Alpha Pro Tech skyrockets amid the coronavirus outbreak

Benj Gallander, Ben Stadelmann, and Philip MacKellar
Monday, January 27, 2020

As we enter our 20th year of writing this column (oh, where did the time go?), this is the first time that we have focused on a stock for a third time. Alpha Pro Tech was our headliner in 2012, when it traded at $1.35, and once again in 2017, at $3.40. Our purchase price was $1.17.

This stock is rarely important to the investing community. Once, when Benj went to the AGM in Markham, just north of Toronto, he was greeted by eight people, all of whom were employees of the company or their spouses. He was the lone shareholder. When attending a few years later, the only other stockholder was Phil MacKellar, Benj’s colleague at Contra the Heard. Which makes it evident that, for the public, this enterprise is normally a big yawn.

That changes whenever a contagion crops up. SARS, H1N1, Ebola and now Covid-19 caused trading volumes to skyrocket along with the price. In the summer of 2014, Alpha was trading around $2.00. In October it jumped to a peak of $10.73, and on three different days the volumes were more than twice the shares outstanding.

During that craziness, 79 percent of our position was sold. It would have been great to unload the whole kit and kaboodle, as the price eventually descended below $2.00. Unfortunately, we did not reload, but simply sat waiting for another kick at the can with our remainder. That moment appears to have arrived.

Although headquartered in Canada, most of APT’s operations are in the United States. Alpha operates in two segments. The relatively boring one is housewrap and synthetic roof products. This division typically does better when the US housing sector is thriving, as it is now, but it is never very exciting.

The catalyst for the stock price frenzy is the protective apparel component, which makes such products as masks, scrub shirts, pants, gowns, boots, shoe covers, face hoods, bouffants and a bevy of other merchandise. When a major outbreak occurs, sales for the gear skyrockets and the bottom line is boosted handily. During the H1N1 scare, the black ink soared from $1.5 million to $9 million.

The corporate financials are the kind that we love to buy into. APT is profitable year after year. There is no debt. Revenues are generally stable, though spiky with a contagion. There is over $5 million in the till. The current ratio is a robust 13 or so.

The share tally has shrunk over the past decade, from about 23 million to 13.5 million, and last month the repurchase program was expanded by $2 million. (Hopefully, none of that cash will be deployed now, given the elevated stock price.) Management is experienced and President/CEO Lloyd Hoffman grew up in the business, replacing his father.

What sets APT apart from most of its competitors is that they are sprawling enterprises that manufacture a myriad of products. Alpha Pro is about as close as an investor can get to a “pure play” in the sector, which explains why it responds so vigorously when alarm is in the wind.

As with previous viral dangers, the coronavirus catalyzed the stock price to jump 50 percent last Tuesday. On Friday the trading volume was over 90 percent of the float. As of midday Monday, the stock was up a further 25 percent. With the contagion apparently gathering strength, more nuttiness is likely in store.

When the virus is wrestled under control, the stock price will likely fall under $3.00 again and slumber. That could be a good time to procure shares, as another disease of this nature is certain to arrive one day. While we do not wish anyone ill, preparing and profiting from these situations does not disturb us, as APT’s products save lives.

It would be delightful if there were more “inevitable” stocks like this in the portfolio. Happily, it has contributed to our 10-year annualized return of 18.4 percent. Maybe if enough people glom onto the nature of corporations like this, we’ll see them at one of the company’s AGMs. There are always lots of empty seats.