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This is written with serious investors in mind, though sometimes they're just drafts in progress. 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 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.

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