The investment originated as an outcome of a few conclusions I reached about agriculture, and forage crops in particular; namely:
- the supply of arable land is declining globally
- to an increasing degree, the quality of arable land has been degraded through inappropriate irrigation techniques which have led to a hostile growing environment as a result of high soil salinity
- there will be a premium on water-efficient crops for at least three reasons:
- an absolute reduction in the quantity, reliability, and quality of water - the result of more frequent and more prolonged droughts, and the reduced availability of groundwater as a result of ground water mining
- increased competition for water e.g. the highest and best use is for urban and industrial consumption
- increased costs (in light of the foregoing, an increased price is being placed on water which heretofore was often heavily subsidized by government)
Least one think that these are "third world" issues, one need only look at the current state of almond growing in California. It has been a disaster and likely as not, the implications will be notable for other crops. https://newrepublic.com/article/125450/heres-real-problem-almonds
I tried to look for "pure plays" for this theme, for example:
- more efficient irrigation and other ways of conducting agriculture in arid environments
- indoor agriculture
- alternative crops
I concluded that a promising area would be the breeding of more water-efficient crop varieties for the following reasons
- it offers an opportunity for a "pure play"
- it is a "space" where small entities can compete
- the upside can be significant in the event that a company is successful in bringing a product to market, especially if taken over by a larger entity (larger companies don't often have the agility to develop new technologies and accordingly, have corporate models which look for take-overs in order to expand their product offerings).
S&W provides expertise in agricultural breeding, production and processing for the alfalfa and stevia industries. Each day that passes, three major issues affect the world’s population. First, the population of the world continues to increase; secondly, the availability of arable land continues to decrease. This creates a dire set of circumstances for farmers trying to feed a population increasingly wanting a diet which includes many of the foods that alfalfa hay, the “queen of forages,” supports, including milk, cheeses and beef. Third, the rates of obesity, diabetes and other health-related issues continue to rise around the world, much of which has been attributed to the over-consumption of sugar. A natural alternative is needed in the marketplace, and S&W believes that alternative is Stevia. S&W Seed Company is capitalizing on these three very important trends to help farmers combat the challenges of today, while keeping an eye on providing sustainable solutions for tomorrow.
http://swseedco.com/about-us/
For that reason, I was prepared to sit back and await the results of my bet, knowing that it might be a decade before the investment bore fruit.
My investment thesis was simple:
- The company is focused on the development of seeds for drought-tolerant alfalfa. Given the current pace of climate change and there will be a demand for more water efficient forage crops plants in light of water shortages/competition and higher soil alkalinity.
As an added bonus, I discovered that the company was also focused on the development of improved varieties of stevia. It may represent an unintended outcome of my original search: that stevia may present a better opportunity.
As noted earlier, I am patient when investing in technology companies. I am prepared to take on risk and to accept that the stock price will fluctuate wildly in response to the vagaries of the market.
While I do not pay too much attention to the market action of the moment, I do focus on:
- the honesty and transparency of management (for strategic reasons, however, many companies hold their cards close to their chests ... and I accept this)
- progress with the product (on the premise that it meets a real need that the market is prepared to pay for it)
- strategic alliances (this can take many forms: composition of the Board of Directors, relationships with other companies for marketing and distribution - things which lie outside the core competencies of the company but which are complementary to its activities
- the development of income streams to offset operational costs
- a consistent ability to secure financing
- promising field trials, preferably overseen by objective and competent third parties
S&W has survived and is making progress. It is boring: no major breakthroughs - just a steady slog with the occasional achievement. Like many nascent enterprises, this company has had some false starts as it has explored pathways to grow in its economic niche. The company has survived and learned. It is the nature of these enterprises that success is ultimately built on sustained and compounded effort. I am prepared to wait. And I don't pay much attention to quarterly reports - they are inimical to ventures of this nature.
With investments of this type, it is rare for companies to meet all of the above-noted conditions. However, when they do, the results can be gratifying. I took this approach several years ago with Questor Technology Inc. and was rewarded nicely with my first 10 bagger. And to think that my original investment sank by more the 50 percent. After a spectacular performance, the company tanked with the decline in the oil patch. My thought is that there is still great potential with this company. It is resilient and nimble and the recovery of oil prices and a broadening scope of products holds the prospect of a return to good times. It helps that the company has an excellent balance sheet and great management.
Another observation: With innovative companies, it is common for prices to peak shortly after an IPO. The "story" rather than the realities of "performance" tends to dominate investor decisions. It is common for prices to decline thereafter and to languish for years. Tiny, technology-based innovators are fragile beasts BUT if they have a product that meets a real market need and have good management, their prospects of survival are enhanced. While one can never get the timing "right" (i.e. buy at a low and sell at the peak), it often pays well to look at yesterday's darlings - to get beneath the botox and see if the teeth and bones are good. S&W Seed Company may once again, return to the ballroom.
In future posts, I will report on my search for investments along the theme of water efficiency and alternatives to sugar.
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