Investment Blog

Blind Spots

“Bull markets end when the perception of earnings growth disappears […]. Manias, on the other hand, end when the market runs out of buyers.” – Andy Kessler

2020 ended with the world collectively eager to put a challenging year in the rear-view mirror while looking forward to the light at the end of the tunnel. The US election results are now (mostly) behind us, and we have two approved Covid-19 vaccines being distributed in the US with an additional 5 being used in other parts of the world.  What is most surprising to me is, having witnessed a year where we endured the worst global pandemic in a century, the fastest bear market in history, a global recession, and a contentious presidential election; that I would find myself in the same place I was exactly a year ago: contemplating whether the market accurately reflects the reality of our economy.  

Stepping Back from the Noise

“And so I moved that very day into the heart of a quince, where the seeds are few and almost silent.” – Khalil Gibran, from the poem “The Pomegranate”

I was always taught that evolution is a slow process that occurs over generations.  The reality is that evolution can occur quickly.  A meteorite slams into the earth, smoke and debris deny plants of sunlight, and the dinosaurs begin to die as their food sources whither. Mammals emerge from their tunnels and thrive as they realize their former predators are quickly dying away. Any change in our external environment can lead to faster evolution as species do what it takes to survive.  Scientists have even shown[1] that a species can evolve in real time. 

Viemed Healthcare (VMD) – “Healthcare from Home”

Company:    Viemed Healthcare, Inc. (VMD)

Sector:     Healthcare – Healthcare Equipment 

Price/Market Cap:   $9.85/$358M

Target Price/Implied Upside:    $15/52%

Thesis

Specializing in respiratory healthcare services, Viemed Healthcare (VMD) is a fast growing, free cashflow generating business serving an underserved niche market with tremendous runway ahead. VMD is building a moat by developing strong relationships with hospital systems and doctors while generating cost savings benefits to the healthcare system. 

The Market Looks Forward

“When you put a fire under a pot, you learn what’s in it.” — Malcolm X

If a deadly pandemic overtakes the world, but the market looks past it, did the pandemic really happen?

The equity markets staged a dramatic rebound during the quarter as local economies opened across the country.  The question for investors is, how can the market turn so positive when data points to rough months ahead?

The short answer is “because the market is forward looking.” Investors are peering many months into the future to a point when Covid-19 fades away, the population gains herd immunity, or researchers find an appropriate treatment or cure. Investors are looking past current data towards a recovery. 

Should the Market be so confident? 

Our World Has Changed

“Crisis does not create character; it reveals it.” – Jim Stovall, Wisdom for Winners

In just a few short months, our world has changed. 

Even the word “pandemic” is scary.  Health officials have labeled the coronavirus as “novel,” because the human species has never been exposed to it.  We seemingly have no natural antibodies. As the news of the virus has unfolded, and nations and communities accepted that our first (and possibly only) line of defense was the concept of “social distancing,” I gained a newfound respect for survivors of previous pandemics. The Bubonic Plague. The Spanish Flu.  Or even 1612 when Native Americans welcomed the Pilgrim settlers traveling from Europe bringing with them smiles, smallpox, and leptospirosis[2]

Intelligent Systems (INS) – “Small and Focused Wins”

Sector:      Technology – Internet Services and Infrastructure

Price/Market Cap:   $40.71 / $362M

Target Price/Implied Upside: $92 / 125%

Thesis

Intelligent Systems (INS) has established itself as the go-to payments-processing software provider specializing in complex credit. Previously under the radar, the company is attracting attention after being tapped by Goldman Sachs and Apple to support the new Apple Card.  The announcement was a whale for the company and, if the partnership is successful, could set Intelligent Systems on a path to multiply in size while attracting other large clients seeking highly flexible and customizable software to manage authorizations, fraud identity, interest and rewards calculations, and other merchant processing functions. Intelligent Systems’ CoreCard software was purposely built to uniquely address the rapidly evolving merchant processing market with solutions that other large software providers are not built to handle.  They have made investments in their software technology that create a barrier to entry for competitors.

Defying Gravity

Overall, 2019 was quite a year with most indexes increasing by roughly a third.  From a historical perspective, the period from 2010 through 2019 was the first contiguous decade in the history of the market without a recession[1].  During this period, we had only one (2018) negative year.

The gains of 2019 were phenomenal in light of the many headwinds facing investors heading into, and throughout, the year:

GameStop (GME) – “Swimming Against the Current”

A company we have been tracking and researching for better than two years now is GameStop (GME).  Our initial research on GME was predicated on the thesis that the company was highly overvalued with eroding earnings and reverse network effects.  For reasons described briefly here, we now believe there is value in the stock. However, investors will be unlikely to realize this value.

A Return to Rationality

In July, the current U.S. expansion became the longest on record. Gross Domestic Product (GDP) in the second quarter increased at an annual rate of 2.1% and there are still new jobs being created. While these and other government figures suggest that U.S. and global economies are continuing to expand, there is growing evidence of weakening economies internationally and signs that the current U.S. expansion is losing momentum.

Par Technology (PAR) – “Uncovering the Crown Jewels”

Company:         PAR Technology (PAR)
Sector:                Technology – Application Software
Price/Market Cap:                        $26.30/$458M
Target Price/Implied Upside:     $41/55%

Thesis

PAR Technology Corp. (PAR) is an underappreciated, cloud-based, Point-of-Sale (POS) software provider anchored by its legacy as a government contractor.  New leadership has redirected the company to be laser focused on their future in the cloud.  The Balance Sheet has been recapitalized with a $80M convertible debt raise.  Proceeds will be used to accelerate the growth of their cloud based recurring revenue, and solidify their market position through bolt-on acquisitions. Growth of SaaS recurring revenue will improve margin and profitability profile and force a multiple revaluation. The Government business will continue to be a source of cashflow until the company finds an attractive buyer leaving the company as a pure-play, cloud-based restaurant and hospitality solution. Longer-term, the real growth opportunity may be in their nascent merchant services business launching in 2H 2019.