Marchex (MCHX, M.Cap: $164 million) is a call analytics company that helps businesses connect, drive, measure and convert callers into customers. Edenbrook has been a stockholder since the first quarter of 2015. Here are few notable points from the letter: (a) The Company’s management team successfully transformed Marchex from a primarily transactional business to a recurring revenue business focused on enterprise clients. (b) The company’s crown jewel analytics business is high-margin and recurring in nature.
Oxford Immunotec Global (OXFD): Significant percentage in Stonepine Capital, First Light Asset Management and Endurant Capital’s portfolio and signs of moat
The company is a pure-play product company focused on tuberculosis (TB) screening. The company’s SPOT.TB test is one of the two recommended alternatives to TST. In FDA pivotal studies in the United States, T-SPOT.TB was shown to have sensitivity advantages over QFN Plus, a competitor’s testing methodology.
Fabian Blank, a nominee of Harbert Discovery Fund at Enzo Biochem’s proxy campaign, published an article on LinkedIn titled “Why and How Boards create Value”. It is a quite an interesting read.
During the proxy campaign, the company issued 6 million shares to the chairman, who is also the largest single shareholder. This happened exactly on the eve of the record date for the 2019 AGM. Post-transaction, the chairman would hold approximately 1/3rd of the outstanding shares. In December 2019, the three investors withdrew their proxy campaign citing a recent private placement of almost 20% of DSS stock in the hands of Chairman Fai Heng Chan. The activists argued that the private placement “irremediably tipped the scales in favor of the Board’s slate for the vote at the 2019 Annual Meeting”.
The problem with opinions and studies of activism is that investors develop some sort of preconceived notion over a period of time. This can result in lost opportunities for investors.
As Buffet puts it, “The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot.” Each 13D filing is a pitch. There is no reason to react to every pitch.
TUCOWS (TCX): Significant percentage in Investmentaktiengesellschaft and Osmium Partners’s portfolio and signs of moat
Tucows is a publicly-traded Internet services and telecommunications company. (1) Domain Services: The segment accounted for roughly 72% of total revenue. This segment’s business model consists primarily of non-refundable, up-front payments, which generates recurring revenue and a positive operating cash flow. Generally speaking, domain name renewals are “sticky” in nature. (2) Ting Fibernet: Possible first-mover advantage in smaller cities: In addition to mobile telephony services, the company is offering a gigabit fiber network direct to the premises (FTTP) whether a home, a business or a multiple occupancy dwelling. The total number of subscribers under management nearly doubled in the past year – 5 million in Q1 2018 to 9.5 million in Q3 2019.
Quarterly letter from RF Capital Management: Garrett Motion operates in a duopoly market and enjoys a high ROI; faces indiscriminate selling from institutional investors
Mr. Roger Fan founded RF Capital Management LLC in 2017. In the latest investor letter, Roger Fan explained his rationale behind adding Garrett Motion (GTX, M. Cap: $760 million) to the portfolio. GTX is not your typical auto supplier. GTX essentially operates as a duopoly in the turbocharger market with BorgWarner. GTX is also at the top of the auto supplier chain, with an 80% variable cost structure. In the event of a downturn, we believe GTX will perform better than other suppliers.
In December 2018, Stilwell Activist Investment delivered a request to examine the financial records of the company. Since the company did not deliver the financial records, Stilwell Activist Investments filed a lawsuit compelling the company to make available for inspection certain financial records, pursuant to Maryland General Corporation Law. In April 2019, the company filed a motion with the Court seeking dismissal of the complaint. Stilwell Activist Investments opposed the motion, and on October 31, 2019, the Court held a hearing on the motion and denied the company’s motion to dismiss the complaint. Joel I. Sher, attorney for Stilwell Activist Investments, made an argument as to why it was important to deny the complaint. If you want to read the “real-time” courtroom debate, read this article.
(a) Migration towards SaaS (recurring revenue business model): The company has steadily grown its base of SaaS subscribers and continues to move towards becoming a pure-play provider of software and subscription services. (b) Patents: As at February 28, 2019, the company has 73 US patents and 200 foreign patents.
A high-quality transcription software is useful for buy-side professionals. Here are the options- (a) Automatic / computer-generated transcription (b) Human-generated transcription.
Cove Street Capital was founded by Jeffrey Bronchick. Roughly 30% of the companies in the portfolio have a market cap of less than $1 billion, while 60% are between $1 billion to $10 billion. The fund’s blog covers various areas – investment strategy, investment management industry, competitive advantage, activism, governance, compensation, etc.
Many view 13D filings as similar to an oral liquid antibiotic, i.e. to generate alpha, one should invest within a few hours or days. This is bad logic – period. Are there reasons for this delusional approach? One of the reasons could be due to the way an activist’s performance is computed. It is common practice to compare the stock price on the “first filed 13D date” with the stock price on the “date of exit”. Since this data is widely reported in the media, many think they should invest with the same horizon to replicate the return.
(1) Unique business model: No insurance, no prior booking, and cheaper than industry average. (2) Franchise model(3) For spinal manipulation, the company charges approximately $27, which is roughly 65% lower than the industry average.
In October 2019, the company agreed to sell its Workspace Management business for $120 million. After the sale of this segment, Asure Software will be a pure-play human capital management (HCM) focused company, and the recurring revenue mix will be more than 90% of total revenue.
(a) National Research Corporation derives 89% of total revenue from renewable annual subscription-based service agreements with its customers. (b) Michael D. Hays has served as CEO and director since he founded the company in 1981. His base salary is $127K, which has remained the same since 2005 as per his request.
(a) Brand: With more than 90 years of operation, Bluebird is an iconic American brand. (b) Reputation and regulation act as barriers to entry: The school bus industry has few competitors due to the importance of brand and reputation for safety and durability, compliance with stringent safety and regulatory requirements, an understanding of the specialized product specifications in each region, and specialized technological and manufacturing know-how. (c) Leadership in Alternative Fuel: Blue Bird is the market leader in propane, gasoline and CNG fuel powered-buses, having sold approximately eight times more alternative fuel school buses than all of its competitors combined from fiscal 2010 through fiscal 2018.
Under Delaware law, if a company fails to hold an AGM or take action by written consent to elect directors for a period of 13 months, any stockholder may petition the Court to compel that a meeting be conducted.Under Delaware law, if a company fails to hold an AGM or take action by written consent to elect directors for a period of 13 months, any stockholder may petition the Court to compel that a meeting be conducted.
When Petit launched the campaign, the company argued that Petit had engaged in material misconduct and engaged in improper accounting practices. Moreover, all three proxy advisory firms recommended shareholders to vote against Petit.
Even though Caligan Partners has filed a 13D in only two stocks, Merksamer is no stranger to activism. He served as a managing director of Icahn Capital for eight years before launching Caligan Partners. Caligan Partners argued that the individual components of the company’s portfolio are worth more than $30 per share, and the company enjoys several competitive advantages.
In December 2018, Michael R. Zapata, founder of Sententia Capital, was appointed executive chairman and president. In July 2019, the company appointed Zapata as CEO. As per the employment agreement, Zapata will receive a retainer fee of $90,000 and the company granted 48,000 RSUs. The RSUs vested in the amounts set forth below on the first date the 15-trading-day average closing price of the company’s common stock equals or exceeds the corresponding target price (listed below).
East 72 is a publicly traded closed-end fund in Australia. Its latest quarterly update mentions two sub-$200 million companies –Vulcan International and PICO Holding.
Well, the crux of the story is this – Vulcan International announced its decision to liquidate the company, which it will do “at its own pace”. East 72 argues that the company’s assets are worth (gross asset value – pre-tax) ~US$205/share, and states that, “for the first time, there is a hint in the 18 September 2019 release that “the Company intends to commence stockholder distributions.”
Greenhaven Road Capital runs a concentrated portfolio that focuses predominantly on stocks that have a market cap under $500 million. In the latest investor letter, Scott Miller explained his rationale behind making “jockey” bets. He wrote, “Given my operating experience, I am a firm believer that people build businesses. Particularly in the context of a smaller enterprise, the contributions of a “jockey” can be profound. These are not super humans who can overcome all challenges, but the right jockey pursuing the right strategy with a little bit of good fortune can be very profitable.”
Every time a company (under $2 billion market capitalization) appoints a new CEO, we research the track record of the CEO. This is a core research conducted by our team. Every year, hundreds of new CEOs are appointed. CEOs who have an A+ track record get hidden among others. By uncovering an excellent CEO, you can uncover a great investment idea.
On August 21, 2019, the secretary of Ivy High Income Opportunities Fund sent a letter to the fund’s shareholders. The letter requested shareholders to “defeat” a “dangerous proposal”. It was actually the choice of words that caught my attention.
So, what exactly is the dangerous proposal the letter referred to? It is the proposal submitted by Saba Capital to de-stagger the board.
PGT Innovations: Market leader in impact resistant windows and doors; Significant percentage in Broad BAY Capital and Spitfire Capital’s portfolio
PGT has the #1 position in the market for impact-resistant windows and doors in Florida. According to published data, the company enjoys over 50% of the market share in Florida. More than 80% of total sales are generated in Florida. There are some areas in Florida where building codes require impact resistance. According to a 2014 report by Karen Clark & Company, four of the top eight US cities that are most vulnerable to major storms are located in Florida. Over three million WinGuard® units have been installed, with zero reported impact failures. It is difficult for a new entrant to create this track record.
On August 15, 2019, the company amended the employment agreement of Nathaniel A. Davis, the company’s CEO. The company awarded a one-time issue of performance-based restricted stock, valued at $10 million that will vest over three years, subject to the company attaining its free cash flow goals for 2020, 2021 and 2022.
Retrieval of information is a vital tool for an investment professional. Searching Google drive is like a doing a Google search of your research files. It will retrieve all the documents (Word, Excel, PDF) that contain your keyword in both the content and title. The system will list all the documents that contains the keyword.
Tarkio Fund’s 2nd quarter 2019 shareholder letter explains their rationale behind buying Manitowoc. The core argument revolves around the CEO (appointed in December 2015) who is transforming the company through lean strategies.
The blog is run by Richard Lewis, who, with painstaking effort, has published transcripts of The Daily Journey Annual Meeting and other meetings. I came to know about this blog through Cove Street Capital’s blog.
Globalscape : Signs of moat, well-written CEO letter & significant percentage in Fondren Management’s portfolio
Huge recurring revenue: The maintenance and support segment of Globalscape accounted for 63% of the 2018 revenue. Maintenance and support (M&S) are recurring in nature. Almost all customers who purchase a perpetual license to use the EFT platform also purchase an M&S contract, for which they pay a recurring fee that is typically 20% to 30% of the perpetual license fee per year.
As per the company’s 10-K, GastroPlus has one significant competitor and has a high barrier to entry, as it would be difficult to validate new software to levels required to support regulatory submissions. In the past three years, that company generated roughly 69%-80% of revenue from renewals. The company’s renewal rates were 85% based on accounts and 93% based on fees.
Given the fact that a significant number of 13D filings are filed by first-time filers or those with little or no track record, many buy-side professionals will bypass the stock because they are unsure of how the company will benefit simply because a newbie activist has filed a 13D. By tracking significant changes that companies implement after the involvement of an activist, we can identify companies that are making changes irrespective of the track record of the activist investor.
Pay close attention to the CEO’s language. Also, check the number of times the CEO uses the word “acquisition”, and how bad news is delivered – it is a red flag if the CEO tries to obscure the details of bad news.
Transcat’s calibration service is critical to ensure that test equipment is operating according to specifications. This segment is supported by a recurring revenue stream. This segment maintains high margins and an inherent operating leverage. Out of the $1.4 billion calibration service market, 41% is controlled by 3rd party service providers. Transact enjoys a 17% market share of the 3rd party service segment.
On November 23, 2015, Rodney A. Bienvenu, managing partner of Spear Point Capital Management, sent a letter to the board of GSE Systems, and expressed his belief that the company enjoys several competitive advantages.
GVP has great barriers to entry, extremely high levels of industry and institutional knowledge, a very large base of current customers, and mission critical software solutions that once installed become extremely difficult to dislodge or replace.
(a) The company’s technology is the only mask-free, clinically validated alternative to the current standard of care for the treatment of respiratory distress.
(b) De nova: The FDA recently granted the company’s de novo request for an expanded indication for the Precision Flow Hi-VNI system. De nova means the device is “novel” with no existing classification or predicate device on the market.
(c) Recurring revenue: Vapotherm generated roughly 67% of its total revenue for FY 2018 from the sale of single-use disposables, nasal interfaces, cannulas, and adaptors used in conjunction with the Precision Flow capital units.
(d) Huge installed base + treated patients: As of December 31, 2018, more than 1.7 million patients have been treated with the Precision Flow systems, and the company has a global installed base of over 14,000 capital units.
Liquidity Services : Significant percentage in 22NW LP & Roumell Capital’s portfolio and signs of moat
The company creates liquid marketplaces for surplus and scrap assets. The company’s warehouse can be replicated – in fact, a competitor can easily double or triple the company’s warehouse capacity (which is less than 0.6 million square feet), but it is difficult to attract a large buyer and seller base. Think of Facebook, LinkedIn, eBay – the network effect itself acts as a barrier to entry.
Failure to reply to the company’s question before the deadline makes the nomination letter a failure: lessons for wannabe activists
If you plan to send a nomination letter, you are required to send it before the “deadline”, which can be found in the by-law / proxy statement.
Even though Saba Capital sent the nomination letter before the deadline, BlackRock Muni New York Intermediate Duration Fund argued that Saba Capital failed to respond to the board’s further questions within the deadline. As such, the company rejected the nomination.
(a) Kimmeridge failed to win the proxy fight at PDC Energy, citing failure to garner support from passive investors.
(b) NexPoint Advisors failed to win the proxy fight at Medley Capital Corporation due to poor institutional ownership and a huge insider ownership.
Most of the activist letters and proxy documents contain heavy arguments about the management and the board. These arguments range from capital allocation to corporate governance.
Some arguments are distinct and worthy to note. In fact, if added to the “investment checklist”, it could improve the investment research process. #1 Transactions that are favorable to an insider #2 Arguments against a buyback #3 Issuing stock options at a significantly lower exercise price than a recent buyback program
http://thepatientinvestors.blogspot.com/. This blog is run by Avram Fisher, Portfolio Manager at Long Cast Advisers. The blog is updated regularly – most recently he discussed Cynergistek, Quest Resources etc.
Occasionally, I write about a few technical hacks. This article is about the usage of “Pin” in windows.
There are two pin options: (a) Pin to taskbar and (b) Pin to this list
Roumell Capital’s top five stocks account for 57% of the total portfolio. ZAGG accounts for 17% of the total portfolio – Rank #1
Signs of Moat – The company’s screen protection products enjoy a 51% market share in the US market. Moreover, the company enjoys 67% market share of US battery cases; 35% market share of US external power; 23% market share of US wireless charging pods.
When Mr. Martin attended the annual meeting of Tidewater (May 6, 2019), he was handed a “Rules of Conduct” document. Basically, the document provided the rules for asking questions and information regarding “removal from the meeting”. Mr. Martin was clearly not pleased.
Activist’s minority board seat is not an insurance for alpha. Screen companies that experienced a majority board change
Even though securing a board seat is a significant activism milestone, as evident by few activist situations, gaining a minority board seat is not enough. Incumbent directors may not listen to the activist. By tracking companies that underwent “majority” board changes after activist(s) showed up, investors can increase the odds of success.
KEMET Corporations Moat: When was the last time you saw a company where its customers offered interest free loans?
KEMET is a market leader in polymer tantalum, with an estimated market share of greater than 50.0%. The company claims that over the years it has transformed its product portfolio from a commodity-based approach to a customized, design-in approach.
Activist’s letters and presentations are long, and most of the contents are arguments that highlight mistakes of the management or the board. We extract the sections that provide readers with “insights”.
Two wonderful letters:
1. Laughing Water Capital says Iteris, a micro-cap company, enjoys a huge market share and has the potential to be a $billion+ company
2. Edenbrook Capital applauds the Marchex management for its initiatives over the course of 2018; Believes that the stock is worth $6.25 per share
MAK Capital runs an ultra-concentrated portfolio with just five stocks. Agilysis is the second largest position, and accounts for roughly 25% of its portfolio. Agilysys has been a leader in hospitality software for more than 40 years. The company has shifted from the legacy business model (license and maintenance) to the SaaS model. Generally speaking, SaaS customers face huge switching costs – (a) risk of data loss from migration from one platform to another platform; and (b) the learning curve involved with learning a new platform.
Looting of assets and attempt to kill: Investors who track 13D filings have every right to remain silent
Even though shareholder activism is a fertile hunting ground for finding ideas, there are some situations when it is better to avoid getting involved too early. For example, from an investing standpoint, when a shareholder refers to an insider’s transaction as “looting of assets” and “little more than theft”, it is better to stay away from the situation until the “core problem” is solved.
(1) Huge insider ownership is always a hurdle in a proxy fight, irrespective of shareholder sentiment. (2) ISS, a proxy advisory firm, approves an activist investor nominating a family member as a nominee. (3) Overcommitted nominee is voted against by ISS and G&L.
As a part of preparing an investor presentation, the activist group visited 200 stores, interviewed 100+ industry experts and 40 former employees, surveyed 650 customers, reviewed 15 years of SEC filings and 10 years of earnings transcripts, had discussions with advisory firms… well, the list continues.
Israeli District Court is shareholder friendly: Enjoins a dilutive offering by directors during a proxy campaign
Israeli Companies Law is generally considered shareholder-friendly. Joseph Payne’s victory in blocking the attempt of the Board of Arcturus Therapeutics to dilute shares by 24.5% before the EGM date is a perfect example of shareholder-friendly laws in Israel.
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