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Sangoma Technologies Corp (STC.v) – Update

I am going through my current portfolio and sharing thoughts on my holdings in hope of getting some feedback from readers. At the very least, it’s a therapeutic exercise for me. Please don’t expect clear succinct thoughts from these posts, it’s more of a mental dumping ground for my brain.

I originally wrote up Sangoma way back here and briefly mentioned it here. Since writing Sangoma has made some acquisitions (and integrated them), invested new products and services, and is seeking a larger share of wallet from customers. Since coming onboard, the CEO has stated that he wants to grow top line and move away from one time product sales towards having recurring revenue to remove lumpiness in the business.

All this has led to a shift in the financials as the new services, acquisitions, and legacy products all have different margin profiles. As with many analysts on the conference calls, I was somewhat skeptical of the desire for top line growth given how much cash was sitting idle. Most of the high cash net-nets sit on cash and do nothing with it. At least with Sangoma, management was acting.

All the hard work has led to a higher top line, less lumpiness through the year, and still have the combined gross margins above 60%. Operating margins have been challenged as this work was integrated and more expenses were required to market to new verticals and geographies. All this was done while maintaining positive net income over the last two years in a corner of the market that is not booming.

The tone from management has been consistent stable growth in top line will translate into a stronger bottom line eventually. Around 40% of revenue is now coming from services and the legacy products now make up about 30% of revenue.

Below is a look at their product vs. service revenue mix. Quite a change. And you can see the working capital required as a % of revenue has declined as well.

STC rev mixstc-wc

Here is a look at the new IP phones that bundle several of their products together. Demand has been strong according to the last two conference calls.

Over the last two years there have been some angry investors attending the conference calls that were not supportive of management’s actions (I could only imagine how many emails and calls the company has gotten directly). From my vantage point, management has executed the plan that they have consistently communincated to investors.

Will 2017 be the year that we see the hard work bear fruit? I am betting on it.

STC.v was also mentioned on Investorfile.

Q1 2017 results should be out really soon.

 

*author is long shares at time of writing

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Life After Renting for 1.5 years

I feel bad sometimes for not posting more on the Petty Cash. The site has brought a ton of connections and ideas to me and sometimes I forget that. I heard somewhere that the key to any successful relationship is low expectations, I think that applies to anyone still following the site. Expect (next to) nothing and be happy when anything happens.

I want to take some dedicated mental energy and share how the transition from owning a home to renting has been. To be fair, I don’t know if owning is better than renting I just know it works for me. This won’t be me convincing you to rent or buy, but just me putting some thoughts, feelings and experiences out there. For my family owning vs. renting really came down to the math.

I know there are many home owners out there who are waiting for a crash and want to time the market. As well, there are many people who don’t own currently that feel the societal pressure to own a home.

First, the former is just a stupid idea. To think you can actually time when the market is going to crash (and presumably jump back in after the crash) is asinine. Your ability to time the market is likely no better than anyone else’s.

The latter is tough to quantify. Generally we have been taught as Canadians that anyone successful owns a home and learn to associate renting as someone who “is starting out” or “doesn’t get it”. People said congrats when I told them that I was approved for a mortgage. In fact, many people brag on how much they are approved for. When I tell people that I sold my house to rent I get this puzzled look. Most immediate dismiss anything that comes out of my mouth after that. “How can he know anything about investing (or anything else for that matter) if he isn’t even smart enough to buy a house.”  That’s what I imagine others are thinking of my decision. It takes more courage than you realize to act upon something that makes sense for your family when you know you will be scrutinized by your peers, friends, co-workers, etc.

For me and my family it came down to math. Simply removing emotion and letting actual facts make the decision.

Owning – pros and cons

Pros

  • capital appreciation in the house
    • one should note that unless you are able to pick the right house, capital appreciation expectations should be limited to annual inflation rate as housing costs make up a large portion of the annual inflation rate
  • likely inflation protection vs. holding cash in a bank account
  • stability (for the term) in mortgage payments
  • ability to pay off mortgage faster and get a guaranteed after tax way to build your net worth
  • Stability for the family – I can pretty much know where I will live for the foreseeable future
  • can borrow against the house (via HELOC) for anything I want
  • Tax free capital appreciation for your primary residence in Canada
  • It’s easier to fit in

Cons

  • Property tax goes up pretty much every year
  • Can be expensive
    • You buy a new(er) house and have big payments
      • Something to note is that many have had bad experiences with new homes still not being built with high quailty
    • Or you buy an older/fixer-upper and have to spend time/money maintaining it
  • Reduced mobility
    • it takes a lot of time and money to move (especially if you have a family)
  • Your Time required
    • cutting the lawn, painting, shovelling snow, raking leaves, etc

Renting – pros and cons

Pros

  • the biggest one for me is time
    • none of my time is dedicated to maintaining the house: no yard work, no snow shovelling, etc
  • usually you can lock in your expenses for a minimum of a year (likely longer)
  • no surprise breakdowns/repairs that you have to pay for
  • most people who rent have high mobility
    • they are able to pick yup and move quicker
    • that means less “things” which for me led to less mental clutter and more time/energy to focus on the things I truly value
  • If you have capital built in your house, you now have better access to it

Cons

  • You can have very little notice on when your house/condo/apartment can be sold and you have to move
  • You have to make rent payments as long as you rent
    • eventually when you own you stop making mortgage payments
    • I mean that’s the dream right?
    • You get to live in your house for free at some point
  • You could have a bad landlord
  • You aren’t able to “make it mine” by painting the rooms whatever color you want or knocking down a wall or renovating the kitchen

For us it was a matter of taking the capital that was tied up in the house and investing it in the public markets to (hopefully) get a higher return than if the capital was left in the house. This of course requires a ton of time.

You also have to consider ALL the expenses with home ownership. Property tax, utilities, sewer, additional fees from the city to upgrade streets, appliances, anything that breaks down.

Once we ran the numbers and realized that it makes sense for the family, we executed in pretty short order. It was actually quite therapeutic to downgrade the size of our living space. We got rid of a ton of things that we didn’t need. Without being forced to move, we likely would have kept many of those things.

Post Move Feels

Positive

  1. The largest thing that I noticed since we moved was how much extra time I have to do things I really want to do. I have been surprised with how much I’m into fitness. I spend a decent amount of time in the gym and wouldn’t be able to do that without sacrificing something else if I had a house to maintain. I also get more family time which is really appreciated in Edmonton’s short summer. Investing performance has improved as I spend more time understanding each business I purchase.
  2. Probably more important that the time is the reduction in mental clutter. I don’t worry about remembering to do or organize something related to the house.
  3. Going against the grain by renting has given me courage to challenge other societal norms. If I didn’t try renting then I wouldn’t have the courage to challenge other traditional beliefs.

Negatives

  1. We have less geographical security. Once in awhile you hear a horror story about someone renting and having to move with very short notice. This has crept into my thoughts a few times. We like to keep as nimble as possible so we are able to react to surprises.
  2. Even after almost 2 years, I still have friends and family think that I’m “wrong”. It’s funny how many people have it ingrained that you just own a home.

Not sure if it’s positive or negative, but many people want me to look stupid. Since they are so emotionally attached to rising house prices, they feel that anyone who doesn’t own a home is a bet against their fundamental beliefs and values. It’s hardened me as a person. In my 20s I would seek acceptance from people, in my 30s I really don’t care what others think of me.

Concluding Thoughts

The only thing I would encourage the reader of this article to do is to ask yourself what is right for you. Not what is easy. But what makes the most sense for you as a person. It wasn’t always easy and yes there is always times of doubt, but in the end renting has been a worthwhile endeavour.

If anyone has a similar experience, please share it.

Thanks,

Dean

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Evolution of a “Value Investor”

This post will not involve in depth company analysis, instead I wanted to catalog some things that have changed with my philosophy when it comes to picking stocks to invest in.  Recently, some good news was released on one of my top holdings that clearly displays my change.

I started purchasing Pivot Technology Solutions (PTG.v) in the summer of 2014.  The idea behind the investment was a cheap company with decent ROIC (though admittedly low margin), capable management and a large overhang in the capital structure.  There was a large amount of preferred shares outstanding that I felt were preventing the company from being properly valued by the market. The common shares are illiquid and well under $1, making it something that many institutions would ignore. Given who owned the common and preferred shares, it would make sense to do some sort of conversion of the preferred to common to clean up the capital structure. Management had mentioned several times that they had intended to do so.

I continued to purchase shares throughout the fall of 2014 as the company executed on operational promises to investors. There was still mention of some sort of conversion in the future. I was happy with management running the business and the focus on operations. I figured the conversion eventually happened whether organically or being forced by some sort of activist once the value of the business was made apparent.

At the beginning of March 2015, the company announced some good news:

  • company officially initiated a process to convert the preferred shares to common shares
  • announced a normal course issuer bid to repurchase. though many company’s announce this and don’t follow through
  • initiated a quarterly dividend starting in Q3 2015, annual yield at today’s price is around 10%

Old vs. New

The previous version of myself would have simply sold the shares on the good news and likely plowed the winnings into something that was “cheap” (likely one of my losers). I would put money into something the market doesn’t understand and likely a dinky little company that abuses the share price and struggles to execute. I would expand the numbers of company’s I own, which has two effects on the portfolio.

  1. Another company for me to keep tabs on, therefore increasing the demand on my time to maintain an understanding of yet another business with yet another management team.
  2. Increasing the number of company’s in the portfolio reduces the effect that the winners have on the portfolio as a whole.

The new version of me took a few days to reflect and reassess. I reviewed the business, the management team and what I see as the market’s expectation going forward. I have concluded that shares are still cheap, and I have recently increased my position.

Why would I sell a cheap company that is growing and shouldn’t need to dilute shareholders in the future?

Dean

Disclosure: The author is long PTG.v

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Hang in there, more posts are en route.

Posting has slowed down lately. Mostly becasue I have been busy.

There are a couple of companies that I am researching that may find their way into my portfolio.

Some new features…

  • I have added a “Contact Dean” page, where you can email me about anything.
  • There are a couple of new links in the blogroll. Some are under the “friends of the blog” and a couple new investing sites. Check them out!

Dean

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Comment Update

Just an update to those that have been following.

If you left me a comment and I didn’t reply, it is not because I didn’t like it or thought it wasn’t relevant. It’s because WordPress has been putting all my comments in the “spam” section. Though I think 99% of them were spam, I have been deleting everything in that folder without reading the comments. It wasn’t until today when Adam from ValueUncovered commented that I realized what was happening.

Sorry for any inconvenience. Please feel free to comment going forward.

I should have an update on a couple of holdings soon…

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Update

I have reached the point were almost all of my positions are out in the open. There are a few that I have, but know I will be selling as soon as I can find a replacement. Having to put my ideas out there has helped my analysis process, even if there isn’t much in the way of feedback. The toughest thing about this blog is trying to get all of my grammar and punctuation in order.

Where do we go from here? This blog has been started primarily to benefit me (I know it’s selfish), but many “younger” value investors can benefit from my successes and lessons. I know reading other blogs has saved me many hours and lots of money. Given that most investment money managers can find the value of my portfolio between the cushions on their couch, mostly smaller portfolios will benefit from my analysis. In the future I will blog more on:

  • Updates from current ideas
  • Companies that I pass on (like ADF)
  • My different valuation models
  • Position sizing
  • Measuring portfolio performance
  • Other things to watch out for

I would like to start posting more often, perhaps weekly. Lets hope I can find the time. I may even start posting on my performance. I don’t want to make this blog “Dean’s thoughts on headline news…” or “Dean knows what this country needs…”, as that usually isn’t constructive and won’t help save or help make you (and me) money. I will stick to hard boring tangible number crunching, sometimes it’s the only thing that makes sense to me.

Dean

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Good news

You have stumbled onto Petty Cash. I hope to have something meaningful shortly.

Dean

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