Hourglass Journal - Leadership, $HPS.A, & Grand Theft Auto
Issue XXII: Dec. 18 - Dec. 22
Welcome to Issue 22 of the Hourglass Journal, a weekly newsletter that covers a new stock on my radar, some pillar of investing that I’ve been chewing on throughout the week, and a highlight on another investor article/writer.
And this is a special issue, as we are quickly approaching Christmas - happy holidays folks! I hope you’re all taking a small step away from investing to spend that time with family. I’ll be taking a small step back from HGI next week to do exactly this, so the next Tuesday podcast episode will come out on January 2nd, instead of the scheduled December 26th, but the next company deep dive ($GLBE) will drop on schedule for December 28th - keep an eye out for that!
Also, I’d like to extend a really heartfelt thank you to everyone that’s subscribed to Hourglass Investing this year - your continued support of my work and learning is the best gift I could ask for.
Now, dig in, enjoy, and have a great weekend!
Hammond Power Solutions ($HPS.A)
Continuing on with the trend of Canadian small caps, I was alerted to Hammond Power Solutions through a Twitter/X thread and did some digging. Since its 2001 IPO, $HPS.A has handily outperformed the market with a 24.3% CAGR for shareholders, and has really picked up the pace of growth since late 2020, when shares were trading at only ~$8.
Hammond manufactures infrastructure for energy production plants, grids, and distribution across a variety of assets - nuclear, oil- and gas-based, and renewables - as well as for different use cases, including microgrids, energy storage, data centers, EV charging, semiconductor production, and improving power quality.
Hammond also has all the makings of a company I’d love - its products are sold globally, including in India where renewables and energy growth has been and will continue to be massive. The business as a whole is driven by long-term tailwinds as the world moves towards electrification, and it’s also well diversified across different energy asset classes to ensure that the company can benefit from these tailwinds regardless of which energy type becomes the dominant form over the coming years. Finally, its gross, operating, EBITDA, and net margins have all improved substantially over the last 5 years as Hammond grows and is able to purchase and manufacture at greater scale (though it is still a low margin business overall).
Their products also seem to have pricing power based on management’s discussion of a growing backlog, to go along with 26% YoY revenue growth, even after price increases. Cash from operations have grown as well, though free cash flows have declined from 2019 figures, which indicates to me the company is still investing lots into growth of the business. These investments are driving high returns, too, with returns on invested capital, assets, equity, and total capital all expanding over the last 5 years.
ROIC (‘19 - TTM): 10.5% → 33.6%
ROA (‘19 - TTM): 6.1% → 15.1%
ROE (‘19 - TTM): 10.6% → 32.4%
ROTC (‘19 - TTM): 8.7% → 23.3%
If all that wasn’t enough, Hammond’s valuation multiples give it the profile of a slow and steady company, rather than a business growing at strong double digit clips while improving margins and capital returns, not to mention expanding the dividend payments at a more than 15% clip over the last 3 years. At 1.34x EV/S, it trades just barely above what it’s pulling in for revenues, while P/E (15x) and EV/ETBIDA (10x) also don’t scream expensive, though they are significantly above historic multiples on the business. Free cash flow multiples, like EV/FCF and FCF Yield look terrible, but I think that can largely be attributed to the reinvestment period.
Despite margin and capital efficiency expansion, low multiples, and nice top- and bottom-line growth, there are still some potential concerns I have on the business - low margin worries are tempered by growth in these metrics, but the industry that Hammond operates in is extremely competitive and could hamper the margin growth in the long-term. Debt is also barely covered by cash, though this isn’t a huge concern, just due to the fact that Hammond’s capital structure is not oriented towards debt at all, with EBITDA outweighing net debt and a low debt/equity ratio.
Finally, manufacturers always have to be analyzed for their differentiation compared to other players in the space. I think the long-term trend towards electrification across the world and key markets that Hammond operates in will serve to drive significant growth for most players in the space over the coming years, but that differentiation is still key to Hammond avoiding a death spiral on margins. The fact that they can push through price increases and still grow their backlog and top-line revenues so significantly does lighten this concern in the near-term, but it’s still something I’d like to research more before buying into this company.
Despite the concerns, there’s a lot to like about Hammond’s business and fundamentals. It’s going very near the top of my watchlist, and I’ll likely be diving deeper into this company in just a few weeks here, so keep an eye out!
The Value of Leadership
Inspired by a Lex Fridman Podcast episode interviewing Jeff Bezos, I’ve recently started reading the annual shareholder letters from Amazon. This is an exercise I’d recommend to all investors - they are a wealth of information, but that’s not why I’m recommending them. Underlying all of these shareholder letters and permeating through Jeff Bezos’s nuggets of wisdom is the foundational reason for Amazon’s success: leadership.
Of course, Bezos isn’t there talking blatantly about what a great leader he is - rather, you start to pick up on the little things that Bezos implemented that allowed Amazon to succeed, and just how critical his leadership was to the Amazon we think of today. Competition was fierce when Amazon was initially building its business - there were lots of companies trying to build out e-commerce platforms during the dotcom bubble. But we don’t talk about many of those other companies today - Amazon looms large in the business world while its former competitors are largely forgotten members of a graveyard littered with scrappy internet start-ups that weren’t able to make it.
And the difference was the leadership - the long-term vision that Bezos had, his ability to drive the company to greater heights, the processes and culture he ingrained in Amazon that have allowed the company to continue succeeding even after his departure as CEO. This quote from 1997 perfectly demonstrates the preference for long-term growth and compounding value he instilled:
“When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the latter.”
These letters have so much to teach investors about the value of leadership, and served as the inspiration for this week’s investing tidbit. Now, I’ve always considered the quality of a company’s leadership team when analyzing a business - but after reading these letters, I’m not sure that I’ve paid enough attention towards how crucial effective leadership is to success.
It’s a critical factor in any company’s capacity to drive returns to shareholders and make a truly valuable business, but some types of businesses really stand out as needing an exemplary leader. M&A companies really depend on talented management teams to set hurdle rates, make great capital allocation decisions, and ultimately build value. Think Henry Singleton with Teledyne, or perhaps the Buffett/Munger partnership with Berkshire - the business model was by no means a new one. It was their approach to it, their capacity to make value accretive acquisitions and investments, to think in a contrarian manner - that’s what set Teledyne & Berkshire apart (and drove healthy paydays for investors).
It’s also especially true when considering companies working to create new and/or disruptive technologies. There are only a handful of visionary leaders that have had the right combination of skills, drive, vision, and charisma to not only create a new product or way of doing business, but also to take their companies the full mile - these leaders, as much as the companies themselves, have driven amazing returns for investors. Think Steve Jobs with Apple, Musk with Tesla, Bezos with Amazon, Mark Leonard with Constellation.
The examples are not endless - these kind of leaders come along only once in a while. Our job as investors is to identify them, invest alongside them, and hold on for dear life. Which got me thinking - Bezos, Leonard, Buffett are all excellent examples of the value of leadership, but who are some other great leaders?
In other words, what is the Mt. Rushmore of CEOs/founders that are currently running companies and are either in or entering their “prime” as leaders? Here’s a little list I drew up off the top of my head
Luis von Ahn (Duolingo)
Jeff Green (The Trade Desk)
Satya Nadella (Microsoft)
Jayshree Ullal & Andy Bechtolsheim (Arista Networks)
Lisa Su (AMD)
Honourable Mention: Mark Zuckerberg (the success of the Metaverse will define his legacy among great leaders, for better or worse)
Did I miss any? I’d love to hear from you as well - drop a comment if there’s any CEOs you think I missed or deserve some extra attention.
The joy of six
I come from a gaming past and, invariably it seems, every gaming past finds its path intertwining with Take Two Interactive’s legendary video game series, Grand Theft Auto. The franchise has dominated Take Two’s revenue streams over the last decade, despite the fact that the last installment, Grand Theft Auto V, came out in 2013. The gaming world has long awaited the return of the iconic series through the sixth game, Grand Theft Auto VI.
And though I’ve (sadly) left the gaming world behind me, I too find myself eagerly anticipating the 2025 release of Grand Theft Auto VI, though now for investing reasons as opposed to gaming reasons - nor am I the only one thinking along this wavelength. The drop of the first official trailer for the game, which lasted an entire minute and thirty seconds, sent shares of Take Two more than 6% higher.
I was curious enough about how the release of GTA VI would impact Take Two’s shares in the long-term to go looking, and I was rewarded for my curiosity with this excellent article fromon Take Two and the GTA franchise. I highly recommend the article if you invest in gaming, are looking to take advantage of the highly anticipated return of the series, or are simply curious about the potential tailwinds GTA VI will bring to Take Two shares (hint: they’re big). Check it out, and be sure to give the author a follow while you’re at it for excellent insight into other parts of the growthy gaming industry.
What’s New at Hourglass
Calian Group ($CGY.TO) - You Name It, Calian Offers It
This week’s podcast episode was a listener requested dive into a small and seemingly unloved Canadian small cap (~$700m CAD), Calian Group. Calian’s growth model revolves around the acquisition of firms operating under any of its four business segments: IT & cybersecurity, advanced technology, healthcare, and education programs for military/defence programs.
Despite a global presence, the vast majority of its revenues are still tied up in Canada, giving Calian a huge potential growth lever through expanding its already existent global network of healthcare providers and implementing its education programs in NATO member countries. The company is also benefitting from a number of tailwinds across its various offerings, including agriculture tech, cybersecurity, nuclear energy, and satellite receiver technology.
Three of its main four segments are incredibly resilient to market downturns, while the last, IT & cybersecurity, positions Calian for growth during periods of inflated tech spending. Its growth model to date has driven total annualized returns, inclusive of its now 2.2% dividend yield, of 15% over the last decade. With the tailwinds to the business, this doesn’t seem set to slow down,
Tune into the episode as I work through Calian’s wide range of offerings, make sense of the business model and the low valuation multiples, and finally my concerns on the business.
Got a company you want me to cover in a podcast episode? Reach out to me on X/Twitter or shoot me an email at firstname.lastname@example.org
To stay up to date on future Hourglass Journals, as well as company specific deep dives and podcast episodes, pump your email in below and get all of it sent straight to your inbox!