I also love that Saltz will continue to own enough to keep "skin in the game" (though he'll be obliged to vote his shares with the new Chair).

... a big difference b/t here and EVI is that Nahmad was from the get go so clearly a dealmaker while Freidberg here paints a picture of a more wonkish, "consultant turned operator". Having spent ~15-years in institutional research analyst before founding LCA, I have seen ways that doesn't work out.

Freidberg's bio indicates he's been involved in a handful of prior companies during periods that mostly align with under-performance. On the surface, a negative, but to be fair, if I were to join a Board, it would start with my investments that I thought needed the most help and that I aimed to try to fix. I think that sample is self selective towards underperformance.

A quick review of  year end 13F-HR's offers some sense of an investment record at Sagard under his watch ...


... some hits & some misses. An apparent value bent. Clearly likes the services companies. Is focused on smaller companies.

Noteworthy that Sagard's total value of stocks as per these filings grew from $200M in 2010 to $385M in 2014 (+17% CAGR), which means he had some success growing his business, before falling back to $180M in 2016 when Freidberg left (I reckon he took some of that with him).

In chatting with folks who've worked with him, I've heard: Smart, thoughtful, diligent, raised points no one else raised, the Board was better with him on it, aggressive but in a friendly way (the kind of thing you'd expect from a Canadian investor).

Assessing all of this will be an ongoing effort but the initial view is that this could be a terrific potential change. Hopefully the deal goes down, not only to have a more involved and engaged Board but specifically to have Dan Friedberg on Board.

At $1.65, QRHC is trading at 12x trailing EBITDA of $2.4M. The way I think about it, if it can get to +$6M EBITDA within three years, this is at least a double for investors. The pathway is topline growth + good technology to better scale overhead. The feedback I have on mgmt is they're a good sales and operating team but weak on tech. These are fixable problems for a team willing to address them. It seems like that team is waiting in the wings.

** Before closing, I wanted to circle back on something...

I am a large shareholder of QRHC but a year ago, its CEO stopped talking to me. It seems to have started when I asked about insider buying though I've been told it started with a question about negative reviews on glassdoor. Subsequent questions, raised after more substantive due diligence, remain ignored.

My older siblings can attest that I can get under people's skin and I am certainly not to everyone's tastes but I have never experienced anything like this since I started in institutional finance in 1999. There's a first for everything.

On one hand, everyone apportions their time how they want and if someone doesn't want to talk with me, they shouldn't have to. On the other hand, I think it's part of the CEO's job to respond when shareholders ask reasonable questions (and if they're not reasonable, at least explain why). I think it benefits all shareholders when potential weaknesses are raised with, and addressed by, management.

Whatever outcome of this investment will be independent of whether or not the current CEO ever talks to me. More watchful and careful eyes will soon be on the Board. They have likely conducted with their own due diligence (I've heard Friedberg is very thorough) and if the questions I've asked are indeed reasonable, this new Board will ask the same ones, likely more tactfully and undoubtedly more impactfully.

I am keen only to see the company operate towards its optimal outcome, something it appears this new Chairman may have the ability to help achieve.

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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF FUTURE 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.

Monday, March 11, 2019

Information is the Foundation of Fundamental Analysis ($INS)

When I was in 8th grade, I lost $20 playing three card monte outside of Grand Central Terminal, an experience I'd be ashamed to admit were it not for the lesson I gained in the process: It's important to know what you're getting into before you lay out the cash.

That tidy conclusion would be a nice segue for the topic at hand, but in full disclosure its worth mentioning the rest of the story. I had no train fare! The shivering realization of consequence frightened me and I started to freak out. I didn't know the game was rigged, but I knew I had no way of getting home and I was in a panic.

To make me go away, the crew (3cm is always a crew) gave me back $4 for the ride home. Though lighter $16, i'd gained a further education in managing risk; make sure your mistakes don't leave you stranded.

I imagine the inexperience of youth forms the foundation of so many of our future endeavors but I had no idea then how proximate mine would become. Years later, here I am, running an investment management firm dedicated to fundamental research and downside risk management.

I've been thinking about this following recent news on Bloomberg that Goldman Sachs is the new customer on the $INS CoreCard platform. Close readers know that back in December, when I presented on Intelsys for MOI, I mentioned the scuttlebutt that Goldman was the large customer driving customization revenues for a license due to close in early 2019.

Where did I learn that information? Nobody at the company told me. It's not available in financial filings. But the basis of the work I've been doing since college, as a writer, factchecker, PI and in institutional equity research, is trying to figure things out. Information is the foundation of fundamental analysis.

Information, for the fundamental analyst, is the air we breathe, and it always starts with some independent variable that can be tested and assessed, like historical financial statements. Not charts. Not trading patterns. Not analyst reports. Not forecasts based on imaginary futures. Not hot tips. Not whisper numbers.

Then (if you like what you see) the fun begins; figuring out what you don't know and where you can find it. I find this often takes time and like any creative pursuit, emanates sometimes from intense focus or sometimes from intense distraction. Either way, the goal is to understand - qualitatively - what led to the quantitative information in the filings, how sustainable it is, and what if anything is changing.

Sources of information can come from reading news or industry rags, sometimes through the public filing of a non-financial document, sometimes as a passing comment at an industry conference, sometimes as a note passed over the transom, sometimes its simply shared by another investor.

The key is that experienced observers - from investors to fishermen to mechanics - can identify information based on tell tale signals that appear as noise to most everyone else.

The information that I see around $INS isn't limited to this one specific piece of news now reported by Bloomberg, but on the company as a whole, which to mine eyes is different, unique and unusual.

To name a few: It is an owner / operator company run by the same CEO for +30 years who owns 25% of the company with limited dilution. This isn't his first rodeo in payment processing and he's focused on building a strong, durable and flexible platform, that now offers processing as well as licensing. That's recurring revenue in a business with a huge TAM. And he's just signed one of the premier customers in the space. 

CoreCard has been funded over the last 15 years through cash generated by another operating company that Intelsys has since sold, to the frustration of shareholders. Now the company is growing, profitable and cf+ (and only spends 200 bps on marketing). I could go on and on ... but if the news reported by Bloomberg is true, kudos for landing such a large contract. IMHO the ingredients exist for continued success.

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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF FUTURE 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.

Monday, March 4, 2019

A Brief Comment on "Casual Racism"

I recently had a meeting with someone who mid-lunch dropped racist tropes as easily as talking about their children. I have no interest in disclosing information about private meetings but I do have a desire to make change, even in small ways, when I see and experience prejudice.

I write here b/c in relaying this event to someone else, they indicated that my response was unusual. I imagine anyone else would've done the same thing, but in an effort to make the unusual more common place, I wanted to share.

The over-arching goal is that racism won't change until white people talk about it and that's what I'm doing here. It doesn't matter what he said; his comments reflected unfair biases without regard for context, empathy and blind to the wider reality.

Specifically, I told him three things ...

1. There is a lot of institutional racism in this country. White people may never see it, may not be aware of it, may never feel it and likely may never experience it.

I can send my kids to the cornerstore and I'm pretty confident they won't be given the side eye, they won't be looked at suspiciously, they won't be stopped-and-frisked and they won't be followed or questioned.

These experiences can be very very different for our african american friends, especially boys and men, all too violently, all too glaringly and all too recently, while they were going shopping, talking on a phone, retrieving their license, etc.

One effect of this institutional racism is what's seen on TV. I'm sure crime, drug addiction, domestic violence, sexual harassment, etc. exist across all races but they are reported on and prosecuted very differently by race.

2. There are an awful lot of successful black people in America. To say there aren't is to diminish these successes. Concurrently, anyone of any race, gender or color can fall through the cracks and margins of society.

3. The stories we tell ourselves about our family history and our background are deeply embedded in our personal identities. These stories help form identity.

Now consider how slavery deprived +4 million people directly of these histories, and their ancestors for years after. Abolition of slavery was only 150 years ago and in parts of this country, for the first 100 years after abolition, black people were still denied education and opportunities for advancement.

Now think about how easily family history comes to many of us. Charlie Munger said this about his grandfather at the recent DJCO shareholder meeting ...

"... he was a Captain in the Black Hawk Wars, and he stayed there and he bought cheap land and he was aggressive and intelligent and so forth and eventually he was the richest man in the town and owned the bank, and highly regarded, and a huge family, and a very happy life."

... his idea of who he is at +90 is supported by family lore he's heard since he was a child.

How long does it take to overcome a loss of history? Layer on institutional racism, incarceration, etc. that prolongs its effects and it seems to me that we are only beginning to dig ourselves out of this. A long overdue reclamation of history has only begun, and needs to continue.

(Incidentally re: family history, my grandfather was a police officer in Philadelphia and many of my views on race were informed by him and his empathy for the people he spent a lot of time around. I believe his experience is true for most police officers, even while they work extremely stressful jobs in a profession that like many is tarnished by the behavior of a few.)

As a kicker, over lunch I was also offered complaints about political correctness. PC is all too easy to disparage ("How many letters of the alphabet do I need to describe someone's sexuality these days?")

The reason PC exists is to show respect through language. For too long, people have been denied this respect b/c of the color of their skin, their sexual orientation, their fondness for unusual hobbies and habits, their dress, their hair, their look, their attitude, etc that might not have fit in with rigid norms.

Yeah, it seems to go overboard sometimes. But it's not there for me. It's there for people who for too long have been denied the same respect. It definitely requires a different way of thinking and speaking but at the heart, it's an effort to give space and respect to anyone of any stripe willing to reciprocate.

I cannot fathom why any mindful and healthy adult wouldn't want to participate in that effort.

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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF FUTURE 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.