An investor with a thesis, not a hypoc

This is a cross post from a discussion board formerly for the Hidden Gems service.

A history of one investor and one stock
I first purchased Sun Hydraulics in the dead of the great recession 10 years ago. I made some big gains since then. I’ve recently revisited why I bought the stock using some logic that might be helpful to other investors and owners of other stocks.

Why Buy SNHY?: A nimble innovator in a prosaic industry
For several decades, Sun Hydraulics (SNHY)has had one of the most forward thinking and innovative cultures of manufacturing companies in the world. There is a Harvard Business School Case Study about the flat management structure and flexible labor policies they put in place before any other American companies were doing it. SNHY’s products are mainly hydraulic and electrical controlled valves. (Sexy, eh?) These valves are critical to all sorts of machinery in a broad range of industries. Sun was one of the early American manufacturers to cross-train many of their engineers and line staff to give them flexibility about what gets built and when. Sun out-maneuvered the competition by being more nimble and smart. For example, rather than taking straight orders for certain valves and offering up a delivery date based on their general manufacturing schedule, SNHY started talking to customers and creating the order process based on when the customer needed the valves. If a customer needed them fast, SNHY was flexible enough to re-arrange its manufacturing queue and get the customer what they needed on the customer’s schedule. Customers worried about expedited timing are not so price sensitive, so SNHY had no problem charging a premium. They were able to run rings around valve producers that were captive parts of larger companies.

Innovating during downturns
And when a downturn came in this highly cyclical industry and other companies laid off employees, SNHY did something different that took the long view without sacrificing their financial position. They would offer to continue to pay employee benefits - particularly health insurance - even as the employees might need to find salaried work elsewhere. That meant the employees had an easier time finding a job. It also meant that SNHY kept a sort of option making it easier to bring many employees back when the downturn ended and it was time to try to gobble up market share. It’s a company that has been very easy to follow and easy for an off-beat investor to love. It never was going to be a super growth company, but it paid a dividend, had rock solid financials and always seemed to grow faster than the industry.

Why own SNHY now?
As far as I can tell, SNHY’s new CEO Wolfgang Dangel has decided two new things are important:

  • Being a growth company
  • Hitting $1 billion in sales by 2025

He’s been purchasing companies and adding on debt. He’s also been pushing for higher organic growth at existing units. It seems pretty clear he’s willing to dilute shareholders and preside over questionable EPS growth in order to meet his directives. It’s a much riskier strategy for a company that’s in an extremely risky (read: cyclical) industry. As Buffet says, you don’t know who’s been swimming naked until the tide goes out.

The changing role of management
In the old SNHY, CEO Allen Carlson’s pay package was among the most modest in the field, and he was very clearly trying not to screw up the culture that was able to produce so well and stay innovative. He made acquisitions but made sure they wouldn’t overwhelm what the company already had. New CEO Wolfgang Dangel seems to come from the school of CEOs that know they are going to make more money if the company is bigger. I haven’t spent that much time looking at the pay incentives built into his employment contract. But I wouldn’t be shocked if rising revenue were a key performance indicator for him to get bonuses and that measures that related to debt levels weren’t really that important.

Being an investor with a thesis, and not a hypocrite
Anyway, I was planning on holding onto this stock because I know it and have owned it for a long time, and I’m not much into trading. (I’m also a little sentimental since it saw me through the Great Recession.) SNHY stock has also done reasonably well so far under the new CEO. But when he recently changed the company name to Helios, it kind of woke me up. I began to revisit why I first bought the stock. I began to think that the change wasn’t merely symbolic. Nearly every reason I owned a slice of the business originally has also changed. And that means either I have to be comfortable with the new business that is SNHY or do what my personal investing principles require me to do.

Yesterday I decided that being a true investor means not getting seduced by a rising stock price if the company’s business, culture, etc., no longer fit you.

So rather than be a hypocrite, I sold.

I’m not saying others need to make the same decision. But I’m hoping a little tangent into this logic might help a few others who are trying to decide what to do with another stock that they own.

Good luck to all.



An investor with a thesis, not a hypocrite

  • That’s the title I intended for my post.

I’m new to this board. I hope folks will forgive the typo.



Thanks J. I wasn’t sure if I still owned this or not. I’ve been slowly culling my large portfolio since I committed to the Saul way. And guess what, I still own it.
Thanks for the wake up call.

Bruce, you are welcome. I wrote the post in part to clarify my own thought process. It’s a big bonus for me if it can help someone else out too. :slight_smile:

I wrote the post in part to clarify my own thought process. It’s a big bonus for me if it can help someone else out too. :slight_smile:

Writing, editing, and posting are absolutely wonderful for getting ideas straight in one’s own head. I highly recommend it. Don’t forget the “editing” part, make sure that what you wrote makes sense. I’ve trashed many of my posts because they didn’t make sense. Writing it today and editing it the next day is even better.

Denny Schlesinger