On Quality

The importance of quality is easy to underestimate when stocks are rocketing up and to the right. Supermicro Computer (SMCI) gained a whopping 1,180% in the year leading up to its March 2024 peak. A $10,000 investment grew to $128,000 over that period with the stock topping at $1,188.07/share.

The stock trades for $420.36 at time of writing, following mounting fears of accounting “irregularities” and the company indicating it would miss its original financial reporting deadlines. That decline represents a 64.6% drop from peak, or $82,688.

The rise and fall of Supermicro Computer has echoes of 25 years ago, as we wrote about here.

SMCI came across our desk around the same time we wrote that piece. Our due diligence process on SMCI checked most boxes. But not all. Sifting through historical filings revealed what Google did not—namely, a history of accounting irregularities and fines, which led the Nasdaq to temporarily delist the stock from its exchange in 2018.

We don’t place client money where integrity is uncertain. It’s a black and white matter for us. Most people would avoid going into business with a neighbor who has a history of dishonesty. The dishonest neighbor may have turned over a new leaf but confidence in their integrity will forever be lacking. The principle is no different here.

Investing with principles like accounting integrity, strong balance sheets, and valuation discipline may cause missed opportunities. But it also drastically reduces the likelihood of owning a stock that goes to $0. That’s a tradeoff that both math and commonsense support.

There will be periods where it feels like the world has permanently left the basics behind. Often when that feeling is most salient, something like the SMCI story comes along to remind investors why quality still matters.

Source: YCharts; Image Link

Disclaimer:

Other than disclosures relating to JGP Wealth Management, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst’s judgment.

Our employees may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed in this research.

We and our affiliates, officers, directors, and employees will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research, unless otherwise prohibited by regulation or JGP Wealth Management policy.

Any third party referenced herein may have positions in the products mentioned that are inconsistent with the views expressed by analysts named in this report.

This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.