Category Archives: Random Thoughts

Buy and Hold Quality Forever? Viemed $VMD.to

Congrats. You did it. You found a company (thanks to Chip for pointing it out) that no one was really looking at and put a decent amount of money to work when it mattered. You held onto it through ups and downs all along the way there were doubters to the story. You may have trimmed along the way, but it’s still a larger part of your portfolio than you would like and no longer a cheap company.

We will take a look at my real life example in Viemed – $VMD.to.  It’s less a profile of a company and more of a place to store my thoughts and look for feedback from others. This will be a quick one.

Backstory

Viemed was originally split from a Healthcare roll-up darling in Canada Patient Home Monitoring. It was purchased by Patient Home Monitoring in 2015 and eventually traded on the Venture in Dec 2017 after the split. PHM has a colorful history that was part of the reason the opportunity presented itself.

Viemed Healthcare, Inc., through its subsidiaries, provides in-home durable medical equipment and health care solutions to patients in the United States. The company offers respiratory services and related equipment, including non-invasive ventilators; bi-level, continuous, and automatic continuous positive airway pressure (PAP) machines; and oxygen units, as well as services of respiratory therapists; and respiratory disease management, neuromuscular care, and oxygen therapy services. It also provides in-home sleep apnea testing services to determine the existence of sleep apnea at home. In addition, the company leases non-invasive and invasive ventilators, PAP machines, percussion vests, oxygen concentrator units, and respiratory equipment, as well as sells medical equipment and/or patient medical services. Further, it provides therapy and counseling to patients in their homes using its technology. The company was founded in 2006 and is headquartered in Lafayette, Louisiana.

The company has a high touch service model that send Respiratory Therapists into the home, mostly for the proper use and monitoring of non-invasive ventilators (NIVs). This high service model helps the company separate itself from local and larger competitors.

Their service of treating patients in the home has proven to extent life and reduce hospital re-admission. This is a win for the patient’s quality of life as well as reducing costs to treat patients.

High Growth with lots of TAM

They have been specifically focused on stage 4 COPD that are candidates for their therapy. We all know the demographic profile of the US is a tailwind for this type of service. Despite the growth in recent years, they estimate to have about a 5% NIV market penetration.

There are opportunities to increase presence in existing states, expand into new states, expand product offerings, as well support patients that aren’t quite as severe as stage 4 COPD.

Management & Execution

Casey Hoyt (CEO) and Todd Zehnder (CFO) stayed on after the split from Patient Home to run the business. Both have proven to be excellent operators. Below is a list of accomplishments since early 2018.

  • surveys to educate their stakeholders on the value of their service – I’m refering to a KPMG and Harvard Medical School study
  • investor calls early on to tell the story
  • investing heavily to support patients remotely
  • Veterans Affairs contract win
  • growing in existing states and expanding into new ones
  • have growth in other products
  • providing PPE products during pandemic – this shows how quickly they can respond and is a nice bonus for shareholders
  • actively diversifying payor base and reducing their risk from a Medicare reimbursement cut
  • US listing

You can see they have been busy in just a few years.

Conclusion

This is all great, but with a market cap of over 500 mil and many institutional eyes on this, my edge of dealing with small illiquid companies has eroded. I will have to pivot my thinking if I continue to hold shares.

For me, VMD still warrants a position, albeit smaller. I have trimmed to where it is a less meaningful part of my portfolio. They want to be the largest respirator company in the US long term. That’s quite ambitious, but does provide some context to the long term plan for the business. They seem to have the runway and the strong leadership. I will be curious to see how they manage acquisitions if they do go down that road. There are risks to the business for sure.

In the past I have tried to model out the future with a couple of different scenarios. Those models never seem to work for me. I’ve posted it below for entertainment purposes. This model doesn’t include any (temporary) sales of PPE made during the pandemic.

At the end of the day, this is a business with a long runway and a solid management team. Valuation is not cheap, but I think with a long enough time horizon it’s worth having a position.

Anyone else own Viemed?

Thanks,

Dean

*the author is long shares of Viemed at time of writing

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Getting caught off guard; Recro Pharma ($REPH)

If you’ve been in this game long enough you are going to get caught off guard once in a while (unless you are part of Fintwit where everyone bats 1.000). I would say that of all the executive functions, emotional regulation is probably my weakest. It is kind of funny given that I realize that it takes a higher EQ than IQ to be successful at this investing thing.

There are usually some minor positive or negative surprises on quarterly or annual financial statements. More often then not these lead to a minor reaction in the share price, say 5-10%. These “surprises” are usually easily explained on the conference call or in the MD&A. Once in awhile, you really get a surprise and the stock rises or drops by 25+%. The company releases numbers and the stock gaps up or down. You had no idea and where caught off guard. These are the moves that test your conviction in the company and in your process. It’s easy to take credit for the positive surprises and blame management for the negative ones. In reality it doesn’t matter who’s “fault” it is, but how you pick up the pieces and move forward is what is important. It’s so hard to remember that in 2 or 3 years, you won’t care about this specific quarter unless you did something you regret based on the results.

This recently happened to me with REPH as they released numbers and the stock gapped down 40%. I’m going to share how I am approaching the situation now.

Here is a good post on REPH. The author does a great job going over the business and valuation. Check it out before continuing.

Despite not being in an industry that I’m familiar with, the REPH investment thesis was fairly easy to articulate:

  • decently high barriers to entry
  • deep relationships with customers
  • producing drugs that are not going away anytime soon
  • split of the 2 businesses (CDMO and specialty pharma) to focus on core competencies
  • not immediately or materially affected by COVID (at least from what I understood)
  • discount to peers and previous buyouts
  • issued guidance for the business and previously beat guidance
  • there is likely to be a push for drugs to be produced in North America given some supply shortages of certain critical drugs during the Covid pandemic

There were some things to get comfortable with:

  • high cost debt
  • no CEO for the CDMO business
  • not cheap on an absolute basis
  • not expecting stellar growth (though I am not expecting negative growth either)
  • management communication has not been great
  • compensation seems high for a business of this size, but that does seem to be normal for pharma companies

Given all this, I took half a starter position or about 3%.

Now with shares about 45% lower than when I bought, I’m left with a pretty small position.  At a this point REPH is about 2% of my portfolio. When the shares crashed, REPH occupied way more than 2% of my bandwidth. I needed to take a step back and reassess. I could average down, hold or lick my wounds and blow out the position.

Here are some questions I ask myself whenever I get one of these surprises:

  1. Is this a temporary bump in the road or is this quarter indicative of the long term prospects of the business getting worse?
  2. Is there a reasonable explanation for the surprise? Did management do everything in their control?
  3. When communicating bad news, did management take accountability?
  4. If you didn’t already own shares, what would you do?

Here’s what I came up with:

  1. I don’t think the long term prospects of the business have changed and the barriers to entry have lessened.
  2. Yes and No. They were expecting a re-entry of a competitor into their market (Mylan) and seemed to have the underestimated the impact. Covid has led to delays in reorders as customers have worked through some inventory on hand. As well, business development efforts were paused due to Covid.
  3. I do feel that they took accountability for what they could control and revised guidance was issued. They have set up a Covid task force to help navigate the pandemic. They adjusted costs and are looking to save 2 mil.
  4. If I didn’t own shares, I would likely wait on the sidelines.

Given that the position is quite small and I don’t have a better use of the capital at the moment, I’m going to hold on to my shares and not add or sell. I realize that this means that I am missing out on a potential rally in the shares.

I have come up with tangible milestones to build confidence in management before adding to my stake and working towards a full position. To me, these should all be complete by the end of the year.

  • Have a better idea of how the new competitor in one of main markets
  • Hire new CEO for the CDMO business
  • Refinance high cost debt
  • Signs of significant growth in new products to fill existing capacity
  • Meet previously issued guidance

When’s the last time you got a negative surprise? What did you do?

Dean

*the author owns shares of REPH at time of writing

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Buy when there’s blood in the streets? O&G edition

So many investors pride themselves on being a contrarian. I’m not really interested in labels, but I do like to increase my net worth.

Oil and gas has been out of favor for years now. Back in 2015 $WTIC was over $100, it bottomed in early 2016 around $30 and today it sits around $55. There are numerous reasons, many of them I’m not very versed in.

Activity in my backyard here in Alberta has been particularly hit hard. You can see the number of active rigs in Alberta below.

Western Canadian Select has been under pressure with the broader market and the difference between West Texas Intermediate and Western Canadian Select was growing until the mandatory production curtailments. The curtailments are in response to the inability for our oil to reach international markets given pipeline capacity constraints. You can get some more information here on the curtailments.

With so much negativity around oil and gas companies in today’s market I have decided to take another look. I’ve been down this road before.  I’m taking a top down approach, with some specific criteria in mind to lower my risk. I believe that we need at least stability in the oil and gas market in order for these trades to be profitable. We may not need significantly higher oil/gas prices, but I will need sentiment to change. I don’t expect all my picks to be winners, but I do expect this to be a reasonable way to deploy capital and generate above average returns.

As usual, I chose the oil and gas services/support companies. I like the indirect play on oil and gas activity and these small names seem to be delayed in sentiment which allows me to do research and build a position before shares move higher. I’ll do a quick post on each of the companies I have taken a position in. It may take several weeks or months to scale into each position. Stay Tuned.

Let me know if you have any companies you’d like me to take a look at related to O&G.

 

Thanks,

Dean

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