A 157% Reason why Information Arbitrage Works

“Information Arbitrage” (InfoArb) is when there is a noticeable disconnect between a company’s stock price and the available public information about that company, creating an opportunity that is monetarily worth pursuing.

What #InfoArb looks like:

• On August 12, $PSIX reported that its 2024 second quarter profits rose 157% 
• The stock fell 9.3% as some investors focused on the fact that second-quarter sales were down 9% to $110 million.
• However, a detailed reading of the second-quarter press release revealed that sales are expected to increase moving forward, and the company is starting to target the data center market, with large contracts anticipated.
• After taking all this information in, along with some additional preliminary research, we quickly added the stock to our Model Portfolio on August 14, 2024. 
• The stock is now up ~64%, having reached a high return of 77.87% (peak price $20.90) in just 12 days.

We love investing in ‘boring’ companies that discover new ways to grow by capitalizing on industry trends, creating new growth opportunities. In fact, it’s one of the nine multi-bagger factors we look for.

We are very excited about the data center focus, especially since we’ve had some success investing in that space. For example, TSS, Inc. (OTCQB:TSSI), a model portfolio holding, is up over 1,700% year to date.

TSSI assembles technology that is delivered to data centers. A significant portion of this business comes from its biggest customer, who we believe is Dell Technologies Inc. (NYSE:DELL), which just posted results yesterday, saying it had “record servers and networking revenue of $7.7 billion, up 80%”. Most of its current growth is coming from its data center business.

InfoArb #1: Second-Quarter Press Release

Here are the comments from PSIX’s second-quarter press release that sparked our excitement about the data center opportunity.

PRESS RELEASE COMMENTS

“Looking ahead, we remain optimistic about sales increase for the remainder of the year, thanks to the continued robust demand for products in the power systems, especially PSI products serving the growth of Data Center markets that PSI has been actively pursuing since last year. We have successfully secured and are in the process of finalizing several major multi-year sales agreements with key customers for Data Center applications.”

After interviewing the CEO yesterday, we learned that the company’s data center product is an enclosure designed to protect power systems. This caught our attention because power is one of the biggest growth areas in the data center market. The global data center power market is expected to grow from approximately $22.46 billion in 2023 to $41.3 billion by 2029, with a compound annual growth rate (CAGR) of 10.6% during this period.

This simply means that more enclosures will be needed to protect power systems that are part of the data center buildout.

InfoArb #2: Company Website

#InforArb also means checking websites for additional information. In the case of $PSIX we confirmed that they are indeed targeting the data center market.

Finally, SEC filings gave us some information about which $PSIX product category offered a a data center solution and what that product actually is:

SEC FILING COMMENTS

“Higher power systems end market sales were primarily due to increased demand for products across various applications, with the largest increases attributable to products used within the packaging market such as enclosures serving the fast-growing Data Center market, as well as oil and gas products and demand response products. We are strategically prioritizing the rapidly expanding Data Center sector, improving and increasing our manufacturing capacity and capabilities to meet and exceed our customers’ evolving demands for our products.”

InfoArb #4: Two Research Finds

With a little bit of extra research, we figured out that revenue has been down lately due to two reasons:

First, the company has been exiting low-margin product areas to focus on higher-margin opportunities. This strategy has led to improved profitability, even as sales have decreased.

It’s great finding stocks at this stage of a growth cycle because many investors focus on the obvious and will miss these important details. They will eventually enter the stock once sales start increasing and the stock screeners start finding the company.

Second, the company has been focusing on reducing its debt burden and refining its business model to enhance profitability, so that earnings could accelerate quickly once sales do start increasing.

Valuation

The stock trades at a price to earnings ratio of around 7x our near-term annualized earnings per share estimate. So, what we have here is a stock selling at value trap levels and is about to enter a new and higher historical growth rate.

Finding value traps before the market realizes they’re not value traps anymore is one of our expert specialties.

$MUEL (diversified industrial equipment) is up 249% since we resumed coverage on the stock in July 2023 when we predicted the stock would no longer be a trap.

$VIRC (the leading U.S. manufacturer of school furniture) is up 265% since we identified new growth trends of this value trap stock in September 2022.

We can’t stress enough that we love it when old school companies like $PSIX re-invent themselves as new trends create new opportunities. If you value this type of timely research, we’d love to have you join our research platform.

Discourse on Maj Soueidan’s Interview Checklist for Vetting Potential Multibaggers

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