There are a few very key reasons why I am not a long-term investor. Evidence. Pure and simple. There is little evidence of companies that have successfully emerged from small-caps into mid-caps and continued to grow into large-cap companies AND stay there. Taking a guess, in my experience, I would say 95% of companies fail at some point in their growth cycle and return back to where they started.
Another reason is that I cannot with any confidence tell you what the world will look like in 5 -10 years. Moreover, even the aspects of life we will continue to maintain and the companies exposed to them, is no guarantee of success. Take a look at literally any current large-cap company and their 5-10 year performance is dismal. If I listed all the top 50 ASX companies and we printed their trading prices today versus 10 years ago – there is literally no difference. In many cases today’s trading prices are lower than 10 years ago. NAB has barely seen any capital growth over 20 years!
I always reassess my portfolio, positions and strategy every week and unless I can find a reason to keep it, it gets cut. Just like the weather, there is more success in predicting for tomorrow than in 2 years from now.
However, there is ALWAYS an exception and an exception has to be pretty special. That is exactly what Structural Monitoring Systems (SMN) is – very special. On the 4/9/2015 I introduced this company to readers (click here for the article http://www.sharecafe.com.au/greg_tolpigin.asp?a=AV&ai=36377 ) where I noted its unique technology, market position and its potential to change not only aviation safety but safety of infrastructure in general. Please refer to the article for some company history and analysis of their technology. I gave another update later in the year when the company received FAA approval for its sensors to be used across commercial aircraft fleet.
At the time of the initial article SMN was trading at 53c. Following FAA approval a couple of months later the share price fell just shy of the $2.00 level and since has been treading water around the $1.50 mark – not a bad 200% return. But there is more to come, a lot more.
The company announced a deal to trial its sensors in helicopters that adds to the scope and reach of its technology monitoring metal fatigue. But the big announcement is the deal with Delta airlines where the airline will adopt the sensors across its fleet. This is due this quarter (so imminently) and will give insights into the revenue model SMN will adopt for the use of its technology.
The key for SMN and why it has a monopoly on the industry is that not only is its technology years ahead of its rivals, but it creates such a financial benefit that if one airline adopts it, all have to just to remain competitive. That is an extremely unique position to be in.
So I completely stand by my comments on the potential of this company from last September and I still continue to hold (and buy more) shares since 2014. It is the stock that I have held the longest by a significant margin.
Am I in love with the company?
No. I did that once before, I ignored the technical price action on the charts and I suffered as a result. Unlike drinking alcohol and saying “never again” – I meant it this time.
So while the price action on SMN is positive my outlook will remain likewise. My target remains $5.00 for 2016 and there is nothing on the price action to suggest otherwise. In fact the share price is currently building for its next major move higher – a repeat of the November/December rally of 2015. This will likely be triggered by the official announcement of its deployment of sensors across Delta aircraft.
As the chart below shows a consolidation has been forming in the first quarter of this year – a triangle pattern that is commonly viewed as a continuation pattern. A break through the topside beyond $1.60/1.70 should trigger that repeat of last year’s rally. That generates targets into the $2.50/2.60 zone. Multi-month consolidations of this nature are amongst my favourite setups, especially when they are combined with improving fundamentals and news flow. SMN has all three here.
SMN’s market cap is currently $157 million and is still on target for the $500 million I originally believed it could reach when I first discovered the company in 2014 (equivalent to $5.00).
So far this company is the only thing I can find with confidence that can be considered a long-term investment.