#47 - The Curious Case of Atlas Engineered Products

Note: I wrote this post before the earnings release of 2021Q4 for $AEP.

Should I have sold AEP.V?

AEP.V is a significant position in my portfolio. But lately, I’ve been pondering whether I should trim it a bit.

Atlas Engineered Products is a roll-up company in Canada’s truss, wall panels, and engineered wood products industry. They’ve acquired 7 companies ince going public in late 2017 (3 in Ontario, 1 in Manitoba, and 3 in BC).

The reason I thought about selling some of my stock is the is rising interest rate environment we’re embarking upon, on the back of a clear housing bubble, meaning house prices have nowhere to go but down. The first signs have already started to show up.

With prices down and consumer buying power getting squeezed out by the crazy high inflation, it seems to me that builders don’t have a strong incentive to build. Which means AEP will take a hit to its revenues.

So I thought (a lot) about selling, but I didn’t.

Here are my reasons.

What I like most about AEP

1. This is a business I could see myself owning for a long-time because I see two strong tailwinds behind it.

A] The first one is that Canada, is underbuilt. Here is an article from ScotiaBank that estimates the structural housing shortage in Canada. Suffice it to say that we have the lowest number of housing units per 1,000 residents of any G7 country (we are at 424 housing units per 1000 population). The article concludes with: “Solving our country’s housing challenge should be a national priority.”

In B.C., housing affordability has become a hot topic. Here’s a snapshot. When both liberals and conservatives agree on something, I think it’s worth paying attention to. In Canada, local governments (municipalities and such) have hampered construction way too much.

I think (and hope) that trend is about to change. Here’s a good article on the topic. Something to keep an eye on.

The same situation can be found in Ontario: here’s what the Ontario housing task has to say.

Also worth keeping in mind: according to the Canada’s Immigration Levels Plan, Canada expects to welcome 400K+ new permanent residents per year in the coming years (up from about 300K yearly before). These people will need a place to stay!

B] The second tailwind is the construction labor shortage. According to this article, the construction industry is facing a workforce shortage of 650,000 in 2022. This is a tailwind for AEP because they bring pre-built modules to the construction site, easing some of the workforce needs of the builders.

2. I like the CEO, Hadi Abassi.

He’s an owner-operator and I believe he owns more than 10% of the company. Listening to his interviews on YouTube, he seems shareholder-friendly and focused on the bottom-line. The company has been buying back shares - not much, but it’s a start. Most importantly, I like the way the company navigated the pandemic as well as the crazy high lumber prices. I’m curious to see what Hadi will do on a downcycle. What I’d like him to do is to get aggressive on the M&A front and buy distressed operations. I’m not 100% sure he’ll do it but let’s see how it goes.

3. Even if there’s a downcycle, I’m not sure it would be bad for AEP long-term

This is related to the last point of the previous paragraph. Because this is a roll-up story, a downcycle might end up being favorable long-term for the business, in terms of available acquisition opportunities. Looking 5 or even 10 years ahead, I’m not sure it matters. The business clearly provides value to its customers and I don’t see this value diminishing over time.

What I like least about AEP

1. The gross margin (between 20% and 25%) is very low, which means not much operating leverage.

2. The moat: I don’t know if there’s any. I think they’re good at what they do, but I don’t know what would prevent new entrants to pop up. This could be (at the moment) a reflection of my lack of understanding of the industry.

3. The share buyback so far has been fairly timid so far. I would have liked them to be more aggressive about it, especially under $0.60.

The bottom-line

Irrespective of what I like or don’t like about $AEP, the main reason I don’t want to sell now is that I don’t want to sell because of macroeconomic reasons. I will trust far more intelligent people than me on that one: I am unlikely to get it right.

And whether I get it right or not this time is irrelevant: I just don’t want to go there.

So I’ll sell when or if the business deteriorates, which hasn’t happened yet.

Plan going forward

I want to track:

• how the housing start trend in B.C. and Ontario

• how the company manages to protect its gross margin in the coming quarters/years

• how aggressive the company will be with their acquisitions if the environment turns sour

If all these three signals are positive, not only will I not sell, I’m prepared to add - especially if the price stays flat or goes down. Otherwise, I will rethink my position.

On the other hand, what would cause me to instantly change my mind on the stock is any kind of dilution at these sub-$1 levels. I’m also keeping an eye on the option awards and overall management compensation. I want don’t want to see a loosening of the discipline there.

Should I have bought Voxtur Analytics VXTR?

Voxtur is in a great spot, strategically speaking. They are solving a real pain, and it seems that they are a the forefront of a trend towards digitizing, simplifying and reducing the costs of real-estate transactions.

The company was on my radar, but I wasn’t able to understand everything they were doing and come up with a comprehensive picture that linked their acquisitions and activities, the total adressable market, and how it all could translate into potential revenues for the company.

So this one was too hard, for me. Or said otherwise, I was not smart enough to get it. That’s OK, I’ll wait for easier pitches.

On top of that, I’m not “clicking” with the management here. Now this is a totally subjective judgement and has pretty much no value in terms of predicting how the company will fare, but it has value in predicting how well I would sleep holding this investment. Having money in the hands of people I don’t like or don’t trust just doesn’t work for me, so I’ve stopped doing it - irrelevant of how good the opportunity might look.

So in a nutshell, I think Voxtur is probably a incredible opportunity, but it’s not for me.

Becoming Chris Mayer

I am a fan of the investment game, and I’m a fanboy of many super investors. I don’t know if there’s an official definition of what a super investor is, but for me it’s just investors with a public track record that beats the market as well as freely available content online (interviews, YouTube clips, blog posts, or books).

Here’s an non-exhaustive and unordered list of the ones I admire the most: Charlie Munger, Mohnish Pabrai, Rob Vinall, Nick Sleep, Terry Smith, Joel Greenblatt, Tobias Carlisle, Christopher Mayer, and the list goes on and on…

So why have chosen Chris Mayer as the one I want to deep clone? (meaning, I don’t just want to clone his investments, I want to clone how he thinks and behaves)

Three reasons.

First, his philosophy is simple and holistic. It makes sense. The parts are elegantly connected to the whole, and the whole reinforces the parts.

Second, Mayer is a meta-thinker: he thinks about how to think. This is appealing to someone like me, who sees investing as a yardstick to measure personal progress.

The third reason is merely practical: Chris Mayer has (in my opinion) more publicly available content than any of the other super investors. Not only that, his content comes in all four major formats: books, blog posts, YouTube clips, and podcasts.

So what does it mean to become Chris Mayer?

It means that during 2022, my main goal in terms of investing education will be to read every one of his books, every single blog post of his I can find in the public domain, as well every interview or presentation he has given. I have created a dedicated Google Drive folder to save these artifcats and have them readily available in the future.