EP135: Nine That Shine
Stock Ideas From Investment Professionals
Welcome, subscribers!
This week, we reviewed a wide-ranging group of investor letters and pulled together nine compelling ideas spanning luxury goods, building products, electrical infrastructure, semiconductors, telecom, international conglomerates, and IT services.
A common thread runs through many of them: investors are looking past near-term uncertainty, be it AI disruption, cyclicality, leverage, temporary earnings pressure, or shifting industry structures, to find businesses with durable competitive advantages, strong capital allocation, and attractive long-term earnings potential.
If you know someone who enjoys investor letters and discovering new ideas, feel free to forward. 📬
This week’s ideas include:
A nearly 200-year-old luxury brand whose craftsmanship, scarcity, and multigenerational customer loyalty have produced extraordinary pricing power—and whose recent pullback created a rare entry point.
A fast-growing electrical equipment manufacturer sitting directly in the path of AI, electrification, and reshoring—with backlog surging and capacity investments giving it dramatically shorter lead times than competitors.
A mission-critical semiconductor equipment supplier that could benefit from both the AI-driven wafer-fab spending boom and a normalization in customer inventories, while leverage declines and margins expand.
A busted telecom roll-up turned special situation where asset sales have eliminated debt, funded substantial cash returns to shareholders, and left investors with a remaining business that may itself soon be sold.
An under-the-radar Japanese compounder with a Berkshire-like approach to capital allocation, significant insider ownership, an 18% historical return on its public investments—and an unusually cheap valuation.
A digital-native technology services company is experimenting with teams that combine human engineers and AI agents, potentially offering an early blueprint for how IT services firms can move beyond the billable-hour model.
Disclaimer: Nothing here constitutes professional and/or financial advice. You alone assume any risk with the use of any information contained herein. We may own positions in the securities listed. Please do your own due diligence.
To the investment managers who read this, you can send us your letters at elevatorpitches@substack.com or on Twitter (and Threads!) if you’d like to be included in a future issue.
Let’s get to it.
Wedgewood Partners initiated a position in Hermès International (RMS-FR), viewing the company as a rare example of enduring brand equity built on nearly two centuries of craftsmanship, product quality, and scarcity. Wedgewood believes these attributes have created exceptional pricing power, customer loyalty, and profitability, while the recent pullback in the shares provided a more attractive entry point into what it considers a uniquely high-quality business.
Hermès
We recently initiated positions in Hermès International, one of the world’s leading designers, manufacturers, and retailers of ultra-luxury leather goods, apparel, and accessories.
Hermès began in 1837 as a harness and saddle maker in a Paris shop, after its founder, Thierry Hermès, trained for eight years as a master craftsman. From the beginning, the company focused on artisanal skill, high-quality materials, and exceptional craftsmanship, earning awards and serving a prestigious upper-class clientele in and beyond Paris, including world leaders and royalty. Over time, the Company expanded into adjacent equestrian-related product categories, including bags, leather gloves, and scarves, intended for riders. In the 20th century, with the advent of the automobile and the fading importance of horses, the Company applied its leather goods expertise to areas such as luggage, leather jackets, and handbags. Today, the Company still produces equestrian equipment as part of its leather goods segment, which remains its largest at 44% of revenues. The Company has also built important businesses over time in apparel and accessories (28% of revenues), a highly recognizable and unique business in silk scarves and other fabrics (9% of revenues), and businesses in watches, beauty, perfume, and other areas.
The Company has likewise expanded from its single store on Rue Honore in Paris—which still exists—to nearly 300 stores globally. Top geographic markets now are Asia (over 50% of revenues), Europe (roughly 25%), and the Americas (roughly 20%), with sales in the Middle East relatively insignificant. However, Middle Eastern customers make sizable contributions to sales in other markets as tourists.
Over time, Hermès has continued to focus on the factors that led to its success nearly 200 years ago: using highly skilled artisans to hand-produce its products from the highest-quality materials. This has given the Company a lasting brand heritage that has driven demand, commanded deservedly high prices, delivered high, consistent profitability, and insulated the Company to a large degree from competition.
Hermès has repeatedly produced iconic products with decades of staying power, indicating that the brand’s success is not built on the caprices of fashion whims or fads but on its heritage and quality. Some of these products include the Birkin bag, first produced in 1984 after the Company’s CEO shared a plane journey with actress Jane Birkin, who complained that there were no fashionable handbags suitable for a young mother; the Oran sandal, first launched in 1997 and known for its quality, comfort, simplicity, and versatility; and the Company’s iconic silk scarves, produced in very limited runs in a variety of patterns, originally intended to protect the long hair of horse riders and now adapted for a variety of uses.
Many brand names do not mean anything. To demonstrate this, one need only survey the detritus of “brand names” littered all over Amazon, which are clearly made-up noises for cheap, low-quality commodity products. Any company can spend advertising money to tell you that its product is great, preferably through some of our long-time holdings, Meta and Google. Advertising generally seeks to lead consumers to attribute some credit or personal affection to those brand names. Most of those companies are mass-producing products with cheap materials and methods in low-cost manufacturing markets; or perhaps with slightly better materials, methods, or manufacturing; or by trying to convince you that they are doing so with better design sensibilities, which are in fashion and sometimes are not.
Producing luxury goods by the hands of the most skilled artisans in markets such as France or Italy, using the highest-quality materials, which are usually produced in these same markets, is in fact a unique, personal appeal. Doing so with a brand that has developed a decades-long reputation for this (nearly centuries-long, in the case of Hermès), in reality and not only in an advertising pitch, earns you a loyal, often multigenerational following, which should lead to established premium pricing and sustainable high margins.
The Company’s long-term focus on the highest quality has led to sustainably strong demand and exceptional profitability. While we have found it difficult to obtain reliable, easily comparable data for the luxury goods industry—and there is an array of definitions of what “luxury” is—we can provide a direct comparison between Hermès and the U.S. Apparel, Footwear, and Accessories industry, which will be most familiar to our readers and comprises the majority of our investment opportunities in this segment.
According to the U.S. Bureau of Economic Analysis, U.S. personal consumption expenditures on clothing, footwear, and related services have grown at a compound annual growth rate of about 2.8% over the past 20 years.
Over the same period, Hermès has seen its revenue growth compound at 11.8%. Given the varying definitions of the global luxury goods market and the lack of particularly good data available to us, our best approximation is that the luxury market itself has roughly tripled over this time, for a CAGR of roughly 5.5%. Although the luxury apparel-footwear accessories market has outgrown the standard market for those categories, the Company has capitalized on its strategy and heritage to deliver outsized growth relative to its industry. We would note that this period included two of the most traumatic economic periods in recent history: the 2007-2009 global financial crisis and the 2020 pandemic.
Another interesting component of the Hermès story, and of the ultra-luxury world in general, is the supply side of the equation. One could reasonably point out that a business strategy to limit supply is a sound approach in an industry seeking to cultivate an air of exclusivity and sustain high prices. An important point in the luxury goods industry is that supply appears constrained, whether or not that is a company’s strategy. Again, although solid industry data are hard to come by, our readers could search “luxury goods artisans’ shortage” and find more than 10 years of articles lamenting the shortage of skilled artisans in the industry.
The aging of the workforce, as older artisans retire and are not replaced, and the younger generation’s aversion to manual work. We understand that a skeptical person might not take some industry pronouncements at face value, and that a fear of supply shortages may drive both pricing and demand—we have found projections saying the industry is 20,000 artisans short. We have found others saying the industry is 90,000 people short, and there may be some leeway in those numbers. However, we would point out that luxury companies across the industry, as well as the governments of France and Italy in particular, have been investing in training and schools to encourage more people to enter these positions. Hermès itself has opened 24 workshops in its leather goods division, with four more scheduled to open over the next four years. Industry peers LVMH and Bottega Veneta likewise have invested heavily in training and education, and some Italian luxury houses are even making agricultural investments to support Italian silk and wool production.
So, we would say that Hermès and the rest of the industry may have planned for some supply scarcity over time as an effective strategy. Still, there seems to be a genuine scarcity of skilled artisans, with fairly compelling evidence that companies and governments are investing to prevent the supply situation from worsening. Again, we will point out that when you combine strong, consistent demand with limited and arguably declining supply, you get the pricing power and high profitability that we see with Hermès.
Turning to a real-life example, let’s refer back to the iconic Birkin bag. Perhaps you know someone who would like to get their hands on a new one? Here’s how. First of all, walking into a Hermès store isn’t going to do it. The bags are made in very limited quantities, so there will not be any in stock, and the few that trickle into stores are immediately sold by allocation to the store’s most important customers. How do you become one of the most important customers? You develop a long personal relationship with one of the sales associates. The key to this relationship is consistently spending a lot of money on other Hermès products. Sifting through various blogs, it seems you might be expected to spend at least one to two times the price of the Birkin bag before you even have a chance, at which point you might be offered one in a period somewhere between six months and three years later. If you are so lucky, retail prices start around $15,000 for smaller bags made from the company’s “base leather,” and you can spend multiple times that amount on other designs. If you aren’t able to get an allocation directly from the store, though, don’t worry - you can buy the same bag from someone selling it on the secondary market for roughly double that price. This is very powerful brand equity for a bag introduced 42 years ago. This brand is not a fad. We also highly suspect that this brand equity would no longer exist if Hermès had chosen at some point to skimp on artistry or materials.
On the valuation front, the stock is rarely what many people—especially those outside the U.S. large-cap growth arena—would call “cheap.” Still, we note that significant insider ownership (the family owns 66.7% of the shares) serves as a valuation floor, and a business model of this quality warrants a premium valuation. The stock recently retreated to a more reasonable level after the company’s most recent results showed a modest negative impact from the outbreak of war in the Middle East. This disrupted some travel and particularly weighed on the business of Middle Eastern customers in tourism markets worldwide; we view this impact as temporary.
In summary, we believe Hermès is a true example of a company with significant brand equity, earned through an established, nearly 200-year history of doing things that are not easily replicated: having skilled artisans produce the highest-quality products from the highest quality materials. The process and the brand work together to create both significant demand for the company’s products and significant profitability, and we expect the company to continue this trajectory of growth and profitability.
Paid subscribers can keep reading for eight additional ideas, including a building-products consolidator riding housing and infrastructure tailwinds, an electrical equipment manufacturer leveraged to the AI power buildout, a semiconductor supplier positioned for a major earnings inflection, a telecom special situation returning substantial cash to shareholders, an overlooked Japanese capital allocator, and three IT services companies that may be mispriced as AI losers rather than future enablers of enterprise adoption.
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