“When business is booming, people convince themselves that the growth will never stop. And when times get tough, suddenly everyone believes the downturn is here to stay.”
I've got burned in the past by similar investments where time is not on your side. I.e. the longer this takes to play out the lower your return is. Do have a catalyst in mind?
That's a great question! To be frank, I don't have a visible catalyst. That is also exactly why this thing is valued so low - if we knew things are going to improve by, say, Q3 2025, the market would take that into consideration and we wouldn't have such a discount here. Mike Burry one said something like "a catalyst is not necessary - sheer, outrageous value is enough" and I really like that quote.
This one is unprofitable, but I also have a second one from that industry that is and probably will continue to be earning money even though the industry is in some bad condition. Similarly cheap too, but profitable, so a larger position there.
This company, however, is just a few % of my overall portfolio, so even if it takes longer than I'd like for things to improve, other companies will make up for it. If you buy cheap enough, and buy a group of such stocks, good things will probably happen to you.
So to summarize, I don't have a catalyst, nor do I think one is necessary for this strategy to work well. But I am pretty sure, looking at the history, that the European steel industry will deal with the issues sooner or later, especially as they are not structural ones but rather a result of COVID and the Ukrainian War happening. Costs go up, inflation is high, less overall demand, but it's not like steel is some specialty market that can stay depressed for a decade - and if I'm wrong, hell, the debt is really manageable so no bankruptcy risks for the company, plus it's only 2% of the portfolio at the moment.
Cyclical stocks are challenging to value due to their sensitivity to economic cycles, which can lead to fluctuating earnings. Debt cycles amplify this, as rising interest rates can increase borrowing costs, affecting profitability. This makes predicting their long-term performance and cash flow stability more complex. And timing the bottom of the cyclicality is really hard! Great post, thank you!
Great article! I agree with Matt, the longer it takes the higher the risk that the net assets are burned down. Do you understand the steel cycle well? Have you thought about replacement costs (maintenance capex)?
If most of the assets are tied up in inventory and cash is being burned then you may want to walk away. You should always discount inventory on the balance sheet if it can’t be sold or becomes obsolete. Most Net/Net retailers fall into this category.
It's not a retailer. They mostly sell steel products, and most of the inventory is raw materials, so I wouldn't really count this as a valid concern. This is also the first time since pretty much the beginning of the previous decade when they're unprofitable.
Hey there :) I'm glad you liked it! I put a lot of work into polishing all the details.
I replied to his comment, which also answers some of your doubts.
I don't understand the steel cycle like an expert would, probably just beginner knowledge, and I haven't yet thought about actual replacement costs for this company (just put a discount on the book value of assets), but that's a good advice to check those!
Nonetheless, it's a small % of my portfolio as I said in that comment. I like to keep it simple, so my fundamental point for this thesis is just the numbers for now. I'll certainly go deeper when I have more free time and after my cold is gone 😂
Very well written post. I ve got the same experience with Huntsman when its stock fell like 30 percent over span of 3 days. Huntsman being petrochemical company making plastics was in pretty good position. The problem was that commodity prices have decreased from the 2022 level and market did not liked that. Huntsman reported decreasing revenues. and stock dipped. However plastics havent decreased by such margin so I bought their shares. I ve closed the position after 2 months with 16% gain. Here is the comparision between Huntsman revenue (blue line) and price of plastic (red line): https://cubeupload.com/im/Qubax8/HUNchart.png. And here is for your USAP company revenue compared to Fabricated Metal Products total exports: https://cubeupload.com/im/Qubax8/USAPchart.png. Thanks for the post. Its always nice to know that there are still investors, that are interested in cyclical companies. These days I meet more and more investors analyzing purely growth companies. So yeah ... cheers man!
I've got burned in the past by similar investments where time is not on your side. I.e. the longer this takes to play out the lower your return is. Do have a catalyst in mind?
That's a great question! To be frank, I don't have a visible catalyst. That is also exactly why this thing is valued so low - if we knew things are going to improve by, say, Q3 2025, the market would take that into consideration and we wouldn't have such a discount here. Mike Burry one said something like "a catalyst is not necessary - sheer, outrageous value is enough" and I really like that quote.
This one is unprofitable, but I also have a second one from that industry that is and probably will continue to be earning money even though the industry is in some bad condition. Similarly cheap too, but profitable, so a larger position there.
This company, however, is just a few % of my overall portfolio, so even if it takes longer than I'd like for things to improve, other companies will make up for it. If you buy cheap enough, and buy a group of such stocks, good things will probably happen to you.
So to summarize, I don't have a catalyst, nor do I think one is necessary for this strategy to work well. But I am pretty sure, looking at the history, that the European steel industry will deal with the issues sooner or later, especially as they are not structural ones but rather a result of COVID and the Ukrainian War happening. Costs go up, inflation is high, less overall demand, but it's not like steel is some specialty market that can stay depressed for a decade - and if I'm wrong, hell, the debt is really manageable so no bankruptcy risks for the company, plus it's only 2% of the portfolio at the moment.
What's the company :)
I'll share the name in part 2!
Cyclical stocks are challenging to value due to their sensitivity to economic cycles, which can lead to fluctuating earnings. Debt cycles amplify this, as rising interest rates can increase borrowing costs, affecting profitability. This makes predicting their long-term performance and cash flow stability more complex. And timing the bottom of the cyclicality is really hard! Great post, thank you!
Great article! I agree with Matt, the longer it takes the higher the risk that the net assets are burned down. Do you understand the steel cycle well? Have you thought about replacement costs (maintenance capex)?
If most of the assets are tied up in inventory and cash is being burned then you may want to walk away. You should always discount inventory on the balance sheet if it can’t be sold or becomes obsolete. Most Net/Net retailers fall into this category.
It's not a retailer. They mostly sell steel products, and most of the inventory is raw materials, so I wouldn't really count this as a valid concern. This is also the first time since pretty much the beginning of the previous decade when they're unprofitable.
Hey there :) I'm glad you liked it! I put a lot of work into polishing all the details.
I replied to his comment, which also answers some of your doubts.
I don't understand the steel cycle like an expert would, probably just beginner knowledge, and I haven't yet thought about actual replacement costs for this company (just put a discount on the book value of assets), but that's a good advice to check those!
Nonetheless, it's a small % of my portfolio as I said in that comment. I like to keep it simple, so my fundamental point for this thesis is just the numbers for now. I'll certainly go deeper when I have more free time and after my cold is gone 😂
Sure, I think you might be on to something. Looks definitely interesting. I guess if you buy a bucket of those you do very well.. Cheers!
Very well written post. I ve got the same experience with Huntsman when its stock fell like 30 percent over span of 3 days. Huntsman being petrochemical company making plastics was in pretty good position. The problem was that commodity prices have decreased from the 2022 level and market did not liked that. Huntsman reported decreasing revenues. and stock dipped. However plastics havent decreased by such margin so I bought their shares. I ve closed the position after 2 months with 16% gain. Here is the comparision between Huntsman revenue (blue line) and price of plastic (red line): https://cubeupload.com/im/Qubax8/HUNchart.png. And here is for your USAP company revenue compared to Fabricated Metal Products total exports: https://cubeupload.com/im/Qubax8/USAPchart.png. Thanks for the post. Its always nice to know that there are still investors, that are interested in cyclical companies. These days I meet more and more investors analyzing purely growth companies. So yeah ... cheers man!
I haven't heard of this one yet! But it's quite fascinating that one can still find inefficiencies of this sort today. I appreciate your comment :)