Trade alert: February Pick, A Commodity Business With an Operator Edge

Commodity business, non-commodity results.

Hi,

Today I added a new position to the portfolio as the February stock pick.

The funny part is the business sits in a corner of the supply chain that most people write off as “no moat.” The products look like commodities. The competition looks brutal. The returns “should” be mediocre.

And yet, some operators keep proving the same thing: you can earn outstanding returns in a commodity-ish industry if you run the machine better than everyone else.

Think Southwest Airlines, a sector famous for awful ROIC.

By the way, there is a Business Wars series on Southwest if you are into business podcasts.

Or think DAQO, which became my best investment and returned about 17x, even though it sold polysilicon. The product was a commodity. The execution wasn’t.

One of my best picks on Seeking Alpha was Daqo Energy (DQ), a Chinese manufacturer of polysilicon photovoltaic products. I first published my thesis and buy recommendation in September 2017 @ $5.23 per share, re-iterated the buy in November 2018 @ $4.71 per share, one more buy in February 2020 @ $15.18 per share and finally closed my position in February 2021 @ $95.25.

This new pick fits that playbook.

It sells something the market treats like a box. But the company has built a supply chain and operating model that actually matters when the cycle turns:

• It runs at real scale, which helps it source components and execute when others can’t.

• It reacts fast to mix and pricing, because it controls the customer relationship, not just the factory output.

• It turns working capital into an advantage, collecting cash earlier and paying suppliers later.

• It has a services and deployment engine that makes the “box” stickier than it looks on day one.

I’m publishing the full investment thesis to paid subscribers soon.

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Trade alert:

• Buy DELL (3.5% of the portfolio)

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Here’s the short version of why I like it:

• It’s the operator play. Dell’s edge is execution: supply chain, pricing, mix, and delivery at scale. In a commodity-ish industry, that’s the moat.

• ISG is the profit engine. Infrastructure is where the operating income lives, and the AI server demand wave is pushing that segment back into growth.

• AI today, attach later. AI servers are low margin right now, but the strategy is footprint first, then higher-margin storage, networking, services, and support attach.

• The cash machine is real. Negative working capital and deferred revenue shrink invested capital, which lifts ROIC and supports aggressive capital returns.

• Shareholder returns are the plan. Dell targets returning a big chunk of adjusted free cash flow via buybacks and dividends, and the per-share math can compound fast if execution holds.

More soon in the full deep dive.

~George