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Newsletter VIII - Mauboussin, Dentistry & Small Caps
Recapping a Week in the Markets: Sept.11 - Sept.14
Hot IPO Market
The long-awaited IPO of Arm has finally come to fruition, and was already off to a good start before launching on the Nasdaq, pricing its IPO at the top end of its price range at $51/share. Its success didn’t stop there; it was immediately off to the races after officially entering the public markets too, jumping more than 13.5%.
The success of Arm’s IPO also inspired another anticipated tech stock, Instacart, to raise its IPO price range by 10%. These big moves in the IPO market from several larger and exciting companies may indicate the beginning of a bounceback for IPOs, which have been depressed over the last year or so. If Instacart’s IPO is similarly successful, look for some other companies to start following suit, too.
Google’s trial started this week in the largest antitrust case against a tech company since Microsoft in 1998. The Department of Justice maintains that Google has illegally kept its monopoly over the search market by striking deals with internet and phone companies to have Chrome pre-downloaded. Google responded by arguing that other search engines suck, and forcing people to use them is not competition. Okay, those weren’t the exact words used, but that pretty much sums it up. I have to say this is one of the weakest cases I’ve ever taken a quick glance at - I’m not sure how it can be argued that behaving like a business and striking deals to display your products is illegal. We’ll see how the case develops over the next ten weeks, which is how long the trial is expected to last.
Not a specific book this week, but rather a fantastic resource I was forwarded by a fellow investor through the Commonstock community, and which has kept me completely absorbed since receiving it. The Mauboussin Almanack, which covers many of the writings and ideas of one Michael J. Mauboussin, is an infinitely engaging resource, a compendium of many of his writings over the years.
Who is Michael J. Mauboussin? He’s one of the investing maestros that every investor should try to learn from. Currently working at Morgan Stanley as the head of research, he has also authored several books on investing mindsets, behavioural approaches to the markets, the psychology of investing, and how the human psyche can impact investing, market prices, etc.
The readings within the almanack are so varied that I couldn’t possibly do any justice by trying to sum them up in a paragraph or two, so I won’t try. I also haven’t read them all yet, so that doesn’t help. I can, however, say that everything I’ve read so far from Mauboussin has been incredible and I intend to go and find some of his books over the coming weekend. That will undoubtedly be an upcoming weekly read recommendation, but for this week I’ll leave you all with the almanack, which by itself has an absolute wealth of information. You can find the Mauboussin Almanack here.
Go to Bed Wiser - Everyday
Research, research, research. It’s my whole schtick with Hourglass - I try to compile a ton of resources into single-source and hopefully thorough research articles on specific companies. But I don’t write about general investing knowledge at all, which is the foundation on which company-specific information is made valuable. Without a deeper understanding of markets, yourself, and investing strategies, then articles like mine can lead to simply borrowing ideas, which is a recipe for underperforming the market.
My substack also doesn’t cover investing psychology. I don’t write on the history of the markets, or on specific financial know-how. Frankly, compiling all these things would be a full-time job in and of itself, and I don’t get paid nearly enough from this Substack lark to justify that. But I do think these things are important to know, so this week’s tidbit is to go to bed wiser, every single day. If you are learning something new everyday, the compounding effect this has on your general investing knowledge, even after just a year, is massive.
In the age of information, there’s simply no excuse for not taking advantage of all the data we have available to us to learn something new everyday. There’s a ton of great resources for this: podcasts, books, the library, news websites (particularly recommend the Economist and Bloomberg), and sites like Substack, + you can check out last week’s newsletter if you want to read about some of my favourite investing-specific sources. I also recommend branching out - don’t limit yourself to investing only! Investing is a multidisciplinary field, and general history, psychology, and self-help books can teach you as much about investing in an indirect way as Warren Buffett’s shareholder letters can teach you in a direct way. (Michael J. Mauboussin is a great example of this!).
My final piece of advice is this; keep a journal. Some of the most brilliant minds through history have made a consistent habit of writing, and you’d be remiss not to follow in their footsteps. It was part of the reason I started the Hourglass Investing series, and I also keep a ridiculous amount of journals for a variety of topics. The most important of these is the journal in which I summarize my key takeaways from everything I read, and write down, every single night before bed, the single-most valuable thing I learned that day. The journal allows me to distill all the information and narrow it down to the most important bits of information, and writing it down also helps to commit it to my (fairly poor) memory.
Read, listen, learn, and write down the results. Get a little smarter every single day. This will translate not only to success in investing, but success and personal happiness in life.
Idea Hive / Value Investor’s Club
Idea Hive on X/Twitter posts some of the most consistently high-quality content on the platform, including a recent thread on Henry Singleton (that I would highly recommend going and checking out right now if you haven’t read much about this amazing capital allocator before).
They also run a Substack that’s been producing Actionable Investment Ideas since July of this year - I have consistently found interesting new ideas from these, and all these ideas follow a consistent trend of good to incredible value.
I’d recommend checking these out if you’re feeling a little stuck as to where to throw some capital, but these are really just a funnel into the excellent service that is the Value Investor’s Club. This is a more recent discovery by me, but I’m so glad I came across it. This is a community of value-oriented investors that are posting their insights and ideas, both short & long, into a single forum. It requires a free sign-up as a guest to the club, but it’s well worth the two minutes this takes for access to the Club’s well-rounded portfolio of excellent ideas. I can’t recommend this service enough if you’re value-oriented, looking for special investment situations, or simply want to be part of a great community of investors with excellent ideas.
This Week’s Watchlist
dentalcorp Holdings (Ticker: DNTL)
Today’s watchlist is bending the rules a little bit, and that’s because I actually already own it in the Hourglass portfolio. But recent downturns and continued under-appreciation of the stock has placed it firmly back on the buying seat, so I thought I’d share it with you all.
Similar to a certain unmentioned company that I recently produced some research on (more on this below!), dentalcorp is a consolidator. And while the perfectionist in me is bothered by the fact they don’t capitalize the first letter in their name, I can look past it for this particular business opportunity, because dentalcorp is about as underappreciated a stock as you can find. I have only come across one other investor that has been discussing this serial acquirer, and that’s today’s investor spotlight feature, Idea Hive!
The company acquires dental practices in the fragmented but market-resilient Canadian dental care space and rolls them into a broader dental service organization (DSO). dentalcorp is the largest DSO in Canada, with more than 525 dental practices across the country and consistent additions of more independent dental firms, which usually hover in the range of $1m-$2m in revenues. Once tucked under the dentalcorp umbrella, organic growth figures clock in around 4%+ as a result of operational synergies, benefits from economies of scale, and increased digitization for efficiency and optimization.
The name of the game with dentalcorp is cheap, because it certainly isn’t exciting. Sitting at a market cap of $1.1bn today while their latest figures have them looking at FY’23 revenues of $1.45bn, they’re trading well-below fair value on a revenue basis, despite still growing at a decent 20% YoY clip. The business is also generating impressive free cash flow, which is then cycled back into its acquisitions and de-leveraging strategy, yet trades at just under under 10x FCF. The stock has only continued to get cheaper while the business gets better, and this is likely a position I’ll be deploying further capital to in the upcoming week - even a re-rating back to historical valuations would see significant returns for investors, not to mention the company still has plenty of runway for growth.
If you’re interested in Idea Hive’s more technical analysis of dentalcorp, check out the article below, or sign up to the Value Investor Club for an even more in-depth look at the company.
What’s New at Hourglass
Episode VIII - What is the Small Cap Advantage?
Slowly closing in on ten episodes, this week’s podcast epi is all about small caps, a topic very near and dear to me. In the episode I discuss the often-touted small-cap advantage: higher potential returns over large caps, the opportunity to get in on the ground floor of innovative businesses, and long time horizons before the business hits its fifth phase of decline.
I also discuss some of the drawbacks to the small-cap approach and emphasize that it isn’t for every investor, before I spend some time getting into a few of the smaller businesses in the Hourglass portfolio or on our watchlist - including today’s watchlist stock, Dentalcorp! So check out the episode below if you’re interested in small-cap investing, and be sure to drop a comment on the pod for your favourite small cap!
WSP Global Research Article
Also out this week was the latest research article, this time into WSP Global. WSP is a massive consolidator of engineering, environment, and consulting firms with a leading and global presence in their industry. With operations all across the world, WSP is able to benefit from a diversified revenue stream that allows them to benefit from tailwinds wherever they are in the world while reducing the impact of headwinds in other areas.
The company is an adept acquirer of new firms and even better at integrating, with an organic growth figure that’s expected to hover between 6% and 9% for 2023. The company is headed up by CEO Alexandre L’Heureux, who took over the top job in 2016 and has since turned around the growth story, resulting in a +10% CAGR out-performance over the pre-L’Heureux days. The scale of their operations is a large reason for this outperformance and starting to pay massive dividends, as well; the company’s most recent quarterly earnings reporting +31% revenue growth and a significant raise on guidance for all their key metrics for the rest of the year.
Without giving it all away in this newsletter, WSP is seemingly underappreciated by investors, as I have heard almost 0 recognition for it amongst any investing circles. While they’re certainly not cheaply valued on a trailing basis, I believe the significant tailwinds, operational leverage, and balanced growth strategy could make today’s value a reasonable price to pay for an undisputed leader in the space.
I can also honestly say that anyone interested in investing in WSP will get good value out of this article - the company has a lot of different sources to draw from and it took a very long time to compile all the necessary information for this one. But readers can get all of it in one spot with my article, and learn everything you need to know about an under-the-radar beast that has handily outperformed the market with a 26% CAGR over the last 5 years.