Hi all.
I’m taking a break from my other projects for now…
Before I dive too deeply into this, I want to disclose that there are eight small holdings that I am deliberately excluding from this list. For those eight holdings, the size of my holding should substantially increase over the next few years. So, I don’t think they are nearly as “interesting” as the other nine.
My write-ups for each of these will be a bit longer - on average - than the treatment given my top holdings. I’ll try to include how I plan to move forward (or not) with the holding. I’ll go from largest to smallest, but even the largest is less than a quarter-of-a-percent of my portfolio.
Instead of one long post, I’ll write several smaller ones. Some will cover several companies and some just one, depending on what I want to say about each company. The first will be a single company, where I have lots to say…
BOOM - Great ticker! Dynamic Materials Corp. (a.k.a., DMC) is primarily known for explosion welding, where two sheets of metal are welded to each other by explosive forces (this is also known as “cladding”). Usually, a thinner specialty metal is welded to a thicker base metal. In chemical manufacturing, for example, the specialty metal may represent the corrosion-resistant inner lining of a vessel, while the thicker base metal is specified to allow for the vessel’s contents to be under pressure. Historically, there have been three methods of performing this type of welding. The best method to use generally depends on the thickness of the plates involved and the chemical reactivity of the metals involved. DMC also manufactures explosives used in oil wells to perforate the casing and allow the flow of oil and gas into the oil well from the surrounding reservoir. As you’d imagine, anything having to do with explosives is highly-regulated, creating a barrier to entry. This small-cap caught my attention - among other reasons - because its corporate HQ is in Boulder CO, where I live. I attended their annual shareholder meetings on a regular basis. They started affectionately referring to me as “our shareholder” because I was often the only shareholder in attendance. This despite my penchant for asking probing - and occasionally difficult - questions. The affection was reciprocated because - despite being competitive businessmen - it was very evident to me that the executives I met were good, honest, human beings. One highlight for me was being invited to an Analyst’s Day meeting held at their main shooting facility outside of Pittsburgh Pennsylvania. The plates are received and assembled in a big warehouse. They are brought by truck to a nearby old limestone mine/quarry. The analyst group was allowed to watch from a nearby, but safe, location, as the DMC team proceeded through the safety protocol. Then, deep inside the mine, the explosives were detonated. The old mine’s many air shafts helped mute the explosive forces experienced outside the mine. Still, what I got to see was an impressive display! First, the ground rumbled in a way that was partially heard, partially felt. Then you could see debris (e.g., dust and leaves - not pieces of metal) eject from the mine entrance. We learned later that the explosive materials used in the shoot we saw were very similar to those used in the Oklahoma City bombing (I know that event was more than twenty years ago, so it may not resonate with everyone, but you can look it up). But our explosion used three times as much explosives! Post explosion, the cladded plate is returned to the warehouse where it is returned back to flat using a multi-ton press (the kind that “terminated” the original Terminator, if you recall the film), and further metallurgical testing is performed to insure that the weld meets every customer specification.
Awesome, right? How does this become a bottom holding for me, and what lessons can be learned?
Well, part of the reason for holding the Analyst Day was to introduce the new Chief Operating Officer and explain the company’s succession plan. I was slow to realize it (probably because I wanted to continue liking the company so much), but the new team didn’t seem quite as adept with the business as the old one. The oil well explosives side of the business had taken off with the expansion of domestic drilling earlier in the decade, but proved very cyclical when oil prices later collapsed and rig counts practically evaporated! Business on the cladding side seemed to have issues too. Management claimed they weren’t losing a disproportionate number of deals and that they didn’t see competitive technologies encroaching, and I took them at their word, hoping better economic times would lead to a cyclical rebound. The first dent in my confidence occurred when I heard IPGP - the fiber laser company I mentioned in my “top holdings” post - use the word “cladding” as an example of new applications. I have yet to confirm that lasers are indeed a competing technology with explosion welding, but I wonder if this was the missing piece that wasn’t seen. Hot roll-bonding and arc welding had been the other two competing technologies, but I can see how lasers could succeed as IPGP was able to increase their power. Eventually, due to poor business and stock price performance, BOOM lost its TMF recommendation. Although I still hold all my shares, they are on my short list for selling when I need a capital loss to offset capital gains.
I think my three main lessons to take away here are:
(1) Don’t let yourself fall in love with a company. I did with this one - no doubt! I only saw it in hindsight, but I think I know enough now to better understand the warning signs. [BTW, Saul, I already “hear” you putting two-and-two together, and I’m also contemplating whether BOOM is my only transgression… I suspect that a good handful of this board’s participants will “get” my reference.]
(2) Don’t underestimate the fluctuations that business cyclicality can inflict on stock market prices. BOOM’s oilfield products business growth seemed secular, not cyclical. Until it didn’t. I should have paid more attention to the broader industry and not just the niche.
(3) When business is slowing beyond what cyclicality would imply, and you can’t explain it and management can’t explain it, don’t assume that means it will be temporary. Either keep digging for a reason, or sell and move on.
More as I have time. I think the next few will be shorter. But I’ll also have a disproportionate amount to say about my tiniest holding too!
Thanks and best wishes,
TMFDatabaseBob (long: BOOM)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth