We all know the saying: Sometimes Boring Can Be Beautiful.
In fact TSSI 8 month 1000%+ performance , our top performing stock in the MS Microcap Quality Index (MSMqi), was a boring technology integrator that turned exciting when it used its expertise to integrate AI data center racks for its biggest customer, DELL.
Well, there is nothing more boring than “pick and shovel” construction companies, the subject of my pitch at last week’s Starting Five #2 live event.
However, some of the returns of these types of stocks have been nothing short of exciting, as governments around the globe set aside funding to modernize outdated bridges, roads, communication, and subsea infrastructure. The $1.2 trillion U.S. infrastructure bill and $232 billion of government infrastructure funding in Canada are just some examples.
Here is a slide from my Starting Five Presentation last week that puts global infrastructure spending goals into perspective:
Stocks like STRL (road construction) top this list with a total return of 2,566%, or about a 51% CAGR over 8 years.
Finding The Alpha In The Boring
One of the best alpha-generating strategies I have participated in over the years is investing in boring companies that turn exciting.
You get to experience a double-whammy scenario, where earnings per share growth accelerates at the same time that the price-to-earnings multiple expands.
And that is what is quietly happening with a bunch of pick-and-shovel stocks, one after another, that are redefining their stories, as billions of dollars are being deployed to build or modernize data centers.
Part of what the stock I pitched at the Starting 5 Event does is building data centers, which has become a top focus of management.
In fact, they even highlight a NEW brochure on their website detailing everything they do for data centers, from design, equipment sourcing, power solutions, and construction to maintenance.
I predict this stock is going to be a rather significant multi-bagger over the next few years. The company is also aggressively pursuing energy and mining markets.
Here is a brief elevator pitch from the initial Cliff Note we published on October 18, 2024:
“Prior to the positive growth trends that the company has been experiencing over the last two years, EPS was basically stuck around 80 cents going back at least ten years. Management is banking that tweaks made to the business plan will result in the company growing for several years by entering “sexier” markets and establishing long-term, predictable revenue streams. In fact, the recurring revenue backlog is sitting at about $900 million, or approximately 30% of total revenue. If successful, the P/E could experience a sharp upward revision. We found some slight information arbitrage on the company’s website, where data centers are now a main focus. They even published a brochure on this focus!!!”
Supporting Case Studies
Let’s look at a few examples of other “boring” pick-and-shovel stocks experiencing the data center lift, adding to my excitement.
Smith-Midland (SMID) - up 490% in the past five years
From their Q3 Press Release;
…Our third quarter was a record-setter for both revenue and net income, driven by the tailwinds within our sector and multiple special barrier projects, occurring and completed in the quarter, which have a more favorable margin profile,” said Ashley Smith, Chairman and Chief Executive Officer of Smith-Midland. “Our record backlog of $62.8 million reflects the continued strong demand for our products as state and local governments use their allocated funds from the Infrastructure Investment and Jobs Act and for our utility vaults to meet the increasing growth of data centers. These favorable trends should continue into 2025, and we remain well-positioned to create long-term shareholder value…
Power Solutions (PSIX) Introduced a new special enclosure product in March 2024 that protects generators in data centers.
It’s up 69% since being added to our MSMqi in September.
From their Q3 Press Release;
Dino Xykis, Chief Executive Officer, commented, “We continued to deliver strong profit in the third quarter, driven by higher sales from our power systems business, including contributions from the expanding data center sector, along with ongoing operational excellence. To meet growing customer demand, our team is actively working on several projects to expand manufacturing capacity. The Company also is committed to efficiently managing expenses, including streamlining operating expenses and prioritizing certain R&D investments in support of long-term growth objectives.”…
IES Holding (IESC) - up 1,280% in the past five years
From their Q3 Press Release (they will show Q4 numbers in two days);
“Our continued strong financial performance in the third quarter of fiscal 2024 reflects the benefit of the investments we have made to support the growth of our businesses," said Jeff Gendell, Chairman and Chief Executive Officer. "Our Residential segment continues to expand our plumbing and HVAC service offerings into markets where we previously offered only electrical services, while also expanding all service offerings into new geographic markets. These expansions, combined with increasing market share in existing electrical markets, have resulted in our Residential segment's growth outpacing growth of the housing market in general. Our Communications, Infrastructure Solutions, and Commercial & Industrial segments continued to benefit from strong demand, particularly in the data center market.
Limbach Holdings (LMB) - up 3,202% in the past five years
From their Q3 Press Release;
“In the third quarter, we continued to execute the three pillars of our strategy with each pillar contributing to our EBITDA growth and gross margin expansion,” said Michael McCann, President and Chief Executive Officer of Limbach Holdings. “Our results are a direct outcome of executing our plan to shift our business to working directly for building owners on existing facilities, evolving our service offerings and scaling through acquisitions.
“We are seeing durable customer demand for our value-added solutions and achieving organic growth by focusing on deeper penetration with existing customers. Demand in all verticals has been strong, and we believe the long-term growth potential of data centers is set to play an increasingly important role for demand.
I currently own some PSIX. I sold SMID in 2016 around $3.00 during a panic move. I caught a bite-size piece of the IESC and NVEE ascents. I lost money on LMB when it was run by a previous CEO who just could not get things right.
I don’t intend to screw up with this new infrastructure play. Wish me luck!!!
Multibagger Markers
My presentation also discusses our top 8 multi-bagger markers, which we use to identify which stocks from our approximately 2,000 watch list to add to our MS Microcap Quality Index (MSMqi).
I tied in these markers with my presentation pitch, which meets 6 out of 8 of these multi-bagger markers, such as getting more revenue from current customers and developing recurring revenue streams.
Currently, about one out of three stocks added to our MSMqi (out of 102 stocks ) have reached multi-bagger status over the past two and a half years.
