tag:blogger.com,1999:blog-35413526816512021232024-03-18T20:06:02.972-07:00the patient investor's blog"you do you!" musings and observations about investing and sports and other editorial cutsLong Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.comBlogger140125tag:blogger.com,1999:blog-3541352681651202123.post-69959782412128916722023-09-15T08:17:00.013-07:002023-09-15T08:51:27.610-07:00Letter to the RSSS Board<p>I've originally wrote about RSSS in the Long Cast 4Q22 letter, which can be found <a href="http://www.longcastadvisers.com/letters">here</a>. I think the new CEO, Roy Olivier, is operating at a high level and recent results support this view. He's appropriately investing in growth and achieving early signs of cash flow and profitability. </p><p>And yet bizarrely the Chairman and founder, Peter Derycz, <a href="https://www.globenewswire.com/news-release/2023/08/04/2719026/0/en/Peter-Derycz-and-Bristol-Investment-Fund-Ltd-Issue-Open-Letter-to-Research-Solutions-Inc-Shareholders.html">has started a proxy fight</a> to try to regain control of the Board and push him out. It's just a bad look when the Chairman undercuts the CEO and in this particular case its puzzling and quite stupid because the new CEO is achieving levels of financial and operational performance that founder never could. The complaints are idiotic. I met Peter when he was CEO and I chose not to invest in the company because, though he seems like a nice person, he struck me as a low quality CEO and these actions reinforce that view. </p><p>The Board <a href="https://www.prnewswire.com/news-releases/open-letter-to-shareholders-from-research-solutions-board-committee-301900183.html">responded to his letter</a> and is supporting the new management team. Other shareholders, including <a href="https://fintel.io/doc/sec-cove-street-capital-llc-1386301-sc-13d-2023-august-15-19584-1462">this large one</a>, have chimed in as well. I thought it would be helpful to put together a short compendium pointing out the stupidity and hypocrisy of the Chairman's complaints. It's really important to point out that by my estimate more than 90% of the shares the founder and his cohorts, including his brother in law, own, were granted to them when they were in charge, regardless of operational performance and despite their years of mismanagement. </p><p>Here's the letter I wrote to the Board ... </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOO6Q_tR30wt3dv44uID_vlHgqx_YrAxrD3U8jR8FxsLvysXXOEXL5os8CZd2-zQ3_npK8k5NuWK_97hW39ZBtlHOA2qm4-tmJCX5uGnlbJiRoXd5ZSOHwUppAldmE5SlRKiynXYN4SCQemRWJTdKjRcds91CAJr4ZMLD1ZNr6A1ok-rKDa0U635OnEF_n/s691/RSSS%20Letter%20Page%201.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="691" data-original-width="513" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOO6Q_tR30wt3dv44uID_vlHgqx_YrAxrD3U8jR8FxsLvysXXOEXL5os8CZd2-zQ3_npK8k5NuWK_97hW39ZBtlHOA2qm4-tmJCX5uGnlbJiRoXd5ZSOHwUppAldmE5SlRKiynXYN4SCQemRWJTdKjRcds91CAJr4ZMLD1ZNr6A1ok-rKDa0U635OnEF_n/s16000/RSSS%20Letter%20Page%201.jpg" /></a></div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjo4U_XvnUPlHL0Nf9F5IaYHucu2e7P0p8fWFJ4F4V0IC9_x8ezLuavaJ0hyQ6OwsQ3GH0qlEJbg0WOQZkH83Us4In-K-6sdisbhAiNnMwnqyTyDrDWxUe0agfPR7lICWh9IK0tVq98dBGQit55s_y8OD7BF14Qam-pgGqAz-hewTGpLSWHm5Pv0YtzTbHt/s713/RSSS%20Letter%20Page%202.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="713" data-original-width="524" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjo4U_XvnUPlHL0Nf9F5IaYHucu2e7P0p8fWFJ4F4V0IC9_x8ezLuavaJ0hyQ6OwsQ3GH0qlEJbg0WOQZkH83Us4In-K-6sdisbhAiNnMwnqyTyDrDWxUe0agfPR7lICWh9IK0tVq98dBGQit55s_y8OD7BF14Qam-pgGqAz-hewTGpLSWHm5Pv0YtzTbHt/s16000/RSSS%20Letter%20Page%202.jpg" /></a></div><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTOICyhEcaznYNAnJwEeV04SiieKOjnlmQCZnqchv8UtKD7TqvPWp9F59dQoaKkam0uEJHIw1-13v79GX3HNgds5rWf7MRGjUpaok_K7Aku_cKFi-kSGJA2VlXEy1-MqTmcHz6kFk-D7ArMM1tPJGA8COqyykZGFRupa35BCnZXpbxGoC0ucJ6jvj28mHc/s593/RSSS%20Letter%20Page%203.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="593" data-original-width="522" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTOICyhEcaznYNAnJwEeV04SiieKOjnlmQCZnqchv8UtKD7TqvPWp9F59dQoaKkam0uEJHIw1-13v79GX3HNgds5rWf7MRGjUpaok_K7Aku_cKFi-kSGJA2VlXEy1-MqTmcHz6kFk-D7ArMM1tPJGA8COqyykZGFRupa35BCnZXpbxGoC0ucJ6jvj28mHc/w565-h640/RSSS%20Letter%20Page%203.jpg" width="565" /></a></div><br /><p><br /></p><p><br /></p><p><br /></p>Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com1tag:blogger.com,1999:blog-3541352681651202123.post-13073461184894893562023-03-28T12:05:00.011-07:002023-04-29T04:16:22.663-07:00On Performance, Returns and Finding Ideas<p>A flooded basement isn't just a confrontation with nature but a reckoning with all the shit stored down there. Here's a long kept advert in the now repaired basement from the Sept 21, 2001 issue of WSJ. I kept it for sentimental reasons since GE was the first company I covered on the sell side as an associate at CSFB. My boss, Mike Regan's, advice on approaching the analysis of a behemoth like GE was priceless: "Imagine it like a grocery store," he advised, "this aisle has turbines ... that aisle has appliances. Keep it simple." </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEi6TGjaXcMjSMIY2jGFUNH8ktCJuSYd2-nlrdYwZ9juh236MYfyX7cpRkEZdhkxbLsF6bpaYUpkFvZk-O9fKUxVvKXhcj-Jk9cBizQZHfrT8Ec7gOUfHzHqrTKC0BjFKs-3hzQItSdFLdbiW4Ccq5Lo46mjV-v1Vgk_QFtUL35Jkk14QQhusGi5fWrSmg" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="574" data-original-width="394" src="https://blogger.googleusercontent.com/img/a/AVvXsEi6TGjaXcMjSMIY2jGFUNH8ktCJuSYd2-nlrdYwZ9juh236MYfyX7cpRkEZdhkxbLsF6bpaYUpkFvZk-O9fKUxVvKXhcj-Jk9cBizQZHfrT8Ec7gOUfHzHqrTKC0BjFKs-3hzQItSdFLdbiW4Ccq5Lo46mjV-v1Vgk_QFtUL35Jkk14QQhusGi5fWrSmg=s16000" /></a></div><p>Back then the company was very much admired and respected and nobody seemed to blink at the fact that GE Capital was the biggest single driver of operating profit. The GECS segment - the bank - did it all: Consumer loans. Industrial product loans and leasing. Transportation finance. Mortgages. Insurance. Re-insurance. And it owned the Montgomery Ward BK claim. </p><p><a href="https://blogger.googleusercontent.com/img/a/AVvXsEhQOxPdMu7IWHJPFJthVg_Zyjnyk5psMlDFTOBPn3BdaL9iWiHJww7ZvwSSjauBscAbBRh2jvj2h07IeNLorfp77CLuAavSgmoQRR3QtFFGjW3bkaYEfh5UnX-FpiUH6hltqu90Iqv6mw2FwWf25FCsW7eNmwuvPnG6kaD_O3qLQKdZfIVAPKHzvRltXA" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img data-original-height="734" data-original-width="846" height="555" src="https://blogger.googleusercontent.com/img/a/AVvXsEhQOxPdMu7IWHJPFJthVg_Zyjnyk5psMlDFTOBPn3BdaL9iWiHJww7ZvwSSjauBscAbBRh2jvj2h07IeNLorfp77CLuAavSgmoQRR3QtFFGjW3bkaYEfh5UnX-FpiUH6hltqu90Iqv6mw2FwWf25FCsW7eNmwuvPnG6kaD_O3qLQKdZfIVAPKHzvRltXA=w640-h555" width="640" /></a></p><p>Though I spent most of my time on appliances and HVAC and related products (compressors, motors, etc), and contributed little to this report, I was given co-author credit with <a href="https://research.esairesearch.com/mauboussin-almanack">Michael Mauboussin</a> on this piece "<a href="https://app.box.com/s/7en65zr1gz3w329jfodqdf7lt4rsvxhd">Wanna Be GE</a>". Parts of the report didn't age well (ie lauding Enron and GE) but the analysis of value creation and the failings of accounting to track those inputs in a knowledge and service economy remain timeless. He's been in at it awhile and is a true professional. </p><p>Also found this clip of Pete Rose in the basement, which I don't remember ever having. I'm a Philly sports fan but those Reds were something special: Rose, Bench, Morgan, Foster, Seaver ... now I'm dipping into the internet... Dave Concepción, César Gerónimo and Ken Griffey, Sr.. ... that starting eight "played 88 games together during the 1975 and 1976 seasons, losing only 19." (Wikipedia) Impressive! Pete Rose belongs in the HoF. </p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEgLnG-kDD5_LXJLms_oEoM3Sgx1MGI0q3Kmj7_kcelW7MVusCwwMKyjiMW46FiZhrgk86WDkNC0noWsb99jS9iORBL5Yy-JwzrnR9WGlTR0gFchrgyM_yRNGuaQKhZLyx3ASSeTxfEQz-jdua2pQzDQeb7ZJBCOqwnFgeFq5QRSDq9qlLi_rtKjmQXwIw" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="556" data-original-width="434" height="240" src="https://blogger.googleusercontent.com/img/a/AVvXsEgLnG-kDD5_LXJLms_oEoM3Sgx1MGI0q3Kmj7_kcelW7MVusCwwMKyjiMW46FiZhrgk86WDkNC0noWsb99jS9iORBL5Yy-JwzrnR9WGlTR0gFchrgyM_yRNGuaQKhZLyx3ASSeTxfEQz-jdua2pQzDQeb7ZJBCOqwnFgeFq5QRSDq9qlLi_rtKjmQXwIw" width="187" /></a></div><br /><p>I didn't write this with intention of revisiting old things in a box, but to <a href="http://www.longcastadvisers.com/s/4Q22-letter-final.pdf" target="_blank">share my YE'22 letter</a> and include below a portion that didn't make it into the final piece; I prefer to keep the letters short and this struck me as "off topic". It is an observation on returns and performance that is both "duh" - obvious, everyone knows it - but I think worth noting. </p><p>Time Weighted Returns (TWR) is an industry standard and is generally the “headline number” reported by investment firms. But TWR is an awfully flawed figure b/c it's a function of <i>percent returns </i>regardless of size or timing. Therefore, it can be skewed by the fat tail of one good (or bad) investment at any point in a fund’s life. </p><p>As a result, TWR doesn't offer information on consistency, and I don’t mean “consistent returns”, but <i>the consistent selection and weighting of companies that increase in value and the concurrent consistent avoidance of those that don’t</i>. Without that consistent capability, clients are unlikely to generate returns that match the fund's overall performance. And if they're not generating those returns, what's the point? </p><p>An extreme illustration. Let’s say you daytrade $100 to $200 (100% return) and your friend who is an even better day trader and ends up with $1,000 (900% return). Now you both realize you’re onto something and since you want to generate wealth, you start a fund and “market” those returns … and then put all the money you raise into the S&P TR ETF. </p><p>Let’s compare 2016 to 2022 returns between these two funds and the S&P, all years showing the same returns except in the first year replace the +12% (see table below) with 100% and 900%, respectively, with subsequent years tracking the S&P. By the end of ‘22, the S&P time weighted return would be +12% CAGR while you and your friend would show gross TWR +21% and +52% collecting fees on undifferentiated results. </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEhVVUJprqAI_d2VeNIn7F_XFJ5mBzBSI5UEwObvg0q_HG07N_NYDYbcn5RfY2of3F1n0NjKqI2GBj7DdCJT5E2EtU9yRzp7xnbsYgS5ETFhQCJVQ0IKC9PT4ztlRThMzlmpaQIuscL-wCsg9obnFoHfps0cDIc9WT2G9f0We6ooCynFRKJraq_pwTJVrg" style="margin-left: 1em; margin-right: 1em;"><img data-original-height="113" data-original-width="495" height="91" src="https://blogger.googleusercontent.com/img/a/AVvXsEhVVUJprqAI_d2VeNIn7F_XFJ5mBzBSI5UEwObvg0q_HG07N_NYDYbcn5RfY2of3F1n0NjKqI2GBj7DdCJT5E2EtU9yRzp7xnbsYgS5ETFhQCJVQ0IKC9PT4ztlRThMzlmpaQIuscL-wCsg9obnFoHfps0cDIc9WT2G9f0We6ooCynFRKJraq_pwTJVrg=w400-h91" width="400" /></a></div><p>This isn't "scandalous", it's a rough example of how TWR works; one bonanza can move the "performance needle" for long periods. Given the way it works and its importance, consider how it influences PM behavior? Some PM's swing for the fences - it's certainly a strategy with small amounts of money that one can afford to lose - and it can result in massive TWR. However, that TWR won't reflect the expected return for the "next client" wooed by yesterday's high returns, a problem in this what-have-you-done-for-me-lately business. </p><p>I'm not a swing for the fences investor so much as "buy good companies at a value price" and I think a better indicator of performance is "median client return". Maybe something to ask a portfolio manager if you're seeking one out. </p><p>Speaking of seeking out portfolio managers, I was recently at a meeting with a potential client and they asked how I find ideas. I threw out a bunch of "idea generating activities" - screening, reading through industry lists, talking with other investors, staring at a wall - but concluded with an uncomfortable truth about this business, that a lot of it is random. The potential client ultimately said no, so let me share from experience, that "so much of it is random" isn't a granular enough answer for an outside allocator to base an opinion, even if it's foundationally true 8( </p><p>Now I find myself going through a list of companies presenting at a conference, and I'm trying to figure out which ones to meet with, so I thought I'd document a bit of how I winnow this all down. </p><p>First cut: Sort list by EV and start with smaller companies since that's what I focus on. Many of them are already recognizable to me since I do this all the time <a href="https://blogger.googleusercontent.com/img/a/AVvXsEg4yelRj8CryQbRyZFfx70NvrCBTLjqYAptPKGvq98pjQ4eE2MVu_HHaQ4r8SRS0erAtb_jKtxwq8Wfr-RtOWKq-NiDsCZkPaw7-g_ixceUX59GSTTkJZX7Y8CqV5eOXxfu8HFib2TW11D7zurmNhbFpr5BjT8A4Wex5SQ1wyXGPWZCuFDFudNlz8SbwA" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img alt="" data-original-height="526" data-original-width="999" height="336" src="https://blogger.googleusercontent.com/img/a/AVvXsEg4yelRj8CryQbRyZFfx70NvrCBTLjqYAptPKGvq98pjQ4eE2MVu_HHaQ4r8SRS0erAtb_jKtxwq8Wfr-RtOWKq-NiDsCZkPaw7-g_ixceUX59GSTTkJZX7Y8CqV5eOXxfu8HFib2TW11D7zurmNhbFpr5BjT8A4Wex5SQ1wyXGPWZCuFDFudNlz8SbwA=w640-h336" width="640" /></a></p><p>For something that is new to me or "seems interesting" (totally qualitative), I'll jump over to an excel template I created awhile back that shows four years of quarterly results and a dozen of annual. It has a summary P&L, B/S and CF statement so I can take a quick look at the progression of growth, margins and cash flow, the latter b/c (to quote that aforementioned Mauboussin report): "Value for any financial asset equals the present value of future free cash flows. Free cash flow is the difference between a company’s inflows (sales) and its outflows (operating expenses and investments). It does not matter what accounting standards a company chooses—cash is cash." </p><p>As I'm looking at this data, I'm trying to consider the context - macro environment, industry situation, some independent variable - that drove the data, and I'm generating things to look for in the financial statements and their footnotes. Ultimately, I'm looking for "what's changing now". </p><p>One of cheats at the single company analysis is to look at tangible book value per share (ie book value excluding goodwill and intangibles). I think it's a Joel Greenblatt-ism or one of those gurus and it makes sense to me as a proxy for value creation over time. </p><p>Here are some examples of TBV: CCRD has created tremendous over the years. </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEgnTeoUEyxpB2rSfwKdJMBWnYnD-O5FVX40zc_G7GhgIVNysCgd2hIeASs68YnIbpurj66bDoit6Y80yaArzjm14kcxal_hbw8WuJ4s4qaWHp44VKcw5ZCGZqeXmgNQhcJSzsUnHobcq5Lqd_EskSPJaB4DH1iY8cptCjwIbulTZ3gATI0sGbKRS_EPKw" style="margin-left: 1em; margin-right: 1em;"><img data-original-height="46" data-original-width="835" height="35" src="https://blogger.googleusercontent.com/img/a/AVvXsEgnTeoUEyxpB2rSfwKdJMBWnYnD-O5FVX40zc_G7GhgIVNysCgd2hIeASs68YnIbpurj66bDoit6Y80yaArzjm14kcxal_hbw8WuJ4s4qaWHp44VKcw5ZCGZqeXmgNQhcJSzsUnHobcq5Lqd_EskSPJaB4DH1iY8cptCjwIbulTZ3gATI0sGbKRS_EPKw=w640-h35" width="640" /></a></div><div><br /></div>Here's RELL. Not much going on with TBV but something is changing with returns ... <div><br /></div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEhbqXlVNggsAEokV3opbFD7m4lQORCgtRdyoj534apw0dINbnX-cxf6bMdpcLcNi4j93MqnoDCS1c9I8T_pdhK05RFxti2uaj31kGhPFonDy9MmTrrkyblDpkxGu4nrlALazpHw5EcnxqbTLZRdPlbby_cwvnCZAv7KBjrc6zs_65q049Fys67OOT2mHQ" style="margin-left: 1em; margin-right: 1em;"><img data-original-height="121" data-original-width="835" height="92" src="https://blogger.googleusercontent.com/img/a/AVvXsEhbqXlVNggsAEokV3opbFD7m4lQORCgtRdyoj534apw0dINbnX-cxf6bMdpcLcNi4j93MqnoDCS1c9I8T_pdhK05RFxti2uaj31kGhPFonDy9MmTrrkyblDpkxGu4nrlALazpHw5EcnxqbTLZRdPlbby_cwvnCZAv7KBjrc6zs_65q049Fys67OOT2mHQ=w640-h92" width="640" /></a></div><br />... which is even more obvious in the trailing quarterly results and seems sustainably driven by companies replacing combustion with regenerative electronics, lead acid batteries with ultra capacitors, etc. </div><div><br /></div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEjWW3803OqYsO1irdPx6fHE-1_QP6HXjVwejp243zFrd1liCQT_FoY9H4m5c5dJT8svRhINS6UAMidrABjiPFAZrtjpYdHasYxjtX6zFt7Dzz_2W-UBBDdzoow4Q_HW9IS01sLsuOeTdbyLsWWfP9Ht7yG66m43b1ZBymLKWrnitIXmxuTkNbaDZ0dypQ" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="181" data-original-width="360" height="161" src="https://blogger.googleusercontent.com/img/a/AVvXsEjWW3803OqYsO1irdPx6fHE-1_QP6HXjVwejp243zFrd1liCQT_FoY9H4m5c5dJT8svRhINS6UAMidrABjiPFAZrtjpYdHasYxjtX6zFt7Dzz_2W-UBBDdzoow4Q_HW9IS01sLsuOeTdbyLsWWfP9Ht7yG66m43b1ZBymLKWrnitIXmxuTkNbaDZ0dypQ" width="320" /></a></div><div><br /></div></div><div><br /></div><div>Here's another company where the data shows <i>none </i>of the attributes I mentioned above. It's a cyclical construction company with a pretty fetid history of value creation. Yet, I'm looking deeply into it b/c I think it could soon experience a cyclical tailwind. I'm very familiar with the industry and the time to buy is when things look worst ... </div><div><br /></div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEhI5MplgDWzIhnAX3mjlzgX2N5B8jcmviVtiy8ubY6Gs6phGfB17zz547X5u2ksTFHpzE6sDS9M5gcE6WBkFHjBB60LE6C06Tp282VsQ59hEJxLd1F7vUDy66oPdzjsOZEQUY80EvUjGiDEJ70e-e5OSW3-ZOi2dGVmPZgHpy2XUbIc1JcNpR8ifT1i_w" style="margin-left: 1em; margin-right: 1em;"><img data-original-height="121" data-original-width="835" height="92" src="https://blogger.googleusercontent.com/img/a/AVvXsEhI5MplgDWzIhnAX3mjlzgX2N5B8jcmviVtiy8ubY6Gs6phGfB17zz547X5u2ksTFHpzE6sDS9M5gcE6WBkFHjBB60LE6C06Tp282VsQ59hEJxLd1F7vUDy66oPdzjsOZEQUY80EvUjGiDEJ70e-e5OSW3-ZOi2dGVmPZgHpy2XUbIc1JcNpR8ifT1i_w=w640-h92" width="640" /></a></div><br /><div>... finally, here's Plus 500 which trades in London. It has all the "data driven attributes" (no acquisitions, so TBV doesn't apply) but it seems almost too good to be true. One reason to be cautious! </div><div><br /></div></div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEh2D-wbiZqsnAwDp2cVlCBsT4N4dvrwJN84FNrZJCzg1oL4tGimTxe6Ewfyy_K61ftjx1Jlg59-MJhJ8siguBGb9EUJ0aGMaUIJySsd7QGxrMO-rTPUrKH-Razuek0rNpi5sFJmLJNbRhE2_bNkDtCiJXn5MpJ9MlESRub-LdrtOcOKboH3R5AKvFgvYQ" style="margin-left: 1em; margin-right: 1em;"><img data-original-height="91" data-original-width="835" height="70" src="https://blogger.googleusercontent.com/img/a/AVvXsEh2D-wbiZqsnAwDp2cVlCBsT4N4dvrwJN84FNrZJCzg1oL4tGimTxe6Ewfyy_K61ftjx1Jlg59-MJhJ8siguBGb9EUJ0aGMaUIJySsd7QGxrMO-rTPUrKH-Razuek0rNpi5sFJmLJNbRhE2_bNkDtCiJXn5MpJ9MlESRub-LdrtOcOKboH3R5AKvFgvYQ=w640-h70" width="640" /></a></div><br /><div>A key thing to note is that these financials are <i>just the starting to point. </i>Anyone can look at data; what's actually going on at the company? Learning is an endless function and buying shares is just a step in the road to a higher education, which keeps going until you find a higher IRR idea to replace it with.</div><div><br /></div><div>Ultimately investing is a decision making business and decision making is hard. One's investment decisions rest on the decisions of the CEO's, whose decisions rest on those of their operating managers, etc. down to the line worker or coder or customer service provider. It's like an infinite regression, the asset allocation version of "<a href="https://www.youtube.com/watch?v=6gBV-Nzq7Pg" target="_blank">turtles all the way down</a>." I just keep looking for better ideas and when I find something I think I like, I rely on skepticism to enable more questions, more learning and more avenues of research. </div><div><div><div><br /></div></div><div>-- END -- </div><div><br /></div><div>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. THIS IS NOT FINANCIAL ADVICE. 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.</div></div></div>Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com4tag:blogger.com,1999:blog-3541352681651202123.post-34122972251748477452022-11-02T11:11:00.488-07:002022-11-09T05:20:07.879-08:00On Tracking Tigers + LCA 3Q22 Letter<p>I recently attended a small retreat for fund managers where one of the guest speakers, via video presentation from a game reserve in S. Africa, was a lion tracker. He shared some point about tracking lions that had significant overlap with investing. I thought I'd share a few notes I jotted down ... </p><p>Intuition drives the first step </p><p>"Trackers sit in the tension of the unknown" </p><p>"Trackers are energized buy the state of the unknown" </p><p>Walking over the same areas multiple times offers opportunities to see new things more clearly </p><p>Trackers develop narratives based on information but they need to be open to new information and open to re-calibrating those narratives. </p><p>"We take in the macro (sounds, wind direction, weather) and integrate it into the micro."</p><p>When trackers lose a trail, they stop. Then reassess. </p><p>... there were many more nuggets of information, and the guy was pretty inspiring, but I wondered how much more effective a tracker is vs simply hanging out at a watering hole and waiting. I suppose that would be the index investing analog to tracking a lion: Less fun, less interesting and though unlikely to have as high a success rate, zero effort utilized. Of course, if hanging out at the watering hole is just as good as the tracker, then maybe the tracker isn't so good? </p><p>Our portfolio is having a pretty good YTD - <a href="http://www.longcastadvisers.com/s/3Q22-letter-FINAL.pdf">here is a link to my 3Q22 letter</a> - but whatever success I'm having rests heavily on lessons learned from 2020, which was a very hard year for me and our portfolio. It took me a long time to internalize the experience of significant losses and learn from it. I wrote about some of these lessons in my <a href="https://static1.squarespace.com/static/581274a0f5e231316b7c8224/t/5fbd23af106e860cb970a30c/1606230960921/3Q20+letter.pdf">3Q20 letter</a> and these lessons very much inform my work as a portfolio manager today. I can summarize those lessons in three words: "IRR is everything." </p><p>I started my business with significant experience as an analyst and zero experience as PM. I knew there was a lot to learn and seven years in, I've learned a few things beyond just the importance of IRR. It includes the importance of changing ones mind, limiting large losses, starting with smaller sized investments and growing them over time, buying on the way up or down, all in the effort to upgrade the lowest expected IRR company in the portfolio with companies with higher IRR's. Though I aspire to own stocks forever, the realities of managing a portfolio of SMA's is very different and occasionally prohibitive of that endeavor. </p><p>I realize what I do is idiosyncratic and not for everyone. I'm still not earning what I would make if I were an employee, but it's all moving in the right direction, slowly and steadily. I love engaging my curiosity about the world through the lens investing and I believe I'm building something thoughtfully and step-by-step that I can do for decades longer. If I keep my head down and show consistency in finding companies that grow in value, the business will grow in value too, and create something of substance for me and my clients. </p><p>-- END -- </p><p>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. THIS IS NOT FINANCIAL ADVICE. 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.</p>Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com0tag:blogger.com,1999:blog-3541352681651202123.post-49760516095010471572022-07-13T14:45:00.007-07:002022-07-14T10:17:15.941-07:00Richardson is Having an Interesting Product Cycle This is a product-based thesis. The company, Richardson Electronics (RELL), long a “dog” stock with a lousy corporate governance structure, is having its day. It has a few new products that are finding eager audiences. These products include ultracapacitors to replace lead acid batteries in backup power systems (wind farms, telecom base stations, et al); lithium phosphate batteries to replace lead acid batteries in diesel engines; and magnitrons used to convert methane into diamonds (seriously).<br /><br />“Why this? / Why now?” comes down partly to Maxwell’s demise under Tesla; partly due to ESG rethink of the use and pervasiveness of lead batteries; partly due to keen segment management by industry veteran Greg Peloquin, who returned to the company from Arrow in 2016; and partly due to the CEO’s willingness to fund odd and interesting projects. <br /><br />The stock may be cheap for a number of reasons. Investors may assume growth is cyclical semi CAPEX related. The company’s long history of under-performance and poor corporate governance may lead to doubt and disbelief among otherwise knowledgeable investors. It is likely to fly under many investors radars and requires a bit of effort to understand. But the company seems to have locked up substantial supply of raw materials at reasonable prices and has a head start on competitors in what could be a large and durable niche in the uninterruptible power supply ecosystem and possibly beyond.<p class="MsoNormal" style="text-align: justify;"></p><p class="MsoNormal" style="text-align: justify;"><b>Introduction</b>: Richardson
Electronics (ticker: RELL), an electronics parts manufacturer and distributor,
is a publicly traded family business. At the current price of $14 and with 14M
diluted shares outstanding (Class A + Class B), RELL has a market valuation of
~$200M. Less ~$40M cash (no debt) yields an enterprise value of $160M. Given
TTM EBITDA of ~$18M this yields an EV / EBITDA multiple of ~9x. It trades
roughly in line with, if not at a slight premium, to its industry group but TTM
sales growth of 30% is the highest among them and EBITDA has grown faster. <o:p></o:p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_usVtYUK2uXve0SG0vTKWKALTSdNA5_8FWinBMmNa5dmKv-MiTVH0Y7JYugKbMbw2ffWs1upIJrSOuKOFMjILjTmDSPW2hCqTHWHx_81O8YO4hXd6IVv-VHap2wKDOgpGmDi1_UEmwfBaUBSOdq_yhNXGqyTUgOyr-KzZ96BlgqkTX9XdMGieTt962Q/s4564/Pic%201.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1114" data-original-width="4564" height="156" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_usVtYUK2uXve0SG0vTKWKALTSdNA5_8FWinBMmNa5dmKv-MiTVH0Y7JYugKbMbw2ffWs1upIJrSOuKOFMjILjTmDSPW2hCqTHWHx_81O8YO4hXd6IVv-VHap2wKDOgpGmDi1_UEmwfBaUBSOdq_yhNXGqyTUgOyr-KzZ96BlgqkTX9XdMGieTt962Q/w640-h156/Pic%201.png" width="640" /></a></div><br /><div><p class="MsoNormal" style="text-align: justify;">The electronics distribution business
is operating in the midst of global inventory imbalances and a semiconductor
CAPEX cycle. Knowledgeable but uninformed investors would wisely apply a low
multiple to cyclically inflated sales for companies so exposed. However, the
underlying thesis on RELL is only partially driven by current cyclical industry
conditions. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">This thesis is primarily driven
by specific products the company offers. Broadly speaking, these products are
supported by “a new age of electrification”. I realize it’s a weird thing to
say 90 years after the death of Thomas Edison, but there is a shift happening
on the margins resulting in changes in energy storage away from non-hydrocarbon
sources and changes in generation from non-combustion sources. Wind and solar
generation, hydrogen, lithium or various kinetic systems for storage, nuclear, etc.
<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">How much of the total energy pie
these alternative eventually provide isn’t known or even relevant; it is such a
big pie that small changes are meaningful, especially to the component supply
dynamics in the electronics industry, leading to changing demands for power
management and power storage across the production chain. This is RELL’s
wheelhouse. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Specifically, there are three product
tailwinds of note: <o:p></o:p></p>
<p class="MsoListParagraphCxSpFirst" style="margin-left: 0.25in; mso-add-space: auto; mso-list: l0 level1 lfo1; text-align: justify; text-indent: -0.25in;"><!--[if !supportLists]--><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">1.<span style="font: 7pt "Times New Roman";"> </span></span></span>Ultracapacitors replacing
lead acid batteries for remote backup power, et al. A <a href="https://www.nrcan.gc.ca/our-natural-resources/minerals-mining/minerals-metals-facts/lead-facts/20518">lead industry website </a>indicates that 86% of global lead production is
for lead-acid batteries used in transportation, and also for zero emission and
hybrid vehicles, back-up power (for example for computers and telephone
systems), and energy storage in remote power applications. Global production of lead is about 12M tonnes and it is said that 90% of lead is recycled but this math doesn't seem to foot. <o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="margin-left: 0.25in; mso-add-space: auto; text-align: justify;">How big is the lead market? I’ve seen (free) internet
data that global lead sales is ~$20B and that <a href="https://www.mordorintelligence.com/industry-reports/lead-acid-battery-market#:~:text=The%20lead%2Dacid%20battery%20market%20is%20fragmented.,International%20Technology%20Limited%2C%20among%20others.">global
lead acid battery sales are ~$40B</a>. How much of that is uninterruptible power supply? I am trying to find out, but don't think 10% is a conservative guess. A UPS system typically includes a lead acid battery as a starter. Given how we’ve "rethunk" lead
in paint and gasoline it’s not a stretch that engineers would rethink its use
in batteries, especially in an ESG dominated world. Ultracapacitors, which hold a charge longer than
regular capacitors, offers an improved solution for UPS systems. </p><p class="MsoListParagraphCxSpMiddle" style="margin-left: 0.25in; mso-add-space: auto; text-align: justify;">These improvements are
especially functional in wind turbines, which take a lot of effort to maintain. Each blade of a wind turbine has its
own pitch control system so the blade no longer catches wind. Each pitch control
modulator has its own backup power system. Vestas wind turbines control blade
pitch hydraulically (in a fault, gravity does the work) but hydraulics are
messy and prone to failure. Other manufacturers – including most GE wind
turbines - use electronic systems with a lead acid battery as the backup power
source.</p><p class="MsoListParagraphCxSpMiddle" style="margin-left: 0.25in; mso-add-space: auto; text-align: justify;"><o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="margin-left: 0.25in; mso-add-space: auto; text-align: justify;">The problem is that lead acid batteries require replacement
every 3-5 years and degrade in extreme temperatures. There are opportunities to
do better. <a href="https://www.energy-storage.news/how-ultra-capacitors-are-helping-wind-power-generation-realise-its-full-potential/">Wind
turbine owners are electing to swap out lead acid batteries for ultracapacitors</a>,
which last more than 10 years and operate consistently in wider temperature
bands. An ultracapacitor need only store enough power to pitch a blade, which
takes less than 30-seconds. <a href="https://www.blogger.com/blog/post/edit/3541352681651202123/4976051609501047157">Here's a short video from 2018 with a former regional sales manager at Maxwell</a> (he's now at Licap). </p><p class="MsoListParagraphCxSpLast" style="margin-left: 0.25in; mso-add-space: auto; text-align: justify;"><o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.25in; text-align: justify;">In May I attended
the American Clean Power conference and talked to competitors, customers, OEM’s
and installers all of whom affirmed this evolution. In the
US based <i>aftermarket</i> <i>wind turbine business</i> alone, this is estimated to be a $300M
opportunity (30,000 installed GE wind turbines x $10,000 / turbine). <o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.25in; text-align: justify;">The opportunity
to sell U/C’s into the wind farm world fell into RELL’s lap when Tesla acquired
Maxwell for its dry capacitor business and shut down everything else. RELL (and
many others) formerly sourced U/C’s from Maxwell. Forced to go elsewhere, it
now has an exclusive supply agreement with Korean-based LS-Mtron for
distributing U/C’s into the US “green energy” space. RELL is supposedly buying
every U/C LS Mtron makes and at a significantly lower price than from its prior
supplier. <o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.25in; text-align: justify;">RELL US
assembles the U/Cs into a form factor identical to the lead acid battery system
and has a patent on this design. Former Maxwell folks have split into two
separate companies (<a href="https://www.licaptech.com/">LICAP</a> and <a href="https://maxwell.com/products/ultracapacitors/">UCAP</a>, which <a href="https://www.batterypoweronline.com/news/ucap-power-acquires-maxwell-technologies-korea-raises-special-purpose-venture-fund/">acquired
the old Maxwell business</a>). They, along with Skeleton in Europe, are
pursuing this market, all from behind RELL. <o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.25in; text-align: justify;">I think this
market alone is enough to support continued growth and earnings from a low
base. But taking a step back from wind turbines, when one considers how often a
lead acid battery is integrated into a backup power system (at telecom base
stations, to start a generator, etc) and that ultracapacitors last longer and
need less maintenance than a lead acid battery, and that lead acid batteries
are considered “dirty” in an ESG world, it isn’t a hard stretch to believe the
ultracapacitor opportunity could be quite a bit larger than simply backup pitch
control systems for GE wind turbines. <o:p></o:p></p>
<p class="MsoListParagraphCxSpFirst" style="margin-left: 0.25in; mso-add-space: auto; mso-list: l0 level1 lfo1; text-align: justify; text-indent: -0.25in;"><!--[if !supportLists]--><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">2.<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]--><span dir="LTR"></span><a href="https://ajot.com/insights/full/ai-railroads-converting-to-batteries-could-save-94-billion-in-two-decades">Diesel
electric engines replaced with lithium phosphorous engines</a>. RELL has a
supply distribution agreement with Chinese based Amolgreen to supply lithium
phosphate batteries to Progress Rail – a division of Caterpillar – for
integrating into rail cars. The sales value per car is in the six figures. RELL
is one of the few US manufacturers with the capability to assemble these cells
in the US, meeting “Made in America” purchasing requirements. The company
believes that in-roads with CAT could bear fruit on additional machinery and
implements. </p>
<p class="MsoListParagraphCxSpLast" style="margin-bottom: 8.0pt; margin-left: .25in; margin-right: 0in; margin-top: 12.0pt; margin: 12pt 0in 8pt 0.25in; mso-add-space: auto; mso-list: l0 level1 lfo1; text-align: justify; text-indent: -0.25in;"><!--[if !supportLists]--><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">3.<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]--><span dir="LTR"></span>RELL builds specially
designed magnetrons that used to <a href="https://www.sciencealert.com/how-artificial-diamonds-are-made-microwave-methane-gas-lab-ethical">create
synthetic diamonds from methane</a> and for <a href="https://www.recyclingproductnews.com/article/12639/microwaves-used-to-achieve-near-100-percent-tire-reduction">tire
recycling</a>. The specialty magnetron is an engineered solution where RELL has
called out significant growth as per the 3Q22 earnings call (4/7/22): “For
instance, on the magnetrons, in the normal year on the YJ1600, we build 800 a
year. And we went from building 800 last year, we have orders for over 5,000
right now.”<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">In addition to these secular
tailwinds, and as previously mentioned, there is concurrently a semiconductor
CAPEX cycle, which is driven by both supply / demand dynamics (ie resolving
“chipageddon”) <i>and</i> the effort to produce chips and components
domestically. Chip making is a highly cyclical and high capital intensity
business and development CAPEX will ebb and flow. <i>The key is that I think
most investors believe whatever is happening at the company today is mostly
tied to the semi CAPEX cycle and missing the greater product related “secular”
event</i>. <o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><b>History</b>. RELL was founded
by the father of current CEO Ed Richardson, who has worked there (according to
his self-reported business biography) since 1961. Mr. Richardson owns 2.1M Class
B shares, which convert 1:1 to common shares but has 10x voting rights. This situation
gives him ~60% of the vote, a corporate governance red flag and therefore should
be noted right off the bat. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Started in the 1940’s as an
electronics overstock seller and distributor, the company moved into
manufacturing through the 1981 purchase of National Electronics in La Fox IL –
still the national headquarters - and it went public in 1983. Skip ahead to 2010:
Over-levered, losing money and suffering from the transition from analog to
digital TV, the company <a href="https://www.rell.com/press-news/richardson-electronics-agrees-to-sell-its-rf-wireless-and-power-division-to-arrow-electronics-inc-for-210-million/#:~:text=Million%20%2D%20Richardson%20Electronics-,Richardson%20Electronics%20Agrees%20to%20Sell%20it's%20RF%2C%20Wireless%20and%20Power,for%20%24210%20Million&text=to%20sell%20its%20RF%2C%20Wireless,for%20%24210%20million%20in%20cash.">sold
its core RFPD electronics distribution business – it’s largest segment - to
Arrow Electronics for $210M</a>, leaving behind a smaller company with two
business lines: The “Electron Device Group”, focused on capacitors, vacuum
tubes, and high voltage power supplies and an integrated display business (ie
“Canvys”) focused on the healthcare space. (Expecting parents possibly saw the
first glimpse of their issue on a Canvys display integrated into an ultrasound
machine.) <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">In 2014, three years after the
sale of Richardson RFPD to Arrow, the company rehired that segment’s leader, Greg
Peloquin, who had been part of the sale, and put him back in charge of the EDG
division, an effort akin to “getting the band back together.” <i><u>The primary
driver of this investment thesis is substantial growth and opportunity in this
segment, now renamed “Power and Microwave Technologies” (PMT), and notably in
ultracapacitors and magnitrons.</u></i> <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">A homegrown third business line
called “Healthcare” launched in 2016, manufacturing replacement tubes (“Alta
750”) for CT-scanners and MRI machines. This business has struggled due to
OEM’s willingness to match replacement prices in order to protect long term
service customers. <i>This segment has been a drag on earnings and possibly as
an acknowledgement of its poor market position, incentive compensation for the
Canvys and PMT business leaders excludes performance at the Healthcare segment
(ie 50% segment results, 50% corporate OpInc excluding Healthcare).</i> <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Status quo in Healthcare is not
sustainable. Either of the two alternatives - success in pending product
launches for Siemens machines or outright closure of the segment – would both be
beneficial to earnings. <u>I don’t anticipate any success here; any would be meaningful
upside to what is already attractive.</u> <o:p></o:p></p><div class="separator" style="clear: both;"><b>Financials</b>. The company’s fiscal year ends in May and it already preannounced FY22 sales of $225M, up 27% y/y, accelerating from 13% sales growth in FY21. Margins have expanded since 2H21 from the lower single digits to higher single digits. Backlog at year end was $200M, up 87% y/y, but this should be taken with a grain of salt, since the company has only recently started quantifying backlog. (Management says it was previously immaterial).</div><br />Management has indicated that backlog is driven primarily by volume, not price and not supply chain backup. The concurrent growth in sales AND backlog speaks to this trend. If these opportunities for ultracapacitors and magnitrons are as real as they seem to be and they are delivering on them as they seem to be, this will be worth substantially more. <br /><br /><b>FCF</b>. It’s understandable for a company in the distribution space to use its working capital to fund growth by re-investing profits into inventory and receivables - that’s what distributors do – but RELL’s FCF conversion is lumpier than larger, well known and arguably better managed distributors. This probably speaks to the opportunity for better w/c management. Given the corporate governance structure, the CEO would need to find their own motivation to change. In the meantime, he’s buying as much inventory as he can b/c he thinks the market could be big<p class="MsoNormal" style="text-align: justify;"><span style="font-family: inherit;"><o:p></o:p></span></p><p class="MsoNormal" style="text-align: justify;">
</p><p class="MsoNormal" style="text-align: justify;"><o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"></p><p style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgsw67M_ZjOQ_Dz3-315nOLLD2-G1SWl9ZgqooGrPEIifRYniMc3AJ2i5gZv09Op5m4yxuPjyEZWTyuB0fxNqwxn_dVpEgwrnLi_njG0fe-EGRUt2R72dkJI08Czugzg8eIyxWaP2tuXuxcVf4u62SeCCfgkLX4B3b3Cp9FdImB2OXWH9H6AUKyTDbgxw/s3087/Pic%203.png" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: inherit;"><img border="0" data-original-height="1114" data-original-width="3087" height="144" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgsw67M_ZjOQ_Dz3-315nOLLD2-G1SWl9ZgqooGrPEIifRYniMc3AJ2i5gZv09Op5m4yxuPjyEZWTyuB0fxNqwxn_dVpEgwrnLi_njG0fe-EGRUt2R72dkJI08Czugzg8eIyxWaP2tuXuxcVf4u62SeCCfgkLX4B3b3Cp9FdImB2OXWH9H6AUKyTDbgxw/w400-h144/Pic%203.png" width="400" /></span></a><span style="font-family: inherit;"><br /></span><span style="font-family: inherit;"><span style="font-size: 11pt; line-height: 107%;"><b><span style="font-size: 11pt; line-height: 107%;"><br /></span></b></span></span></p><b>Valuation</b>. The company is likely to do $20M in EBITDA this year, so the stock is trading at less than 8x FY22 results. Growth is largely driven by discrete products in the company’s portfolio and primarily tied to a secular “age of electrification”. If these trends continue and the company can indeed deliver, there’s an argument for this re-rate higher against higher forecasts. Given the importance of a few products on this thesis, and given the company’s long history of under-performance, I expect this asset will require a more than the usual monitoring.<br /><br /><p class="MsoNormal" style="text-align: justify;"><b>Risks.</b> There’s a tendency
for investors to try to encapsulate risks as if they aren’t infinite. On the
flip side, it’s not hard to worry unendingly about everything. Here are a few rational
concerns at the top of my risk list: <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">As a family business, it is possibly
not run to optimize for efficient manufacturing. A database search for “six
sigma” or “lean manufacturing” within RELL documents showed zero hits. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Ultracapacitors don’t work /
manufacturing is shoddy. This is kind of a new market and variuances out to be
expected. Maybe turbines are the test bed, particularly b/c the maintenance is
so onerous. But what if they don’t hold up? Also, RELL says its sole sourcing
from a S Korean manufacturer that is new to the market and therefore reliant on
a single supplier for a large market. <o:p></o:p></p><div class="separator" style="clear: both;">Limited history of value realization. For the many years the company has been around, results have been mixed. Over the last 20 years, you’d have seen growth in Tangible BVPS (see graph) only for the first 10, culminating in the RFPD sale. And the company has come across my radar over the over the years generally viewed as a “value trap” ie cheap without a catalyst. I think the poor corporate governance, the long history of under-performance, and the belief that growth here is all driven by a cyclical semiconductor CAPEX cycle phenomenon leads to the mispricing. However, underlying secular trends notably effecting the PMT group offer potential for a sustainable shift in earnings power that is not yet reflected in the price.</div><div class="separator" style="clear: both;"> <br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh814T7apHRhrWIga4DgHChcODztrdMgOHapqE5LsX2Tioy0AUkU3lGoyuHiNb-QVHJwbQu9cp5LCdvoSxoJ6hjeoNd4Xq-PI5T_y9Dwi5g4fKsM3JItRKVXNbky9pEYxH9Xz4M88sF2kOP1bo0GQb29U_09hLVjrA7sHeika04IGGyS9Ubfs641KLtyA/s880/Pic%202.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="472" data-original-width="880" height="215" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh814T7apHRhrWIga4DgHChcODztrdMgOHapqE5LsX2Tioy0AUkU3lGoyuHiNb-QVHJwbQu9cp5LCdvoSxoJ6hjeoNd4Xq-PI5T_y9Dwi5g4fKsM3JItRKVXNbky9pEYxH9Xz4M88sF2kOP1bo0GQb29U_09hLVjrA7sHeika04IGGyS9Ubfs641KLtyA/w400-h215/Pic%202.png" width="400" /></a></div><div><span style="text-align: justify;"><br /></span></div><div><span style="text-align: justify;">Corporate governance risk. For
better or worse, the CEO does not make decisions 100% optimized for capital
allocation and shareholder returns. The reality is, most CEO’s - and most
people too - operate for the sake of ego gratification first and foremost and
it’s the rare leader that puts the customer or shareholder first. My impression is that the RELL CEO
cares deeply about customer and employee satisfaction but that has not translated into durable shareholder returns.</span></div><p class="MsoNormal" style="text-align: justify;"><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Changing tides on ESG. I don’t
see anyone “standing up for lead” the way they do with coal or gas, especially
given we’ve removed it from other products over the years due to its extreme
toxicity, but anything is possible. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">These risks can be
ameliorated through portfolio management ie keeping the position size reasonable until pending deeper due diligence over time. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p>-- END – </p><p class="MsoNormal" style="text-align: justify;"><o:p></o:p></p>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. THIS IS NOT FINANCIAL ADVICE. 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.<br /><br /></div>Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com1tag:blogger.com,1999:blog-3541352681651202123.post-85668179192781097592022-06-08T07:27:00.001-07:002022-06-08T07:27:45.408-07:00capital losses is tuition in the school of portfolio management <p>So CTEK is selling itself for $1.25 / share. The company is in a “go shop” period until the end of June and still publishing contract announcements, so maybe there’s a higher price on the horizon but it's unlikely to exceed our cost basis. It will result in a permanent loss of capital. </p><p>Owning this company (for this long) has been a terrible mistake. I say "has been" and not "was" b/c large portfolio losses have long tails, often why managers restart under new names after events like this. Not me. The only clients I've heard from are adding money, which is not a bad idea at the moment. War. Inflation. These are terrible times to invest, so valuations are attractive. </p><p>Energy is an interesting environment. What seems different this time is that producers have financial flexibility to increase capacity based on <i>higher</i>, not lower prices, the scourge of past cycles. It is not an area we invest in, a view whose justification has been upheld by an argument lost many years ago to someone who isn't even a client, so possibly up for revisiting (as my son says: "money is money"). I'm in no rush to change but there was easy money in oil when it turned negative during COVID. </p><p>Back to CTEK, I’ve written a letter to the Board reviewing mistakes - theirs and mine - and a public version of it is <a href="http://www.longcastadvisers.com/s/Dear-Board-060222-PUBLIC.pdf">linked to here</a>. (The private version was quite a bit harsher I'm afraid to say). </p><p>A characteristic of SMA's run as if it's pooled capital is that purchases are allocated towards available cash, regardless of account. I make an effort to rebalance but - and i'm stating the obvious here - it is hard to know the "best and highest use of capital", ie choosing between A and B, at any time. That is of course portfolio management in a nutshell. It isn't easy. I generally think about upgrading the "worst" position in the portfolio: Which one has the highest risk of costing me money? Get rid of it. </p><p>I've improved my portfolio management skills over the years, the tuition partially paid for by those CTEK losses. Given two paths for solving the complexity - either owning a little of everything or as few things as possible - I choose the "fewer" route and continue to endeavor to consolidate around best ideas, not b/c i understand them best but b/c I think their opportunity relative to their risk is highest. For accounts with constraints on cash, the CTEK sale frees up capital at less unattractive prices, to reallocate to higher return ideas. </p><p>One new idea I am buying is in the electronics space; design, assembly and distribution. Component manufacturing is not historically a great business and it is possible that what I find attractive here is simply a semiconductor CAPEX cycle masquerading as a secular trend. But the hypothesis I am testing is whether the electronics space is experiencing "a new period of electrification" 91 years after Thomas Edison died. </p><div>I observe shifts happening in the way electricity is generated and stored. It might only be on the margin and the overall slice of the energy pie will likely remain overwhelmingly hydrocarbon and combustion based for the forseeable future. But energy is a big pie and small changes can be meaningful, especially when it bumps up against an industry that is historically static and commodity driven. I think we are still in early iterations of companies figuring out what works best. Wind turbines are improving. Solar farms are improving. The T&D grid has to improve. OEM's are building products that implement new ways of managing and storing energy. </div><div><br /></div><div>I think it's possible something big is happening with profound changes in valuation on the horizon for companies so disposed. I think the company we are presently allocating towards is benefitting from one such shift. Getting a read on an industry has to include looking at its biggest players so while I most enjoy burying my head in smaller more obscure companies, ARW's and AVT's are in the hopper. Will write more about this later. </div><div><br /></div><div>-- END -- </div><div><br /></div><div>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. THIS IS NOT FINANCIAL ADVICE. 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.</div>Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com0tag:blogger.com,1999:blog-3541352681651202123.post-55980005375649369002022-03-22T07:57:00.002-07:002022-03-22T07:57:45.741-07:00An Observation on High ROE Companies and their Market Caps<div>Been awhile since I've written here. I've cooled on the blog to focus on my investment business, <a href="http://www.longcastadvisers.com/">Long Cast Advisers</a>, which continues to grow, slowly and thoughtfully. But the not-writing has left me with a hole of sorts. I like researching companies and sharing what I know with others who might be interested. Having been stuck at home with the fam basically the last two years, I can say confidently that folks around here are <i>not </i>interested. So I gotta put it "out there" instead. </div><div><br /></div><div>Figured I'd start with a quick review of hits and misses over the years, what's aged well and what hasn't, etc. I went back and <i>briefly</i> scrolled through old posts. </div><div><br /></div><div>What's working >> OTCM, CCRD (nee INS), QRHC and CCRN </div><div>What's worked >> (all takeouts) IVTY, ARIS, SEV and CDI</div><div>What didn't >> FHCO, PSSR, ESWW and STLY </div><div>What stings the most >> post on not buying OLED. (I generally regret most the things I don't do). </div><div><div><br /></div></div><div>FTLF gets a special call it. I sold it long ago but kudos to Dayton Judd, who recapitalized it and transitioned into a capital light and pure play brand now generating growth in profits and book value ahead of where it was before he took over. He understood the value of the brand and put the right investments behind it to make this all happen. </div><div><br /></div><div>Thinking about "the value of the brand and the right investments", I have stumbled on a chance to share a recent observation, which is a wide disparity in valuation multiples for small companies versus large companies that both have high ROE's. </div><div><br /></div><div>But let me take a brief step back ... With regards to finance, every few years there's some new / old idea and even occasionally new / new idea that takes the world by storm (CDO's and MBS, REITS and MLPS, SPACs, etc.) and promise juicy returns for investors. Often they do for some period of time, and certainly enrich the facilitators of these idea, but these rarely endure. </div><div><br /></div><div>But there's something foundational about active value investing where the less "new" the better. This is why timeless classics of investing are still relevant even if you've already heard them 1,000 times. I think adhering to the principles of value investing is what makes it so simple and pure, though one get lost at times looking at shiny new things. </div><div><br /></div><div>That's how I found myself flipping through Chris Mayer's "100-Baggers". There are always going to be stocks that go up 100x to great fanfare ... and then crash when no one is looking. This book is largely about the durable businesses that continue to operate to plan. It's not a ground breaking book, more of a tasting menu of other great books, and that's not a critique, it's just that the attributes of durable businesses that comprise 100-baggers haven't changed that much, so drawing on the "the Outsiders" and Joel Greenblatt and Michael Mauboussin, etc. is totally appropriate. </div><div><br /></div><div>For me it served as a simple reminder of the foundational principles of investing and one of those principles is looking for companies that have high ROEs. </div><div><br /></div><div>It's been awhile since I've done a simple "high ROE screen" but I got it in mind and fired up Sentieo's screening to look up companies with ROE between 25% and 45% and found something kind of crazy. Based on the data kicked out by Sentieo (which is sometimes quite wonky) on average, small companies with high ROE's trade at less than half the valuation multiples of large companies with high ROE's (and I included the median to account for outliers). </div><div><div><br /></div></div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEjvFqxIv9HCbQFLUL1hYRQjMG4Gj-qP72IRAbg1wwuzlIF7GUN_VQu1vK5SnE_Qdkn-osbH3S7zBsbCyssEYzPsgoSzS3Td1Nt69ZOJVEjgY3CSJWHHhz_BzKTYYGIPLVDVwQq9TFngbWfU-HcHbjZUT74xFg3G6jWHz6A82fIgHCOxahWkLfkP1oM5aw" style="margin-left: 1em; margin-right: 1em;"><img data-original-height="165" data-original-width="520" height="203" src="https://blogger.googleusercontent.com/img/a/AVvXsEjvFqxIv9HCbQFLUL1hYRQjMG4Gj-qP72IRAbg1wwuzlIF7GUN_VQu1vK5SnE_Qdkn-osbH3S7zBsbCyssEYzPsgoSzS3Td1Nt69ZOJVEjgY3CSJWHHhz_BzKTYYGIPLVDVwQq9TFngbWfU-HcHbjZUT74xFg3G6jWHz6A82fIgHCOxahWkLfkP1oM5aw=w640-h203" width="640" /></a></div><div><br /></div>This is just an observation. I don't think there's really enough data to draw firm conclusions as to why this might be the case and I don't want to fall into an anova excel-hole at the moment, though I'd be keen to explore how revenue growth might be a factor here. (Happy to share the data with anyone or collaborate on some deeper analysis). </div><div><br /></div><div>But my hypothesis is that larger companies whose brands are by nature better known enjoy the premium b/c investors believe the "moat" is wider and deeper, so easier to protect the R of ROE. One thing to note from this observation; investing in small companies with high ROE's might (might!) be a value trap unless there's a pathway to larger growth. </div><div><br /></div><div><div>Another thought is that from a high level, all business is "... a brand with the right investments behind it." That brand can be perceived or actual "better product quality, service, results, etc." Smaller companies are still developing those brands so there's more uncertainty to the brand value vs larger companies where the brand value is already established. </div><div><br /></div><div>And one final thought is the value available when a small company with an established brand that has endured years of poor investments gets taken over by someone who can put the right investments behind it. Like FTLF, or maybe that yellow pages company THRYV (which I don't know enough about). It was certainly part of the thesis behind the investment in <a href="http://thepatientinvestors.blogspot.com/2020/12/a-brief-look-at-nurse-staffing.html">CCRN</a> and a few others over the years. </div><div><br /></div><div>- END - </div></div><div><br /></div><div>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.</div>Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com1tag:blogger.com,1999:blog-3541352681651202123.post-8053521005481578322021-05-20T09:02:00.002-07:002021-05-20T20:48:25.235-07:00on bugs and seeds (SANW)We inhabit a world of bugs that has existed / will exist far longer than us and will feast on us when we are long gone. As a homeowner, I have my regular battles with the insect world. The termites get professional treatment; Chlorfenapyr indelicately pumped into the ground beneath my foundation every few years. But they always come back, b/c they smell wood and can't help it. <div><br /></div>On the ants, I use the NY State legal version of Fipronil, a nasty neurotoxin that workers bring back to their colony, feed to the larvae, and then the entire colony dies. It's brutal but they will have the last laugh. <div><br /></div><div>I bought the Fipronil direct from DIYpestcontrol, one of those sites that of course exists and of course has horrifying comments like "It's great!! I sprayed it all over my yard and now nothing moves!!" when the instructions call for sparing use in a few specific locations. I think insects live a more deterministic life than we do but those comments beg the question: "Who in fact is the insect here, mindlessly consuming and destroying b/c they don't know any other way?" </div><div><br /></div><div>Both ants and termites trace back to the Crestaceous period, more than 100M years ago. They are born in dirt, feast on wood and other decaying cellulose (in the case of termites) or pretty much anything (in the case of ants), live as part of a colony and then they die. My house was built in their environment and I will fend them off, at least as long as I'm a homeowner. Thereafter, it'll be someone else's responsibility. </div><div><br /></div><div>***</div><div><br /></div><div>I didn't set out here to write about insects so much as technical bugs, specifically one related to this blog. Feedburner is turning off email subscriptions, so if you subscribe, thank you, first and foremost, but be prepared that at some coming date, I think in July, new posts will no longer generate emails. </div><div><br /></div><div>I'm sure there is a workaround but I haven't bothered to figure it out yet. I'm now five years into running an investment management firm and my clients get most of my attention. If you're an accredited investor, I'd love to connect since I'm at a point in my business where I feel comfortable expanding my customer base, but anyone can sign up for quarterly letters through my website: www.longcastadvisers.com. </div><div><br /></div><div>In my last letter, I wrote about two companies and in this here penultimate blog post before the subscriptions get turned off, is what I wrote about S & W Seed. </div><div><br /></div><div>***</div><div><br /></div><div>You likely notice we’ve been purchasing S & W Seed (<b>SANW</b>), a producer and manufacturer of agricultural seeds. At current price of $3.90 and with 34M diluted shares and $50M in debt, SANW has an enterprise value of ~$180M. Against trailing 12-month sales, this infers a 2x EV / sales multiple which is in the mid point of the 1x-3x range typically seen in the industry space. </div><div><br /></div><div>My interest in the company was piqued b/c I was looking for something that would work as a potential commodity hedge against inflation, and agriculture tends to do that. Digging in, I saw two broad attributes that make this company compelling. </div><div><br /></div><div>First, agriculture unfolds over a time frame that is utterly foreign to Wall Street – 6 to 8 year development cycles, limited by growing seasons – and that makes the company largely uninvestable to anybody but the most patient investor. It’s perfect for us! Second, the company is coming towards the end of a product development cycle with three new products to be released in the next 24 months. These will be the first new product launches since the company altered its strategy about six years ago. </div><div><br /></div><div>By way of backstory, back in 2015, SANW was pretty close to a pure play on alfalfa seeds and Saudi Arabia was its second largest market. Then, in the midst of a drought, the Saudi monarchy decided to no longer grow domestic alfalfa. </div><div><br /></div><div>The company had a large shareholder, noted small cap value investor Michael Price, who owned a ~10% stake in the company and he brought on the Board Mark Wong, an agriculture industry veteran who had previously built, grown and sold companies in the industry and in his retirement, ran his own ag business “for fun”. The company was already in the process of a slow pivot to diversifying its products and end markets when Price asked Wong to take over, which he did, in June 2017, with the understanding that the pivot would take several years and require a significant capital commitment from Price. </div><div><br /></div><div>We are now four years in. Price, through various stock offerings and capital raises, now owns ~50% of the company. The share count has nearly doubled to 34M diluted shares but revenues are roughly where they were in FY2017 and to the outside observer of financial statements it would seem like nothing has changed but the destruction of capital. </div><div><br /></div><div>What has in fact changed is a significant investment to diversify to “secondary crops” such as grain and forage sorghum, sunflower, pasture seed, stevia and alfalfa with key markets in the US and Australia. The diversification was enabled through various acquisitions including of two distressed businesses, Chromatin out of US bankruptcy, which delivered a sorghum portfolio, and Pasture Genetics, Australia’s third largest pasture seed company, while Australia was in the midst of a drought. Both were acquired at roughly 1x trailing sales. </div><div><br /></div><div>One further consequential change to the company was that it previously operated under a distribution agreement to sell its alfalfa seeds through the Pioneer brand, which is owned by Corteva. In 2019, Corteva wanted to bring this brand back in house and agreed to pay SANW $70M to exit the distribution agreement, essentially pulling forward the remaining term to one year. The implied valuation on the sale of this product was 3x revenues. Buying at 1x and selling at 3x might be a theme of the way CEO Wong runs his business. </div><div><br /></div><div>To date, there is little on the income statement to show for all this diversification. However, backing out Pioneer, the remaining “core” business grew revs 54% in FY20 (year end June 2020) and 27% YTD this year without even hitting the peak season (winter and spring in the northern hemisphere). The key is that most of the major investment is done. If the products find a market, there is significant room for rewards. </div><div><br /></div><div>The three products expected to commercialize in the next two years are all non-GMO by US standards (which to be fair has pretty weak GMO standards) and include a low lignin alfalfa that is easily digestible to dairy cows (and therefore potentially able to lower methane waste), an <a href="https://www.agriculture.com/news/crops/sw-seed-releases-herbicide-tolerant-sorghum-system">herbicide resistant sorghum</a> and most compelling a <a href="https://ag.purdue.edu/stories/purdue-developed-sorghum-safer-for-grazing-animals-and-takes-stress-off-producers/">dhurrin free sorghum using technology licensed from Purdue University</a>. When one considers land use, water use and potential carbon offsets related specifically to forage crops, there is a lot of potential for this company to be where the puck is going, realizing that in this industry, the puck and the company move very slow. </div><div><br /></div><div>If any of these product launches work, this business becomes something completely different than what it appears to be today and what it has been in the past. Ultimately, the goal is to create a company that can dominate secondary crops the way the big four (BASF, Corteva, Monsanto and Syngenta) dominate the primary crops (corn, soy and cotton). Since it takes so long to develop a product, any success would be protected by a wide moat and would appeal to these larger companies for an acquisition. I’ll add below a comment made by the company in its most recent shareholder letter: </div><div><br /></div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCMeIuVzuDUWgVVW6UTidqkMunjb-kxH6tOuAtc9cpbwNGY-pd91DCtvQ7V1VP4cc55HYZ-D81lrO6wn3N3NAnlekrTUqW0uWfcswisJBayUA7qaFJZCQJwW26e20LUY3fZf41_pfLTsoG/s460/image+2.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="175" data-original-width="460" height="153" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCMeIuVzuDUWgVVW6UTidqkMunjb-kxH6tOuAtc9cpbwNGY-pd91DCtvQ7V1VP4cc55HYZ-D81lrO6wn3N3NAnlekrTUqW0uWfcswisJBayUA7qaFJZCQJwW26e20LUY3fZf41_pfLTsoG/w400-h153/image+2.png" width="400" /></a></div><br />Stocks in this space tend to trade at 1x-3x sales and we’re currently buying it at the midpoint of this range on a trailing basis and without the benefit of new product launches. If they’re successful – and this management team has a history of success – I think this easily fits into our threshold of three to five year doubles. In short, I see this as a small cheap bet on the potential for something becoming much bigger that would unfold over time. </div><div><br /></div><div>-- END -- </div><div><br /></div><div>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.</div>Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com0tag:blogger.com,1999:blog-3541352681651202123.post-58286449894127767012020-12-07T14:32:00.006-08:002020-12-09T17:21:36.805-08:00A Brief Look at Nurse Staffing <p>For the tl/dr crowd >> Writing about Cross Country Healthcare, a nurse staffing company. At the recent price of $9 it has a market value of $325M. With $53M in net debt, an EV of $380M. Trailing revenues are $836M compared to $816M in FY18 and $822M in FY19. This isn't a growth story it's a mature business that's been under-managed for decades whose founder has returned after a +20 year hiatus, a time period that included several significant entrepreneurial successes for him, including in other biz services. His last mgmt role was a PE roll up sale to CCRN's largest competitor AMN. Already seen SG&A decline from $180M / year down to annualized $160M / year. COVID has helped speed this up + brand reductions (from more than 20 to 1) + new investments in technology. Mgmt target doubling EBITDA margins from 3% to 8%. Not an aggressive reach. Largest comp AMN is a 10-year 10x via levered acqs. Under new and experienced mgmt, this can too. </p><p>***</p><p>There are many ways to think about a company and structure an investment narrative, for better or worse, and rightly or wrongly. Like plastic bags, narratives are easy to construct and hard to get rid of, and they drift around our minds long after they've outlived their purpose. An investment narrative that wraps too tightly and explains too much doesn't leave room for the reality of life and its inevitable surprises. One held too dearly exerts a gravity on perceptions and pulls objective data into an orbit of conspiracy. Investors need be cautious with their investment narratives as one is cautious with a box cutter; inadvertently left open it can cause harm. </p><p>I'm particularly cautious of narratives around heroic CEO's who turn companies around b/c the deux ex machina is a prop of theater not an investment thesis. But despite all this, here I am thinking about Cross Country Healthcare (CCRN), which strikes me as an opportunity given its new entrepreneurial CEO, who also happens to be the company's co-founder. </p><p>In the mid-80's, Kevin Clark co-founded this specialty nurse staffing company with Joe Boshart and then left after it was acquired by WR Grace and subsequently passed into PE hands. Boshart, the other co-founder, took it public in 2001. William Grubbs, a staffing industry lifer, took over as CEO 2013 to 2019 (<a href="https://investor.volt.com/board-of-directors">he's now Chairman at Volt</a>). And now this +30 year old company is on its 3rd CEO who happens to be the co-founder. </p><p>Clark's long interim history is worth noting. He was <a href="https://adage.com/node/1875526/printable/print">CEO of Poppe Tyson in 1997</a> and saw it through <a href="https://www.clickz.com/modem-media-poppe-tyson-to-merge/61082/">the merger with Modem Media in 1998</a>, establishing himself as an executive in the early digital marketing world. His <a href="https://www.linkedin.com/in/clarkkevin/">self reported business bio</a> shows a string of other entrepreneurial leadership roles (I think he fell in with the PE crowd and was a go-to CEO for a variety of firms). </p><p>Most recently he lead <a href="https://www.bowstringadvisors.com/transactions/bowstring-advises-locum-leaders-on-its-acquisition-by-ogh-llc/">the roll up of Onward Health</a>, a Welsh Carson backed firm that included nurse staffing, physician staffing and a SaaS vendor mgmt system, <a href="https://www.prnewswire.com/news-releases/amn-healthcare-completes-the-acquisition-of-onward-healthcare-locum-leaders-medefis-300018597.html">and was sold in 2015 to CCRN's largest competitor, AMN Healthcare, the only other publicly traded company in the medical staffing industry</a>. </p><p>What's most appealing is that the staffing industry - a low fixed cost "your assets leave everyday" kind business - especially favors entrepreneurial management and this is particularly important given Clark's history of success in the industry and related fields relevant to the industry. He brings that experience to a business that operates at scale - it is the 5th largest nurse and physician staffing firm in the US - but has never been managed aggressively. </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4zdb8HQFOorWqPKl5Vzrg3PnVyKSBctyPxYAZije9pyPe0uHh9A2LzCneeUlUL1oRGIPkFeOHP4Hj4BamEgubV7ES6NXio31mXi-8xUIlHKw6fglLCUPchBDHR2yTKmCpJ3TtvnhTsl21/s1440/Picture1.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="465" data-original-width="1440" height="206" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4zdb8HQFOorWqPKl5Vzrg3PnVyKSBctyPxYAZije9pyPe0uHh9A2LzCneeUlUL1oRGIPkFeOHP4Hj4BamEgubV7ES6NXio31mXi-8xUIlHKw6fglLCUPchBDHR2yTKmCpJ3TtvnhTsl21/w640-h206/Picture1.png" width="640" /></a></div><br /><p>I covered both AMN and CCRN as an associate 2004-2006 and back then CCRN was always the smaller and not-quite-as-put-together as AMN. Until late last year, I hadn't looked at either in ages, but with COVID, I could see a need for helping hospitals staff emergency medicine, so I took a look. I saw that AMN has been a 10-bagger over the last 10-years and CCRN has done nothing except continue to exist at scale. And it had a recently appointed new / old CEO returning after a +20 year hiatus. </p><div class="separator" style="clear: both; text-align: center;"><p style="text-align: left;">Given the new CEO, there is little relevance to the company's long term history except that it's pretty consistently been a low margin business with little organic growth. The company is also poorly diversified with 90% of revs and 95% of OpInc from nurse & allied staffing (even pre-COVID) and nominal contribution from physician staffing and search. </p><p style="text-align: left;">Recent history shows higher returns and improving TBV / share - a sign of value creation - but it's hard to pin that short term success on any one thing Clark has done, particularly given how skewed the market is from COVID. The point is, what he's done so far, very little shows up in the financial statements. </p></div><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUi-g6QAZuqazMuWBIFQ50ByTounGUOTKJd3tkXtOlqmTrsCk01gk6wH1_7zphHUXH-YkY7uwCoNSnDcsc5sfl_FiyEOhjm1038r0MfHkWrznGsBHE1s9-v3y4u6bwmDWo8lyCAZYwAoDz/s2048/CCRN1.png" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="1556" data-original-width="2048" height="486" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUi-g6QAZuqazMuWBIFQ50ByTounGUOTKJd3tkXtOlqmTrsCk01gk6wH1_7zphHUXH-YkY7uwCoNSnDcsc5sfl_FiyEOhjm1038r0MfHkWrznGsBHE1s9-v3y4u6bwmDWo8lyCAZYwAoDz/w640-h486/CCRN1.png" width="640" /></a></p><div class="separator" style="clear: both; text-align: center;"></div><p>When Clark joined the company in January 2019, it had over 20 brands and more than 60 branch locations, the results of unintegrated acquisitions and years of under-management. He's whittled the company down to one brand and ~15 branch locations (taking advantage of wfh to close branches and reduce the company's RE footprint). These are the kinds of things that a reasonable manager does. The resulting writedowns make recent financials somewhat "noisy" but have an expected impact of $20M in annual cost savings. Already on a quarterly basis SG&A has declined from ~$45M to ~$40M indicating some success with this endeavor. That shows up on the income statement but is masked by the headwinds of COVID. </p><p>Then there are investments in new technology - even through COVID - at a pace, one gets the picture, that hasn't been done before at the company. The benefits of a new technology stack by someone who has experience doing such things, and with experience in the industry and with experience in turnarounds, offers a variety of ingredients to success. Again, none of this shows up on the income statement. </p><p>COVID casts a pall over everything. Charts below show volume and price metrics for nurse staffing (left) and physician staffing (right). Staffing is a bill / pay spread business and the impact of the pandemic sees declines in nurse volume offset by increases in price and no seasonal uptick in the physician side, probably b/c nobody is going away on vacation.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjkUGLiF0NblTFUgTDsIRVztMYgi1Nby6vqu5ULmbRbnP-9zKUQGlJ27P29SFNvidg7SSm4608nxWuA09EHWI72BVu_4M_87aoUoiCkJ1C21DysQK9io0xle18_TJDWd-ftp1SEhcoVUasv/s1932/Screenshot+2020-12-07+213942.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="590" data-original-width="1932" height="196" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjkUGLiF0NblTFUgTDsIRVztMYgi1Nby6vqu5ULmbRbnP-9zKUQGlJ27P29SFNvidg7SSm4608nxWuA09EHWI72BVu_4M_87aoUoiCkJ1C21DysQK9io0xle18_TJDWd-ftp1SEhcoVUasv/w640-h196/Screenshot+2020-12-07+213942.png" width="640" /></a></div><p>With little to observe about CCRN under the new CEO, let's take a look at its largest competitor, AMN. Over the 10-years where the stock price increased 10-fold, it added specialties and technologies to sell to hospitals, including the 2015 acquisition of Clark's last company and most recently an acquisition in the telehealth space. </p><p>Looking at some summary data below, one's eyes no doubt, if they don't gloss over or go cross eyed, will eventually be drawn to growth in EBITDA margins and in returns punctuated by jumps in debt / equity and negative TBV / share. </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjqmv5R-1BCpwE-wbYvsGu5yIC8SWmGEeo2_VdGbGWxy2pN-VK7bk11C6SzgzVU-giFeluva9O-cX4PLhxO_yJS6bFN7_68v8FpoIZv69l92msx9-ldLMFp8CcRLkKz6PHdCSDhM-jyA09u/s2048/AMN1.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1556" data-original-width="2048" height="486" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjqmv5R-1BCpwE-wbYvsGu5yIC8SWmGEeo2_VdGbGWxy2pN-VK7bk11C6SzgzVU-giFeluva9O-cX4PLhxO_yJS6bFN7_68v8FpoIZv69l92msx9-ldLMFp8CcRLkKz6PHdCSDhM-jyA09u/w640-h486/AMN1.png" width="640" /></a></div><div class="separator" style="clear: both; text-align: center;"><br /></div><div class="separator" style="clear: both; text-align: center;"><p style="text-align: left;">One would correctly draw the conclusion that this company engages in debt funded acquisitions of higher margin services, not a bad way to operate for a low fixed cost, services based, cash flow generating business with cheap access to capital. As a result of these acquisitions, AMN is much more diversified, perhaps why AMN is a darling of the two companies. But before it started its acquisition and expansion efforts, it looked a lot more like CCRN. </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDuiNtZhlplontK6oN2qoA5gY0a-7n2ViJx_uXUt8uFg-rpLZO6ReE-UEAORESb3ezBVyDCjN_2ixvxhJIDzmzzJk7lJbmuU_lBL8jGBobv2ezsM9gmR79Xd1lbZU7Kp6vq2eXr4tJ8i82/s1164/Screenshot+2020-12-07+215018.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="642" data-original-width="1164" height="352" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDuiNtZhlplontK6oN2qoA5gY0a-7n2ViJx_uXUt8uFg-rpLZO6ReE-UEAORESb3ezBVyDCjN_2ixvxhJIDzmzzJk7lJbmuU_lBL8jGBobv2ezsM9gmR79Xd1lbZU7Kp6vq2eXr4tJ8i82/w640-h352/Screenshot+2020-12-07+215018.png" width="640" /></a></div><br /><p style="text-align: left;"><br /></p><p style="text-align: left;">CCRN shows no such evolution, yet. But what if it could? What if with the right technology platform and targeted acquisitions, the types of things the CEO has done before, CCRN, which is relatively underlevered, could acquire higher margin ancillary businesses? Why wouldn't it, in the right hands, be able to copy the AMN playbook, even at least partially? </p><p style="text-align: left;">The downside is that this mature company remains consistently a no growth, low margin value trap. The upside however offers the opportunity for significant returns. With changes by the new CEO and more still to come, I think the patient investor could experience the benefits of these returns over time. </p><p style="text-align: left;">-- END -- </p><p style="text-align: left;">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.</p></div>Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com0tag:blogger.com,1999:blog-3541352681651202123.post-71594775642860233232020-07-11T12:47:00.001-07:002020-07-11T15:52:48.154-07:00on small adventuresHappy Post July 4th holiday, everyone. I prefer Constitution Day (9/17) over Independence Day as the Constitution contains the road map for governing a democratic society, versus the Declaration of Independence, which is more of a war document. But who would say no to BBQ and fireworks?<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiU2XV3982MsRZvHOjMGyRPQzDbpbijXY_4oS0Hs5T48bHvnw2R99xbK5jRfFkGiR8wG5Kzy7wyFDinYA8l6iBh8UoZqFa0nH2ySCd8ErYAfvpGOTlWaMZsvMMw48zgn8Uhu3lm3tJag-UD/s1600/IMG_6880.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="640" data-original-width="480" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiU2XV3982MsRZvHOjMGyRPQzDbpbijXY_4oS0Hs5T48bHvnw2R99xbK5jRfFkGiR8wG5Kzy7wyFDinYA8l6iBh8UoZqFa0nH2ySCd8ErYAfvpGOTlWaMZsvMMw48zgn8Uhu3lm3tJag-UD/s320/IMG_6880.jpg" width="240" /></a></div>
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Worth noting here that within both these documents, the word "freedom" only shows up once, in the First Amendment: "Congress shall make no law ... abridging the freedom of speech, or of the press."<br />
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These two documents, built on compromise and sacrifice, shape and form our country's intangible assets of "life, liberty and pursuit of happiness" and the tangible assets of a democratically elected government with built in tensions on account of "balance" between three independent branches. They formed our country as a new experiment and provided a road map for other people's pursuit of self governance.<br />
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I've served on a few boards (coop, PTA, sports leagues) and just those small cases reveal how hard is self-governance but also how tension and conflict can lead to better decision making.<br />
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How each generation resolves those tensions is how we measure up or fall short from any guidepost of american exceptionalism. I see no better example of how far we are falling short than the hilarious / hideous video of wealthy white people screaming at and screaming past each other in a neighborhood aptly named "The Villages". It sums up what seems to be a zeitgeist of national schizophrenia.<br />
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I've learned a bit about that disease reading my friend Bob Kolker's book "Hidden Valley Road" (highly recommended). He writes early on: "Schizophrenia is not about multiple personalities. It is about walling oneself off from consciousness, first slowly and then all at once, <i>until you are no longer accessing anything that others accept as real</i>." It is a sad and debilitating disease.<br />
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I understand the Constitutional Convention of 1787 had quite a great deal of conflict itself, comprised of the same white and wealthy demographic as "The Villages" (sans women), but at least our forefathers had a loftier goal in mind. The goal now seems solely "politics as circus."<br />
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The modern day Village is a dark and dysfunctional place, lacking respect and full of contempt, egged on by those whose sole incentive is to fan their followers' emotions with little regard for long term resolution. All of this is a luxury we can ill afford at present and is certainly not a sustainable foundation for healthy governance.<br />
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***<br />
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Oh but those emails ...<br />
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I was never much favorable to Madame Secretary until a friend of ours and fan of hers asked in 2016 to have a conversation to re-assess my views. I will always welcome a conversation of self reflection, (especially about stocks), and I came away with a reformed view on how much gender bias shaped my perception.<br />
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Here was a woman from a fairly conservative family, raised in the 50's and early 60's, smart, precocious and ambitious at an early age, likely aware and reinforced that for a woman to get ahead, she simply can't show emotion. And so she didn't, not through all of the shit thrown at her, deservedly or not, over the last 30-years.<br />
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Rather, she was steely and tough. She hid from view or suppressed as best she could any vulnerability. I came to view her as a modern day Marlboro Man, the strong, silent mythological male (in modern times, that silence hides the dysfunction of someone who can't access their feelings). In her case, I think it created an incongruency in what we normally expect from a woman.<br />
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I don't know if she would have won if she were a man - her campaign had issues on its own - but I'm confident she would have been more accessible in conforming with people's expectations. Coincidentally, we ended up with male president who almost comically doesn't show vulnerability and has the dysfunction of someone unable to access their feelings. But hey, he puts on a good show, a recurring victory of style over substance.<br />
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***<br />
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I didn't intend to go off on this tangent so let me return to the matter at hand, the small adventure that is the market since March. I wrote early into this crisis in a letter to clients ...<br />
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<i>The sun will set tonight and rise tomorrow and eventually calm will prevail again in the markets. For this reason I have been putting cash to work adding to existing holdings or buying other well positioned companies that fit our investment profile. In three years time, I think there will still be consumers and entrepreneurs; franchises seeking to recycle and compost waste; hospitals in need of outsourced IT services; there will still be credit card transactions; and airports and weather; etc. </i><br />
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<i>The old saying “you know who’s swimming naked when the tide goes out” comes to mind, as this decline may reveal which businesses and what funds are over leveraged, over margined and unsustainable. But skinny dipping is fun and I don't want to pick on it.</i><br />
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<i>As we think about the beach, I'd rather remind bathers - beclothed and bare - <a href="https://www.youtube.com/watch?v=4peeulD5vSU&feature=youtu.be&t=48" target="_blank">how to survive a ripcurrent</a>. I imagine getting pulled past the break might be terrifying but the worst thing to do is panic. Either swim parallel to shore, or tread water and float since the circular nature of the current may shortly return you to shore.</i><br />
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... and lo, for those who did nothing, the market brought us back close to where we started.<br />
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Painfully, this hasn't been the case to date for the small companies in our portfolio. "Ours" means mine and my clients, my wife's, our friends, my sister's retirement savings, the institutions and individuals who entrusted me with stewardship of their assets, all totalling roughly $5M in AUM at the beginning of the year that has diminished on paper by roughly 20% as of this writing. It's a hard feeling to underperform. Navigating the analytical vs emotional process is part of the parcel.<br />
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Our portfolio is skewed towards services companies, which are asset lite and have operating leverage. They solve important problems for their customers such as cyber-security planning, nurse staffing or managing waste streams. "Man hour labor" businesses tend to lead cycles; first in / first out. They have the capital to survive and while patience is trying at times, I am a long term investor in sound businesses at reasonable valuations. I expect they will endure and grow in time.<br />
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Through this adventure I've been thinking about one of my favorite stories of survival, that of <a href="https://www.nytimes.com/2014/01/05/magazine/a-speck-in-the-sea.html" target="_blank">John Aldridge</a>, the local Long Island lobsterman swept off his boat in the middle of the night and 40 miles at sea.<br />
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As I re-read that, it got me thinking about stories of people getting lost, which is akin to the feeling I get trying to make sense of this market that is supported by QE^n and the never ending stimulus. I feel lost trying to reconcile market valuations with municipal budgets, declining GDP and missed mortgage payments, etc. (Here is a <a href="https://frank-k-martin.com/2020/07/10/down-the-rabbit-hole/" target="_blank">funny blogpost by Frank Martin</a> who also trying to make sense of it all).<br />
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I read about <a href="https://www.nytimes.com/2016/05/27/us/missing-hiker-geraldine-largay-appalachian-trail-maine.html" target="_blank">Geraldine Largay</a> who got lost and died in her tent not far from the trail and less than 200 miles from the end of the Appalachian Trail. I remembered reading about two teenagers who got lost and died when they were overcome by a fogbank while kayaking off the coast of Nantucket. It eventually <a href="https://www.hup.harvard.edu/catalog.php?isbn=9780674088078" target="_blank">inspired a book about navigation</a> by <a href="https://www.nytimes.com/2013/07/21/opinion/sunday/losing-our-way-in-the-world.html" target="_blank">Harvard physicist John Huth</a> who was coincidentally lost in the same fogbank but survived. And the story of four tourists travelling in the US in 1996 that got lost in Death Valley National Monument and <a href="https://www.otherhand.org/home-page/search-and-rescue/the-hunt-for-the-death-valley-germans/introduction/" target="_blank">how their remains were eventually found</a>.<br />
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There is a recurring tendency for people who are lost to panic, to seek action, to move. And then, either b/c one leg is shorter than the other or there they are not paying attention, they end up walking in circles.<br />
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The key is that when you're lost, you don't panic. The Boy Scouts teach "STOP" (Stay calm, Think, Observe, Plan). Why would someone need to be reminded to think? B/c gripped by panic, it's usually the first thing to go, and if you can't think, you won’t be able to find a reference point to re-orient or work your way out of the problem.<br />
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One way I've found to work my way out of the problem of the market adventure is to find new ideas. I'll spare the trouble of re-writing what others have done so well and suggest reading about $SMIT by @Deep Value Observer on twitter (I thought I was one of only people in the world watching that stock) or the MicroCapClub forum on $LSYN (I agree mgmt stinks but the podcast business continues to grow and activists are still engaged; what could this look like with a competent CEO?).<br />
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I also go on my own adventures and take day hikes up in and around nature. It is as accessible as the outdoors and with summer foliage even city parks offer lush vantages that hide the presence of man.<br />
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The Patient Investor's family recently took a day hike up in the Adirondacks. Walking through a wooded trail, climbing a summit, focused only on the surround sound of nature and the placement of the next footstep, it was easy to access a sense that we are all working for something bigger and grander than ourselves.<br />
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It's a universal feeling I think, but one too often tethered to a cause or belief. As comforting as certainty may feel, once we cling to it, we are anchored to an idea that can crowd out reason and create new biases. Uncertainty in contrast, a base principle of science and investing, is a bit harder to pin down. But learning to live with it and the knowledge that maybe we are all a little lost at times is itself a victory of substance over style. <br />
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-- END --<br />
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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com0tag:blogger.com,1999:blog-3541352681651202123.post-50402700864100590442020-02-01T14:37:00.001-08:002020-02-01T20:00:32.612-08:00Thoughts on PESI from LCA Y/E Letter<span style="font-family: "calibri" , sans-serif; text-align: justify;">Perma Fix (PESI) is one of the newer holdings in the Long Cast Advisers portfolio. I wrote about it in our year-end letter (<a href="http://www.longcastadvisers.com/letters" target="_blank">link</a>) and wanted to just focus on it here for interested followers. </span><br />
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<span style="font-family: "calibri" , sans-serif;">PESI operates
in the nuclear waste remediation business through two segments.</span></div>
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<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">The Treatment
segment (62% of TTM revenue) is an asset heavy operator of </span><a href="https://en.wikipedia.org/wiki/Low-level_waste"><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">low level and mixed low level
radioactive waste facilities</span></a><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;"> in Tennessee and Washington and a liquid waste facility in
Florida. (Can go </span><a href="https://rcrapublic.epa.gov/rcrainfoweb/action/modules/hd/handlerindex"><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">here</span></a><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;"> and search
by site ID for RCRA information or the links below for the company’s self
reported information.)<o:p></o:p></span></div>
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<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Tennessee. </span><a href="http://www.perma-fix.com/dssi.aspx"><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Diversified Scientific Services (DSSI)</span></a><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">. Site ID:
TND982109142<o:p></o:p></span></div>
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<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Washington. </span><a href="http://www.perma-fix.com/pfnw.aspx"><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Perma Fix Northwest (PFNW)</span></a><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">. Site ID: WAR000010355<o:p></o:p></span></div>
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<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Florida. </span><a href="http://www.perma-fix.com/pff.aspx"><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Perma Fix of Florida (PFF)</span></a><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">. Site ID: FLD980711071<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Treatment is a capacity utilization business where volume growth
offers operating leverage and non-linear margin expansion once fixed costs are
scaled. </span></div>
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<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;"><br /></span></div>
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<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Historical financials understate the true earnings power of this
segment for two reasons: 1) TTM results are negatively impacted by closure
costs for a facility ("M&EC") that is now closed. Excluding those costs, which are one
time in nature, proforma margins are in the ~30% range. 2) PESI has never
operated a strong Services component but now that one is growing, it can feed additional
volume to treatment facilities, where incremental margins are +70%. In short, I
think the earnings trajectory in Treatment may shift positively. <o:p></o:p></span></div>
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<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;"><o:p><br /></o:p></span>
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<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDYPC4vhkVwjlDmN_doQpItvfQAGLermZ7tgeE2l8J7tQ726LjWAKk5-tV8zi9AqYJIhtHYXiOi_IPjew89QJO4SFL-kJ_Sm8SM4eUE3dH1K9tGhWtHW9TSYjB9YirwiJGuF4yNDigX1XL/s1600/Treatment.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="367" data-original-width="732" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDYPC4vhkVwjlDmN_doQpItvfQAGLermZ7tgeE2l8J7tQ726LjWAKk5-tV8zi9AqYJIhtHYXiOi_IPjew89QJO4SFL-kJ_Sm8SM4eUE3dH1K9tGhWtHW9TSYjB9YirwiJGuF4yNDigX1XL/s640/Treatment.png" width="640" /></a></div>
<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;"><o:p><br /></o:p></span></div>
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<span style="font-family: "calibri" , sans-serif;">Concurrent with the closure of M&EC the company exchanged pf'd shares for common at $4.80, which served to simplify the capital structure. Furthermore, with the closure, the company received $5M from its insurer that had been held in collateral associated with insuring the facility, a benefit to the balance sheet and w/c. </span><br />
<span style="font-family: "calibri" , sans-serif;"><br /></span>
<span style="font-family: "calibri" , sans-serif;">The Services
segment (38% of TTM revenue) is a variable cost model. It’s essentially boots
on the ground in Tyvek suits with picks and shovels plus engineering expertise,
et al. This segment is benefiting from a turn-around under relatively new CEO Mark Duff, appointed in 2017, having replaced the founder who had run the company for decades. The growth in services has the multiplier
effect of increasing waste volume to Treatment.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZs_EnWXWTdxWBPbCq71p98oM_8egkIF_Y43vCMcgIkUy9chraNZe5wUbzWsVaonSV6mK0acl2Dk-Op-OeaQozjT3AJ75i-ZwF_4BY_Os3gcJyg-uSawGiOQ4TmQhEduTl8UX9xOMRjRZG/s1600/Services.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="217" data-original-width="732" height="187" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZs_EnWXWTdxWBPbCq71p98oM_8egkIF_Y43vCMcgIkUy9chraNZe5wUbzWsVaonSV6mK0acl2Dk-Op-OeaQozjT3AJ75i-ZwF_4BY_Os3gcJyg-uSawGiOQ4TmQhEduTl8UX9xOMRjRZG/s640/Services.png" width="640" /></a></div>
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<br /></div>
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<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">An
interesting part of the Services turnaround in my mind is that the Mr Duff
actually once ran and grew this exact business. A look at old filings and self
reported biographies indicates that in the mid-2000’s until 2010 he was
President of a company called “Safety and Ecology” where he grew revenues from
$50M to $80M. He was running it </span><a href="https://www.militaryaerospace.com/home/article/16717525/homeland-security-capital-acquires-safety-and-ecology-corp-for-204-million"><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">when it was
sold in 2008</span></a><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;"> to what appears a fairly schlocky public rollup called Homeland
Security. He was gone however by </span><a href="https://www.businesswire.com/news/home/20110719005562/en/Homeland-Security-Capital-Corporation-Agrees-Sell-Subsidiary"><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">2011 when SEC
was sold to PESI</span></a><span class="MsoHyperlink"><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">,</span></span><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;"> which failed
to sustain its growth (ie drove it into the ground). <o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">After SEC, Duff
was a project manager at the Paducah Gas Diffusion site, first for </span><a href="https://www.westkyjournal.com/news.php?viewStory=5136"><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">LATA-Kentucky</span></a><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;"> and then for
the Shaw Group / CBI JV that took over the site when that contract changed
hands. Now he’s back at the original SEC and two years into a turnaround that
is taking shape. <o:p></o:p></span><br />
<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;"><br /></span>
<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">I'm writing a fairly abbreviated summary here. A lot of information is disclosed in the financials. One of the aspects that worried me during my d/d related to the growth in fixed price work on the Services side. Any company that goes into a new business under f/p terms is asking for trouble. However, as I understand it, this is not hard dollar / low bid / fixed price rather it's fixed unit price so there is limited risk of taking a loss on a services contract. </span><br />
<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;"><br /></span>
<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">And IMHO the pros > cons. The </span><span style="font-family: "calibri" , sans-serif;">company has a lot of attributes I find attractive and various tailwinds to support growth. It is easy to understand and has a long operating history accessible for analysis. </span><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Its primary customers (DOE, DOD cleanup sites, et al) are spending money and re-letting contracts after a long lull, including </span><a href="https://www.exchangemonitor.com/three-teams-said-competing-hanford-tank-closure-contract/"><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">potentially large contracts on which PESI is rumored to be a named sub-contractor</span></a><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">.</span></div>
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<br /></div>
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<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Finally, large legacy contractors like </span><a href="https://www.exchangemonitor.com/weapons-complex-still-weighing-impact-fluor-government-biz-sell-off/"><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Fluor</span></a><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;"> and </span><a href="https://investors.aecom.com/news-releases/news-release-details/aecom-accelerates-value-creation-strategy-sale-its-management"><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">AECOM</span></a><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;"> are selling / have sold their managed services businesses to private equity, who in turn I think are mostly attracted to the outsourced IT programs. This could create potential disruptions for themselves and opportunities for smaller companies like PESI, especially given its newly installed but experienced management team.<o:p></o:p></span></div>
<br /></div>
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<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">At current
prices - after Friday's sell off - the company is valued at ~$90M EV. It trades at 1.5x TTM revenues, 6x
TTM gross profit and 18x pro-forma EBITDA (after adding back one-time closure
costs). </span><a href="https://investors.aecom.com/news-releases/news-release-details/aecom-accelerates-value-creation-strategy-sale-its-management"><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">This looks
expensive, especially given AECOM sold their managed services division for 12x
EBITDA</span></a><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">.
Some of the multiple is driven by rumours of the large contract I mentioned
above. </span><br />
<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;"><br /></span>
<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">If
we apply 12x EBITDA to just the Services segment, this implies the Treatment
business trades for 1.5x sales and that’s hard to fathom. PESI’s Treatment
business is one of three named contractors on DOE contracts to handle low level
waste. The others are Energy Source and Waste Control. Those two </span><a href="https://www.arnoldporter.com/-/media/files/perspectives/publications/2017/11/energysoultions-waste-control-specialists.pdf"><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">tried to
merge in 2015 a deal valued at 8x sales that deal was blocked on anti-trust
grounds.</span></a><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">
I’m pretty sure 8x is <i>not</i> the right sales multiple for PESI’s treatment
but in an environment like we have today, with increased volumes concurrent
with high barriers to entry, it is likely worth more than the multiple inferred
by comparative valuations on the Services business.</span></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify; text-justify: inter-ideograph;">
<span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">Regarding the sell off, </span><span style="font-family: "calibri" , sans-serif; mso-ascii-theme-font: major-latin; mso-bidi-theme-font: major-latin; mso-hansi-theme-font: major-latin;">I think the contract everyone is waiting for was supposed to be awarded by the end of January. It wasn't. Why not? There's a <a href="https://www.tri-cityherald.com/news/local/hanford/article239540638.html" target="_blank">protest on a separate contract at the Hanford site</a>, which is pushing out the schedule for other contracts. Overall, i</span><span style="font-family: "calibri" , sans-serif;">f they win the contract, it’s revolutionary but even if they don’t, the increased spending in general will lift all boats in the space. (But it would be better if they won). </span><br />
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<br />
<span style="font-family: "calibri" , sans-serif;">Historical
figures are only good as a baseline and investors will make money on <i>future
</i>results. What can this company look like in an environment where a large customer is spending again, there's some competitor dislocation and a relatively new management team that for the first time
has Services experience? </span><br />
<span style="font-family: "calibri" , sans-serif;"><br /></span>
<span style="font-family: "calibri" , sans-serif;">I think for the long term shareholder, it offers a
wide success pathway and ample opportunity for returns even though current
multiples don’t screen for value. But you should do your own homework. I'd be happy to hear what you find and I am always open to critique. </span><br />
<span style="font-family: "calibri" , sans-serif;"><br /></span>
<span style="font-family: "calibri" , sans-serif;">-- END -- </span><br />
<span style="font-family: "calibri" , sans-serif;"><br /></span>
<span style="font-family: "calibri" , sans-serif;">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.</span></div>
</div>
<br />Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com0tag:blogger.com,1999:blog-3541352681651202123.post-64919664310424508422019-10-31T07:48:00.000-07:002019-11-01T06:54:28.860-07:00It all started with a song (LCA 3Q19 letter) Five years ago Halloween I decided to start my business, and it all started with a song.<br />
<br />
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” …<br />
<br />
“Someday everything is gonna sound like a rhapsody,<br />
When I paint my masterpiece<br />
<br />
Someday, everything's gonna be different,<br />
When I paint my masterpiece”<br />
<br />
… 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.<br />
<br />
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).<br />
<br />
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.<br />
<br />
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.<br />
<br />
That night I had dinner with a friend who'd started a few years earlier his own (incredible) <a href="https://www.oneillrosearchitects.com/" target="_blank">architecture firm</a>. He was like, “oh, yeah. It’s fucking terrifying. But go get your LLC and see where it goes.”<br />
<br />
And that's what I did.<br />
<br />
I had three primary tenets when I opened my business:<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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 <a href="http://www.longcastadvisers.com/letters" target="_blank">LCA's 3Q19 letter</a>.<br />
<br />
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.<br />
<br />
Here's a sampling of things other entrepreneurs have said to me over the years ...<br />
<br />
A friend who started a brewery: “my head is exploding every day.”<br />
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”<br />
A fellow fund manager whose daily mantra is "this shit is hard.”<br />
<br />
... 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.<br />
<br />
-- END --<br />
<br />
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.Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com1tag:blogger.com,1999:blog-3541352681651202123.post-48682926054673480452019-08-18T08:11:00.000-07:002019-08-29T15:21:50.869-07:00this 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.<br />
<br />
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.<br />
<br />
Cynergistek (CTEK) is a large holding of ours that debuted its new CEO, Caleb Barlow, on its recent 2Q19 earnings call.<br />
<br />
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.<br />
<br />
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.<br />
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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.<br />
<br />
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.<br />
<br />
Or is this actually a gross restaurant? It's time to double down on research, (but it's also natural to rationalize).<br />
<br />
CTEK has two lines of business ...<br />
<br />
"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.<br />
<br />
According to the most recent 10Q this segment has $25M in backlog, up from $24M last year.<br />
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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.<br />
<br />
... the culprit for the quarter was the staffing business, <a href="https://cynergistek.com/investor-relations/one-of-the-largest-health-systems-in-us-expands-engagement-with-cynergistek-to-bolster-security-and-privacy-programs-supplement-on-site-security-teams/" target="_blank">which had a robust 2H18</a> 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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
In 2019, <a href="http://thepatientinvestors.blogspot.com/2018/09/ctek-letter-to-management.html" target="_blank">with urging at least from this shareholder</a>, 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.<br />
<br />
... 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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
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-- END --<br />
<br />
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.Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com0tag:blogger.com,1999:blog-3541352681651202123.post-13987077260454348902019-08-02T14:23:00.001-07:002019-08-02T14:23:21.041-07:00"Mike Wallace is Here" + LCA 2Q19 LetterI 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 <a href="https://www.youtube.com/watch?v=358ps8yH-p8" target="_blank">Night Beat</a>, and he developed his style at a time when most such interviews were fluff pieces.<br />
<br />
Certain interviews were iconic, such as <a href="https://www.youtube.com/watch?v=5tsZP2lXQVw" target="_blank">this one with General Westmoreland</a>. Some were absurd enough to spawn spoofs like <a href="https://www.nbc.com/saturday-night-live/video/60-minutes/n9280" target="_blank">this one about fake novelty joke items on SNL</a><br />
<br />
But two things mentioned in the course of documentary struck me as relevant today.<br />
<br />
1. The idea that healthy independent journalism is a reflection of a healthy democracy.<br />
2. The reflection of the interviewer as a surrogate for the viewer.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
On that note of capital stewardship, I recently posted my <a href="http://www.longcastadvisers.com/letters" target="_blank">2Q19 letter on my firm's website</a>, which includes a few comments on long time holdings QRHC, CTEK, DAIO, SIFY and INS.<br />
<br />
I always welcome the (non-spam) feedback from this growing community.<br />
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-- END --<br />
<br />
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.<br />
<br />Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com0tag:blogger.com,1999:blog-3541352681651202123.post-58071541895421155482019-05-25T11:46:00.002-07:002019-05-27T08:00:55.976-07:00A 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?<br />
<br />
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 <a href="http://investorfieldguide.com/bottomless/" target="_blank">one recent and recommended episode</a> ... "I met our guest Michael Mayer because of twitter. <i>I followed and enjoyed one of several pseudonymous accounts that he maintains to experiment with ideas. His various accounts have wide followings</i>" ... 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?<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
Which brings me to a recent <a href="http://aureliusvalue.com/research/ins-a-wolf-in-petes-clothing/" target="_blank">short report on INS</a> 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.<br />
<br />
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 <i>legitimate </i>short sellers. Parker Petit is on its board. It uses a regional accounting firm with limited pubco experience.<br />
<br />
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.<br />
<br />
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.<br />
<br />
But a <i>legitimate </i>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.<br />
<br />
As the report concludes ...<br />
<br />
"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)."<br />
<br />
... 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.<br />
<br />
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 ...<br />
<br />
"... if Apple gathered a full 27 million accounts over the first 3 years, <i>equal to the entire number of American Express basic consumer cards-in-force in the U.S.</i> ... "<br />
<br />
... 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.<br />
<br />
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 <i>American fucking Express</i>? Put me down for "zero probability".<br />
<br />
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.<br />
<br />
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).<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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 <i>chipper</i>". 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.<br />
<br />
-- END --<br />
<br />
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.Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com1tag:blogger.com,1999:blog-3541352681651202123.post-53070700191422220292019-04-13T08:12:00.001-07:002019-04-13T08:35:49.328-07:00LCA's 1Q19 review ($INS, $CTEK, $QRHC) <span style="background-color: white; color: #222222; font-family: inherit;">I posted LCA's 1Q19 results on my website <a href="http://www.longcastadvisers.com/letters" target="_blank">here</a>. It includes brief discussions of three portfolio holdings: INS, CTEK and QRHC. As I wrote in the email that went out ... </span><br />
<span style="background-color: white; color: #222222; font-family: inherit;"><br /></span>
<span style="color: #222222;">"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. </span><br />
<span style="background-color: white; color: #222222;"></span><br />
<span style="color: #222222; font-family: inherit;">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.</span><br />
<span style="font-family: inherit;"><span style="background-color: white; color: #222222;"><span style="background-color: transparent;"><br /></span></span></span>
<span style="color: #222222;">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."</span><br />
<br />
<span style="color: #222222;">If I can simplify what I've learned in my first three years running a growing investment mgmt firm ...</span><br />
<span style="background-color: white; color: #222222; font-family: inherit;"><br /></span>
<span style="background-color: white; color: #222222; font-family: inherit;">you gotta pick the right stocks</span><br />
<span style="background-color: white; color: #222222; font-family: inherit;">you gotta own them at the right weighting</span><br />
<span style="background-color: white; color: #222222; font-family: inherit;">you gotta find clients who appreciate your worldview</span><br />
<span style="background-color: white; color: #222222; font-family: inherit;">you gotta have enough assets to make it all meaningful</span><br />
<span style="background-color: white; color: #222222; font-family: inherit;">and you gotta manage the administrative burden with an eye on time and costs</span><br />
<span style="font-family: inherit;"><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: xx-small;"><br style="background-color: white; color: #222222;" /></span>
<span style="background-color: white; color: #222222;">... it's complicated but the effort to get it right is energizing. </span></span><br />
<br />
<span style="color: #222222;">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 <a href="http://www.longcastadvisers.com/contact" target="_blank">drop me a line</a>. I very much appreciate those that have and the partnerships made along the way. </span><br />
<span style="color: #222222;"><br /></span>
<span style="color: #222222;">-- END --</span><br />
<br />
<span style="font-family: inherit;">
<span style="background-color: white; color: #222222;">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.</span></span>Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com0tag:blogger.com,1999:blog-3541352681651202123.post-26668752408807053422019-04-06T07:52:00.004-07:002019-04-06T13:25:23.183-07:00the full monte: a compendium of unanswered letters and emails to QRHC CEO & Chairman<div class="separator" style="clear: both; text-align: left;">
It's been on my mind to share all my unanswered inquiries to QRHC. </div>
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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. </div>
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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. </div>
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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. </div>
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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.</div>
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I followed up with this email from that never rec'd a response, including questions from two other investors I brought to the meeting ... </div>
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... mgmt took my many questions on the <a href="https://seekingalpha.com/article/4124972-quest-resource-holdings-qrhc-ceo-ray-hatch-q3-2017-results-earnings-call-transcript?part=single" target="_blank">3Q17 conf call, November 14, 2017</a> (the one where they had "far out" guidance). I thought they were generally good questions. </div>
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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. </div>
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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 ... </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibuh8d8G5qNnhWTLcoQhMd1clmvz8qhdLTdIuX34U7bMZNtE4jMStm0zJaMITuB2-o0iFAoVO-oMlFX_bj1Bs4qMUX7ZydaCc056RuCMQKsDbp5aX2dh1Q-eG5znA2K18adVM0ZHIwKhxT/s1600/conf+call+email+april+2+2018.jpg" imageanchor="1" style="clear: left; display: inline !important; margin-bottom: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="409" data-original-width="659" height="247" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibuh8d8G5qNnhWTLcoQhMd1clmvz8qhdLTdIuX34U7bMZNtE4jMStm0zJaMITuB2-o0iFAoVO-oMlFX_bj1Bs4qMUX7ZydaCc056RuCMQKsDbp5aX2dh1Q-eG5znA2K18adVM0ZHIwKhxT/s400/conf+call+email+april+2+2018.jpg" width="400" /></a></div>
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... Concurrently I'd sent CEO this direct email ... </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinvkfJihdN50nqR0LkNn9RGqVobsL4FHSM42rUm4lQ5g6Phnh4xtR6D2inauBHgOskpNncFH3ulp57I0Hn6Yp7foQnt0GHQfyxQ0jNDezT3O9uehIBODtPvCC5je2RhejYgNPS-58NJima/s1600/ray+april+2+2018.jpg" imageanchor="1" style="clear: left; display: inline !important; margin-bottom: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="418" data-original-width="634" height="262" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinvkfJihdN50nqR0LkNn9RGqVobsL4FHSM42rUm4lQ5g6Phnh4xtR6D2inauBHgOskpNncFH3ulp57I0Hn6Yp7foQnt0GHQfyxQ0jNDezT3O9uehIBODtPvCC5je2RhejYgNPS-58NJima/s400/ray+april+2+2018.jpg" width="400" /></a></div>
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... 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" ... </div>
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"Ray - </div>
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Your reviews - especially the most recent ones - seem to indicate a pattern of lack of organizational expertise. </div>
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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. </div>
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/Avi"</div>
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... I was told then by IR that had really pissed off the CEO, so I wrote him an apology ... </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEmdPfKUxvuq5Iu-meD0n32PBCOPQ-tdUQdtZlQUtCnNYZik8mhbUVPgMDzpoRAu2UU-1Qua5U-tnhqcmjAudDTQWzkk2-m1aFPQWWTOuqOrng_JoOs-ipPysLXZA5g9bTNwt1e8BvMMAg/s1600/qrhc+apology.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="354" data-original-width="694" height="203" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEmdPfKUxvuq5Iu-meD0n32PBCOPQ-tdUQdtZlQUtCnNYZik8mhbUVPgMDzpoRAu2UU-1Qua5U-tnhqcmjAudDTQWzkk2-m1aFPQWWTOuqOrng_JoOs-ipPysLXZA5g9bTNwt1e8BvMMAg/s400/qrhc+apology.jpg" width="400" /></a></div>
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... I figured at some point they'd get back to me. A week later I followed with another email, cc'ing their IR "jeff" ... </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNi6JkV8b9FqLJfP-s5jsn5vzZ9Kask3vhzf_3MMDB2lKpvbqMN7HIGg7_XB2BcmI9xv93xI81tZz65BTNJcz4PBrfQvUnr8h1JeYxh6F-kbP4-HjiH9BgeE8J4-SMHHw3i-aw1vBSd5Cp/s1600/qrhc+040918.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="323" data-original-width="654" height="197" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNi6JkV8b9FqLJfP-s5jsn5vzZ9Kask3vhzf_3MMDB2lKpvbqMN7HIGg7_XB2BcmI9xv93xI81tZz65BTNJcz4PBrfQvUnr8h1JeYxh6F-kbP4-HjiH9BgeE8J4-SMHHw3i-aw1vBSd5Cp/s400/qrhc+040918.jpg" width="400" /></a></div>
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... still nothing. </div>
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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. </div>
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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 ... </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkTAiv5XDrx8S4lZcLvcyc3_yXFGjQSsfCY-O_6Wf4XoJGwLKO2ERb-iKhvj18HpkedXVYH4b0ja9GIpkVl0w_nZkoMa0NIffLP7qF4O99ILHJfHgt5pIRTv09z3vfZtWJj-oLnoT_-XA2/s1600/board+letter+1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="729" data-original-width="704" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkTAiv5XDrx8S4lZcLvcyc3_yXFGjQSsfCY-O_6Wf4XoJGwLKO2ERb-iKhvj18HpkedXVYH4b0ja9GIpkVl0w_nZkoMa0NIffLP7qF4O99ILHJfHgt5pIRTv09z3vfZtWJj-oLnoT_-XA2/s400/board+letter+1.jpg" width="386" /></a></div>
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... I got a message through IR: Not interested. </div>
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In May, this went out, a request to address tech investments on the upcoming call ... </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgut7xByp5uISSTx8Q9f6_r5FgGsApu-VIbjb6uPRAfJAC7al_qSTTH4OwLNh3QrvjVORc_PPBaYtmvTQrmTqIaVACq_lZqMgKDWdgf5UA04ajJi8FkLnUPrYy6zB0KZkTQc732orFDUBMO/s1600/qrhc+050918.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="440" data-original-width="649" height="270" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgut7xByp5uISSTx8Q9f6_r5FgGsApu-VIbjb6uPRAfJAC7al_qSTTH4OwLNh3QrvjVORc_PPBaYtmvTQrmTqIaVACq_lZqMgKDWdgf5UA04ajJi8FkLnUPrYy6zB0KZkTQc732orFDUBMO/s400/qrhc+050918.jpg" width="400" /></a></div>
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... 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) ... </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPBHCrAuXSD7z1P8EQ9oNK28fGuY0cfm6ZIDSZBenY-S66NM2Yh56wdRy_GfnmniVc6X6JK4Uwmp5NUJpz3BQQbNX6vTrwZOsmBLUy3lbJQ8xoNDM2fwdbRn5Q6ieOqjV_iRs0UAjCAlNf/s1600/board+letter+2.jpg" imageanchor="1" style="clear: left; display: inline !important; margin-bottom: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="284" data-original-width="567" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPBHCrAuXSD7z1P8EQ9oNK28fGuY0cfm6ZIDSZBenY-S66NM2Yh56wdRy_GfnmniVc6X6JK4Uwmp5NUJpz3BQQbNX6vTrwZOsmBLUy3lbJQ8xoNDM2fwdbRn5Q6ieOqjV_iRs0UAjCAlNf/s400/board+letter+2.jpg" width="400" /></a></div>
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... 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 ... </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZla9ngj06oOQZPj-GwBaft0dgvJgjVZM2cdznDEnxP5NB-jc29T4TK4W2SJ1z3jO577MjMbkSfgwNKmQgIy1oB7sd1vdmNz9_2zH9Nca37eHqv8xajv3tP9yLmgTn-ILoByHYNqmNCiIL/s1600/qrhc+060218.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="445" data-original-width="660" height="268" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZla9ngj06oOQZPj-GwBaft0dgvJgjVZM2cdznDEnxP5NB-jc29T4TK4W2SJ1z3jO577MjMbkSfgwNKmQgIy1oB7sd1vdmNz9_2zH9Nca37eHqv8xajv3tP9yLmgTn-ILoByHYNqmNCiIL/s400/qrhc+060218.jpg" width="400" /></a></div>
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... 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. </div>
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And neither to these questions after 2Q18 ... </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlJug70mgxR7ZfEbS_ekG0ulKHO2AqG5hPkWb21w5wstX6SjCkWhy4h_l-2MMZDwciLib0HddCBqpB_zC3zejm-etaN_4NSg2ErgspzWhNKFcDFi8xtz1QEq_fYJW4ALv5HSiaPNXoFhNz/s1600/qrhc+2Q18+questions.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="342" data-original-width="651" height="210" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlJug70mgxR7ZfEbS_ekG0ulKHO2AqG5hPkWb21w5wstX6SjCkWhy4h_l-2MMZDwciLib0HddCBqpB_zC3zejm-etaN_4NSg2ErgspzWhNKFcDFi8xtz1QEq_fYJW4ALv5HSiaPNXoFhNz/s400/qrhc+2Q18+questions.jpg" width="400" /></a></div>
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... nor this after 3Q18 ... </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEjbZsl9wD93muGRIEmHlCEd9cfnFVLf6PlFJDqHU2fSkwOyfETIUXjYOCnEdiHALj-6kGoO6XtwhFyMuAjbg8d3yNibfRhbhTjQQwzmkw0Y49YaDZTfprnh5kTIEygvsQl0mD5xcYMQn_/s1600/qrhc+3Q18+questions.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="131" data-original-width="647" height="80" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEjbZsl9wD93muGRIEmHlCEd9cfnFVLf6PlFJDqHU2fSkwOyfETIUXjYOCnEdiHALj-6kGoO6XtwhFyMuAjbg8d3yNibfRhbhTjQQwzmkw0Y49YaDZTfprnh5kTIEygvsQl0mD5xcYMQn_/s400/qrhc+3Q18+questions.jpg" width="400" /></a></div>
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... 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 ...</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgx-ZV2xCDr24iZncIUl-EfZjSZ4_JKbwnnReSCUBkiY-AJ7RcTtos8yqk-UZrnKM1nC4YEOEyf5gEHGOMOHf2yrdlRcnaVTdv8de7hO3FClPaG80lwZgnT58D3790fGhu5-8eghEP124vB/s1600/board+letter+3.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="507" data-original-width="572" height="353" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgx-ZV2xCDr24iZncIUl-EfZjSZ4_JKbwnnReSCUBkiY-AJ7RcTtos8yqk-UZrnKM1nC4YEOEyf5gEHGOMOHf2yrdlRcnaVTdv8de7hO3FClPaG80lwZgnT58D3790fGhu5-8eghEP124vB/s400/board+letter+3.jpg" width="400" /></a></div>
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... from there on, I basically gave up trying to get in touch with them. </div>
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After the filing <a href="http://thepatientinvestors.blogspot.com/2019/03/friday-filings-portend-potential.html" target="_blank">about the potential new Chairman</a>, 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 ... </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-6KE3Xc4IFrn6y46ED3YQ2kdKy_ZCQq2q3ZSy7f1Xwn9MIqSwV5j2g1jW4DQ2GUAGBaeC90ubcZih-57iAPxzqZxkhv9sD-a3dQImsmN6_orkSplP3B80ILG95bbBW4J8VNEF8Xb8okBK/s1600/board+letter+4.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="247" data-original-width="739" height="212" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-6KE3Xc4IFrn6y46ED3YQ2kdKy_ZCQq2q3ZSy7f1Xwn9MIqSwV5j2g1jW4DQ2GUAGBaeC90ubcZih-57iAPxzqZxkhv9sD-a3dQImsmN6_orkSplP3B80ILG95bbBW4J8VNEF8Xb8okBK/s640/board+letter+4.jpg" width="640" /></a></div>
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... and to the CEO ... </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgI082UK5xcRCl9m-F6kg0XJoo2RZsa6k-kjAcTOi-Pu_Ge0KnL_smzd0kBklc4ZJD903jYl47qlK3tiSjwhlLJgqLyLNtzB3fP1bcgXc0ITUppYp9ZHwlNyzfPO77LAnIcExzMKNnjqYGX/s1600/new+chair+email+to+ray.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="263" data-original-width="645" height="162" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgI082UK5xcRCl9m-F6kg0XJoo2RZsa6k-kjAcTOi-Pu_Ge0KnL_smzd0kBklc4ZJD903jYl47qlK3tiSjwhlLJgqLyLNtzB3fP1bcgXc0ITUppYp9ZHwlNyzfPO77LAnIcExzMKNnjqYGX/s400/new+chair+email+to+ray.jpg" width="400" /></a></div>
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... I'm throw up a little reading it. Those were wrong. </div>
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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. </div>
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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. </div>
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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. </div>
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I view all of these as fixable problems, which is why I hope the <a href="http://thepatientinvestors.blogspot.com/2019/03/friday-filings-portend-potential.html" target="_blank">agreement with Dan Freidberg is seen through to completion</a> 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. </div>
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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. </div>
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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF FUTURE RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.</div>
Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com0tag:blogger.com,1999:blog-3541352681651202123.post-63857464868867257522019-03-18T14:50:00.002-07:002019-03-19T21:03:21.291-07:00Friday Filings Portend Potential Positives at QRHCAs 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 <i>shrinking </i>revenues 45%. There's cash flow and bvps growth, and they've done it patiently, in a brutally competitive business.<br />
<br />
A patient investor has to admire this.<br />
<br />
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.<br />
<br />
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.<br />
<br />
<i>Cue the "deux ex machina"</i><br />
<br />
A bunch of "Friday Filings" indicate a potential <i>and potentially positive </i>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.<br />
<br />
There are a lot of moving parts and multiple parties involved, but as I understand it from the public filings ...<br />
<br />
Saltz (current Chairman) will sell Freidberg 1.7M shares @ $2 / share via put / call stock agreement<br />
<br />
... on the condition that ...<br />
<br />
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<br />
<br />
... meaning at the end of all this, if it happens as planned ...<br />
<br />
New board<br />
New ownership partially at $2 / share<br />
Saltz will continue to own 11%, Forte 8%, Dick 0%<br />
<br />
... which begs the question "is this good, or just different???"<br />
<br />
I think this could be very good. There are a few things to love about this ...<br />
<br />
I love what I've heard about Freidberg from colleagues and managers he's worked with in the past<br />
I love that this guy is paying $2 / share for at least some of his stake<br />
I love the potential that larger institutional shareholders have the opportunity to get involved<br />
I love that the ownership will be less concentrated in the hands of Saltz and Co.<br />
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).<br />
<br />
... 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.<br />
<br />
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 <i>investments that I thought needed the most help and </i>that I aimed to try to fix. I think that sample is self selective towards underperformance.<br />
<br />
A quick review of year end 13F-HR's offers some sense of an investment record at Sagard under his watch ...<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJtIHm8u7AsnvOQYSb9B8QBNNYqa_coGGsC0jNirX7Ytk85hDbQkhjoL3MfWzgncnuPhH8iGpgz556ozVWAc2cgdI9ixbynzOpWBCh_kY_Si-2xPsjqvmWLDSbl_WGgylL1bQj2bg433Wz/s1600/Sagard+Table+3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="898" data-original-width="1600" height="358" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJtIHm8u7AsnvOQYSb9B8QBNNYqa_coGGsC0jNirX7Ytk85hDbQkhjoL3MfWzgncnuPhH8iGpgz556ozVWAc2cgdI9ixbynzOpWBCh_kY_Si-2xPsjqvmWLDSbl_WGgylL1bQj2bg433Wz/s640/Sagard+Table+3.png" width="640" /></a></div>
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... some hits & some misses. An apparent value bent. Clearly likes the services companies. Is focused on smaller companies.<br />
<br />
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).<br />
<br />
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).<br />
<br />
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.<br />
<br />
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.<br />
<br />
** Before closing, I wanted to circle back on something...<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
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-- END --<br />
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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF FUTURE RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com1tag:blogger.com,1999:blog-3541352681651202123.post-40033829654016331282019-03-11T11:49:00.000-07:002019-03-11T18:31:04.692-07:00Information 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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
I've been thinking about this following recent news on Bloomberg that <a href="https://www.bloomberg.com/news/articles/2019-03-11/goldman-s-apple-card-said-to-land-big-win-for-tiny-georgia-firm" target="_blank">Goldman Sachs is the new customer on the $INS CoreCard platform</a>. Close readers know that back in December, when I presented on <a href="http://www.longcastadvisers.com/letters" target="_blank">Intelsys for MOI</a>, I mentioned the scuttlebutt that Goldman was the large customer driving customization revenues for a license due to close in early 2019.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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. <br />
<br />
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.<br />
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-- END --<br />
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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF FUTURE RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com0tag:blogger.com,1999:blog-3541352681651202123.post-12245226582008290442019-03-04T12:14:00.005-08:002019-03-07T08:31:10.154-08:00A 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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
Specifically, I told him three things ...<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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 ...<br />
<br />
"... 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."<br />
<br />
... his idea of who he is at +90 is supported by family lore he's heard since he was a child.<br />
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<br /></div>
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.<br />
<br />
(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.)<br />
<br />
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?")<br />
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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.<br />
<br />
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.<br />
<br />
I cannot fathom why any mindful and healthy adult wouldn't want to participate in that effort.<br />
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-- END --<br />
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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF FUTURE RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com5tag:blogger.com,1999:blog-3541352681651202123.post-9208053322018901562019-02-21T08:18:00.002-08:002019-02-25T13:53:24.247-08:00Letter to RVLT BoDI briefly <a href="http://thepatientinvestors.blogspot.com/2018/10/not-so-revolutionary-thinking-rvlt.html" target="_blank">wrote about $RVLT</a> 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.<br />
<br />
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.<br />
<br />
"To the Board of Directors of Revolution Lighting:<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
Sincerely ... "<br />
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-- END --<br />
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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF FUTURE RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com2tag:blogger.com,1999:blog-3541352681651202123.post-83412585110206916922019-02-20T11:23:00.004-08:002019-03-04T17:54:06.128-08:00A long overdue lesson on backgammon <div class="separator" style="clear: both; text-align: center;">
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I frequently play a poor game of backgammon, occasionally against strong competition. It's all good fun, but I've long been stuck in ... "I know i'm doing something wrong, just not sure what it is". Last night (*with much gratitude*) my opponent became my teacher and in the span of a few hours this beguiling game revealed how much I've been mis-estimating, mis-calculating and mis-playing.<br />
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To start with, I've been using the totally wrong model. This die matrix ...<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCE7nrckTh6ZFh-x78NVizVnK_nf_6jyHgktbVNTuYG-fX7Fx8lB1cQKJsgmEHn3z0K2d1Jlr9rPIenllGv53Arb7J4QJKdSdzsaae9_1Y9dKi76nRMMYD1ma9243iFjemb3CQrIh4R7f8/s1600/die+matrix+1.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="298" data-original-width="396" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCE7nrckTh6ZFh-x78NVizVnK_nf_6jyHgktbVNTuYG-fX7Fx8lB1cQKJsgmEHn3z0K2d1Jlr9rPIenllGv53Arb7J4QJKdSdzsaae9_1Y9dKi76nRMMYD1ma9243iFjemb3CQrIh4R7f8/s320/die+matrix+1.PNG" width="320" /></a></div>
<br />
... is fine for craps but wholly insufficient for BG.<br />
<br />
This is the right way to think about the bg dice matrix. These are the rolls ...<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCEXYf8HC7ScOQkDIP0xyIVamEJdNphvTn-E9TI88hQXJp3vyq1ZlSR1txEInSD930xDgE5OvqsXjWcVi2xNlPy7vOxV4YyGWk5yFNLDqAH6I_jtGjp9FVuSV7Cvop3-e5stpEvni8mL3_/s1600/die+matrix+2.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="296" data-original-width="390" height="242" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCEXYf8HC7ScOQkDIP0xyIVamEJdNphvTn-E9TI88hQXJp3vyq1ZlSR1txEInSD930xDgE5OvqsXjWcVi2xNlPy7vOxV4YyGWk5yFNLDqAH6I_jtGjp9FVuSV7Cvop3-e5stpEvni8mL3_/s320/die+matrix+2.PNG" width="320" /></a></div>
<br />
... Each of the 36 spots is worth 2.78%. Frequently faced issues can now be solved with simple math.<br />
<br />
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.<br />
<br />
Leave two open spots ("I need a 1 or a 2!!" they say) and that offers a 56% chance to hit; 20 outs.<br />
<br />
Three open spots and forget about it. Probability of success in need of three different numbers is 75%. That's hardly a big advantage.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEib-l5plgk-9rsCUcMh0vzcLW-ty6bxoNLkqqskdZU6-wokY5YuQs_7j6Cv2NHNvSnC-N3IWtytzI-lDby4dzO31Cu6JrniXHjeBYTYBOrRdsnaiDXvzncOqwLPK8J7rCinxfZ8g4KraH-h/s1600/simple+outs.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1036" data-original-width="1261" height="523" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEib-l5plgk-9rsCUcMh0vzcLW-ty6bxoNLkqqskdZU6-wokY5YuQs_7j6Cv2NHNvSnC-N3IWtytzI-lDby4dzO31Cu6JrniXHjeBYTYBOrRdsnaiDXvzncOqwLPK8J7rCinxfZ8g4KraH-h/s640/simple+outs.PNG" width="640" /></a></div>
<br />
I also mis-estimated safe distances to keep an open pip?<br />
<br />
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.<br />
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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.<br />
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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!<br />
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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES.<br />
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<br />Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com0tag:blogger.com,1999:blog-3541352681651202123.post-39802613060384837152019-02-14T13:09:00.002-08:002019-03-01T10:04:46.734-08:00How Sixers Trade (and Investing) Offers Lessons on Yin / Yan of Hope and FrustrationWhere 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.<br />
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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.<br />
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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 <a href="https://sixerswire.usatoday.com/2019/02/19/sixers-sports-illustrated-cover-first-time-since-2008/" target="_blank">believe the hype</a> we should already crown them Eastern Conference finalists.<br />
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I rarely believe the hype and I always get a chuckle reading about "blockbuster trades" and <a href="https://en.wikipedia.org/wiki/2011_Philadelphia_Eagles_season" target="_blank">dream teams</a> and other "sure bets" b/c they are rife examples of the yin / yan of hope and frustration.<br />
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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.<br />
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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%.<br />
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Why now? It's as if the team <a href="http://people.stern.nyu.edu/adamodar/pdfiles/blog/DiscountRateMyth3.pdf" target="_blank">suddenly lowered the discount rate on their assets</a>. 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.<br />
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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.<br />
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On reflection, I think <a href="https://thepatientinvestors.blogspot.com/2016/04/hinkies-letter-to-shareholders-and.html" target="_blank">Sam Hinkie's genius</a> 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.<br />
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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.<br />
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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!<br />
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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.<br />
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With patient investing, the season is as long as you want it to be. At least through <a href="http://www.longcastadvisers.com/letters" target="_blank">Long Cast Advisers' first three years</a>, the record indicates some success with these efforts.<br />
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* I don't actually own them, I'm just a lifelong fan<br />
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** When I took economics in college <a href="https://en.wikipedia.org/wiki/Carl_Christ" target="_blank">with this guy</a> 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.<br />
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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.</div>
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Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com0tag:blogger.com,1999:blog-3541352681651202123.post-57453102938347637182019-01-16T08:10:00.001-08:002019-01-16T17:22:41.018-08:00In 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.<br />
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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 ...<br />
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<a href="http://www.longcastadvisers.com/">http://www.longcastadvisers.com/</a><br />
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... 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.<br />
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I've also just recently posted our 2018 "year end letter". It's also on the website (see "links & letters" page).<br />
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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.<br />
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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 ...<br />
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you gotta pick the right stocks<br />
you gotta own them at the right weighting<br />
you gotta find clients who appreciate your worldview<br />
you gotta have enough assets to make it all meaningful<br />
and you gotta manage the administrative burden with an eye on time and costs<br />
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... 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."<br />
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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).<br />
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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.<br />
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If it interests you as well, please <a href="mailto:avi@longcastadvisers.com" target="_blank">drop me a line</a>.<br />
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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com0tag:blogger.com,1999:blog-3541352681651202123.post-9795221021854296022018-11-22T08:46:00.004-08:002018-11-27T11:52:29.852-08:00On thanksgiving I've liked this poem "<a href="http://mwkworks.com/desiderata.html" target="_blank">Desiderata</a>" by Max Ehrmann since I first saw it in college in Baltimore. I know it's a bit sentimental and cliched, and I realize it wasn't really discovered in a church but whatever, most origin stories are BS. It doesn't take anything away from the experience.<br />
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Another sentimental cliche is that this is the time of year when family gets together and fight. We seem to do that <i>everyday </i>in our household. But I've never had the seemingly most cliched Thanksgiving experience of arguing radical politics or having the "crazy uncle" thing. I adore my uncles, though sadly I lost one this year. Even then, I'm grateful that I knew him. He was an <a href="https://www.nytimes.com/2018/08/07/obituaries/robert-silman-engineer-who-saved-fallingwater-dies-at-83.html" target="_blank">outlier in many ways</a>. At his funeral my aunt, herself a published author, read something from his journal about a simple question frequently asked in his younger days "could we ... ? " evolving with time and experience to "should we ... ?"<br />
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It seems relevant to reflect on this question in an era of fast paced technological change (crspr, AI, self driving cars, drones and weaponry, etc.). Should we have left fire in the domain of nature? Of course not. I think we should ... as responsibly as possible ... understanding that there's a learning curve and we're likely to burn ourselves early on.<br />
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I write here not about technology but with Thanksgiving and "gratitude" in mind. However, it would be disingenuous to honor those virtues without acknowledging the range of other emotions that seep into investing life when expectations aren't met: Anger, impatience and fear.<br />
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In thinking about both gratitude and anger, I acknowledge posts I've written here (as well as other "Dear Chairman" letters I haven't) that were written with too much of the latter and not enough of the former. In some cases I regret it and have apologized. In other cases, sharp words can help hold executives accountable to their shareholders when they hide their failures and lies behind silence.<br />
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But it would be ridiculous to not acknowledge the gratitude as well. I'm grateful for clients. I'm grateful for the returns. I'm grateful for the executives who manage our companies wisely and with integrity to enable those returns, and those who acknowledge their shortcomings and adapt when they are wrong, because course correction is always an option. I'm even grateful for the mistakes that I've learned from, as humbling as they can be.<br />
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Today should be a reminder that a little gratitude can help us all aim more accurately towards equanimity, to help make better decisions, to improve process, to better steward ours' and our clients' capital and to compound the value of investments for the long term. These attributes will enable business longevity and durability, two things I want, along with growing my client base and continuing to compound returns.<br />
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As the poem reminds us, "... many fears are born of fatigue." That and days when the indexes are down 500 points or large holdings decline 20%. At the very least we can be grateful to have a place to sleep, so we can wake refreshed and prepared for tomorrow, whatever it brings.<br />
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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com0tag:blogger.com,1999:blog-3541352681651202123.post-37937953458007353342018-11-15T08:36:00.000-08:002018-11-17T06:14:14.259-08:00QRHC decision tree, b/c making decisions while frustrated is bad If QRHC had never issued '18 guidance and reported $2M-$2.5M in EBITDA this year, investors would have been happy. B/c let's not forget first and foremost, this company has done a really good job to date turning this business profitable.<br />
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However, they did issue guidance and they've fumbled in their own end zone mismanaging "the street". Here's a brief history of guidance ...<br />
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<b>11/14/17 (3Q17 report)</b> >> "Based on the aforementioned, <u>we expect revenue growth for 2018 to be between 10% and 15%, driving positive net income with estimated GAAP earnings between $2 million and $3 million, or GAAP earnings per share between $0.13 and $0.20, and estimated non-GAAP Adjusted EBITDA between $6 million and $7 million</u>, or non-GAAP Adjusted EBITDA per share between $0.39 and $0.46. Per share estimates are based upon the issued and outstanding common shares as of September 30, 2017. Before the full effect of our strategic shift is reflected commencing in 2018, we anticipate that earnings for the transitional fourth quarter of 2017 will be relatively flat with the third quarter.”<br />
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<b>4/2/18 (4Q17 report)</b> >> "Quest currently <u>expects positive net income during 2018 with estimated GAAP earnings between $500,000 and $3 million, or GAAP earnings per share between $0.03 and $0.20, and estimated non-GAAP Adjusted EBITDA between $4 million and $7 million</u>, or non-GAAP Adjusted EBITDA per share between $0.26 and $0.46. Per share estimates are based upon the issued and outstanding common shares as of December 31, 2017." </div>
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<b>5/13/18 (1Q18 report)</b> >> ""First quarter results were in line with our expectations, and the previously delayed customer implementations are beginning to ramp and contribute to sequential revenue and earnings growth.” said S. Ray Hatch, President and Chief Executive Officer. “We are building a significant pipeline of new business and expect new innovative programs, such as the one we announced with Shell, to provide significant growth opportunities. <u>We have made progress toward our annual targets and expect to show improvement throughout the year</u>.” ... on the call it was added ... "We're on track to meet our goals for 2018 which I'll remind everyone is an adjusted EBITDA of $4 million to $7 million."</div>
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<b>8/14/18 (2Q18 report)</b> >> "In addition, we have built a significant pipeline of new business that we expect will <u>lead to significant incremental growth during the second half of the year. Based on the continuing ramp of business with existing customers, our expanding pipeline of new business, and the earnings leverage in our business, we believe that we are on target to reach $4 million in Adjusted EBITDA for 2018</u>.”</div>
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And then on the call ... "<u>Although, it looks like we’ll have a ways to go to meet the lower end of the $4 million EBITDA number on our target, we showed significant progress towards that target in the second quarter, and are definitely moving in the right direction when it comes to showing sustainable improvement in our financial performance ... We’ve also built a significant pipeline during the first half that gives us visibility <b>to continue sequential growth in the second half of 2018 </b>and lays the groundwork for double-digit growth in 2019</u>."</div>
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Plus the CFO says ... "<u>I don’t remember ever putting out $3 million on the net income</u>." (??!)</div>
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<b>11/13/18 (3Q18 report)</b> >> "<u>We now expect Adjusted EBITDA will be approximately $2.0 million to $2.5 million for the year 2018</u>, which would represent a substantial increase of 150% to 200% over last year and set a new record for annual operating performance." </div>
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... and here we are, frustrated and disappointed, two feelings that generally lead to poor decisions. What information can we derive from this guidance fiasco?<br />
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The generous view:<br />
They just don't understand the ebbs / flows of new customer ramps<br />
They aren't experienced as pubco execs and don't understand how to "manage the street"<br />
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The less generous view:<br />
They have no visibility into their business b/c their IT platform doesn't enable them to access real time invoice management<br />
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Chairman (or some other shareholder) encouraged them to state absurd stupid guidance so they could sell</div>
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The least generous view: </div>
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They are liars and will say anything </div>
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They are clueless</div>
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I lean most towards the lack of visibility due to weak IT platform, b/c that's what my due diligence tells me, and its reinforced by the fact that <i>halfway through the quarter</i>, they have no sense of whether sequential EBITDA is going to be up or down.<br />
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It's not a problem to not know tech, but it's a problem to not fix it. </div>
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<i><u>You want to succeed in life? Acknowledge your weaknesses and work to fix them. Find people who pay attention who can provide honest critical feedback and then work towards fixing it. Everything is solvable. But if you don't acknowledge what you're bad at, you'll never ever overcome it.</u></i></div>
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So what do investors do now?</div>
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Either you can assume the Chairman who owns a lot of this company wants to make money, is reasonable, will start asking questions and invest in a solution. Properly implemented and utilized, the right tech platform would enable this company to scale significantly and generate fcf with little required re-investment. </div>
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Or you can not waste your time b/c you're not getting water from a rock, especially the one the Chairman lives beneath. </div>
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Regardless of what happens to the stock over the next year, you have to be able to look back and say "I made the right choice with all the information available." </div>
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I'm sure that if they'd never opened their mouths on guidance, we'd never be here and all this speculation would be unnecessary. But here we are, on the clock, mgmt has gnawed it's credibility to zero and this is now a "show don't tell" story. Investors must choose their own adventure.</div>
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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN. </div>
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Long Cast Advisershttp://www.blogger.com/profile/13731550239184386639noreply@blogger.com0