A wide moat company, a small cap compounder and a profitable microcap go into a bar...
Investing in 123 #5/2024
1 question to reflect on
The result of last week's question: I’m glad you all have a great investing mindset!
This week’s question:
When I started investing, I considered buy-low and Sell-High decisions to be discrete, two singular moments in time. That has changed over time. I prefer building an initial position and adding to it as the investment case strengthens. In reverse, instead of outright selling, I prefer to trim positions.
Together with the correct position sizing, it's a way of managing risk in your portfolio. If you want to dig deeper into this topic, you can check out a previous article:
I great idea I heard from John Rotonti Jr. (former Motley Fool) is he never sells outright. If he wants to get rid of a position, he always keeps 1 single share. Each time he looks at his portfolio, he will be reminded of his losers. This keeps him humble.
2 quotes, do you agree?
To be an investor, you must believe in a better tomorrow
Benjamin Graham
Focus on the downside, and the upside will take care of itself
Mark Sellers, hedge fund manager
In other words, we need to embrace the paradox. We need to imagine a future that can be bright and devastating simultaneously and then choose the most probable outcome.
Although Benjamin Graham was known for his net-net strategy, he looked at everything. He even had a “large cap in a short-term downturn” category. Copying Benjamin and Peter Lynch, I think it’s a great idea to categorize your investments and keep an open mind.
Do you stick to a single strategy or are you more open?
3 ideas of the week
I’ve got some Yin and Yang ideas this week. (changing microcaps and high-quality compounders)
Serstech AB (Ticker: SERT)
Category: Profitable inflection microcap in a niche market
What does it do?
It manufactures handheld Raman detectors. The name Raman comes from an Indian Physicist who won the Nobel Prize in 1930 for his work on light scattering. These detectors are used to identify almost 17,000 substances by measuring their chemical composition. Possible end-markets are law enforcement (narcotics), hazardous environments, and the pharma industry.
Why should you care?
Although the first Raman device was produced in 1966, the current market leaders lack innovation. Serstech is a younger player, has a net cash position, has grown revenue fast (+200%), and became profitable last year riding a tailwind of the fentanyl boom and increasing geopolitical uncertainty. Important fact: 30% of revenue comes from software instead of device sales. The thesis here is to assess if the growth is structural or not going into the future.
You can dive a little deeper into this Redeye report.
ASML Holdings Inc. (Ticker: ASML)
This idea came after a discussion with a reader. Do not hesitate to email me to discuss stocks!
Category: Large Cap Partial Compounder (cyclical)
What does it do?
Most of you probably already know this company. They manufacture lithography systems (huge machines). In its simplest form, these are systems that use light and lenses to project a pattern onto a silicon wafer. This results in a microchip. Deep Ultra Violet (DUV) light (older machines) or Extreme Ultra Violet (EUV) can be used. ASML has a monopoly on the EUV machines as these can be used to make the most dense microchips. Clients are Intel, TSMC, and Samsung.
Why should you care?
Price has come down over the year as TSMCs execs claimed to not need the new EUV machines in the short term. A leak of Q3 reporting showed slower-than-expected earnings. However, last week, an article claimed that TSMC should receive ASML's newest high-end machine at the end of this year.
I call ASML a partial compounder because on average it has reinvested 25% of its earnings each year. They have done some buybacks and provided a small dividend. Lots of CAPEX spending at the moment to fuel the next-generation systems. This company is a monopolist in EUV systems.
As an additional note, a super investor, Dev Kantesaria bought ASML (1.5%) one year ago at the current price. Why does this matter? Dev is notorious for his inactivity. It will be interesting to see if he has added to his position in the coming 13F filings. At a P/E of 35, it might look expensive, but if you had bought 5 years ago at a P/E of 45, you would have doubled your money.
Rorze Corporation (Ticker: 6323)
Category: Small Cap Quality Compounder (cyclical)
What does it do?
Rorze manufacturers circuit boards, and equipment to the semiconductor industry.
Why should you care?
For some reason, this company keeps popping up on my screens. It has low debt, high interest rate coverage, and EV/EBIT sits at 12. Management proclaims guidance of 25% sales growth in the coming years. Since their main market is the semiconductor industry, one should be vigilant when looking at their guidance.
That’s it for this week.
May the markets be with you, always!
Kevin
I find interesting your polling questions to probe investing mindsets.
Great read - love the combo of different ideas. Thanks Kevin