Introduction
In my limited investing history, I have had some success with "low-risk, high-uncertainty" situations. These situations can occur for any number of reasons, but one common scenario is to find a company operating in a cyclical industry that either has a diversified business or a particularly low-cost operating model. Essentially, you want a company that can stay afloat in the bottom of the cycle (low-risk), flourish whenever the cycle turns (the timing being highly uncertain), and to be able to buy it in the midst of a negative cycle when investors are most uncertain about the timing of a recovery. I believe this type of investing can produce satisfactory results over the long term and is well suited to investors who would list patience as their competitive advantage.
When I first came across GrafTech International (NYSE:EAF), I thought I had stumbled upon one of these low-risk, high-uncertainty situations. The company operates a niche business in a growing but cyclical industry, controls its own means of production, and offers a high-quality product. EAF has signed longer-term contracts that have locked in about 70% of their business and guarantees some level of stability over the next few years. Unfortunately, the company also carries a substantial debt burden and I have some doubts that they would be an appealing investment under average market conditions. I would say that at its current share price, EAF is more of a 'medium-risk, medium-uncertainty' situation.
Understanding The Business
EAF's business might sound complicated at first, but after some light research understanding their operating model becomes relatively simple. EAF starts with something called petroleum needle coke, which is created from decant oil via various refining processes. The company uses this needle coke as a raw material to produce graphite electrodes, which are then sold to steel
