A microcap monopoly, could it exist?
Investing in 123 #7/2024
1 question to reflect on
The result of last week's question: I got burned on biotech in the past. It serves me well for investing in a sector I knew nothing about! Self-awareness starts with listing what you know nothing about.
This week’s question:
If you don’t have any, why not? If you do, do you care to share which ones?⬇️
2 quotes, do you agree?
“What great business is nobody building?”
Peter Thiel, entrepreneur and venture capitalist
Thiel loves monopolies, and for good reason. A monopoly owns its market. It has no competition, so it produces at the quantity and price combination that maximizes its profits.
You could generalize this further and ask yourself: When investing, what game are you playing? Are you playing one with a lot of competition, or are you seeking to play a different game, to not do what most others are doing?
Even if you play a different game, owning a great business is not enough though ⬇️
“Creating value is not enough, you also need to capture some of the value created”
Peter Thiel
A business that is generating lots of value, but all the value goes to the consumer and not to the shareholder, is not a great business to own. An example:
“For example, US airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012, when the average airfare each way was $178, the airlines made only 37 cents per passenger trip. Compare them to Google, which creates less value but captures far more. Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21% of those revenues as profits—more than 100 times the airline industry’s profit margin that year. Google makes so much money that it’s now worth three times more than every US airline combined.”We could discuss the definition of value here but you get the idea.
3 ideas of the week
3 ideas that show monopolistic or oligopolistic traits.
Old Dominion Freight Line (Ticker: ODFL)
Category: US Oligopolistic Buyback Machine
What does it do?
ODFL is a leader in the Less-Than-Truckload (LTL) category in the US. Over the last several decades it has built out a servicing network, increased its competitive position and together with 2 other companies dominates this sector.
Why should you care?
Right off the bat, the stock is too expensive at the moment. The great thing about ODFL is the tangible network that strengthens its MOAT. This company is getting stronger and stronger with time, and the market knows it. A great play on a buy-the-dip list. But you might have to wait for a couple of years.
MercadoLibre (Ticker: MELI)
Category: The Amazon of Latin-America?
What does it do?
MELI is an online platform that offers e-commerce services, and an online marketplace and is increasingly growing through its fintech branch. MOATs and monopolies are local. They dominate countries like Argentina and Brazil and are spreading throughout Latin America. Over the last decade, MELI has grown revenue at a 40%+ CAGR.
Why should you care?
Several countries in South America seem to be turning around, and MercaLibre stands to benefit. Finchat shows me a trailing FCF yield of 6% which is cheap for a company growing as fast as MELI is. There’s not much that I need to add, a wonderful company that seems to trade at a fair price. I need to do more work on it, maybe for a future article.
In the meantime, here’s the best write-up by
Pharmx Technologies (Ticker: PHX)
Category: Australian Microcap Turnaround
What does it do?
In a nutshell, when a pharmacy in Australia & New Zealand needs to order a new medicine, they use an electronic system that is connected to several suppliers. Pharmx is the developer of this system and it is used by 99% of pharmacies in Australia.
Why should you care?
Great, it has some sort of a monopoly then? Show me the money!
Not so fast. They have a solid cash position and pretty good margins, but past revenue is down. Gross profits decreased from 2015 to 2019 (and then fell off a cliff due to COVID). They had 2 business lines, one was losing money. Sadly, management only decided to divest the bad business line in 2022.
But things are changing. There is an opportunity to expand their market. Pharmacies are more and more selling other products than pure medicine. They are signing more suppliers to the system. Management is now focused on growing their profitable business line and avoiding venturing into new horizons.
A detailed analysis has been written by
Full disclosure: PHX is very illiquid. I own a small position.
That’s it for this week.
May the markets be with you, always!
Kevin
Thanks for the shout out Kevin. One point to add on the MELI reported FCF is that it’s artificially inflated by the credit business so needs to be adjusted. Still a wonderful business.
I own Mercado. Looks like a second chance at owning Amazon at a fair price. About Pharmx, you caught my attention. I will have a look in the coming weeks.