Alpha Pro Tech: An Antifragile Stock That Gains From Disorder

Summary

• Alpha Pro Tech has been a Contra the Heard holding since 2012.
• The stock met many of our regular investment criteria but also appeared to gain during health emergencies and outbreaks making it antifragile.
• What does antifragile mean?
• In 2014, most of the position was sold in October during the West African Ebola epidemic.
• Today the Coronavirus (nCoV) is driving APT higher and the trading activity reminds us of 2014.

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Introduction & Thesis:

Alpha Pro Tech (NYSE:APT) has been a holding here at Contra the Heard Investment Newsletter since 2012. It was purchased at $1.17 and met many of the criteria we look for in an investment. At the time (and indeed today) the balance sheet had no debt, and cash on hand was high. Dilution wasn’t an issue, valuations were low, and insiders owned roughly 18%. Profitability and sales were also on the mend after being battered during the Great Recession. One of the company’s primary business lines is Building Products, like housewraps, roof underlayments, and other weather barriers. The housing crunch hurt this unit in 2008 and onwards, but by 2012 it was returning to form.

Source: corporate website.

Alpha Pro Tech is also in the Protective Apparel and Infection Control industries. These two business units were of particular interest to us, and really sweetened the idea of owning shares. This is because these segments tend to sell more during public health emergencies and outbreaks, which makes Alpha Pro Tech antifragile.

What is antifragile?

Although the idea is old (think Hydra old), the term antifragile can be linked to a 2012 book of the same name written by Nassim Nicholas Taleb. It is part of his five volume (so far) intellectual series called Incerto: Fooled by Randomness; The Black Swan; The Bed of Procrustes; Antifragile; and Skin in the Game.

Source: Wikipedia for every head chopped off, the Hydra would regrow two.

Taleb describes antifragile objects or ideas as “things that gain from disorder.” For something to be antifragile, it needs to strengthen as the situation gets worse. This is counterintuitive. It’s easy to imagine something fragile that is damaged by stress, like dropping an egg off a balcony, and also easy to imagine something robust coming to no harm, like dropping an anvil from the same balcony. It is not easy, however, to imagine something antifragile – something, that is, that actually benefits from being dropped off a balcony.

If you’re still struggling to visualize the concept, think of Micky Mouse and his enchanted broom in the Sorcerer’s Apprentice. The harder Micky tries to destroy the broom, the more powerful and prolific it becomes.

Alpha Pro Tech is much the same. The worse a health emergency gets, the better its stock performs, and the more it should be able to sell from its Protective Apparel and Infection Control segments.

On a side note, I highly recommend all the books in the Incerto series, especially for investors interested in refining their approach to decision making. I’d also suggest reading them in the order which they were published, as the first books uncover significant problems around human error, risk, and uncertainty, while the later books suggest solutions to these problems. I feel that Taleb’s books and concepts will continue to be relevant and increasingly important with time – and there’s nothing better than reading tomorrow’s classics today.

Alpha Pro Tech During Health Emergencies:

Alpha’s ticker jumped during the 2003 SARS outbreak, the 2009 H1N1 swine influenza virus, and the 2014 Ebola epidemic. It is up today too (more on this below).

Source: Yahoo Finance

In October 2014, we unloaded most of our position at $3.34 and $6.96. At the time, the daily volumes sometimes exceeded the publicly available float, and the stock had daily double-digit gains. The trading activity today on January 21st reminds us of the situation in 2014. Volumes today were in the millions, versus average volumes of around 15,000, and the shares are up nearly 40%. However, while I bought some more stock personally back in 2015 at $2.00, we did not buy more for Contra, and therefore today’s position is small versus what we held in 2014.

Alpha is not the only company that may benefit from health emergencies. According to the organization’s latest 10-K, competitors in the medical space include Kimberly-Clark (KMB), 3M (MMM), Johnson & Johnson (JNJ), White Knight Engineered Products, Cardinal Health (CAH), and Medline Industries. This said, these companies may be hurt by outbreaks as well, as declines in economic activity would hurt their other lines of business. (This is true to some extent for Alpha too, though to a lesser degree given their business composition.)

In addition to these competitors, Lakeland Industries (LAKE) provides protective clothing and garments, and in the past its stock has rallied during health emergencies. As I write, it is up more than 25% today. We have thought about owning Lakeland as well, but for various reasons haven’t pulled the trigger yet – perhaps it will be a future holding.

Situation Today:

Today’s jump follows news that Wuhan, China’s Coronavirus (nCoV) is now confirmed to spread between humans. Cases have tripled to more than 300, six people have died, and it has reached Japan, Thailand, South Korea, and the United States.

Outbreaks are always unnerving given how quickly they can scale, but this seems to be particularly awful timing as the Chinese New Year is set to begin January 25, 2020, with festivities lasting for two weeks. The Chinese New Year is often the world’s largest annual migration, which increases the risk of the Coronavirus spreading, morphing, and impacting economic activity.

This outbreak follows a year in which China has lost over 100 million pigs to African Swine Fever. During the swine outbreak, Chinese authorities have been accused of responding too slowly, and with opacity regarding the true state of the situation. This doesn’t inspire confidence now as these same Chinese authorities attempt to address this new threat.

Though the Alpha stock has exploded today, and momentum is incredibly strong, this story is fresh and further adverse health developments may unfold in the coming days, weeks, and or even months. This is what we saw happen in 2014 when we unloaded most of our position during the Ebola outbreak. The plan is to sell into this activity again, but we are not yet sure when we will sell, or at what price.

Other Considerations:

We here at Contra hope that the Coronavirus outbreak is more bark than bite, as with many public health issues. Regardless of how bad it does or doesn’t get, though, at some point the health emergency will subside. Shortly before it does, Alpha Pro Tech is likely to fall back to earth in a classic “buy on the rumor, sell on the news” pattern. Therefore, from today’s levels, it does not make for a good long-term investment, and we see it instead as a short-term and speculative trade.

Conclusion:

Alpha Pro Tech has been a Contra the Heard holding since 2012 when it was purchased at $1.17. While it met many of our regular investment criteria, its business divisions in Protective Apparel and Infection Control meant it also had the potential to gain from disorder during public health emergencies. In other words, Alpha Pro Tech appeared antifragile.

This thesis played out in October 2014 when most of the position was sold during the Ebola outbreak. Today, this thesis appears to be playing out again now that the deadly Chinese Coronavirus has spread from human to human for the first time. With the Chinese New Year just around the corner, the concern is that this new illness may spread or morph, continuing to pose a risk to human health, and potentially impacting economic activity. Contra’s current plan is to sell some or all of our remaining position in APT during this period of heightened public health uncertainty.

As per Seeking Alpha’s disclosure requirements, I/we may buy or sell this stock within three days of the publication, given how rapidly APT is appreciating, and given that I do not know in advance exactly when this article will be reviewed and published on Seeking Alpha’s platform.

On a final note, if you know of other antifragile names, themes, or ideas, please email me at [e-mail].

Disclaimer:

The opinions expressed – imperfect and often subject to change – are not intended nor should be taken as advice or guidance. Contra the Heard Investment Newsletter is not an investment advisor or financial advisor. Contra the Heard Investment Newsletter provides research, it does not advise. The information enclosed in this article is deemed to be accurate and reliable, but is not guaranteed by the author.

As per Seeking Alpha’s disclosure requirements, I/we may buy or sell this stock within three days of the publication given how rapidly APT is appreciating and how I do not know when exactly this will be edited, reviewed, and published on Seeking Alpha’s platform.

Analyst’s Disclosure: I am/we are long APT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.