VALUE: After Hours (S07 E29): Lessons from the XPEL Investment

During their recent episode, Taylor, Carlisle, and Jason Hirschman discussed Lessons from the XPEL Investment. Here’s an excerpt from the episode:

My question is for XPEL. So, XPEL is a slightly different situation where it’s a newer business. They have similar crisis, but more directly related to their core business. So, how did you think through the XPEL issue and the crisis? Can you just talk to us a little bit about XPEL?

Jason: Yeah, I think we could talk about XPEL. What I can say, is that I was very fortunate to team up with another investor, Lock, Stock & Barrel, who was also a micro-cap club member, who’s also a patent attorney. And in my business life, I submitted my first US utility patent application at age 21. I’ve sued and been sued for patent infringement. So, we made a good team.

By the way, I always say Lock, Stock & Barrel deserves the lion’s share of the credit for or XPEL. So, what we did to try and understand the situation better, we bought samples of XPEL paint protection film after 3M sued XPEL, we sent it out to a laboratory to be deconstructed, determined that XPEL film did not violate 3M’s patents, and further determined through our own analysis that 3M’s patent is a paint protection film patents were very weak. See, those two things determining the three M’s patents, which are very weak and also determining that XPEL’s film did not violate 3M’s patents gave us a lot of confidence.

Now, 3M is a giant, right? XPEL was a tiny company. So, there’s always the potential that even if you have all the facts on your side, things can go wrong. As you probably know, Buffett sized the Amex position, I think, around 18% or so of Buffett partnership. Honestly, I did the same thing with Amex. I sized it about 18% of my assets at the time. But I could tell you that after I received that chemical analysis report in mid-April 2016, I really stepped up my purchase of XPEL shares the day I received that report. So, from April 13th, 2016, through November 25th, 2016, I personally purchased 40% of the XPEL shares that traded on its primary exchange, the venture exchange up in Canada.

Now, that sounds like a lot, but 40% of 1,600,000 shares is still not that many shares. Those 1,656,795 shares that traded over seven months or so, that only added up to $1.8 million.

Tobias: [laughs]

Jason: So, again, we talk about like micro-cap opportunity and illiquidity. There’s so many people like– They love the XPEL story. Maybe the dream I wish I had XPEL. The opportunity was there, but it wasn’t huge.

The lawsuit went public on December 30th, 2015 through the end of 2016, there were 4.4 million shares that traded. But in the first 10 trading days, 1.4 million shares traded. But they were purchased so quickly after the lawsuit. Is that really investing or is that speculation in paint protection film sardines really at that point?

One of the things that I think people forget, is that it was very fortunate for me that

Lock, Stock & Barrel that mid-2015 there was a bear market for micro-caps, particularly up in Canada. XPEL had disappointed unofficial guidance in late 2015, right before the lawsuit. So, in 2015, XPEL was trading above about $33 before the misguidance and micro-cap recession and lawsuit, which nothing would be wrong with 11 or 12 bagger to the current price. But it’s not the same as the 30 or 40 or 50 bagger. I have on my remaining shares even at the current XPEL price, because of that collapse, which gets us back to the importance. But I think every value investor knows of purchase price. Purchase price is so important even over a longer time period.

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VALUE: After Hours (S07 E29): Lessons from the XPEL Investment

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