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What Do Small-Cap Industrials Have to Do with Sap?

If you’d asked a year ago I wouldn’t have connected the dots, but my recent experience with maple sugaring has a couple small-cap industrials on my mind for a good reason.

Sap Coming Out of Tree into Bucket

Lately I’ve been intently thinking about things like assembly lines, efficiency gains, yield management and other nitty-gritty manufacturing processes.

You may think that it’s because of the manufacturing processes of small or start-up companies, like the small-cap industrial stocks I might cover in my advisory.

You’re not entirely wrong, in fact, I happen to have a couple small-cap industrial stocks in my portfolio right now, and we’ll get to those shortly.

But the main reason is sap.

Last year I began producing maple syrup from the sap of maple trees that are on our property.

The goal was to have fun, learn a few things and enjoy the experience of making maple syrup with our two young boys during early spring, a time of year when there’s not a ton to do outside.

We also had a lot of brush to clear out and burn. And I didn’t want to waste all that energy.

If ever there was a project benefiting from careful attention to processes and operations, it’s maple syrup production.

The high-level process sounds relatively easy.

Buy a kit with some tree taps, buckets and lids. Drill a small hole in each tree, hammer in the tap, hang the bucket and wait for the sap to fill the bucket.

Once you’ve collected enough sap it’s time to boil it down until it’s thick enough to become maple syrup.

Again, the big-picture process here sounds pretty easy. And it is, if you’re dealing with just a few trees and small quantities of sap.

Ten, twenty gallons isn’t a big deal. A few buckets, a big pot, a Solo Stove, turkey frier or some other relatively efficient heat source, and you’re good to go.

But once you up the quantities, maple syrup manufacturing gets serious real quick. Streamlined operations and process management skills, as well as the right equipment, determine whether it will be a rewarding experience or a total nightmare.

Our first experience was right about in the middle.

For starters, the trees on our property are Norway Maple. They have a much lower sugar content than a Sugar Maple. That means we need about 60 gallons of sap to make a gallon of syrup. With Sugar Maples, you need “only” 40 gallons.

We also started with about 10 trees and a dozen buckets. One warm day after a cold night and those buckets are overflowing by early afternoon. In three days, we were storing over 100 gallons of sap. And realized pretty quickly why even smallish sugaring operators run tubes from the trees to a central gathering tank rather than using buckets, barrels and boots.

Boiling down several hundred gallons of sap is no simple process either. Especially if you don’t have a way to feed the sap from storage into the evaporator pan.

In our case, we were clearing out the aforementioned brush so the plan was to cut the bigger stuff into firewood and just use our fire pit. I had an old evaporator pan that held about eight gallons that was borrowed from a family member.

Using some black iron pipe I built a frame over the fire pit, placed the evaporator pan on it and we were off.

Suffice to say an open fire pit lets a lot of heat out, and it requires constant feeding to keep a reasonably consistent temperature going.

In our case, this made for an unpredictable evaporating rate, which was especially challenging given the low sugar content of our Norway Maple sap. Keeping ash from drifting from the open fire into the evaporator pan was another challenge, especially when we’d get a little loose with our fuel decisions and burn smaller brush.

Still, a few weeks into the process we had a few gallons of really good maple syrup. We learned a lot, had fun and are back at it this year.

We’ve also taken last year’s learnings and made a couple significant operational improvements. First, the storage barrels are just uphill from the evaporator setup.

Second, we’ve graduated from the fire pit. I made a camp stove out of a 55-gallon drum obtained from a brewery and converted it into a stove with a kit available on Amazon.

That stove holds a couple of evaporating pans, as well as a warming tray to pre-warm cold sap before it mixes with the much hotter sap that’s being boiled down. This evaporating setup is fed from a hose from the sap storage containers. The line can be opened and closed with a valve.

Since we’re just starting this year’s run, I don’t know how many hours we’ll save and how much syrup we’ll get as compared to last year. But I’m quite certain the entire process will be a heck of a lot more efficient.

And I’m already looking into our upgrades for next year. I have a lot of ideas!

Back to the companies I mentioned earlier that are covered in Cabot Small-Cap Confidential.

Much like my syruping, these companies are striving to improve their operations and become more efficient manufacturers of their respective products – heavy equipment and batteries. If they’re successful, I think their stocks will deliver handsome returns to shareholders.

One is relatively established, the other is in the process of ramping up to commercial-stage production.

The future success of both companies will be determined in large part by how efficiently their operations run. And how tenacious management is with respect to designing manufacturing processes and ordering, building and running assembly line equipment that can crank out usable units at a profit.

For the more mature company, it’s mostly about fine-tuning processes and matching supply and demand in certain global markets.

For the early-stage company, there is a lot more risk and a lot more opportunity. This company is designing an entire manufacturing process for a new range of products. With each stage, they learn a ton and, hopefully, are able to make step-change improvements to their processes.

Every time management talks about “taking their learnings from phase XYZ and applying it to the next phase” I think of our maple syrup production process.

That experience helps me understand what they’re going through. And to decipher when they seem to be making real progress, and when they’ve screwed up and are facing a major setback.

The honest answer is this particular start-up company has done some of both. But big picture, I think they’re on the right track.

I have more confidence in the more mature company, which also pays a dividend. But, of course, the upside potential with that one isn’t as great.

To learn more about what these companies do and where they could go, consider a subscription to Cabot Small-Cap Confidential.

Tyler Laundon is chief analyst of the limited-subscription advisory, Cabot Small-Cap Confidential and grand slam advisory Cabot Early Opportunities. He has spent his entire career managing, consulting and analyzing start-up and small-cap companies. His hands-on experience has taught Tyler that the development of a superior business model is the biggest factor in determining a company’s long-term success. Accordingly, his research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.