Hardide - the end of a 9x ride

Hey everyone, quick update from Wizard Towers on Hardide plc (HDD.L)

Earlier this week our predictive engine (Wizard) flagged Hardide up as a sell. The main reason is the risk/reward model has flipped to the left (risk) and Wizard has also reduced Hardide’s fair value based on its latest calcs.

I sold earlier in the week and overall it has returned 822% since I invested in late October of last year at 7.65p. It has been quite a ride (see the chart below). Any of our readers who picked it up on May 25th at 50p would now be up 36% or so. We think the upside is less certain now, so there’s no harm banking gains if you’re still in - 36% in just over a month isn’t bad folks! (To add to the c. 45% in Tekmar over a similar period).

Why sell

In addition to Risk/Reward tipping to the left, there are some hard business realities ahead for Hardide which we can’t ignore:

• The tungsten risks are real: Management has done a fine job using surcharges to pass through costs. However what we are seeing in our market scan is this: the persistent Chinese export restrictions on Hardide’s main raw material has now injected a permanent risk premium into the discount rate moving forward.

• Lumpy CapEx vs. High-Multiple ARR: The spectacular £4.55m North American order flow is fantastic, but let's be real - this is still lumpy energy sector CapEx, not recurring software ARR. The valuation multiple needs to stay anchored to industrial reality. The market is messy at the moment and capex investment decisions are not immune to that.

• The Growth Trap: At 72p, 57.7% of Hardide’s entire market value is derived from purely implied forward growth. The margin of safety has evaporated, and the market is now paying for a zero-mistake execution pipeline. We worry expectations may pop if there are signs of delays, slowdowns or orders drying up.

Hardide is a quality company and Matt Hamblin has done a magnificent job. But as we saw with our post on Filtronic this week, a quality company doth not a profitable investment make.

The question for sellers ofc is, what do I do with the proceeds?

The players and the team

When we look at our portfolio, we can consider it as a sport’s team. Are there moments when you substitute one player for another?

Naturally, these moments inevitably arrive when a player on the bench can offer more to the team than one on the pitch. In investment, this happens when we have a stock on the sidelines with significantly higher upside than one in our portfolio. The logical thing to do then is to sub one stock out for another.

Right now there are players on the bench just raring to get on the pitch with higher upside than Hardide. Cash is also preferable when the risk/reward skews to the left and upside evaporates - that’s another option and the Wizard has dry powder alongside the stocks he has substituted Hardide with.

Who’s on the substitute’s bench?

The day before yesterday we ran the flag higher on James Cropper.

Since we featured it at the end of May, CRPR.L has run up 18%. That’s small potatoes and there’s a lot more to come. Wizard has CRPR between a double and a 3x. We will be dropping a Note in the next few days where and lay out James Cropper’s path to a 3x - showing business realties, FCF generation and valuation working in tandem to reach our 3x prediction. At the very least this will provide a picture you can work to, fully supported by our forensic bottom up numbers.

In a similar way to Hardide, CRPR has embarked on a ‘3 peaks’ turnaround under its stellar new CEO David Stirling.

Stirling is the ex-Zotefoams CEO who turned it into an international powerhouse and we believe he is going to do exactly the same here. His early results at James Cropper are impressive to say the least - worth reading yesterday’s article if you have not already done so.

Alongside James Cropper there are other high octane, high upside stocks sitting on our subs bench which we will feature in the coming weeks, so please subscribe if you have not already done so.

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