VALUE: After Hours (S07 E26): Magnetic Position Sensors $MELE, Promo Market $FOUR and Ingles $INMKT with Gwen Hofmeyr

Transcript

Jake: Don’t waste all the good stuff.

Gwen: [chuckles] You’ll just hear it again. It’s fine.

Jake: yeah.

Tobias: A hamster is running as hard as he can. I think we’re live. [chuckles] Hang on.

Jake: Hot start. [chuckles]

Tobias: We’re live. Yeah. This is Value: After Hours. I’m Tobias Carlisle. Joined as always by my cohost, Jake Taylor. Our special guest today is Gwen Hofmeyr from Maiden Financial. How are you, Gwen? Good to see you again.

Gwen: Good to be back. It feels very full circle. You inspired me to start my first ever blog eight years ago. So, it’s a pleasure.

Tobias: Oh, I’m glad.

Jake: Do you have a voodoo doll that you’re stabbed that’s [crosstalk] Toby now for seeing you down this path?

Tobias: Value runs backwards?

Jake: Yeah. [laughs]

Gwen: You caught me. That’s exactly what I was doing before this.

Tobias: I’ve been feeling pain. Don’t worry.

[laughter]

Jake: Is that why your back hurts, Toby?

[laughter]

Tobias: Tell us a little bit about Maiden Financial, and then let’s talk about Melexis, your most recent report. So, let’s talk about Maiden Financial first.

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Deep Dive into Melexis: Belgium’s Niche Sensor Powerhouse

Gwen: Yeah. So, Maiden Financial is my research company. I started it, because I published a couple reports last year. One, on a regional bank in the US, called Hingham Institution for Savings. And another one on Ingles Markets. Both reports took about 300 to 400 hours. The market response was pretty overwhelming. I think it affirmed this theory that I had that there’s a lot of research volume today, but there’s not a lot of research depth, especially on the sell side. That’s typically, because sell side research is viewed as a bridge to capture the economics of other financial services. It’s seen as a means to an end.

So, a lot of it is surface level, a lot of it stays at the rapport level. I identified that need to go beyond and to do the work that managers just don’t have the time to do, because they’re wrapped up in the minutiae of running their fund. So, yeah, we do in depth research on companies across the developed world. Our reports average about 50 pages or longer. We research the way that we do with the intention of acquiring an owner like understanding of the companies that we research.

I find in my eighth year now being in the industry that the more that I know about a company, the better that I behave. And so, I think that instead of looking at the forest and forgetting about the few diseased trees that are within the forest, I feel more inclined to go inside the forest and to analyze every tree inside the forest and to say truly, “I know which areas are healthy, which areas are not.” I find it very behaviorally grounding when the tide pulls out to stay focused on business characteristics and not on the movement of their respective share price movements.

Tobias: Well, tell us a little bit about your most recent research report, which is in a firm called Melexis, which I confess I had not heard of before and know nothing about. So, we’ll get started from the start.

Jake: Toby knows more than I do, I think.

Tobias: [laughs]

Gwen: Yeah. So, it’s one of the more recent reports, technically second most recent that I published. It’s on a Belgian sensor producer. So, Melexis is a Belgian sensor producer, mostly for automotive applications. So, about 90% of the sensors that they make are for automotive. And the rest go into white goods, robotics, various other consumer goods.

Jake: Gwen, can you give the ticker for people, so they can–

Gwen: Yes. So, it trades on the Euronext exchange under the ticker, M-E-L-E.

Jake: Okay. Thank you.

Gwen: And so, what drew me to the company, is earlier in the year, especially around the announcement of Liberation Day tariffs, industrial inventories were quite high at the OEM level and also at the supplier level. And they remain fairly elevated. So, a lot of OEMs as well as their suppliers were seeing quite notable declines in the share prices of their stocks.

So, I am fairly interested in analog sensors, just because it’s lagging edge technology that I can wrap my head around. There are sensors that are just taking data about some physical characteristic of the environment, whether that’s heat or electrical current or pressure, and they’re transforming that into a digital signal that can be used for various applications across many different mechanical wares, whether that’s a car or a blow dryer. They’re in everything basically that we use and that require microelectronics to assist their function.

One company that I noticed in particular, so one thing that we do at Maiden is when we’re thinking about analyzing an industry, we just take every company in that industry, put it into a spreadsheet and figure out just almost chart like an archaeological dig site around the whole industry, like what have the economics of each respective company been on a 20-year basis and how has that changed over time and where are the difference in the capital structure and ownership, etc., etc.

Melexis really stood out, because Melexis produces returns on capital and returns on capital employed that are I am about double the average of its named competitors. The only company that best sit on a return on equity basis over the past 10 years and the firm has about 45% debt to equity, so I think it’s relevant to cite that figure is Texas Instruments.

So, Texas Instruments slightly best them, but in terms of return on capital, employed capital efficiency, Melexis bests Texas, which is really surprising, because Texas is one of the better companies in the world, in my opinion. That was particularly odd, because Melexis generates about a 10th of the revenue of its named competitors. So, that begs the question, how is it that a company that generates a 10th of its revenue of its peers, and those peers are 10 times larger and it’s generating returns on capital that are double that peer average? I mean, economies in scale, blah, blah, blah, why isn’t that showing up in those larger peers?

And so, in my experience, when you get a smaller player or even a larger player that shows really high profitability, it’s typically because they have a niche. They’re focused on one particular area of the market, they might dominate that area of the market or they might just be optimized in a way that other firms are not. There’s just a lot of inertia and there’s maybe not the incentive to streamline in the same way.

And so, immediately, I developed theory that Melexis was very likely focused on the production of just a few types of sensors. But you would be misled to be thinking that, because when you look at the company’s website, they offer 13 different types of integrated circuits. And so, from the face of it, you would think, oh, they’re a diversified player. They’re offering a bunch of different products. But there are over two dozen different types of sensors that are sensing completely different environmental phenomenon. And so, if it was the case that they were focused on just a couple different types of sensors, it would be explanatory for their upper profitability, if they’re dominating smaller markets.

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Magnetic Sensor Market Dominance

And so, we looked at all 991of Melexis’ products. And if you do that, you’ll notice that about 45% of their products are magnetic position sensors. So, that was a big aha moment where it’s like, “Okay, yes, it seems to be that our thesis is correct.” Another 25% to 30% or so are magnetic latch and switch sensors. So, 75% of the product inventory that they offer are just magnetic sensors. And so, this is like, “Okay. Well, this is significant.” The next question that follows is, “How many of these things are being sold by competitors on major distributor websites?”

So, we went on to distributors like LCSC, which is the largest microelectronics distributor in Asia and Mauser Europe, which is the top five distributor in Europe. We basically just filtered for these types of sensors to figure out what share of distributor inventory did Melexis hold. And so, on Mauser Europe, Melexis dominates position sensors. They have 85% of listed inventory on that distributor site and about 67% on LCSC. On LCSC, it’s likely higher. The reason why I say that is a lot of the fact sheets that are on LCSC are in Chinese. And so, we didn’t have the time to go through, unfortunately, thousands of fact sheets to translate them all to figure it out. But a lot of named competitors of Melexis, it turns out they are really doing completely different things.

So, in the case of, for example, latch and switch sensors, which I’ll get into the details of what they are and what they do, over 50% of Texas instruments latch and switch sensors on LCSC are not slated for automotive applications. So, even though a firm might list a magnetic position sensor or magnetic and latch switch sensor, it doesn’t mean that it’s being used for the same applications that a Melexis sensor would be used for. So, I confirmed that the magnetic position sensor dominance was real. Then when we looked at latch and switch sensors on Mauser Europe, Melexis has about 35%, 40% of that inventory and has the number one position.

Allegro MicroSystems is the next largest pie of that. Both of those have over 50%. But on LCSC, MicroSystems had a higher share. It was really a MicroSystems, Melexis and Texas instruments. And so, they have 13 or 14 named competitors and those were the three that really had any material share of product that Melexis produces.

So, the next question was, okay, well, MicroSystems is also producing a bunch of these magnetic latch and switch sensors. Are there differences between some latch and switch sensors and other latch and switch sensors? The answer is yes. So, Melexis mostly produces what are known as three-wire latch and switch sensors, whereas MicroSystems produces is two-wire latch and switch sensors.

So, a two-wire latch and switch sensor, basically the signal input line and the signal output line, so that the lines that power the sensor share the same line as the signal transmission line. And so, any variation in the voltage of the current that’s passing through that sensor can disrupt signal quality and can reduce the sensitivity of the reaction time of that signal being sent to an electronic control unit and an action taken in response to that signal.

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Three-Wire vs. Two-Wire Sensor Technology

Whereas a three-wire sensor segregates the signal input line from the signal output line. So, you have your power input line, you have your power output line and you have the signal line, so all three are separated from each other. So, you get faster response time, higher reliability and no risk of disruption of the signal quality. So, automatically, that raises suspicion that Melexis is more focused on producing a higher end product.

And that seems to be the case from Allegro’s disclosure. They do produce sophisticated sensors, but it seems to be that they’re more focused on producing a just good enough sensor. So, lower end automotive applications, I don’t know if you’ve ever driven a higher end car versus a lower end car, but the responsiveness of the steering, of the shifter, of windows going up and down can be quite different. And so, those are some of the applications of where magnetic sensors are used.

Another distinguishing characteristic, is that Melexis really dominates three-axis magnetic latch and switch sensors, whereas Allegro is mostly focused on two-axis latch and switch sensors. Really the only firm that has a material share of three axis sensors is Infineon. But Infineon largely is doing completely different things. So, it’s 10% of a much larger pile that Melexis is totally dominating.

And so, they came out with this sensing technology in 2005 called Triaxis. So, they’ve been focused on it for 20 years. Basically, what it is, is a magnetic sensor senses the presence, absence or variations in the flux of a magnetic field. So, if you have a magnet that has a north and a south pole, naturally that creates a magnetic field, and lines of flux create that magnetic field.

So, if you take one magnet and you push it against another magnet, you create resistance and what’s happening is the one magnetic field is interacting with another magnetic field. And so, an application where a three-dimensional sensor would be helpful. So, that’s what three axis means. It means that the sensor can sense changes in the flux of a magnetic field in three-dimensional space, whereas a two-axis sensor would only be able to measure it on a two-dimensional plane.

So, for things like ride stability, where you need to be sensing the distance of a vehicle’s suspension from the road in three-dimensional space to ensure that your vehicle doesn’t go off the road or fall over, tip over or something, that’s where a three-axis position sensor would be used.

They’re also used in steer by wire technology, which is basically instead of having your steering wheel attached directly to the rack of your vehicle, it’s actually separated, it faces an actuator with a magnet attached to it, and so when you move the steering wheel, it interferes with the flux of that magnetic field and sends that positional data to electronic control unit and you turn the wheels into a car. And it’s just safer. You can just add more sensors. You can add a lot of redundancy to make sure that steering doesn’t fail.

A two-axis sensor is used for north pole, south pole applications. So, putting a vehicle from park into neutral and putting it from neutral into park, it’s simply measuring the presence or absence of a magnetic field. Another good example would be pressing your window button up and down. You press it down for a second, goes all the way down. You pull it up for a second, it goes all the way up and it would be programmed to be okay, north pole window goes down, south pole window goes up. There would be some time delay on that too. So, if you only pulled the button up for a second, it might just go up a little bit. And so, those are the differences. I’m pontificating, so feel free to interrupt me.

Jake: How much does one of those units’ cost? Out of curiosity.

Gwen: Yeah. So, Melexis sells about two billion sensors per year. They cost 50 cents on average. So, they’re a very, very low cost in terms for OEMs. So, it’s typically something that doesn’t see a lot of price cuts. It’s pretty easy to have price stability and to increase prices when demand is present.

Jake: It’s pretty amazing that as a species, we’ve figured out how to have something measure those types of things for 50 cents.

Gwen: Yeah, exactly. Yeah, it’s pretty awesome. They’re getting quite involved in China, which is quite different compared to a Texas Instruments, which is seeing almost a pullout of China in favor of the US, which is unfortunate, because EVs have much more sensors in them. And so, Melexis has really been taking that market in recent years. They have been positioning design, testing of their sensors to be self-sufficient within China as well. They haven’t said this verbatim, but that would protect the company from sanction risk.

If China were to invade Taiwan, they could effectively just have the entity function independently source materials domestically and they’d still probably be able to keep the subsidiary. They just wouldn’t be able to invest that from Europe, which is what they don’t want to do anyways. They’re very utilitarian people. They’re very efficiency oriented. So, they don’t want decisions to be going from Belgium to China. They want decisions to be made in China to have speed to market.

Yeah. So, all that to say, is Melexis is the dominant player in the magnetic sensing space for automotive applications. Those two markets together are worth about $1.6 billion. And so, it makes sense when you look at Melexis sales, which are just under a billion Euros, that verifies that is the case. But if you look at market share disclosures, like if you look at Infineon’s investor presentation, they’ll rank Melexis fourth or fifth in the industry, because they’re measuring sensor revenue as a percentage of total sensor industry revenue, even though there’s literally over a dozen sensors doing different things. Yeah.

Jake: They listed 13 or whatever competitors, and maybe only two real ones. Do you think that is there a reason that they might be obfuscating what the competitive dynamics actually look like? Is it like Peter Thiel said about you want to hide a monopoly?

Gwen: I spoke to the IR rep, because interviews is something that I like doing just after I research a company. It’s great to get the executive on the phone and to share that with members. But I spoke with the IR rep, and it seems that they ended up sharing their report with management, just because it’s– I don’t know if they were necessarily fully aware the extent of the dominance that they have.

I think they’re just so focused on, “Well, this is what we do and this is what we do well. We don’t need some high-end strategy to do well in the market. We can just be a pick and a shovel and we can do it better than everyone else and we can maintain strong relationships with tier one suppliers and make sure that they have what they need when they need it and stand out in that way.”

So, I don’t think that they’re necessarily trying to obfuscate their competitive position. I think that they’re just so busy that they haven’t had time, because otherwise– The IR rep was grateful for the report. I don’t think management would want to read it if they didn’t have anything to gain from it. So, you’re welcome, Melexis, for the free consultancy work, you can send my bill to me [laughs] at a later date.

But no, I’m not sure. I think there is evidence of companies that I have analyzed where that was obvious that they were trying to, I think, not draw attention to their competitive position. I don’t know if that’s the case with Melexis, because what’s the point of Infineon with the company’s whatever, 10 billion plus euros in annual sales going after a small little niche market, where there’s a really strong incumbent. It doesn’t make any sense. Why spend all that money and do all that R&D just for a small slice of the pie? That’s barely going to move the needle. So, I think there’s a lot of business to go around and the industry is very fragmented in terms of the types of technologies that you can look at.

Jake: How do you think about that tradeoff between disclosure and transparency to investors versus revealing corporate strategy perhaps to competitors that might hamstring yourself?

Gwen: Yeah, I think that it’s a good thing. I think that the less the companies disclose in terms of their competitive position, the better. The reason why I say that is twofold. I think for one, the amount of work required to verify what we did was a 300 hour plus project. And on the buy side, you definitely see that level of work being done at some firms. But on the sell side, it’s not as common.

And so, I think with the advent of AI and I think with global funds shifting to passive in a majority way, I think it’s an advantage to investors who are more active to do the really deep work that is increasingly not being done to become a shark in an industry where sharks are facing endangerment. So, selfishly, I think it’s a great thing. It might even better in a way if there’s less people doing that work to verify the competitiveness of various companies, then it could also benefit the companies themselves.

Tobias: So, Gwen, just two quick questions. One is, so these guys make a small and reasonably inexpensive component in a much bigger, more expensive end product.

Gwen: Yeah.

Tobias: How hard is it to copy this and to compete with them directly? And then, after that, let’s talk about the valuation a little bit.

Gwen: Yeah. So, I think China would be a good example. So, their team In China, it’s 100% Chinese, except for one token Belgian. The reason the token Belgian is there is because the Chinese actually don’t have a lot of know-how for sensor technology, and they currently not to be demeaning or anything. They’re just not in a place where they’re really self-sufficient with understanding the technology and understanding how to develop and design the technology to better.

So, I think that it is certainly easier than leading edge. It’s not horribly complex. You pretty much have a magnet with microelectronic components that are just collecting data. I feel like the know-how is limited in China mostly, because China just isn’t particularly interested investing in leading edge technology. There’s not a lot of that happening. A big reason for that is academic institutions are simply not sponsoring it. Like, they’re taking electrical engineering in that microelectronic sense out of the academic curriculum. So, that’s a problem in Europe and it’s also a problem in China. The jobs don’t pay as well. They’re not sexy. It’s not something that it’s exciting to talk about. I don’t know, it’s like–

I wanted to say something that is maybe controversial to say. Maybe appeals to a mind that has a specific interest in the particular mechanics of niche devices. So, yeah, I think there are barriers to the technology being understood and developed on the academic side. I think that’s showing up with their foray into China.

So, I would say there are barriers there and there’s even a concern within Europe itself and within Melexis itself. I always forget her name. It’s Françoise Chombar. Roland Duchâtelet. There’s a lot of Belgian names going on at that company at the executive level. But she’s the chairwoman, Françoise’s the chairwoman. She goes on roadshows all year trying to encourage people to get into stem, specifically on the microelectronics side of the business, just because they’re starved for talent. And so, even within Europe, I think there’s just not a lot of desire to go and compete with the incumbents. So, I think that their position is relatively insulated. Yeah.

Jake: How about valuation?

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Valuation, Cyclicality, and Robotics Potential

Gwen: So, valuation. Yeah, I think they’re trading about €67. So, their last high was around €110. So, I guess they’re about 40% off their prior high. It’s in a position where it is higher than when we published it out. We published at about €54. But I think that it’s still in a position where you can probably beat it up and get a satisfactory rate of return. In fact, I’m looking at it every single day, because I have uncharacteristically cash in my portfolio right now and that always makes me sweat, because I don’t like cash on the books. And so, looking at it every day and thinking about the valuation, for sure, but I would say, yeah, base has probably gone from 12% to around 10%, and so that’s something to consider.

The upper end’s probably gone from about 25% to about maybe 20%. But there is this potential for, I guess, a bird in the bush to be captured in the sense that they’re in the same position as they were with autos 25 years ago, where there was this real opportunity to carve out a niche within magnetic sensors, but specifically with robotics.

So, robotics, in terms of articulated hand functions and things like that would be using three-dimensional position sensors, which is Melexis’s specialty. They have a lot of interest from China and they have prototypes that they’re developing. And so, they really want to be in that industry. I think that that’s a potential boon for them over the long run. It’s not something that I have put any thought into, because I don’t know.

You’re getting the cake that you also might get the cherry as well. So, it’s a position where heads, you make a satisfactory return, tails, you make a really exceptional return. But in the interim, the shares have effectively gone nowhere for 10 years. It’s very compelling. The firm is being discounted relative to peers where in the past, it would have a premium over peers just in terms of their upper profitability.

The IR spokesperson described it as what he’s been calling the tyranny of the few, where if you’re not a large company, you basically just don’t matter in terms of sponsored research. He’s beside himself at why the business is being valued the way that it is. But there are inventory issues still and that will probably take, I don’t know, maybe 12 or 18 months to even out.

That’s a great time to get interested in cyclicals, in my opinion, is when you see that supply blowout and you see demand, that supply demand mismatch, because the market fears lower forward earnings and naturally sells off the stocks. That’s the equivalent of rain. Almost every company is cyclical to some degree. Just some are more cyclical and some are less cyclical. Most of Warren’s businesses have periods where they over earn and under earn. There’s very few Microsoft’s in the world.

And so, with a more cyclical business like Melexis, where it’s tied to a autos, I picture it as when they experience that supply-demand mismatch as it being raining outside. So, the cyclical can almost be thought of as an umbrella. When it’s raining outside, umbrellas are valuable. When the sun comes out, it’s time to put the umbrella away. That’s how I feel about cyclicals is the value, is when they’re in a period of opacity with regards to future earnings.

The attention shifts away from, “Okay. Well, what are earnings going to be next quarter or next year,” whatever, and towards “Okay. Well, this is a product that is driven by necessary demand,” which means that it’s very likely that demand will be higher in the future, or at least as strong. That almost makes it easier for an investor in the sense that they can shift their attention away from what is broadly unknowable, which is forecasting the future economics of a business. They can shift their attention towards the balance sheet, which is asking questions like, “Can this company survive?”

With cyclicals, a lot of them, if you survive, you get free market share for the most part, because a lot of firms are short-term oriented. They will lever up, acquire, mimic the herd mindlessly in a way that ultimately detracts from their ability to invest in those downturns. Melexis is one of those companies that continues investing throughout the cycle. The last repurchase they did was at €65 per share, but they initiated buybacks between about €50 to €65 per share. The company is majority owned by the founders. This is the first time that they’ve done that since the Eurozone crisis. So, when share prices were significantly lower. So, that’s a huge, huge buy signal.

They have stopped, which suggests they’re not willing to purchase at a price above €65. But I don’t know, I think it’s up for an investor’s interpretation, but it’s an excellent company to learn about. I think a lot of the opportunity comes from doing preparatory work and investing. You often don’t have time to do the work when the opportunity presents itself. So, even just learning about companies without any expectation of immediate reward can be very, very valuable over a long-time horizon.

Tobias: Let me do a quick shoutout to the folks at home. And then JT, you want to do some vegetables?

Jake: Sure.

Tobias: Petah Tikva, Israel. What’s up? Winter Park, Florida. Tallahassee. Valparaiso. What’s up, Mac? Bellevue, Boise. Cromwell, New Zealand. Savonlinna, Finland. Cincinnati, Ohio. Tampa, Florida. Jupiter, Florida. Andhra Pradesh, India. Austin, Texas. Monique, Jamaica. Bremerton and Toronto. Snohomish.

JT, what have you got for us? Gothenburg, Sweden. Last one in the house.

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Jake’s Financial ‘Screwtape Letter’

Jake: [chuckles] Yeah. Today’s going to be a little bit more artistic than normal, so buckle your seatbelts. Yeah, this could blow up on the launch pad or maybe it’s fun, we’ll see.

[laughter]

A friend of mine, Adam, recommended that I read this book called The Screwtape Letters, which is quite an odd title for a book. It’s written in 1942. It’s really like a satirical masterpiece by C. S. Lewis. He’s Clive Staples Lewis, better known as C. S. Lewis, was a scholar of Medieval and Renaissance literature and a professor at Oxford and Cambridge. He was quite a prolific author as well. He’s perhaps best known for the Chronicles of Narnia, which a lot of everyone read when they were a kid. But he had a lot of nonfiction things he wrote as well, especially around Christianity. It remains often a bridge for a lot of readers today between reason and faith.

At one point, he was an avowed atheist and then he underwent a profound conversion in his early 30s and was really heavily influenced by one of his close friends, who was J. R. R. Tolkien, who wrote the Lord of the Rings. So, the premise of The Screwtape Letters is both very simple and quite brilliant the way that it’s inverted. The book is a bunch of letters written by Screwtape, who’s a senior demon in hell. They’re written to his young nephew, this demon named Wormwood. He’s a junior demon who’s just getting started on learning how to corrupt human souls.

It’s very Charlie Munger like in its inversion of showing how to create a miserable life. What makes the book really powerful is its voice. They’re written entirely from the demon’s perspective. It really flips good and evil on its head. So, God is referred to as the enemy, and hell is like this very bureaucratic place. It’s like, dry and corporate almost. It’s a great satire, but it’s also a bit of a mirror spiritually. Each letter offers tips on how to exploit human weaknesses, distract the subject with small pleasures, cultivate spiritual pride, distort love into possessiveness, encourage vague anxieties.

The brilliance is not really in demonizing sin in the usual sense. He’s not encouraging them to turn them into murderers. It’s rather more about become this lukewarm complacent, too busy to be thoughtful and really losing your mortal soul from that. So, in an act of profound hubris, I attempted to rewrite a Screwtape letter in a financial context.

Tobias: [laughs]

Jake: So, the following is a letter from Abyssmus, who’s a senior financial demon, to his eager nephew, Tick Worm. So, away we go. [laughs]

“My dearest, Tick Worm, I read your latest report with something approaching satisfaction. Your patient, I gather, has opened a brokerage account, downloaded two trading apps, opened a crypto wallet and started referring to himself without irony as early-stage capital. Excellent, you now stand at the edge of your first real assignment. Not merely to ruin him, but to ruin him in the most elegant way possible, through the rituals of self-diluted financial sophistication.

We do not wish to keep him away from markets. That’s outdated thinking. The more delicious path is to let him enter fully, but wrongly. Let him study enough to be confident, but never enough to be correct. Begin with speculation disguised as investment. Encourage him to chase stories, not actual financial statements. Momentum stocks, SPACs with vaporists, forecasts, hot tips that feel like privileged information, anything trending on social feeds. He must believe he’s early to the next wave, though he’s simply the inevitable bag holder arriving for the rug pull.

Let him believe risk is merely a byproduct of cowardice. Caution, you’ll whisper to him, is a tax on ambition. You only need to get rich once, so why not do it quickly, boldly and with an extra helping of excitement? A man of his caliber deserves good stories to woo the opposite sex, not boring business fundamentals and monk like patience.

Next, initiate him into the cult of macro-obsession. Whisper to him that every CPI release, every Fed meeting and dot plot, and every unemployment print is a tactical moment. He must trade on this data. Let him believe he’s interpreting signals that even the professionals misread. Was that a twitch in Powell’s eyebrow that only he saw? The market isn’t ignoring him, it’s simply not enlightened yet. He’s ahead of the curve.

And now, the algorithm will deliver him to one of our favorite weapons, the TikTok Financial influencer. Let him follow 21-year-old prophets who preach conviction while leaning against rented sports cars. This coin will 10x they declare and your patient obeys. He’s not reading, he is scrolling. He’s not evaluating, he’s imitating. This is what we call user generated misfortune. And it’s a favorite of our Dark Fathers.

From here, elevate him into options trading, where ignorance and leverage embrace in holy combustion. He will say Gamma and Theta as incantations while sacrificing premiums weekly. When he wins, let him feel chosen and smarter than all the other dumb money neophytes. When he loses, tell him he was simply early. We want him addicted to the idea of mastery while remaining functionally confused.

Finally, when he grows weary, offer him the false comfort of diversification. He must not know what he really owns as he scatters his holdings across crypto, uranium, distressed real estate, leveraged ETFs, money losing SPACs, pointless NFTs and vintage wine startups. This, he will say is strategy, but it is clutter and it is our free lunch to his torment.

The high fee burdens of these complex instruments help ensure his road to ruin. Let him spend a decade in motion and call it growth. Let him perform diligence without discipline, conviction without clarity and action without understanding. The delicious tragedy is not that he will eventually be financially devastated. It is that he will think he was smarter than average the whole time. That eventual bitterness of his broken spirit is the sweetest fruit for a financial demon.

And by all means, never let him write anything down, lest he learn from his mistakes. Steer him away from systemization that will lead to self-awareness and an inevitable improvement. Keep the idea of a businesslike approach far from his mind. That is too boring and pedestrian for someone as smart as our man. Yours an infinite churn, Abyssmuss.”

Tobias: [laughs] Bravo. Amazing.

Jake: Thanks.

Gwen: Wow. I feel honored to be to have just bear witness to that. I think that’s one of your better segment, Jake.

Jake: Clearly, I have too much time on my hands is I think the takeaway. [laughs]

Gwen: [crosstalk]

Tobias: Is that your commentary, JT, on the state of the markets currently?

Jake: It’s a touch autobiographical, perhaps. I’m a little skeptical of some of the current behavior that I see. Yes.

Tobias: What do you think, Gwen? Does it feel a little bit toppy to you or where are you at?

Gwen: I guess this is where I’m disappointing, because I don’t think about the market at all.

Jake: [laughs]

Gwen: I really don’t. It has no bearing on my understanding of companies. We’ve had industries that have gone through multiple recessions over the past few years that were completely disjointed from the market and it would have been a complete waste of time to be thinking about, “Oh, well, the market is at a P of X.” But to comment on the behavior that I’m observing in the market yet, it’s very concerning. It’s concerning on multiple levels.

Jake: I was happy to see that we checked the box on hot IPO, which is always a telltale sign of every bubble– [crosstalk]

Tobias: With Figma.

Jake: With Figma. Yeah, which we haven’t had that really in this most recent rehash of financial mania.

Gwen: Right. Is it because the assets already exist to spur the mania and that IPOs are maybe not as sufficient? You’ve got bitcoin, you’ve got crypto, you’ve got things that are maybe–

Jake: Yeah, there is outlets for that. I think there’s also something to be said about the indexation, like where did that money come from? Who’s gotten fired in the course of this transition? A lot of it is small and mid-cap managers. Who bought IPOs? It was small and mid-cap managers. So, it’s quite difficult I think to get an interest in an IPO going, because they’re simply– The indexes aren’t– That’s not really their business. So, it’s an interesting dynamic there.

There’s, what is it, 12,000 plus private companies at this point in private equity’s hands, which is a huge number compared to Russell 2000 or S&P 500. These are really big numbers. They tend to be much, much, much smaller. I think the average PE company is one-tenth the size of the Russell 2000 average company.

Gwen: Right.

Jake: So, who’s going to buy if you tried to IPO of those 12,000 private equity companies? Like, who’s left to buy this? It’s not clear.

Gwen: Yeah. Do you think that there’s going to be some end to the Pavlovian dog-

Jake: Buy the dip.

Gwen: -paradigm that we are in where the overarching thesis that is driving markets is basically just give up and get rich-

Jake: [laughs]

Gwen: -which is a very powerful sales pitch. I don’t know if house of funds can be compared to the mortgage-backed security. The mortgage-backed security was one of the better financial inventions in financial history. It was just abused until it became malignant and not good. I wonder if that’s where passive is headed as well, is there’s this very attractive easy sales pitch. I wonder if there’s an end date to that, I wonder if there’s a way where that can be abused to the point where it actually becomes harmful.

Tobias: What do you see, Gwen, that concerns you?

—

Concerns Over AI, Passive Investing, and Research Quality

Gwen: I think I am concerned about AI to some degree which may be controversial. I’m concerned about AI from– I guess for a few different reasons. So, recently, I have been just researching industrials and I don’t like acquisitive companies. I really don’t like them. I don’t like them, because it just creates a lot of opacity in the financial statements in a way that makes understanding an acquisitive company’s true profitability very difficult.

So, I going through this list of 412 Industrials above $400 million market caps in North America. So many of them were acquisitive. I was just on Kappa Q looking at the M&A history and I was like, “Okay, you know what? I’m just going to ask ChatGPT and I’m just going to say of all industrial categorized companies in North America with $400 million market capitalizations or more, have made at least three acquisitions since 2017.” ChatGPT, Gemini, Perplexity, none of them had the answer, which is really interesting, because all of that information is public.

And so, I went through all 412 companies manually and just figured it out about 75% of them have made more than three acquisitions since 2017. About 25% of them have not. And so, the 25% bucket is what I would be interested in, because it’s really difficult to ignore the hurt. It’s really difficult to ignore social proof bias.

Jake: I’m surprised the AI didn’t write you a haiku, but with the wrong answer in it.

Gwen: Yeah. Yeah. Me too. But maybe next time. Yeah, it was just made me realize that AI might have the unfortunate consequence of incentivizing research that might not necessarily be proprietary, becoming proprietary, so becoming private and becoming increasingly captive, because there are just so many AI platforms that use information that are made and has shared publicly for profit, so they’re selling a subscription. Part of what powers that platform is information that’s been scraped from the web.

And so, I think that there’s the potential negative consequence that the most thoughtful investors in the market, not saying that I’m one of them, may become increasingly private with the information that they produce not wanting it to be swept away into some large AI database or whatever.

I guess the other area that I worry about is passive investing, I think, is reducing the incentive to work hard. I think that AI might serve to compound that trend. I think that the most valuable characteristic that an investor can acquire is self-reliance, an ability to analyze a company from A to Z without reading any analyst report, without getting any prior information. And from that A-to-Z method, acquiring an understanding where they can determine on their own if a company is or isn’t worth investing in.

Jake: So, I’m picturing the scene from Demolition Man, where [chuckles] you have the AI powered, fancy everything and then you got the people living under the bridges in their old clothes and they’re doing actual real work companies. [laughs]

Gwen: Yeah. Yeah. I worry. Dependency is not a good skill. It is not a good-

Jake: Trait

Gwen: -trait in investing. I think being dependent on AI models without verifying is a concern. In almost every study that I conduct, there will be maybe a dozen or so data points where it’s just not necessarily clear, and you have to interpret it a little bit. Those data points might be significant. They might have a material impact on the overall visualization of the end dataset.

I think also there’s this urgency to latch onto speed in the market. Investing is not a race. It’s a waltz. So, I don’t think it’s necessary to give up the old school manual way of just reading through every line of accounting and discovering the nuance, because at least with my use of it so far, it’s been mostly unhelpful in terms of the type of work that I want to do. So, you don’t need to find all the opportunities immediately. If you can acquire information that’s high quality and you can use that over time, you’re going to do just fine.

Jake: Toby, what are you seeing? That’s anything concerns you?

Tobias: General overvaluation. Just before we go on to get too deep in my macro thoughts though, [chuckles] [Jake laughs] do you want to give us two updates, Gwen, on 4imprint and Ingles Market, which I think we discussed last time. So, just maybe a quick update on where we’re at with those two.

—

Updates on 4imprint

Gwen: Yeah. So, 4imprint group last time I talked about it, probably irresponsible– [crosstalk]

Tobias: What’s the ticker on 4imprint? Just– [crosstalk]

Gwen: Oh. It’s trading in on the London stock exchange. So, LSE FOUR. L-F-O-U-R.

Tobias: Oh, F-O-U-R. Okay.

Gwen: Yeah.

Tobias: Good one.

Gwen: Yeah. So, basically, last time I talked about I hadn’t analyzed the company since 2019 so maybe a bit irresponsible of me, but share prices declined in the wake of the Liberation Day tariffs to 2019 prices. And so, I did a full expose of the company. It’s a pretty special business. I definitely suggest people take a close look at it. I analyzed it’s kind of– I almost want to call it an intermediation platform, because its e-commerce platform is just an intermediary entity that just connects suppliers with customers. 4Imprint doesn’t actually really hold any inventory.

But the company is trading at 2019 prices, and the business generates higher cross cycle returns on capital than the Mag-7. So, it’s an extremely profitable business. No debt, $150 million cash on the books, and that cash position is maintained specifically to position the company to take advantage of downturns in the market. Because promotional products is a cyclical business. When you have a management that optimizes their balance sheet to invest across the cycle, it’s unsurprising that foreign print has grown at 20 times the rate of the overall market organically over the past 10 years.

Tobias: Wow.

Gwen: Really, well-run company. Very thoughtfully well-run company. You don’t pay withholding taxes on UK dividends. That’s a nice thing as well. So, when you look at the dividend, I would normalize it, because their profitability doubled in the wake of the pandemic, just because the average selling price of their products went above the rate of new orders. But normalizing that completely back to pre-pandemic and assuming effectively no growth, you’re looking at a pretty decent return I think, in my view, at least a 10% return base assuming pretty abysmal performance over the next five years or so, which is what I like to do.

The key to happiness is low expectations. So, my way of valuation is all about, can I get a good profit if forward economics are below what management would like them to be and below historical performance levels?

Tobias: Good one. The only other one is Ingles Markets.

—

Updates on Ingles Markets

Gwen: Yeah. So, Ingles is also compelling, just because the food cycle is in a downturn.

Tobias: People are eating less.

Gwen: Yeah. There is actually some demand contraction. Yes.

Jake: From GLP-1s? Is that–

Gwen: Maybe GLP-1s. But fuel prices are–

Jake: American eater finally takes an L.

[laughter]

Gwen: Yeah. Yeah, I actually haven’t thought about that too much, but maybe there is some impact there. But fuel prices are also lower, so that has impacted the business as well. It’s impacted Kroger. I use Kroger as a one-to-one comparison, just because their store formats are so similar, which is why you don’t really see Kroger competing Ingles Markets, just because it would be redundant. They’re typically operating within smaller towns in the southeast where there’s not really–

At most, you get a Walmart and an Ingles and then maybe a Publix or an Aldi or something like that. It’s usually smaller markets. But it’s gotten cheaper, and that’s what I expected would happen after just a ginormous run up of inflation and margin expansion post pandemic. It is now at the lowest price to tangible book that it has ever been-

Tobias: Wow.

Gwen: -at least since 1992. The kicker is that the business has about $658 million in property value that isn’t recorded on the balance sheet. So, I went through over 1,000 county tax record searches, identified 445 owned properties, was able to conduct depreciation calculations on each property that wasn’t land, because land doesn’t depreciate, of course. And yeah, but $658 million in value we estimate is not on the books.

Jake: So, what’s that make? Like, Gwen’s adjusted price to book today then?

Gwen: About 0.52%. So, about half book for a very, very competitive and very incumbent regional grocer. If you look at the consolidated numbers, it’s fairly disappointing. They’re dealing with damages from Hurricane Helene. Three stores remain closed. Four stores were closed for almost a year. So, that had a big impact. Also, just cleanup damages and things like that. Even still, their net margin is with a 50% decline in net margin this recent quarter. It’s still higher than Albertsons.

Jake: Two instead of one for grocery? [laughs]

Gwen: Yeah, it’s low. Yeah, you’re right. But [Tobias laughs] company isn’t supposed to be a cash machine, just because they have so much– [crosstalk]

Jake: Lot of return. Yeah.

Gwen: -so much property. But the big exciting piece of Ingles is their leasing business. So, they own a shopping center leasing business, which is it’s not malls. It’s like a plaza, like you go in there and there’s a grocery store and a super cuts and maybe you go get your nails done or whatever. There’s a discount store. Sometimes there’s a dollar store. That’s kind of the model that they go for. So, things that are e-commerce resistant and one-stop shops as far as shopping centers are concerned.

They produce 85% FFO margins in that business. So, it’s significantly more profitable than the grocery business. What you were seeing prior to the pandemic is a shift towards away from investing in the supermarket business and towards investing in the leasing business. And so, margins were steadily ticking up every single year. And so, the leasing business has continued to do well. Base rents are up 16% year over year. You pretty much have this consumer staple funding without debt– [crosstalk]

Jake: REIT.

Gwen: A REIT. So, it’s this exciting, I don’t know if you want to call it a canary in a coal mine. I don’t know if that would be the right saying. But it’s this thing that is bubbling and that has contributed to upper margins over time, and I think that will show again as the supermarket business normalizes and the Helene damages get resolved. But it’s going to continue to contribute larger and larger and larger share of overall profit and will likely increase the margins of Ingles broadly over time.

Yeah, if you look at ROIC, that was acquired by Blackstone, that’s the largest grocery anchored operator shopping centers in the United States, they’re acquired at an enterprise value of about $6 billion. I think Ingles is at an operating as an enterprise value of about $1.5 billion. Ingles is producing slightly higher EBITDA than ROIC was.

Tobias: Thanks for the update, Gwen. We’re going to run out of time a little bit, unfortunately.

Gwen: yes.

Tobias: If folks want to get in touch with you or follow along with what you’re doing, what’s the best way of doing that?

Gwen: So, just follow me on LinkedIn. Just Gwen Hofmeyr, you’ll find me. Or, you can send me an email. Visit my website, Maiden Financial, and you can get in touch with me through there via email. And yeah, those are the two best ways to do it.

Tobias: Well, thanks very much for the update. We’ll have you back on in the near future to give us another update and learn about what you’re up to. Gwen Hofmeyr, Maiden Financial, thank you.

Gwen: Thank you very much.

Tobias: JT, any last words?

Jake: No. Enjoy the rest of your summer.

Tobias: [laughs] Nothing to add. All right, folks, see–

VALUE: After Hours (S07 E26): Magnetic Position Sensors $MELE, Promo Market $FOUR and Ingles $INMKT with Gwen Hofmeyr

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