Vigil Health Solutions (cve: vgl)

I wrote this post just before the most recent quarter was released. Not much changed from a valuation standpoint than what is written here.

 

I’ve recently taken a position in Vigil Health Solutions. Of course, I didn’t discover this idea on my own, I stole it from others. Quality Small Caps wrote is up here and this company has been profiled on the MicroCapClub (you should join if you haven’t already). The Quality Small Caps write-up is quite detailed, I suggest you read it.

Background

Vigil develops and markets hardware and software solutions that guide care of and monitor residents in senior living communities. They focus on non-invasive monitoring for residents with dementia.

There are obvious demographic tailwinds with this one. The addressable market is growing quite fast and Vigil provides a high value service with a monthly recurring cost.

They are quality focused and not the cheapest product on the market. They differentiate themselves by focusing on integrating the monitoring system (door, phone, etc) with analytics that will trigger alarms to the relevant parties. For example, if a resident leaves his/her room at 2am when he/she normally doesn’t then the staff are notified and can intervene and ensure the resident is returned safely to their room. They also offer cloud based analytics.

Their service scales up from very basic to quite comprehensive, allowing them to compete on most (if not all) projects.

The sales cycle is long and much of the bookings are part of new facility construction which leads to quite lumpy revenue.

Management

There’s limited information on the management team in the filings, so here’s all I’ve been able to dig up:

  • Troy Griffiths – CEO
    • has been CEO since 2005 and with the company since 1998
    • started out as COO of Vigil’s predecessor
    • compensation last year was $128k in salary with $250k in total comp
    • own 820,000 shares or over 3 times his salary
  • Nicola Chalmers – CFO
    • has been with Vigil since 1998 as CFO
    • compensation last year was $82k salary and $120k total comp
    • owns 167,000 shares or roughly her annual salary
  • Steven Smith – VP R&D
    • has been with Vigil since 2006
    • $117k salary and $156k total comp
    • owns 1.1 mil shares or more than 3x his total comp last year

The team seems to be experienced in the business, is incentivized with common share ownership and gets compensated reasonably.

The variable part of their compensation is based on both financial and business performance. This is something you don’t always see in the Canadian microcap space and is really nice to see.

Board

For a company this size Vigil has a small but quite respectable board. Non-executive directors are compensated by mix of fees and options. Total compensation ranges from $25-41k per year.

  • Troy Griffiths – CEO
  • Greg Peet – Chairman
    • was CEO and Chairman of ALI Technologies which was acquired by McKesson Corp in 2002
    • owns 4.9mil shares
    • principal at GrowthPoint Capital
  • Ian Power
    • several senior positions
    • director of Pender Growth Fund
    • owns 15,000 shares
  • Lindsay Ryerson
    • VP and GM of Telematics at Vecima
    • owns 10,000 shares

Financials

See below for a quick look at the income statement. TTM rev at 6.3 mil, Ebit of 0.5 mil and ebitda of 0.5 mil.

The top line and bottom line have been growing. You can see that they have a strong backlog and bookings. Backlog is almost 4 mil.

They also have a large portion of their revenue based on recurring service and maintenance work. This portion should fetch a high multiple.

Valuation

At $0.50, the market cap is around 9.3 mil and the EV is 6.7 mil. See below for relevant valuations.

Not particularly cheap from a profitability standpoint. But I believe that this is a growing business and should see some operating leverage in the future.

Risks

Here are the risks that I can identify.

  • Liquidity for your personal portfolio. I am blessed to have a small amount of money. If you are responsible for a large amount of capital, it may be difficult to build or unwind a position.
  • Product/service risk for Vigil. There is a chance that despite a large and growing market, customers may seek solutions that Vigil does not compete in. Namely, the low priced and more commoditized portion of the market. Of course, Vigil may be able to adapt. Vigil’s average deal size is around $70k and the facility costs are usually over $10 mil. Go/No-Go decisions are not likely based on the Vigil solutions alone and it’s not a large portion of the cost of the facility.
  • Execution (most notably for a microcap). Many microcaps have the executive teams wearing multiple hats. They regularly have to bounce between long term strategic and day-to-day tactical decisions. That leads to increased importance on specific individuals.
  • Price volatility. Given the long sales cycle, dependent on facility completions and modest valuation, one can paint a scenario where the share price of Vigil could take a hit.
  • There may be concern of reimbursement (medicare/medicaid) risk. I don’t believe that this is a significant risk for Vigil. Given that they participate in the facility build out, they are not exposed to the typical reimbursement risk (at least, not to my knowledge).

Other Things of Interest

  • Wayen Enright owns 2.7 mil share or about 16% of the outstanding. I can’t find much about him online.
  • I’ll be attending the AGM next week

Overall, I think Vigil is a decent bet at these prices. They have a secular tailwind, strong and incentivezed management team, a board that compliments the business and a modest valuation.

Feel free to comment.

 

Thanks,

Dean

*disclosure: the author is long Vigil (cve: vgl) at time of writing.

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Maintenance

I went through a phase where I was listening to podcasts none stop. I thought that if 1/day made you smarter, then why not go for 5 or 6/day. Well, I realized that my brain can’t absorb that much new information constantly. It takes time for me to digest information and actually learn something, let alone recall what I learned. So, I don’t listen to that many podcasts. Maybe 3-5 per week unless I’m on a flight or long road trip.

Having said all that, I found a particular podcast from Freakonomics around maintenance to be particularly useful. It resonated with me on so many levels.

So many things in our life require boring, mundane maintenance. Our health (both mental and physical), our relationships, our car, our house, and of course our portfolio. Performing required maintenance isn’t sexy. No one is lining up to hear how I go to the gym several times per week, how I spend hours each week just “checking in” on companies in the portfolio, watching me enter my receipts and bills into a budget sheet or watch me brush my teeth twice a day. That’s ok with me. I’ll just keep doing it quietly in the corner by myself.

Neglecting maintenance rarely has immediate impacts. I could probably perform no trades and not check up on any of my companies and you may not even notice a change in performance after a year. After 3 or 5 years, you can bet that there would be implications. My operational background emphasizes continuous improvement, but what’s forgotten regularly is the maintenance required to battle entropy. Entropy is persistent and the fight against it is never ending.

The human brain doesn’t appreciate executing consistent recurring tasks that don’t have immediate benefits. It’s probably why maintenance is underappreciated and not really discussed.

Anyways, that’s enough of me rambling. Listen to the podcast.

In praise of maintenance

 

Thanks,

Dean

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Caldwell Partners (tse: cwl)

I recently took a small position in Caldwell Partners and I thought I would would do a post on why I bought. Just to be clear, it’s quite a small position relative to my other holdings. As usual, I stole this idea from others (h/t Gerry Wimmer and DeepDiscount).

I view Caldwell as a position that has good risk/reward profile and will make a nice addition to a portfolio that’s primarily driven by faster growing (and more expensive companies).

Background

Caldwell is an executive search firm that specializes in finding the highest levels of management and operations across many geographies and functions. They have been slowly expanding the number of partners over the years.

The numbers

At $1.20 Caldwell has a market cap of 24.5 mil and an enterprise value of 8.1 mil. Yeah lots of cash. It trades at about 6.5x ebit and 2.2 ev/ebit. That’s statistically quite cheap. One would expect a slow growth (or no growth) business for those prices. They also pay a dividend that is yielding 6.7%.

See below for the income statement

There is top line growth with some operational efficiencies being gained.

See below for geographical mix.

Canada has been flat to slightly up while the US has been consistently growing.

See below for some quick analysis by geography. Note the different axis min/max and Europe is starting from a relatively low base.

The last quarter was particularly strong in Europe, we have seen this before.

 

Positive Comments

The news release from the latest quarter had positive comments that indicates that momentum may continue.

“This was an outstanding quarter, bringing the firm to a new high-water mark for revenue,” said John Wallace, chief executive officer. “Our search teams throughout our geographic regions drove strong growth in both search volume and the value of assignments, despite pressure from foreign currency rates. We are especially pleased with the quarterly profit of our UK operations. With the largest level of new bookings and revenue in a single quarter in our history, we are positioned well for the fourth quarter. The significant increase in volume and our sustained focus on strategic additions to our partner team is creating search execution support needs, for which we will continue to hire in the fourth quarter.”
Wallace continued: “There is a lot of positive momentum inside our firm right now – our updated brand has been very well received since its debut, and we are excited about the recent expansion of our Agile Talent offering with the launch of our Value Creation Advisory Solution. We have an exceptional team of talented professionals at every level, all working towards a common goal – to provide value to our clients and shareholders – and it shows.”

Risks

I think the most obvious risk that came to my mind was LinkedIn taking away market share in executive search. Anecdotally, I would have expected this to have been a bigger impact on lower and mid level managers and not senior leaders in important roles. One would think that LinkedIn could actually be leveraged as a tool by Caldwell. I would think that given how important the roles are in the organizations that quality of candidates matter more than anything. I see the Caldwell brand as particularly important.

The other big risk that I can think of is the economy. Less hiring equals less need for Caldwell’s services. One does tend to get nervous after 9 years in a bull market.

These risks are not going away, so you will have to get comfortable with them if you take a position. For me, I will control these risks by limiting exposure to Caldwell.

Management

  • CEO – John Wallace. He jointed in 2008 and has previous experience in another executive search division of Hudson Highland Group. John owns about 20% of the shares.
  • COO & CFO – Chris Beck. Joined in 2013 as CFO. Recently appointed COO as well. Also has experience at Highland Parnters (which is a division of Hudson Highland Group).
  • Total compensation seems a little high, but much of the total compensation is based off performance bonuses.
  • Both of these gentlemen have employment agreements in place.
  • I think a key metric to think about is revenue per partner, which has been trending in the right direction.

Board

  • The board is comprised of 5 members with 4 of them being deemed independent.
  • The Chair of the board is not the CEO of the company.
  • The board is comprised mostly of corporate directors.
  • Many of the board members are also on the board of other public companies.
  • Almost all board meetings had full attendance in 2017.
  • Compensation is a mix of fees and shares. Average 2017 compensation was $40k/director.
  • I did some digging on the board members and there seems to be pretty good mix of strategic, operations and public market presence.

Summing it Up

I think a starter position is warranted. I would be willing to add with continued confidence in operational leverage or other positive news. Caldwell is nice because you get paid to wait.

Disclosure: the author is long Caldwell Partners at time of writing.

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Ego is the Enemy – Book Review

This book really resonated with me and I wish I had read it years ago. The book is divided cleanly into 3 sections (Aspire, Success and Failure). The chapters are short and digestible and do not drag on.

As a microcap investor, our job is not sexy, the outcomes are not consistent and the harder you work doesn’t necessarily translate into better performance. At least, that’s my opinion.

I have this feeling that the more I learn the more I don’t know. The more experience I have as an employee, father, friend, investor, etc. the more I realize that everyone is trying to figure things out to the best of their ability.

As a lifter, I felt stronger when I first pulled 400lb than when I first pulled 500lb. It’s a fascinating dichotomy as you develop as a person with curiosity and a willingness to grow.

Anyways, some of my favorite passages were:

  • What is rare is not raw talent, skill, or even confidence, but humility, diligence, and self-awareness.
  • Let the others slap each other on the back while you’re back in the lab or the gym or pounding the pavement. Plug that hole—that one, right in the middle of your face—that can drain you of your vital life force. Watch what happens. Watch how much better you get.
  • Impressing people is utterly different from being truly impressive.
  • When you are just starting out, we can be sure of a few fundamental realities: 1) You’re not nearly as good or as important as you think you are; 2) You have an attitude that needs to be readjusted; 3) Most of what you think you know or most of what you learned in books or in school is out of date or wrong.
  • There’s no one to perform for. There is just work to be done and lessons to be learned, in all that is around us.
  • The farther you travel down that path of accomplishment, whatever it may be, the more often you meet other successful people who make you feel insignificant. It doesn’t matter how well you’re doing; your ego and their accomplishments make you feel like nothing—just as others make them feel the same way. It’s a cycle that goes on ad infinitum . . . while our brief time on earth—or the small window of opportunity we have here—does not.

I recommend reading this book.

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A Short History of Financial Euphoria – Book Review

Yep… I read a book. I don’t read a ton of books or listen to a ton of podcasts. When I do read, I try to read something that isn’t as well known and not popular in the investing community today.

The book is written shortly after the crash of 1987. It goes through the biggest financial busts in history. All the way back to the Tulip-mania to the South Sea Bubble to the Crash of 1929. I found it almost therapeutic to hear the stories of the previous generations making similar mistakes with a slight twist. Each boom and bust a little different than the last. The commonality is the current generations belief that their version of financial engineering is better than the last. It’s absolutely fascinating how humans can make such similar mistakes and not learn. I can’t help but think of the current Cryptocurrency and Blockchain mania. Some of the characters presenting investment ideas make my skin crawl. And the ones that don’t are bursting at the seam with dissonance. But I digress…

My favourite passage from the book:

Let it be emphasized once more, and especially to anyone inclined to a personally rewarding skepticism in these matters: for practical purposes, the financial memory should be assumed to last, at a maximum, no more than 20 years. This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind. It is also the time generally required for a new generation to enter the scene, impressed, as had been its predecessors, with its own innovative genius. Thus impressed, it becomes bemused by the two further influences operating in this world that are greatly seductive of error. The first, as sufficiently noted, is the ease with which any individual, on becoming affluent, attributes his good fortune to his own superior acumen. And there is the companion tendency of the many who live in more modest circumstances to presume an exceptional mental aptitude in those who, however evanescently, are identified with wealth. Only in the financial world is there such an efficient design for concealing what, with the passage of time, will be revealed as self- and general delusion.

I have only been at this investing thing for 10 or 11 years, but I can count some minor and major bubbles in my short experience.

  • US real estate
  • Hard Commodity “Supercycle”
  • Emerging Markets
  • Precious Medals due to USD weakness and something about a fiat currency or gold standard or Chinese buying or something
  • Rare Earth Elements – some of these turned out to be good investments
  • Platform companies
  • Anything Saas
  • Crypto things
  • Canadian Real Estate, particularly Toronto and Vancouver – TBD I guess

The takeaway is to avoid getting swept up in these bubbles. It’s simply amazing how much wealth you can generate if your winners compound at 20% for several years and your losers only cost you 10-15%. The net return over 20-30 years (as long as you start with a decent slug of capital) is enough to finance a modest retirement.

The book is relatively short and quite easy to read. I would recommend it to anyone interested a quick history lesson on our previous mistakes. I think it is a good book for someone who has just gotten interested in growing their capital and is willing to learn from others.

 

Dean

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Energy Services Bets – Postmortem

So I made some bets on energy services company’s over the last 18-24 months or so. I thought now might be a time to do some sort of postmortem on the trades and see how they have performed. Full disclosure: recently I have added to some, sold some and continue to hold some of the company’s mentioned. See the Portfolio page for current holdings.

This post will be structured in 4 parts:

  1. Was it wise to bet on Energy Services sector relative to the overall market for the given time period? This should provide an indication of whether looking at the sector from a top down standpoint was a wise decision.
  2. Within the sector, did I pick stocks that outperformed? This should help me understand my stock picking abilities on an individual company basis for the time frame.
  3. Did the stocks that I chose outperform the market?
  4. Did the stocks chosen produce a positive total return?

Before getting started, below are the 4 companies I bought shares in. The first 3 are based in Canada, with the last one being Nasdaq listed.

Ticker Purchase Price Purchase Date Dividends Current Total Return Hold Time (yr)
psd.to $2.30 22/11/2016 $0.20 $3.10 43.5% 1.22
hwo.to $4.75 11/05/2017 $0.12 $4.01 -13.1% 0.76
ave.v $0.49 16/10/2017 $0.00 $0.53 8.2% 0.33
pfie $1.26 20/07/2017 $0.00 $2.19 73.8% 0.57

*Note the average hold time is 0.75 years (or 9 months)

Was it wise to bet on Energy Services sector relative to the overall market for the given time period?

When grading the bet on energy services vs. the overall market I chose the XIU.to (iShares S&P/TSX 60 Index Fund) and SPY (SPDR S&P 500 ETF Trust) for the overall market. For the energy services sector I chose the XEG.to (iShares S&P TSX Capped Energy Index Fund) and IYE (iShares Dow Jones US Energy Sector (ETF)) for the energy services sector.

Here’s how the bets have panned out:

Date Energy Services Market
22/11/2016 -17.6% 5.0%
11/05/2017 1.9% 2.5%
16/10/2017 -7.1% -2.4%
20/07/2017 4.5% 7.8%
Average -4.6% 3.2%

The results show that buying this sector because it was depressed may not have been the wisest strategy.

Within the sector, did I pick stocks that outperformed?

Using the same dates, how did the stocks that I chose do against their peers in the sector? This is definitely a nuanced question. Especially if you look at all the names in the ETF. Not sure it’s fair to grade a 50mil market cap Canadian company against a much larger company. Regardless, the results are below:

Date Energy Sector Stocks
22/11/2016 -17.7% 43.5%
11/05/2017 1.8% -13.1%
16/10/2017 -7.2% 8.2%
20/07/2017 4.5% 72.2%
Average -4.7% 27.7%

As you can see, on average I did better than the energy services sector during the time frame.

Did the stocks that I chose outperform the market?

When you stack up my picks against the market, you get the following results.

Date Market Dean
22/11/2016 5.0% 43.5%
11/05/2017 2.5% -13.1%
16/10/2017 -2.4% 8.2%
20/07/2017 7.9% 72.2%
Average 3.2% 27.7%

This is with the most recent pullback in the markets.

Did the stocks chosen produce a positive total return?

The results showed an average return of 28% over a 9 month time frame. No complaints here. Not sure I can really draw much of a conclusion over a 9 month period and with only 4 stocks being chosen.

Regardless, I wanted to share the results and invite any feedback readers may have.

 

Thanks,

Dean

Disclosure: See portfolio tab for current holdings.

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Aveda Transportation and Energy Services $AVE.v

Another energy related name….

I own things that aren’t energy related, but the recent downturn has brought some interesting opportunities forward. The market seems to be fixated on when Tesla will be able to remove all fossil fuels from our transportation needs and when machine learning will replace everyone’s job.

In the meantime, the broader oil and gas market has stabilized and activity is returning to more normal levels. Costs have been rationalized from contractors, service company’s and producers and the cost per barrel has dropped. While the rig count has bottomed, it remains well off historic highs. Many WCSB companies are once again complaining about crew shortages going into the drilling season.

Enter Aveda

Aveda Transportation and Energy Services Inc. is a Canada-based company engaged in the transportation of products, materials, and equipment required for the exploration, development and production of petroleum resources, including rig moving, heavy haul and hot shot services, and the rental of equipment associated with oilfields operations. The Company carries on its oilfield hauling activities in Canada and the United States under the name, Aveda Transportation and Energy Services; carries on its rental operations under the name, Aveda Rentals, and carries on specialized transportation services under Aveda Heavy Haul. Its rental operations include the rental of tanks, mats, pickers, light towers, well-site shacks and other equipment necessary for oilfield operations. It has presence in the Western Canadian Sedimentary Basin and in the United States, principally in and across the states of Texas, North Dakota, Pennsylvania, Oklahoma and West Virginia.

Their operations are strongly tied to oil and gas activity, particularly in the US. Entering the recession the company was able to do over $150 mil in revenue. They have recently eclipsed that with their Q3 2017 numbers.

See the income statement charts below…

Why I like it

  1. The idea is simple (like the author)
    1. The company is a cyclical and I believe the bottom is in for this cycle.
    2. Recent mention of higher opex in Q3 is indicative of activity levels.
      1. the company believes that many of the increased costs (example lodging) will be passed onto end users as budgets refresh in 2018.
  2. Easy capital allocation decisions
    1. Aveda will use 3rd party contractors to service the customer if they are unable to get some of their equipment to the site.
      1. this represents over 30% of consolidated revenue for Aveda and is very low margin (typically 1-3% gross margin). Aveda has equipment that was previously idled during the downturn to bring back online to capture some of this lost opportunity. See chart below.
      2. It should be noted that 3rd party contractors will always play a role in Aveda’s value proposition to customers, just a smaller role moving forward.
    2. They have also identified gaps in their equipment portfolio to dedicate capital towards, this being hoisting equipment.
    3. They have a pretty levered balance sheet, which means paying off debt with cash generated by the business will help derisk the thesis and improve the valuation.
  3. Recent addition to the management team.
    1. Ronnie Witherspoon recently joined the team and my impression is that he is a strong operator. The company has used the recent downturn to capture more market share.

Valuation

As with any cyclical in transition, current earnings are depressed and the valuation looks high. There are estimates of north of 20mil in EBITDA in 2018. Current market cap is just under 30mil and enterprise value is a shade over 100mil.

If the rebound materializes then I believe $0.50/share will be way too cheap for Aveda.

Other Items

Recent financing was subscribed heavily by the chairman.

AGM was held in October in Calgary and only 1 shareholder attended.

 

Dean

 

Disclosure: the author is long at time of writing.

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