As we enter our 20th year of writing this column, this is the first time that a stock has been our focus three times.
Alpha Pro Tech Ltd. was our topic in 2012, when it traded at US$1.35 (we purchased it at US$1.17), and once again in 2017, when it was at US$3.40. Now, here we are again.
This stock is rarely of importance to the investing community. Once when Benj went to the annual general meeting in Markham just north of Toronto, he was greeted by eight people, all employees of the company or their spouses. He was the lone outside shareholder. When attending a few years later, the only other stockholder was Phil MacKellar, Benj’s colleague at Contra the Heard Investment Letter. Evidently for the public, this enterprise is normally a big yawn.
That changes when there is a contagion. SARS, H1N1, Ebola and now the 2019-nCoV all caused trading volumes in the stock to skyrocket, along with the price. The penultimate example of that was in the summer of 2014 during the Ebola outbreak when Alpha Pro Tech (ticker APT) was trading around US$2. In October, it jumped to a peak of US$10.73. Over three consecutive days that month, the volumes were more than twice the shares outstanding. That is an “ay caramba!” of price and size. During that craziness, 79 per cent of our position was sold. It would have been great to sell the whole kit and caboodle as the price descended to under US$2 again. Unfortunately, we did not reload and simply sat waiting for another kick at the can with our remainder. That time appears to have arrived.
Although headquartered in Markham, most of APT’s operations are in the United States. Alpha operates in two segments. The relatively boring one is housewrap and synthetic roof products. This division typically does better when the U.S. housing sector is thriving, as it is now, but it is never very exciting. The catalyst for the stock price frenzy is the protective apparel component, including products such as masks, scrub shirts, pants, gowns, boots, shoe covers, face hoods, bouffant caps and a bevy of other merchandise. When a major outbreak appears, sales for the gear skyrocket, with the bottom line being boosted handily. During the H1N1 scare in 2009, the black ink soared from $1.5-million to $9-million.
The corporate financials are the kind that we love to buy into. APT is profitable year after year. There is no debt. Revenues are generally stable, although spiky during a contagion. There is more than $5-million in the till. The current ratio is a robust 13 times or so. The share tally has shrunk over the past decade from about 23 million to 13.5 million and last month the repurchase program was expanded by $2-million. Let’s hope the program is on hold given the elevated stock price. Management is experienced and chief executive Lloyd Hoffman grew up in the business, replacing his father.
What differentiates APT from most of its competitors is that many are sprawling enterprises that manufacture a myriad of products. Alpha Pro is about as close as an investor can get to a “pure play” in the sector, which explains why its shares respond so vigorously when alarm is in the wind. As with previous viral dangers, the coronavirus caused the stock price to jump 50 per cent last Tuesday. On Friday, the trading volume was more than 90 per cent of the float. As of midday Monday, the stock was up a further 25 per cent. With the contagion apparently gathering strength, more nuttiness is likely in store.
When the virus is wrestled under control, the stock price will likely fall to under US$3 again and slumber. That could be a good time to procure shares, as certainly another disease of this nature will arrive one day. While we do not wish anyone ill, preparing and profiting from these situations does not disturb us, as APT’s products save lives.
It would be delightful if there were more “inevitable” stocks like this in the portfolio. It has contributed to our 10-year annualized return of 18.4 per cent. Maybe if enough people glom onto the nature of corporations like this, we’ll see them at one of the company’s annual meetings. There are always lots of empty seats.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter