Hourglass Journal - Disruption, $MPTI, & Cutting Losses
Welcome back everyone! Hope you didn’t miss me too much, and apologies for the brief absence.
Enjoy the article!
“All the math you need in the stock market you get in the fourth grade”
Weekly Watchlist Stock
M-Tron Industries - MPTI 0.00%↑
Talk about a debut as a publicly traded company. Since its 2022 IPO, M-T ron Industries has delivered a 182% total return and has grown top- and bottom-line contributions by 30% and 121% respectively.
Firmly in microcap territory at a market cap just over $100m, the company designs and manufactures radio and microwave frequency devices for a wide range of use cases that includes defense, aerospace, industry, and aviation.
Essentially, M-Tron is a picks-and-shovels play for airlines, autonomous vehicles/drones, satellites (imaging & connectivity), and communications, all of which have significant tailwinds over the coming decades. M-Tron’s customers include some of the largest operators in these industries, including General Electric, Lockheed Martin, Boeing, and Honeywell.
Not only is the company and the industries that it serves very attractive, M-Tron’s balance sheet also passes the quick and dirty eye test - strong and growing returns on capital, expanding margins that are impressive for a manufacturer, next to no debt, and a backlog of more than $50m (+9% YoY).
Despite all that, M-Tron is trading at just 3x sales with a PEG ratio at less than 0.3. I believe the seemingly cheap valuation comes down to a few factors - firstly, I suspect this stock could lean towards the more volatile side, just due to the nature of some of the products that M-Tron provides for and the timing of the creation of new airplanes, jets, etc. Secondly, it’s a microcap that’s only recently IPO’d despite being in operation since 1965.
Finally, M-Tron could be considered a ‘sin stock’. More than half of its revenues come from the defense sector and its technologies are crucial to creating missiles, autonomous weapon systems, and drones that are increasingly being used for aerial strikes. This will likely only increase as time goes on, with drones coming closer to ‘slaughterbots’ and unmanned warfare becomes more commonplace.
If this is something you’re comfortable with, I think M-Tron is an intriguing opportunity that has lots of runway for growth between secular tailwinds, fiscal responsibility, and a micro market cap.
Under the Lens of Disruption -
Not the first time that Giuliano has got a feature in one of these issues, but his latest article on Zoetis and the potential impact from industry disruptor VetKiosk was too good an article to pass up sharing it with you all. Not only is it an excellent example of an investor not getting complacent with his research or getting hung up on an ‘ironclad’ thesis, but it’s also an excellent look at how industry disruption takes place and the role of efficiency in pushing innovation.
Giuliano has written extensively about Zoetis, which makes it doubly more impressive to me that he was able to zoom out and incorporate a new outlook & possible risk of disruption from VetKiosk. It’s something I and many other investors could learn from, as it’s easy to get so stuck in a way of thinking about a company that it becomes nearly impossible to incorporate a new view. Either that, or we fail to continue upkeep on our due diligence after investing and keeping up to date with the news on the company.
Even if this isn’t something you struggle with for yourself, this is still a worthwhile read for a little history lesson on disruption and the potential impacts of a new & disruptive technology on one of the most important industries in the world.
Cutting Losses vs. Staying Patient
To me, this is one of the more nuanced topics in the investing world. You’ve bought a stock, and soon afterwards the market corrects or the company hits a snag - the stock plummets, and you’re left holding a bag of excrement.
What do you do? Let’s rewind the clock a bit and pretend we’d bought Meta Platforms at the peak price in September 2021. Shares were trading then for just a little more than $380. If we’d done absolutely nothing and continued to hold the stock, we’d still be down roughly 4% today. That’s even after riding an absolute rollercoaster over the last 2 and a bit years, when the stock price had cratered by more than 70% from peak to trough.
Since that trough, though, shares have rallied by more than 230%.. In light of that, the obvious solution would have been to buy some more shares and average out the price - we could be sitting on a very healthy return on our Meta holding by doing so, even after buying at the peak.
The problem is that it’s obvious in retrospect - there were lots of concerns around Meta at the time and in the broader market as well. There were no shortage of reasons to think your money may be better deployed somewhere else.
In the case of Meta, the right move would be adding to the position and doubling down on the bet. In other cases, the right move is to cut your losses and move on - the company won’t recover and not only has it cost you money but your continued holding of it is now an opportunity cost as well. Other cases are much, much more difficult than Meta, which had a relatively quick bounce back.
Think about Microsoft, which got dinged alongside every other tech name after the dotcom bubble popped. Buying MSFT shares at the peak (without adding) needed a nearly 14-yr waiting period before that investment finally broke even. The S&P 500 significantly outperformed Microsoft over that period, and investors had to get cozy with a red name in their portfolio for nearly a decade and a half.
But Microsoft is a stellar business (when not being run by the most cracked CEO I’ve ever seen). If investors had held onto it and stayed very, very patient over the last 24 years, they would now be outperforming the wider market by more than double.
In the end, there’s no concrete answer to cutting losses or taking the opportunity to get companies at lower prices. Instead, it’s really just a reminder of a few investing basics: 1) invest in quality assets 2) know your companies well enough to understand why the stock is dropping and whether the drop represents a crisis or possibly a goldmine instead, and 3) don’t panic sell. Maybe don’t ever sell. Definitely don’t panic.
I just landed in Guatemala and am sitting underneath the glorious sun (a rare treat for a poor Canadian during the winter months) and watching a volcano poof as I write this. Before flying here a few days ago, I wrapped up a week and a half long roadtrip down the West Coast of the United States.
I know, I know, you didn’t sign up for a travel blog here. But I hope it helps to explain my absence since the last Hourglass Journal issue came out on January 6th. My intention was to continue working during the roadtrip, but it turns out it can be quite difficult trying to produce content while on the road and going in and out of service.
Now that I’m settled down again though, you can expect a return to the normal schedule - bi-weekly deep dives, lots of tweets (of varying insightfulness), and weekly Hourglass Journal issues. The only snag is the podcast episodes - I’ve so far had some difficulty finding places to find peace and quiet to record. I’m still hoping to be able to release weekly, but the usual Tuesday post schedule will be thrown off kilter. It’s a ‘expect them when you see them’ sort of deal, but I decided it was better to release high quality audio than stick to the schedule with terrible quality. Appreciate your patience on the podcast side of things!
I’ll be releasing a new deep dive next week! Stay tuned for that and if you’re not already subscribed, slap your email address in below to get that sent straight to your inbox.
Get the next Hourglass deep dive on release, along with (intermittent) podcast episodes and weekly Journal issues.