Thursday, March 9, 2023

Hammond Power

I recently sold all my shares of Hammon Power (HPS.A). I have no beef with the company: it has done extraordinarily well. It's simply a case of price catching up with value.

I've held Hammond Power for a few years. But I devoted a large portion of my portfolio to it when panic-selling during the initial Covid outbreak provided an excellent opportunity. I recall buying shares for $5 and change at some points. Today, just three years later, the shares sell for about $35 each.

For most of the past three years, the stock traded very cheaply, with a P/E in the mid single digits. Last year, I tweeted about how cheap it was. But not a lot of people seemed to care.

The company continued to grow earnings and backlog, and slowly the stock started to re-rate higher.

What's interesting is that the stock still looks cheap, as earnings have grown substantially over this period as well. So, why sell?

It looks to me like the company is over-earning compared to its long-term earnings power. Pent-up demand has likely caused prices to rise, pushing margins quite a bit higher than normal. At the same time, the company (and likely its competitors) are embarking on expansion schemes to take advantage of these extraordinary margins. This is sowing the seeds for future margin declines once demand is finally met.

So, I've moved on.

Disclosure: No position

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