18 Comments
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Thierry from arvy's avatar

Great Portfolio!

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Heavy Moat Investments's avatar

Thank you Thierry, cool to see you on Substack!

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Thierry from arvy's avatar

I ll give a try for my missing EN community :-) Lets see!

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Jason Leonard's avatar

Great read. Curious, what was the catalyst for the move into micro caps now?

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Heavy Moat Investments's avatar

Arcure just met my criteria and looks like a great risk/reward. I'll see if I like such small companies, but fundamentally it looks great and fitting into my portfolio.

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Mitch's avatar

Nice move on Hermle! I’m also buying more at this prices. Maybe shares get more cheap

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Heavy Moat Investments's avatar

Let's see if it works out. So much negativity priced into the shares, meanwhile they keep investing for the upturn.

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Mitch's avatar

I can’t predict the future. But I can analyze the past. It’s a high quality company with above average margins through cycles. In the past they always came out of a cycle stronger. I’ve heard a bit to the left and to the right. Their machines seem to be Ferraris in its niche.

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Heavy Moat Investments's avatar

Agreed, the risk reward is great. Hermle has industry leading margins and can keep most of them during a downturn. Add a fortress balance sheet and secular tailwinds over the long-term.

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Francoisg's avatar

Where are you based?

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Heavy Moat Investments's avatar

Southern Germany

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firewolf's avatar

Atkore was so painful.

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Heavy Moat Investments's avatar

Indeed, management lost a lot of credibility.

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firewolf's avatar

Also, I overestimated its competitive advantage and pricing power (which was even worse than anyone imagined).

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Heavy Moat Investments's avatar

I actually don't think that the competitive advantage and pricing power were the issue. I still believe that they have an advantage over their competitors, but the unpredictability (2 weeks of visibility) of the underlying commodity destroys all advantage they have. Lessons learned.

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firewolf's avatar

A key indicator of a competitive advantage is pricing power supported by strong barriers to entry. However, the significant price decline and the lack of substantial barriers, as suggested by competitors in Mexico and new factories in the U.S., indicate otherwise. This does not align with the characteristics of a business with a strong moat.

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Heavy Moat Investments's avatar

You're right on the Mexico part actually. I still believe however that the wide network is an advantage.

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firewolf's avatar

Well, distribution can certainly be an advantage. However, two points to consider: 1) If there's no pricing power, it might suggest that the advantage isn't as significant as it seems, or that competitors have found ways to bypass it. 2) Regardless, without pricing power and with limited barriers to entry (not just the Mexico aspect—according to the transcript, new competitors are building factories in the U.S., which is why worse results are expected next year), the business might struggle to sustain its current level of profitability over time.

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