Five years ago Halloween I decided to start my business, and it all started with a song.
I was a month into a job at a hedge fund, a job I'd wanted for a very (very) long time but quickly realized wasn't going anywhere. And up on Spotify popped “When I Paint My Masterpiece” …
“Someday everything is gonna sound like a rhapsody,
When I paint my masterpiece
Someday, everything's gonna be different,
When I paint my masterpiece”
… and when I noticed that I was getting choked up, I realized I had already taken my first steps towards entrepreneurship. I was pretty terrified.
Two years earlier, I’d left behind a career as a sell side analyst, seeking a buyside role. While looking, I continued to invest on my own and gave voice to things I'd long thought about; consulting, public service, volunteering, parenting, etc. (Parenting is by far the hardest and the pay sucks but it's oddly rewarding for the rare moments your "bosses" offer gratitude).
Over that time, I'd met a handful of folks who’d started their own funds, some starting with $2M and growing it to +$25M (and beyond), others who had started with $2M and grew it to $1M (or less), everyone unanimously telling me it was the greatest experience they’d ever had. And everyone encouraged me to do it.
But I thought I needed experience first - took me a while to realize that was fear talking - so I got a job as an analyst, a job that lasted a month and a song.
That night I had dinner with a friend who'd started a few years earlier his own (incredible) architecture firm. He was like, “oh, yeah. It’s fucking terrifying. But go get your LLC and see where it goes.”
And that's what I did.
I had three primary tenets when I opened my business:
1. I want to solve a problem for my clients, not for myself. I wasn't doing this for validation, or to justify my existence. I needed to get a return on capital while offering something different and hopefully better than other available solutions.
2. I want to be available and accessible to traditional hedge fund investors as well as to people who don't normally have access to deeply researched, unique and unusual portfolios.
3. I decided back then (and I still say now), that if I saw signs of failure I’d stop and do something else. Failure doesn't just mean bad returns, which is inevitable from time to time, but failure to deal with stress, with OPM, with down periods and up periods, with the administrative rigmarole, with the professional aspect that you get up and do it even on the days you don't want to. Etc.
And now I'm four years in and I remain committed to those three tenets. There's still much to learn and my awareness is growing. I'm developing a deeper list of ideas, an important tool of portfolio managers, and continuing to keep my mistakes manageable. I've written about other thoughts in LCA's 3Q19 letter.
At the start, a lot of folks told me I'd fail. That's fine; failure is the baseline. Entrepreneurship is hard. I respect anyone of any stripe who starts their own business, including the oddly large cohort of folks around where I live with CBD infused pet food businesses.
Here's a sampling of things other entrepreneurs have said to me over the years ...
A friend who started a brewery: “my head is exploding every day.”
An old camp friend who is a serial entrepreneur and is one of the most upbeat humans I've ever met: “I look optimistic b/c I have to, but it’s so fucking hard”
A fellow fund manager whose daily mantra is "this shit is hard.”
... starting out takes a lot of support and persistence, some experience and undoubtedly some luck. If you're thinking about it, don't let fear hold you back.
-- 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.
Thursday, October 31, 2019
Sunday, August 18, 2019
this shitty week in small caps, 2Q19 ($CTEK)
This might be a particularly urban experience, but do you ever order in from a restaurant where you've never actually eaten, then you drive by it and see a hole in the wall with dirty floors and it looks gross? I wonder how it changes the perspective of the food. If it's good, maybe you stick with it? Maybe it tastes worse next time? Or maybe nothing changes b/c it's good for what it does.
There's something about that perspective shift that resonates to me as an investing experience, especially after a tough week like this for so many small caps for myself and many of my peers also focused on this wee end of the market cap.
Cynergistek (CTEK) is a large holding of ours that debuted its new CEO, Caleb Barlow, on its recent 2Q19 earnings call.
When Mr Barlow's hiring was announced in July, the stock was at $4.80. Already declining going into the quarter on "rumors that a closing fund was liquidating" the stock fell out of bed during the earnings call when the retiring CEO Mac McMillan indicated that due to tough comps and delayed client contracts, sales in the back half would be down y/y.
The press release, filed the prior day, said nothing of this guidance as management chose instead to surprise investors ("surprise!") on the mid-day conf call. Now as of this writing it's at ~$3.05 trading for not much more than Book Value Less Goodwill & Intangibles.
Investors furthermore have no idea what last year's comps even look like. Earlier this year, in March, the company sold its large "Managed Print Services" division, a ~$60M sales per year business, leaving behind a smaller pure play IT svcs / cyber security consulting company with only $20M in sales. However, the company has still not filed pro-forma segment financials for this standalone pure play IT svcs company.
They've really thrown this new CEO into the fire! It's an unenviable environment I think brought on by amateur-hour preparation for the quarter and amateur hour thinking about capital markets messaging.
Or is this actually a gross restaurant? It's time to double down on research, (but it's also natural to rationalize).
CTEK has two lines of business ...
"Managed services" is a "relationship based" multi year services / consulting business to audit, manage and implement network or internet security procedures, mostly at healthcare institutions. This business has been slowly growing and is expected to continue to grow, sequentially and y/y. It is close to a recurring revenue and I think the company's primary focus.
According to the most recent 10Q this segment has $25M in backlog, up from $24M last year.
The second is "professional svcs" more simply a staffing company for IT security people, which is in a tight labor market. This is a lumpier business.
... the culprit for the quarter was the staffing business, which had a robust 2H18 that will not repeat in 2H19. Are customers taking their remediation work elsewhere? Has something changed with access to labor? Is it really just hard comps and management did a poor job messaging it? The contract business is growing.
I'm looking for answers - there's definitely a ton of competition in the space - but I believe a culprit is poor messaging during an interstitial handoff to the next CEO.
This is a sub $50M mkt cap company trading at 1.5x sales. It's on track to do ~$20M in sales this year. At ~40% gross profit margins equals $8M in annual opinc. The overhead is too large, with cash OpEx (S&M plus G&A) running at about $12M per. So they're losing close to $1M per quarter and have $10M in cash, no debt.
If they can grow and scale the cash OpEx, we win. They do this by delighting customers and offering hard to find employees interesting projects to work on.
If not, and they don't royally mess up, I think this could sell for $8 in a private transaction, assuming 15x multiple on $4M per year in EBITDA (after stripping out pubco costs and much of the G&A). But that assumes they're growing. I hear the new CEO is a "good guy" who knows how to solve problems.
But if they're really messing up, this cheap investment can always get cheaper still. And the thing is, the company has a long pattern of messing things up.
Going back five years, the company was named Auxilio and it was a standalone managed print services business to hospitals. Auxilio tried to expand into IT svcs with acquisitions in '14 and '15, spending about $5M in total. On both acquisitions, there was little realized growth and goodwill was written down within a year.
An activist Chairman got involved in 2016 to help it further and in January '17 it acquired Cynergistek, Mac McMillan's IT services / cyber security consulting firm, for ~$28M (1.2M shares of stock, a $9M seller's note and $15M cash funded by debt). A valuation of ~7x forward EBITDA of $5M, which never materialized.
The combined company changed its name to Cynergistek. The Auxilio CEO, who was expected to stay on, bolted to build a PE financed roll up in the managed print services space.
Mr McMillan, Cynergistek's founder who'd just sold his company and had eyes on retiring took over to run the company. In that process, he recognized that the two lines of business - MPS and IT security - brought together by the activist Chairman and touted as a winning pair, were actually way too much for this small levered company to manage.
In 2019, with urging at least from this shareholder, the company sold the MPS business back to its former CEO for $28M, enough to pay off the debt associated with the initial Cynergistek purchase.
... so in a way, Mr McMillan had his own private IPO sponsored by legacy Auxilio shareholders. Meanwhile, those legacy shareholders (if any have stuck around) own at roughly the same EV a smaller unprofitable IT services company instead of a larger low margin MPS business.
That history, I realize, offers ample reason to stay away. We all should want to avoid brain damage. But I also think knowing why people stay away is sometimes part of the reason to own it at the right price.
To be clear, some of that reason is that as a standalone they're not (even close) to as profitable as expected. This is doing 40% GP margins and still losing money on excess overhead. But at Book Value excluding Goodwill and Intangibles, for a company in a high demand space with low fixed costs, it could be a great price b/c IF they're getting the business right and satisfying customers, it can generate significant FCF.
It's still too soon to tell but I think the odds are favorable. In talking with folks who work in healthcare IT, I hear that demand is very high for the services they offer, though competition is also very tight.
As a small company investor, I buy when the ingredients are still in the kitchen and I think the chefs have know how, knowledge and time to bake the cake and still throw a good party somewhere down the line. That approach has to be based on due diligence to offer solid evidence of management capabilities. I've done some of this, it's always on going, and have heard independent positives about Mr Barlow. Not an empty suit at IBM. Understands the industry.
I've also worked in enough kitchens and prepped for enough parties to know that there are often points when you think "this is never coming together." And while the stock makes it look that way, certainly it makes it look like I've made an investment mistake, I think the mistake here is around transparency and disclosure, and I hope it's only made once. A lot of this could have been avoided if the company had just published the pro forma #'s calling out y/y comps offering more visibility rather than a surprise.
Beyond that, there were no surprises - little new information on the call - the core business remains too small relative to the overhead. They want to grow into big shoes. They have $10M in cash and so about two years to turn profitable. McMillan supposedly isn't selling his stock. If the operations are right and the new guy can grow, this is a steal.
Or this could be a terrible investment. The new CEO has zero pubco experience and running a tiny division at a large corporate is very different than running a tiny business. The activist Chairman is a poor look for a company that needs capital market and industry savvy. (This is the same person btw who once tried to open a business in California with someone who was barred from doing business in California, how's that for judgement). I can go on with the things that worry me about CTEK.
I'm reminded here momentarily - and apologize for closing on this tangent - of the time I thought it wise to write down all the things that worried me about my kids, just to get it out of my head. When I got to seven single space pages, I decided maybe it wasn't the best use of my time. The fact is, in life and in investing, there are always more ways by volume to go wrong than to go right.
-- 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.
There's something about that perspective shift that resonates to me as an investing experience, especially after a tough week like this for so many small caps for myself and many of my peers also focused on this wee end of the market cap.
Cynergistek (CTEK) is a large holding of ours that debuted its new CEO, Caleb Barlow, on its recent 2Q19 earnings call.
When Mr Barlow's hiring was announced in July, the stock was at $4.80. Already declining going into the quarter on "rumors that a closing fund was liquidating" the stock fell out of bed during the earnings call when the retiring CEO Mac McMillan indicated that due to tough comps and delayed client contracts, sales in the back half would be down y/y.
The press release, filed the prior day, said nothing of this guidance as management chose instead to surprise investors ("surprise!") on the mid-day conf call. Now as of this writing it's at ~$3.05 trading for not much more than Book Value Less Goodwill & Intangibles.
Investors furthermore have no idea what last year's comps even look like. Earlier this year, in March, the company sold its large "Managed Print Services" division, a ~$60M sales per year business, leaving behind a smaller pure play IT svcs / cyber security consulting company with only $20M in sales. However, the company has still not filed pro-forma segment financials for this standalone pure play IT svcs company.
They've really thrown this new CEO into the fire! It's an unenviable environment I think brought on by amateur-hour preparation for the quarter and amateur hour thinking about capital markets messaging.
Or is this actually a gross restaurant? It's time to double down on research, (but it's also natural to rationalize).
CTEK has two lines of business ...
"Managed services" is a "relationship based" multi year services / consulting business to audit, manage and implement network or internet security procedures, mostly at healthcare institutions. This business has been slowly growing and is expected to continue to grow, sequentially and y/y. It is close to a recurring revenue and I think the company's primary focus.
According to the most recent 10Q this segment has $25M in backlog, up from $24M last year.
The second is "professional svcs" more simply a staffing company for IT security people, which is in a tight labor market. This is a lumpier business.
... the culprit for the quarter was the staffing business, which had a robust 2H18 that will not repeat in 2H19. Are customers taking their remediation work elsewhere? Has something changed with access to labor? Is it really just hard comps and management did a poor job messaging it? The contract business is growing.
I'm looking for answers - there's definitely a ton of competition in the space - but I believe a culprit is poor messaging during an interstitial handoff to the next CEO.
This is a sub $50M mkt cap company trading at 1.5x sales. It's on track to do ~$20M in sales this year. At ~40% gross profit margins equals $8M in annual opinc. The overhead is too large, with cash OpEx (S&M plus G&A) running at about $12M per. So they're losing close to $1M per quarter and have $10M in cash, no debt.
If they can grow and scale the cash OpEx, we win. They do this by delighting customers and offering hard to find employees interesting projects to work on.
If not, and they don't royally mess up, I think this could sell for $8 in a private transaction, assuming 15x multiple on $4M per year in EBITDA (after stripping out pubco costs and much of the G&A). But that assumes they're growing. I hear the new CEO is a "good guy" who knows how to solve problems.
But if they're really messing up, this cheap investment can always get cheaper still. And the thing is, the company has a long pattern of messing things up.
Going back five years, the company was named Auxilio and it was a standalone managed print services business to hospitals. Auxilio tried to expand into IT svcs with acquisitions in '14 and '15, spending about $5M in total. On both acquisitions, there was little realized growth and goodwill was written down within a year.
An activist Chairman got involved in 2016 to help it further and in January '17 it acquired Cynergistek, Mac McMillan's IT services / cyber security consulting firm, for ~$28M (1.2M shares of stock, a $9M seller's note and $15M cash funded by debt). A valuation of ~7x forward EBITDA of $5M, which never materialized.
The combined company changed its name to Cynergistek. The Auxilio CEO, who was expected to stay on, bolted to build a PE financed roll up in the managed print services space.
Mr McMillan, Cynergistek's founder who'd just sold his company and had eyes on retiring took over to run the company. In that process, he recognized that the two lines of business - MPS and IT security - brought together by the activist Chairman and touted as a winning pair, were actually way too much for this small levered company to manage.
In 2019, with urging at least from this shareholder, the company sold the MPS business back to its former CEO for $28M, enough to pay off the debt associated with the initial Cynergistek purchase.
... so in a way, Mr McMillan had his own private IPO sponsored by legacy Auxilio shareholders. Meanwhile, those legacy shareholders (if any have stuck around) own at roughly the same EV a smaller unprofitable IT services company instead of a larger low margin MPS business.
That history, I realize, offers ample reason to stay away. We all should want to avoid brain damage. But I also think knowing why people stay away is sometimes part of the reason to own it at the right price.
To be clear, some of that reason is that as a standalone they're not (even close) to as profitable as expected. This is doing 40% GP margins and still losing money on excess overhead. But at Book Value excluding Goodwill and Intangibles, for a company in a high demand space with low fixed costs, it could be a great price b/c IF they're getting the business right and satisfying customers, it can generate significant FCF.
It's still too soon to tell but I think the odds are favorable. In talking with folks who work in healthcare IT, I hear that demand is very high for the services they offer, though competition is also very tight.
As a small company investor, I buy when the ingredients are still in the kitchen and I think the chefs have know how, knowledge and time to bake the cake and still throw a good party somewhere down the line. That approach has to be based on due diligence to offer solid evidence of management capabilities. I've done some of this, it's always on going, and have heard independent positives about Mr Barlow. Not an empty suit at IBM. Understands the industry.
I've also worked in enough kitchens and prepped for enough parties to know that there are often points when you think "this is never coming together." And while the stock makes it look that way, certainly it makes it look like I've made an investment mistake, I think the mistake here is around transparency and disclosure, and I hope it's only made once. A lot of this could have been avoided if the company had just published the pro forma #'s calling out y/y comps offering more visibility rather than a surprise.
Beyond that, there were no surprises - little new information on the call - the core business remains too small relative to the overhead. They want to grow into big shoes. They have $10M in cash and so about two years to turn profitable. McMillan supposedly isn't selling his stock. If the operations are right and the new guy can grow, this is a steal.
Or this could be a terrible investment. The new CEO has zero pubco experience and running a tiny division at a large corporate is very different than running a tiny business. The activist Chairman is a poor look for a company that needs capital market and industry savvy. (This is the same person btw who once tried to open a business in California with someone who was barred from doing business in California, how's that for judgement). I can go on with the things that worry me about CTEK.
I'm reminded here momentarily - and apologize for closing on this tangent - of the time I thought it wise to write down all the things that worried me about my kids, just to get it out of my head. When I got to seven single space pages, I decided maybe it wasn't the best use of my time. The fact is, in life and in investing, there are always more ways by volume to go wrong than to go right.
-- 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.
Friday, August 2, 2019
"Mike Wallace is Here" + LCA 2Q19 Letter
I recently saw the documentary "Mike Wallace is Here" which was a rather impressive overview of his career and his impact on journalism. He started outside the field of journalism, as an actor and pitchman, but he found his calling in hard hitting 1:1 interviews, starting at Night Beat, and he developed his style at a time when most such interviews were fluff pieces.
Certain interviews were iconic, such as this one with General Westmoreland. Some were absurd enough to spawn spoofs like this one about fake novelty joke items on SNL
But two things mentioned in the course of documentary struck me as relevant today.
1. The idea that healthy independent journalism is a reflection of a healthy democracy.
2. The reflection of the interviewer as a surrogate for the viewer.
On this latter point, an un-aired clip from his mid-1980's conversation with Oprah Winfrey was particularly interesting. Despite their differences in styles and presentations, and there's a tangible iciness between them (typical, I think of Mike Wallace interview; Morley Safer interviewed him later in life and asked him "why are you such a prick?") both Wallace and Winfrey said they both felt like surrogates for their viewers.
I think this stuck out partially b/c it reinforces the reality that there are many (many) pathways to success - Winfrey and Wallace followed very different paths - but each one "got there" on the basis of their own identity, voice and style.
But it also reinforced part of what I see as my motivation for writing here: If it interests me, it might interest someone, and I want to promote that community of curious investors. It's partly also why I write letters to management (if I have questions, issues or concerns, so likely does someone else) though on those occasion I am much more tangibly a surrogate for my clients, to whom I act as a steward of their capital.
On that note of capital stewardship, I recently posted my 2Q19 letter on my firm's website, which includes a few comments on long time holdings QRHC, CTEK, DAIO, SIFY and INS.
I always welcome the (non-spam) feedback from this growing community.
-- 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.
Certain interviews were iconic, such as this one with General Westmoreland. Some were absurd enough to spawn spoofs like this one about fake novelty joke items on SNL
But two things mentioned in the course of documentary struck me as relevant today.
1. The idea that healthy independent journalism is a reflection of a healthy democracy.
2. The reflection of the interviewer as a surrogate for the viewer.
On this latter point, an un-aired clip from his mid-1980's conversation with Oprah Winfrey was particularly interesting. Despite their differences in styles and presentations, and there's a tangible iciness between them (typical, I think of Mike Wallace interview; Morley Safer interviewed him later in life and asked him "why are you such a prick?") both Wallace and Winfrey said they both felt like surrogates for their viewers.
I think this stuck out partially b/c it reinforces the reality that there are many (many) pathways to success - Winfrey and Wallace followed very different paths - but each one "got there" on the basis of their own identity, voice and style.
But it also reinforced part of what I see as my motivation for writing here: If it interests me, it might interest someone, and I want to promote that community of curious investors. It's partly also why I write letters to management (if I have questions, issues or concerns, so likely does someone else) though on those occasion I am much more tangibly a surrogate for my clients, to whom I act as a steward of their capital.
On that note of capital stewardship, I recently posted my 2Q19 letter on my firm's website, which includes a few comments on long time holdings QRHC, CTEK, DAIO, SIFY and INS.
I always welcome the (non-spam) feedback from this growing community.
-- 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.
Saturday, May 25, 2019
A Brief Response to $INS Short Report
When I was a kid, one of the dad-things my dad used to say was "consider the source." If I came to him upset b/c so-and-so said something nasty, he'd say "well consider, the source." It meant ... should I take them seriously? Are they a legitimate conveyor of information? Should I really care what they think?
I continue to spend a lot of time "considering the source" though we live in a day and age when it's meaning has been turned inside out. On the rare occasion that I'm on a long drive by myself, I listen to Investors Field Guide and recall one recent and recommended episode ... "I met our guest Michael Mayer because of twitter. I followed and enjoyed one of several pseudonymous accounts that he maintains to experiment with ideas. His various accounts have wide followings" ... which I've been struggling to reconcile with the lesson to "consider the source". How do you value a source if you don't know who it is?
There've always been authority shaping mechanisms of one kind or another (the emperor, the church, the university, the paper of record, a bigger gun, etc.), which would exclude scrappy folks like Mayer and me for no other reason than our lack of access or pedigree.
Now however, an anonymous twitter account with interesting content and a lot of followers can carry the same weight as the emperor or church or university or paper of record. It's cool b/c without gatekeepers anyone can put up a blog (yay me!) and in an ideal world it expands meritocracy. But our world is far from ideal. Do I really need vaccines? I'll go online and see what it says.
Just from an observation of human nature, which tends to not change and oft strays from ideal, I have this gnawing fear that once we've exhausted questioning the legitimacy of everything we'll revert to the authority shaping mechanism of the bigger bone, sword or gun until we re-recognize that having some kind of organized system that kind of works is less exhausting than fighting all the time.
If it's not obvious by now, I'm the pessimist in my family, which bugs the shit out of my wife but is helpful with investing. This work requires holding two opposing ideas in our heads at the same time - success AND failure - in order to weigh, consider, inspect and decide, from all different angles.
And there isn't a single investment I've made where I didn't think early on or even at times throughout that whatever it is, it could be a total fraud. Part of my checklist is to conduct due diligence seeking signs of fraud - balance sheet imbalances, board composition, etc. - but just b/c you don't see it, doesn't mean it ain't there. Schiller's "Financial Shenanigans" delves deep into these issues and is a must read for anyone putting money into any individual stock.
Which brings me to a recent short report on INS posted by ... I don't know who ... some man or woman operating under a corporate name who seems to have posted a bunch of short pieces on various public companies.
The report had legitimate concerns for sure, but no news. The red flags it raised are front and center to anyone who reads a proxy and 10k on day one of their due diligence and does a bit of digging on day two. INS has a large client that is the target of legitimate short sellers. Parker Petit is on its board. It uses a regional accounting firm with limited pubco experience.
Everyone has their own comfort threshold and for some investors, these issues might equal a "hard pass". We all have to find and trust our own filters. But causation and correlation are two different things and those issues don't make the company a fraud just as the road that goes from my door to John Gotti's doesn't make me a member of the mafia.
No doubt, the issues raised in that report should be on anyone's list of considerations when evaluating the stock. On balance I felt - and still feel - that this a wonderful business and a wonderful investment opportunity. Others may disagree.
But a legitimate short thesis identifies frauds, broken business models and industries in terminal decline and this report fell way short of that, likely b/c INS doesn't fall into any these categories. Ultimately, the report resolved to a valuation short, plain and simple and as Manny Gerard once cautioned me, valuation shorts are really just a form of technical analysis.
As the report concludes ...
"If INS were to revert to a valuation of around 2-5x trailing sales, a multiple typical of Indian outsourcing businesses such as Syntel and Wipro as well as larger processing companies such as First Data, the stock would be worth roughly $5 to $12 per share (70%+ downside)."
... which is just silly. Those companies aren't growing organically +30% / year. Those companies haven't self funded their own development with internally generated cash flow for 15 years. Those companies aren't as parsimonious with expenses as INS is (few are). Those companies have probably issued more shares in the last year than INS (which doesn't dilute shareholders) has in its float.
However, buried in the "pants on fire" effort to raise red flags, there is a legitimate and critically important comment that's essential for perspective ...
"... if Apple gathered a full 27 million accounts over the first 3 years, equal to the entire number of American Express basic consumer cards-in-force in the U.S. ... "
... boom. The rest of the comment made little sense to me, but just that data point alone is a 100% appropriate response to the momentum traders who've pumped this stock up its triple waterfall.
CEO Dr. Strange has long explained that licenses are paid at certain thresholds on the number of active accounts. How likely is it that INS' big new customer (rumored to be Goldman Sachs / Apple) will have more active accounts in year one, or year two, or year three, etc. than American fucking Express? Put me down for "zero probability".
It's too bad the author didn't focus on that point, b/c it's a legit and important perspective to keep in mind. That doesn't make this a $12 stock however. There's evidence to suggest that behind the current large customer are more large customers, and if you consider the pathway and the TAM and comparable valuations of say PAYS it's not hard to get excited.
As I've written, I think there's a wide pathway for this company to do $100M in annual revenues at some point over the next five years not b/c their rumored customer is going to issue X0M credit cards but b/c they have a good system and good experienced people and a good platform to challenge the 40% EBITDA margin oligarchy that hasn't substantially invested in this area of their business over the last X years. (In my experience, PE owned companies like FDC don't make long term investments).
Take this FWIW. I know this blog ain't Forbes or Fortune. I don't have a CFA or an MBA from a prestigious university. This blog doesn't have a douchy Greek name. I don't rub shoulders with the twitterati and I still cry at the end of Cars.
I realize my 10-years experience as a sell side analyst means little to most people and that anyone can open an investment mgmt business. I never got past the gatekeepers at a variety of hedge funds and in this world each of us is our own gatekeeper. The only authority shaping that goes on here is what's occasionally punched out at a keyboard, which I hope includes a little original research and an interesting idea or two.
The goal here has always simply been to be an open book of lucid thoughts on the world of small company investing, following in the footsteps of others' who've done the same.
I've been spending less time here b/c investing resolves to IP and I owe it to my growing base of paying clients to save it for them. But it frustrates me when someone smacks down a good idea for no good reasons just as much as it frustrates me that others light up good ideas with poor reasoning. I can only advise others to work hard, read deep, figure out your own filters and stay skeptical.
I'll close with a brief anecdote: My wife is the optimist in our family. Years ago when we were still dating she came home from deposing a genteel older man noteworthy for two things: He made her a perfect homemade cappuccino and he told her "every relationship needs someone chipper". It's her most of the time, though I step it up when she's feeling down. Still, as a couple of NL East fans who hate the Braves, telling that story is the only time in our house we say "chipper" without screwing up our faces.
-- 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.
I continue to spend a lot of time "considering the source" though we live in a day and age when it's meaning has been turned inside out. On the rare occasion that I'm on a long drive by myself, I listen to Investors Field Guide and recall one recent and recommended episode ... "I met our guest Michael Mayer because of twitter. I followed and enjoyed one of several pseudonymous accounts that he maintains to experiment with ideas. His various accounts have wide followings" ... which I've been struggling to reconcile with the lesson to "consider the source". How do you value a source if you don't know who it is?
There've always been authority shaping mechanisms of one kind or another (the emperor, the church, the university, the paper of record, a bigger gun, etc.), which would exclude scrappy folks like Mayer and me for no other reason than our lack of access or pedigree.
Now however, an anonymous twitter account with interesting content and a lot of followers can carry the same weight as the emperor or church or university or paper of record. It's cool b/c without gatekeepers anyone can put up a blog (yay me!) and in an ideal world it expands meritocracy. But our world is far from ideal. Do I really need vaccines? I'll go online and see what it says.
Just from an observation of human nature, which tends to not change and oft strays from ideal, I have this gnawing fear that once we've exhausted questioning the legitimacy of everything we'll revert to the authority shaping mechanism of the bigger bone, sword or gun until we re-recognize that having some kind of organized system that kind of works is less exhausting than fighting all the time.
If it's not obvious by now, I'm the pessimist in my family, which bugs the shit out of my wife but is helpful with investing. This work requires holding two opposing ideas in our heads at the same time - success AND failure - in order to weigh, consider, inspect and decide, from all different angles.
And there isn't a single investment I've made where I didn't think early on or even at times throughout that whatever it is, it could be a total fraud. Part of my checklist is to conduct due diligence seeking signs of fraud - balance sheet imbalances, board composition, etc. - but just b/c you don't see it, doesn't mean it ain't there. Schiller's "Financial Shenanigans" delves deep into these issues and is a must read for anyone putting money into any individual stock.
Which brings me to a recent short report on INS posted by ... I don't know who ... some man or woman operating under a corporate name who seems to have posted a bunch of short pieces on various public companies.
The report had legitimate concerns for sure, but no news. The red flags it raised are front and center to anyone who reads a proxy and 10k on day one of their due diligence and does a bit of digging on day two. INS has a large client that is the target of legitimate short sellers. Parker Petit is on its board. It uses a regional accounting firm with limited pubco experience.
Everyone has their own comfort threshold and for some investors, these issues might equal a "hard pass". We all have to find and trust our own filters. But causation and correlation are two different things and those issues don't make the company a fraud just as the road that goes from my door to John Gotti's doesn't make me a member of the mafia.
No doubt, the issues raised in that report should be on anyone's list of considerations when evaluating the stock. On balance I felt - and still feel - that this a wonderful business and a wonderful investment opportunity. Others may disagree.
But a legitimate short thesis identifies frauds, broken business models and industries in terminal decline and this report fell way short of that, likely b/c INS doesn't fall into any these categories. Ultimately, the report resolved to a valuation short, plain and simple and as Manny Gerard once cautioned me, valuation shorts are really just a form of technical analysis.
As the report concludes ...
"If INS were to revert to a valuation of around 2-5x trailing sales, a multiple typical of Indian outsourcing businesses such as Syntel and Wipro as well as larger processing companies such as First Data, the stock would be worth roughly $5 to $12 per share (70%+ downside)."
... which is just silly. Those companies aren't growing organically +30% / year. Those companies haven't self funded their own development with internally generated cash flow for 15 years. Those companies aren't as parsimonious with expenses as INS is (few are). Those companies have probably issued more shares in the last year than INS (which doesn't dilute shareholders) has in its float.
However, buried in the "pants on fire" effort to raise red flags, there is a legitimate and critically important comment that's essential for perspective ...
"... if Apple gathered a full 27 million accounts over the first 3 years, equal to the entire number of American Express basic consumer cards-in-force in the U.S. ... "
... boom. The rest of the comment made little sense to me, but just that data point alone is a 100% appropriate response to the momentum traders who've pumped this stock up its triple waterfall.
CEO Dr. Strange has long explained that licenses are paid at certain thresholds on the number of active accounts. How likely is it that INS' big new customer (rumored to be Goldman Sachs / Apple) will have more active accounts in year one, or year two, or year three, etc. than American fucking Express? Put me down for "zero probability".
It's too bad the author didn't focus on that point, b/c it's a legit and important perspective to keep in mind. That doesn't make this a $12 stock however. There's evidence to suggest that behind the current large customer are more large customers, and if you consider the pathway and the TAM and comparable valuations of say PAYS it's not hard to get excited.
As I've written, I think there's a wide pathway for this company to do $100M in annual revenues at some point over the next five years not b/c their rumored customer is going to issue X0M credit cards but b/c they have a good system and good experienced people and a good platform to challenge the 40% EBITDA margin oligarchy that hasn't substantially invested in this area of their business over the last X years. (In my experience, PE owned companies like FDC don't make long term investments).
Take this FWIW. I know this blog ain't Forbes or Fortune. I don't have a CFA or an MBA from a prestigious university. This blog doesn't have a douchy Greek name. I don't rub shoulders with the twitterati and I still cry at the end of Cars.
I realize my 10-years experience as a sell side analyst means little to most people and that anyone can open an investment mgmt business. I never got past the gatekeepers at a variety of hedge funds and in this world each of us is our own gatekeeper. The only authority shaping that goes on here is what's occasionally punched out at a keyboard, which I hope includes a little original research and an interesting idea or two.
The goal here has always simply been to be an open book of lucid thoughts on the world of small company investing, following in the footsteps of others' who've done the same.
I've been spending less time here b/c investing resolves to IP and I owe it to my growing base of paying clients to save it for them. But it frustrates me when someone smacks down a good idea for no good reasons just as much as it frustrates me that others light up good ideas with poor reasoning. I can only advise others to work hard, read deep, figure out your own filters and stay skeptical.
I'll close with a brief anecdote: My wife is the optimist in our family. Years ago when we were still dating she came home from deposing a genteel older man noteworthy for two things: He made her a perfect homemade cappuccino and he told her "every relationship needs someone chipper". It's her most of the time, though I step it up when she's feeling down. Still, as a couple of NL East fans who hate the Braves, telling that story is the only time in our house we say "chipper" without screwing up our faces.
-- 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.
Saturday, April 13, 2019
LCA's 1Q19 review ($INS, $CTEK, $QRHC)
I posted LCA's 1Q19 results on my website here. It includes brief discussions of three portfolio holdings: INS, CTEK and QRHC. As I wrote in the email that went out ...
"Cumulative returns on accounts managed by Long Cast Advisers increased 20% in 1Q19, net of applicable fees. This was better than the baseline market indices. Returns for separate accounts managed by LCA ranged from 17% to 26% for the quarter.
Since inception three years ago, LCA has returned a cumulative 96% net of fees, or 22% CAGR, ahead of the baseline market indices. Because our portfolio is comprised of just a handful of typically very small businesses, it is expected that returns will vary considerably from the baseline.
High returns certainly brings a lightness to the step but a strong quarter like this is really a cautionary tale on small sample sizes, the marginal impact of outlying events and the ability for anyone to look smart doing something right just once in every while. To me, it just illustrates why investors need focus on process, experience, differentiation and repeatability."
If I can simplify what I've learned in my first three years running a growing investment mgmt firm ...
you gotta pick the right stocks
you gotta own them at the right weighting
you gotta find clients who appreciate your worldview
you gotta have enough assets to make it all meaningful
and you gotta manage the administrative burden with an eye on time and costs
... it's complicated but the effort to get it right is energizing.
It remains my desire to grow LCA thoughtfully and incrementally with just a handful of new clients per year. If you would like to talk about my process, experience, differentiation or repeatability, please drop me a line. I very much appreciate those that have and the partnerships made along the way.
-- 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.
"Cumulative returns on accounts managed by Long Cast Advisers increased 20% in 1Q19, net of applicable fees. This was better than the baseline market indices. Returns for separate accounts managed by LCA ranged from 17% to 26% for the quarter.
Since inception three years ago, LCA has returned a cumulative 96% net of fees, or 22% CAGR, ahead of the baseline market indices. Because our portfolio is comprised of just a handful of typically very small businesses, it is expected that returns will vary considerably from the baseline.
High returns certainly brings a lightness to the step but a strong quarter like this is really a cautionary tale on small sample sizes, the marginal impact of outlying events and the ability for anyone to look smart doing something right just once in every while. To me, it just illustrates why investors need focus on process, experience, differentiation and repeatability."
If I can simplify what I've learned in my first three years running a growing investment mgmt firm ...
you gotta pick the right stocks
you gotta own them at the right weighting
you gotta find clients who appreciate your worldview
you gotta have enough assets to make it all meaningful
and you gotta manage the administrative burden with an eye on time and costs
... it's complicated but the effort to get it right is energizing.
It remains my desire to grow LCA thoughtfully and incrementally with just a handful of new clients per year. If you would like to talk about my process, experience, differentiation or repeatability, please drop me a line. I very much appreciate those that have and the partnerships made along the way.
-- 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.
Saturday, April 6, 2019
the full monte: a compendium of unanswered letters and emails to QRHC CEO & Chairman
It's been on my mind to share all my unanswered inquiries to QRHC.
I'm sure they do not represent my finest moments - I've failed in getting many of these questions answered - but I try to be an open book and here at least offer my mind state on the stock, with the hope that others can learn and maybe someone else can ask these questions.
I continue to reflect on what I could have done differently. I think too often I shot from the hip and maybe was overly aggressive. But don't think it's all on me. For ~$350k in annual comp it's fair to expect the CEO of a publicly traded company to answer reasonable questions from a large shareholder. I think when a management team or Board don't answer reasonable questions it ultimately reflects most poorly on them.
In this case in particular, it also reinforces criticism I've received on the CEO's mgmt style, namely not wanting to hear about or address bad news.
I met with the company on Oct 26, 2017, in non deal roadshow. seemed normal. The CEO gave a rebuke when I asked about the lack of insider buying (along the lines of 'what I do with my money is my business'). I'd also raised an initial issue with Glassdoor Reviews and was told along the lines of 'I take that seriously and i'm offended by negative things people write.' I was told he was heading back to TX for the annual Halloween party, a teamwork building and morale boosting kind of thing.
I followed up with this email from that never rec'd a response, including questions from two other investors I brought to the meeting ...
... mgmt took my many questions on the 3Q17 conf call, November 14, 2017 (the one where they had "far out" guidance). I thought they were generally good questions.
From Nov '17 to March 2018, CEO responded to two or three simple emails about conferences I could attend to learn more about the industry and a potential visit as I'd expected to be passing through the Woodlands.
Then came 4Q18 (April 2, 2018) when they started walking back from "far out guidance" of just a few months earlier. These questions were unanswered ...
... Concurrently I'd sent CEO this direct email ...
... I was told they didn't see me on the queue and would call soon. Two days later, nothing. It's likely I was frustrated when I sent this, subject line "Glassdoor reviews" ...
"Ray -
Your reviews - especially the most recent ones - seem to indicate a pattern of lack of organizational expertise.
Given how hard it is to even schedule a phone call with you, or for either of you to pickup the phone and return a call to a shareholder with 160,000 shares, I'd have to say I share their experience ... and their concerns.
/Avi"
... I was told then by IR that had really pissed off the CEO, so I wrote him an apology ...
... I figured at some point they'd get back to me. A week later I followed with another email, cc'ing their IR "jeff" ...
... still nothing.
I don't think I'm asking anything inappropriate. I'm not brow beating the CEO for the way he runs his company. I'm not prodding him to do anything unethical. I am not suggesting any steps simply to raise the stock price. I want this business built on a solid foundation of scalable service and delivery and I think these are fair and important questions related to those issues.
So I decided to go write to the Chairman. This is a fairly tepid ask from a April 2018 letter. I probably should have asked more, but I just wanted to gauge their appetite for small steps towards success ...
... I got a message through IR: Not interested.
In May, this went out, a request to address tech investments on the upcoming call ...
... The next week I followed with another note to the Chairman, suggesting a director who could help unlock value. (It looks like we might actually be getting that with the prospective new chairman as per the SEC filing on March 15th) ...
... still not getting any engagement. I think by June I realized I've nothing to lose b/c they're not responding no matter what I ask, so I sent this fairly passive aggressive email about technology ...
... it's just an effort for them to indicate that they'll take seriously an issue that I understand is at the heart of the business. Guess what? No response.
And neither to these questions after 2Q18 ...
... nor this after 3Q18 ...
... after which I sent an email to their IR ("Dave") cc'ing the Chairman. I'm told the Chairman forwarded it to the CEO, and it didn't go over well ...
... from there on, I basically gave up trying to get in touch with them.
After the filing about the potential new Chairman, I regrettably wrote these separate emails to the Chairman and CEO, over excited and shooting from the hip and trying desperately to paint myself as if i'm "on their side". That was stupid. I feel a bit sick about it ...
... and to the CEO ...
... I'm throw up a little reading it. Those were wrong.
The guidance snafu aside, the company hasn't done a bad job to date - they've transitioned to CF+ by shrinking and changing their revenue stream - but topline growth is hard and they just seem to have zero visibility in their business, which I think comes down to a lack of solid IT.
Former employees I've talked with indicate a small company with IT systems that don't communicate well and data still rolling into excel. I also get a sense from those I've talked with that the CEO is an exceptional salesperson but has the cliched management weakness of surrounding himself with people who agree and limited interest in dissenting opinions. My proximate experience supports this view.
It's not an uncommon model. It''s definitely hard to find "five tool executives" in small cap land. But this is where the Board needs to step in to make sure the CEO is surrounded with people who can fill holes.
I view all of these as fixable problems, which is why I hope the agreement with Dan Freidberg is seen through to completion as I hear he could really help focus the company on the technology piece that's been worrying me most. However, I have no insight into why the offering is taking so long. We'll have to see.
At 0.3x revenues, mid-teen GP margins and 2x gross profits, I think there's an opportunity for value creation, either organically and with good tech so they can scale SG&A or by a sale to a company that has good tech and wants volume to feed their system. It's not the greatest business in the world but it's one that solves a recurring need for customers and when done right should generate cash that can be reinvested at high rates of return. Time will tell if this view proves correct.
-- END --
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 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.
-- END --
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.
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.
-- END --
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.
-- END --
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.
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.
-- END --
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.
-- END --
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.
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.
(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.
-- END --
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.
Thursday, February 21, 2019
Letter to RVLT BoD
I briefly wrote about $RVLT after it announced a takeunder by its Chairman, CEO and largest shareholder. I've been a passive, removed observer since that announcement. It is an unfortunate experience for involved investors and painful to watch given how unfairly shareholders are being treated.
An investor in RVLT reached out to me and asked me to post this letter to the Board. Given my knowledge of the company and my general indignation towards Board and Management malfeasance, I agreed. This letter is from an investor who wishes to remain anonymous.
"To the Board of Directors of Revolution Lighting:
On October 17, 2018, concurrent with a negative guidance pre-announcement around 3Q earnings, Revolution Lighting's Chairman, CEO and largest stockholder offered to acquire all the outstanding stock for $2 per share.
Two days later, the company disclosed an SEC investigation into revenue recognition practices at the company and less than a month later, your Chairman, CEO and largest stockholder reduced his offer to $1.50 per share.
Other than a mid-December press release indicating that you'd hired HC Wainwright to explore the offer and alternatives, public shareholders have received no substantive communications on these proposals. Meanwhile, the company has lost 80% of its market value.
I understand the need to assess alternatives but why should it take so long? The offering party is the CEO and largest shareholder. It is difficult to imagine what further diligence is needed to consummate a deal.
As a concerned shareholder, I urge the Special Committee of the Board to expeditiously conclude negotiations to sell the company before further value is lost. If, in your exercise of fiduciary duty you decide a sale is not optimal, shareholders are long overdue a thorough explanation as to why not and how you plan to enhance the company’s value to greater than the $1.50 per share offering price.
Sincerely ... "
-- END --
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.
An investor in RVLT reached out to me and asked me to post this letter to the Board. Given my knowledge of the company and my general indignation towards Board and Management malfeasance, I agreed. This letter is from an investor who wishes to remain anonymous.
"To the Board of Directors of Revolution Lighting:
On October 17, 2018, concurrent with a negative guidance pre-announcement around 3Q earnings, Revolution Lighting's Chairman, CEO and largest stockholder offered to acquire all the outstanding stock for $2 per share.
Two days later, the company disclosed an SEC investigation into revenue recognition practices at the company and less than a month later, your Chairman, CEO and largest stockholder reduced his offer to $1.50 per share.
Other than a mid-December press release indicating that you'd hired HC Wainwright to explore the offer and alternatives, public shareholders have received no substantive communications on these proposals. Meanwhile, the company has lost 80% of its market value.
I understand the need to assess alternatives but why should it take so long? The offering party is the CEO and largest shareholder. It is difficult to imagine what further diligence is needed to consummate a deal.
As a concerned shareholder, I urge the Special Committee of the Board to expeditiously conclude negotiations to sell the company before further value is lost. If, in your exercise of fiduciary duty you decide a sale is not optimal, shareholders are long overdue a thorough explanation as to why not and how you plan to enhance the company’s value to greater than the $1.50 per share offering price.
Sincerely ... "
-- END --
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.
Wednesday, February 20, 2019
A long overdue lesson on backgammon
To start with, I've been using the totally wrong model. This die matrix ...
... is fine for craps but wholly insufficient for BG.
This is the right way to think about the bg dice matrix. These are the rolls ...
... Each of the 36 spots is worth 2.78%. Frequently faced issues can now be solved with simple math.
I used to think having five points blocking my opponent was a massive advantage. I was not even in the ballpark. Leave one open spot for your opponent to hit ("I need a 1!!" they say) and and they have 11 outs; that's a 30% chance of hitting what they need. Or in other words, leaving your sixth piece open probably works only 70% of the time.
Leave two open spots ("I need a 1 or a 2!!" they say) and that offers a 56% chance to hit; 20 outs.
Three open spots and forget about it. Probability of success in need of three different numbers is 75%. That's hardly a big advantage.
I also mis-estimated safe distances to keep an open pip?
The 7 spot always brought me caution. Totally wrong. It's sheer luck to make the right choices with the wrong information. The 6 is the most dangerous. Leave an open spot 6 pieces away and your opponent has a nearly 50% chance of hitting it. Keep it 7 spots away and risk declines 65%. This is basic stuff to sound players. Now we all know.
The game offers little morsels that are a bit like portfolio management. Not every move carries the same weight, yet each one embeds some level of risk and reward, randomness and valuation. Furthermore, you can do everything right, and still lose. That's important to keep in mind when managing risk.
The way I see, no matter the field or diversion, the pathway to improvement is about honesty and growth and willingness to keep going until you get it right. With time, attention and intentional practice, anyone can improve anything over time. I'm excited to level up!
-- 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.
Thursday, February 14, 2019
How Sixers Trade (and Investing) Offers Lessons on Yin / Yan of Hope and Frustration
Where everyone else sees frustration I often see hope, and when everyone else sees hope I often see frustration. It is a tendency that bugs the shit out of wife.
Take Ikea for example. Full of confusion, arguing couples, annoyed and frustrated families, a maze of lost kids, Eklynd and Harsgaard parts missing somewhere ... yet I believe it to be one of the most optimistic places in the world. Look around and you see new roommates, new families, new renovations all planning for a new and brighter future. Life's improvement is just an allen key away.
I mention this b/c at the NBA draft deadline, my Philadelphia 76ers* made a blockbuster trade to assemble a new starting five that fits together like a well assembled piece of furniture. If you believe the hype we should already crown them Eastern Conference finalists.
I rarely believe the hype and I always get a chuckle reading about "blockbuster trades" and dream teams and other "sure bets" b/c they are rife examples of the yin / yan of hope and frustration.
As the name of this blog suggests, I am a patient investor and I find distasteful the kind of impatience revealed by Sixers' management, their urgency to "win now". Urgency (and many are propelled towards it) is an awful environment to make good long term decisions and good long term decisions brought my team back from the depth of irrelevance even when they were losing at a historical rate.
Now they seek a kind of "get rich quick" scheme; "win the NBA finals quick". It makes me curious of the success rate of "blockbuster trades" like this, so I asked Michael Mauboussin about it when I ran into him at the recent CSIMA conference (I figure if anyone in finance would know, it would be him). Alas, how do you even define "blockbuster trade" and by what timeline would we measure "success"? In the absence of any info, I'd ballpark the baseline at 30%.
Why now? It's as if the team suddenly lowered the discount rate on their assets. Does it have to do with a stadium renovation, (which Comcast is paying for)? Have the rates on their loans changed? Maybe it can tell us something about $APO??! I think they're just impatient.
Youth and picks offer optionality like cash to a portfolio manager. They've lost that optionality so if they don't win now, have given up downside protection and future flexibility. In my mind, they haven't so much widened the opportunity pathway as widened their gutter and as readers here know, I love wide opportunity pathways and narrow gutters.
On reflection, I think Sam Hinkie's genius was recognizing that hoarding draft picks (he called them assets) offered optionality on the future b/c you could project on them any possible future, while turning them into players is so ... much ... harder. Better to wait for the fat pitch rather than chase the tail of instant gratification.
It's possible that my professional devotion to finding niche undervalued and undiscovered securities has bled into a preference for surprise 2nd round draft picks and undrafted free agent over splashy signings. Or maybe as a knowledgeable fan, and as an investor who likes to look at history, I am aware that Jimmy Butler has a spotted history as a teammate, that defense wins playoffs, that it takes time for players to "gel" and that although Sixers coach Brett Brown is a great team maker other teams improved as well, and without giving up as much.
I realize I'm conflating investing theories and sports, which is sometimes appropriate. But most appropriate is keeping our heads on straight and woe be the market participant who invests for the same reasons they watch sports!
I'll admit that with sports, I voluntarily submit to the emotional highs and lows of a season. In contrast, with investing, I aim for equanimity. Yes, it's invigorating to be up and enervating to be down, but investors must focus on facts and knowledge to support them when the whipsaw of short term prices is likely to remove reason from action or separate our heads from our profits.
With patient investing, the season is as long as you want it to be. At least through Long Cast Advisers' first three years, the record indicates some success with these efforts.
* I don't actually own them, I'm just a lifelong fan
** When I took economics in college with this guy I was put off by my erroneous conflation of "utility" with profit. It wasn't until more recently that I learned that Bernoulli purposefully used the vague term "utility" to simply mean "betterness" as it relates to different people under different scenarios. That guy, by the way, was one of many Manhattan project physicists who transitioned to economics after the war and converted equations of nuclear destruction into equations of math destruction via modern portfolio theory.
ALL RIGHTS RESERVED. PAST PERFORMANCE 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.
Take Ikea for example. Full of confusion, arguing couples, annoyed and frustrated families, a maze of lost kids, Eklynd and Harsgaard parts missing somewhere ... yet I believe it to be one of the most optimistic places in the world. Look around and you see new roommates, new families, new renovations all planning for a new and brighter future. Life's improvement is just an allen key away.
I mention this b/c at the NBA draft deadline, my Philadelphia 76ers* made a blockbuster trade to assemble a new starting five that fits together like a well assembled piece of furniture. If you believe the hype we should already crown them Eastern Conference finalists.
I rarely believe the hype and I always get a chuckle reading about "blockbuster trades" and dream teams and other "sure bets" b/c they are rife examples of the yin / yan of hope and frustration.
Now they seek a kind of "get rich quick" scheme; "win the NBA finals quick". It makes me curious of the success rate of "blockbuster trades" like this, so I asked Michael Mauboussin about it when I ran into him at the recent CSIMA conference (I figure if anyone in finance would know, it would be him). Alas, how do you even define "blockbuster trade" and by what timeline would we measure "success"? In the absence of any info, I'd ballpark the baseline at 30%.
Youth and picks offer optionality like cash to a portfolio manager. They've lost that optionality so if they don't win now, have given up downside protection and future flexibility. In my mind, they haven't so much widened the opportunity pathway as widened their gutter and as readers here know, I love wide opportunity pathways and narrow gutters.
On reflection, I think Sam Hinkie's genius was recognizing that hoarding draft picks (he called them assets) offered optionality on the future b/c you could project on them any possible future, while turning them into players is so ... much ... harder. Better to wait for the fat pitch rather than chase the tail of instant gratification.
It's possible that my professional devotion to finding niche undervalued and undiscovered securities has bled into a preference for surprise 2nd round draft picks and undrafted free agent over splashy signings. Or maybe as a knowledgeable fan, and as an investor who likes to look at history, I am aware that Jimmy Butler has a spotted history as a teammate, that defense wins playoffs, that it takes time for players to "gel" and that although Sixers coach Brett Brown is a great team maker other teams improved as well, and without giving up as much.
I realize I'm conflating investing theories and sports, which is sometimes appropriate. But most appropriate is keeping our heads on straight and woe be the market participant who invests for the same reasons they watch sports!
I'll admit that with sports, I voluntarily submit to the emotional highs and lows of a season. In contrast, with investing, I aim for equanimity. Yes, it's invigorating to be up and enervating to be down, but investors must focus on facts and knowledge to support them when the whipsaw of short term prices is likely to remove reason from action or separate our heads from our profits.
With patient investing, the season is as long as you want it to be. At least through Long Cast Advisers' first three years, the record indicates some success with these efforts.
-- END --
* I don't actually own them, I'm just a lifelong fan
ALL RIGHTS RESERVED. PAST PERFORMANCE 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.
Wednesday, January 16, 2019
In closing 2018 (LCA Year End Letter: $PSSR, $INS, et al)
I started this blog to write about investment ideas and other investment related thoughts. "An open book" as I called it.
The thing is, I now have an actual book of business. It's small and humble, but growing and I want to dedicate my time and efforts to it. It's called Long Cast Advisers ...
http://www.longcastadvisers.com/
... I recently posted on my firm's website my presentation on $INS for the MOI 2019 Online Conference. That presentation includes information about my firm in general and about that idea specifically. I think it's a fascinating business.
I've also just recently posted our 2018 "year end letter". It's also on the website (see "links & letters" page).
I'm most likely to continue to post primary ideas on my business website rather than here as this is a blog and I am not a blogger. When I started writing this in 2012, I was a former sell-side analyst trying to figure out what to do next, and I was impressed (maybe floored is the right word) by what oddballstocks, otcadventures and countless others were doing with off-street research.
Now, I'm a sole business owner of a one-person investment management firm. If I can simplify for anyone what I've learned in my first three years, I'd say this: If you like researching stocks, don't start an investment management firm b/c it's far more complicated then just picking the right stocks ...
you gotta pick the right stocks
you gotta own them at the right weighting
you gotta find clients who appreciate your worldview
you gotta have enough assets to make it all meaningful
and you gotta manage the administrative burden with an eye on time and costs
... it's complicated but the effort to get it right is enervating and presents an array of constant professional challenges besides the obvious "finding good stocks and owning them at the right concentration."
When it's done right, there are tangible benefits to my clients. When it's done wrong ... oooph, in this business you live with your mistakes a long time. That's where patience comes in. Or as they say in the kitchen, "make it right or make it twice" (at least that's what was said back when).
It's been a most unexpected pleasure forging relationships here through this forum and even deeper relationships with my clients through my business. I aim to focus on that going forward, so I can continue the endeavor of increasing mine and their prosperity.
If it interests you as well, please drop me a line.
-- 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.
The thing is, I now have an actual book of business. It's small and humble, but growing and I want to dedicate my time and efforts to it. It's called Long Cast Advisers ...
http://www.longcastadvisers.com/
... I recently posted on my firm's website my presentation on $INS for the MOI 2019 Online Conference. That presentation includes information about my firm in general and about that idea specifically. I think it's a fascinating business.
I've also just recently posted our 2018 "year end letter". It's also on the website (see "links & letters" page).
I'm most likely to continue to post primary ideas on my business website rather than here as this is a blog and I am not a blogger. When I started writing this in 2012, I was a former sell-side analyst trying to figure out what to do next, and I was impressed (maybe floored is the right word) by what oddballstocks, otcadventures and countless others were doing with off-street research.
Now, I'm a sole business owner of a one-person investment management firm. If I can simplify for anyone what I've learned in my first three years, I'd say this: If you like researching stocks, don't start an investment management firm b/c it's far more complicated then just picking the right stocks ...
you gotta pick the right stocks
you gotta own them at the right weighting
you gotta find clients who appreciate your worldview
you gotta have enough assets to make it all meaningful
and you gotta manage the administrative burden with an eye on time and costs
... it's complicated but the effort to get it right is enervating and presents an array of constant professional challenges besides the obvious "finding good stocks and owning them at the right concentration."
When it's done right, there are tangible benefits to my clients. When it's done wrong ... oooph, in this business you live with your mistakes a long time. That's where patience comes in. Or as they say in the kitchen, "make it right or make it twice" (at least that's what was said back when).
It's been a most unexpected pleasure forging relationships here through this forum and even deeper relationships with my clients through my business. I aim to focus on that going forward, so I can continue the endeavor of increasing mine and their prosperity.
If it interests you as well, please drop me a line.
-- 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.