LCA's 1Q19 review ($INS, $CTEK, $QRHC)

I posted LCA's 1Q19 results on my website here. It includes brief discussions of three portfolio holdings: INS, CTEK and QRHC. As I wrote in the email that went out ... 

"Cumulative returns on accounts managed by Long Cast Advisers increased 20% in 1Q19, net of applicable fees. This was better than the baseline market indices. Returns for separate accounts managed by LCA ranged from 17% to 26% for the quarter. 

Since inception three years ago, LCA has returned a cumulative 96% net of fees, or 22% CAGR, ahead of the baseline market indices. Because our portfolio is comprised of just a handful of typically very small businesses, it is expected that returns will vary considerably from the baseline.

High returns certainly brings a lightness to the step but a strong quarter like this is really a cautionary tale on small sample sizes, the marginal impact of outlying events and the ability for anyone to look smart doing something right just once in every while. To me, it just illustrates why investors need focus on process, experience, differentiation and repeatability."

If I can simplify what I've learned in my first three years running a growing investment mgmt firm ...

you gotta pick the right stocks
you gotta own them at the right weighting
you gotta find clients who appreciate your worldview
you gotta have enough assets to make it all meaningful
and you gotta manage the administrative burden with an eye on time and costs

... it's complicated but the effort to get it right is energizing. 

It remains my desire to grow LCA thoughtfully and incrementally with just a handful of new clients per year. If you would like to talk about my process, experience, differentiation or repeatability, please drop me a line. I very much appreciate those that have and the partnerships made along the way. 

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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.

the full monte: a compendium of unanswered letters and emails to QRHC CEO & Chairman

It's been on my mind to share all my unanswered inquiries to QRHC. 

I'm sure they do not represent my finest moments - I've failed in getting many of these questions answered - but I try to be an open book and here at least offer my mind state on the stock, with the hope that others can learn and maybe someone else can ask these questions. 

I continue to reflect on what I could have done differently. I think too often I shot from the hip and maybe was overly aggressive. But don't think it's all on me. For ~$350k in annual comp it's fair to expect the CEO of a publicly traded company to answer reasonable questions from a large shareholder. I think when a management team or Board don't answer reasonable questions it ultimately reflects most poorly on them. 

In this case in particular, it also reinforces criticism I've received on the CEO's mgmt style, namely not wanting to hear about or address bad news. 

I met with the company on Oct 26, 2017, in non deal roadshow. seemed normal. The CEO gave a rebuke when I asked about the lack of insider buying (along the lines of 'what I do with my money is my business'). I'd also raised an initial issue with Glassdoor Reviews and was told along the lines of 'I take that seriously and i'm offended by negative things people write.' I was told he was heading back to TX for the annual Halloween party, a teamwork building and morale boosting kind of thing.

I followed up with this email from that never rec'd a response, including questions from two other investors I brought to the meeting ... 

... mgmt took my many questions on the 3Q17 conf call, November 14, 2017 (the one where they had "far out" guidance). I thought they were generally good questions. 

From Nov '17 to March 2018, CEO responded to two or three simple emails about conferences I could attend to learn more about the industry and a potential visit as I'd expected to be passing through the Woodlands. 

Then came 4Q18 (April 2, 2018) when they started walking back from "far out guidance" of just a few months earlier. These questions were unanswered ... 

... Concurrently I'd sent CEO this direct email ... 

... I was told they didn't see me on the queue and would call soon. Two days later, nothing. It's likely I was frustrated when I sent this, subject line "Glassdoor reviews" ... 

"Ray - 

Your reviews - especially the most recent ones - seem to indicate a pattern of lack of organizational expertise. 

Given how hard it is to even schedule a phone call with you, or for either of you to pickup the phone and return a call to a shareholder with 160,000 shares, I'd have to say I share their experience ... and their concerns. 

/Avi"

... I was told then by IR that had really pissed off the CEO, so I wrote him an apology ... 

... I figured at some point they'd get back to me. A week later I followed with another email, cc'ing their IR "jeff" ... 

... still nothing. 

I don't think I'm asking anything inappropriate. I'm not brow beating the CEO for the way he runs his company. I'm not prodding him to do anything unethical. I am not suggesting any steps simply to raise the stock price. I want this business built on a solid foundation of scalable service and delivery and I think these are fair and important questions related to those issues.  

So I decided to go write to the Chairman. This is a fairly tepid ask from a April 2018 letter. I probably should have asked more, but I just wanted to gauge their appetite for small steps towards success ...  

... I got a message through IR: Not interested. 

In May, this went out, a request to address tech investments on the upcoming call ... 

... The next week I followed with another note to the Chairman, suggesting a director who could help unlock value. (It looks like we might actually be getting that with the prospective new chairman as per the SEC filing on March 15th) ... 

... still not getting any engagement. I think by June I realized I've nothing to lose b/c they're not responding no matter what I ask, so I sent this fairly passive aggressive email about technology ... 

... it's just an effort for them to indicate that they'll take seriously an issue that I understand is at the heart of the business. Guess what? No response. 

And neither to these questions after 2Q18 ... 

... nor this after 3Q18 ... 

... after which I sent an email to their IR ("Dave") cc'ing the Chairman. I'm told the Chairman forwarded it to the CEO, and it didn't go over well ...

... from there on, I basically gave up trying to get in touch with them. 

After the filing about the potential new Chairman, I regrettably wrote these separate emails to the Chairman and CEO, over excited and shooting from the hip and trying desperately to paint myself as if i'm "on their side". That was stupid. I feel a bit sick about it ...  

  ... and to the CEO ... 

... I'm throw up a little reading it. Those were wrong. 

The guidance snafu aside, the company hasn't done a bad job to date - they've transitioned to CF+ by shrinking and changing their revenue stream - but topline growth is hard and they just seem to have zero visibility in their business, which I think comes down to a lack of solid IT. 

Former employees I've talked with indicate a small company with IT systems that don't communicate well and data still rolling into excel. I also get a sense from those I've talked with that the CEO is an exceptional salesperson but has the cliched management weakness of surrounding himself with people who agree and limited interest in dissenting opinions. My proximate experience supports this view. 

It's not an uncommon model. It''s definitely hard to find "five tool executives" in small cap land. But this is where the Board needs to step in to make sure the CEO is surrounded with people who can fill holes. 

I view all of these as fixable problems, which is why I hope the agreement with Dan Freidberg is seen through to completion as I hear he could really help focus the company on the technology piece that's been worrying me most. However, I have no insight into why the offering is taking so long. We'll have to see. 

At 0.3x revenues, mid-teen GP margins and 2x gross profits, I think there's an opportunity for value creation, either organically and with good tech so they can scale SG&A or by a sale to a company that has good tech and wants volume to feed their system. It's not the greatest business in the world but it's one that solves a recurring need for customers and when done right should generate cash that can be reinvested at high rates of return. Time will tell if this view proves correct. 

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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.