The scarcity framework is the real contribution here, more than any individual trade. "When there is an enforced control point which prevents supply from expanding to meet demand, there is scarcity." That one sentence is a better investing education than most books. The engine aftermarket stacks three layers of scarcity on top of each other: the fleet is aging faster than production can replace it, the backlog won't clear until the 2030s, and certification requirements block new entrants from competing for the work. All three have to break simultaneously for the thesis to fail.
What makes this structurally different from the AI trade everyone is watching is that none of it depends on a narrative holding. The aging fleet is physics. The production bottleneck is industrial capacity. The certification barrier is regulation. A chatbot isn't going to overhaul a turbine engine. The scarcity here is the kind that technology can't dissolve, which is the opposite of the kind of scarcity most of the market is paying 94x sales for right now.
Hey Sam, good find here. I have a few quick questions:
1. This is a cyclical trade (reminds me of a 'Capital Returns' strategy), but I'm curious why you see this as a trade and not a multi-year investment? Perhaps the stocks are not 'value' as in very cheap, but it feels based on your analysis they could be good mid term holds.
2. As you are trading, is this a spot or leveraged trade?
I read that Berkshire’s second largest incremental add in most recent filing was Delta Airlines. If you’re right that the fleet is old and locked into the 2030s, that’s mildly bearish for Delta’s cost line but bullish for its revenue, but these names are the cleaner, higher-margin way to own the scarcity / Delta more cyclical / messier / more capital-intensive which is what WB historically avoided 🤔
I made a lot of money years ago with Heico HEI. They sell FAA-approved replacement parts for components and engines to the big airlines. They had the best price, Andrew management held a substantial stake. It's probably been way back before covid since I sold them. I'll have to look at them again. It was (hopefully still is) a great company
Fiscal and monetary policy together have worked to reduce the share of GDP going to wages. Inflation by itself doesn't destroy wages (except when wages fail to keep up with inflation). This is really what has happened and the fiscal and monetary policy (monetary primarily) has been responsible for it.
Hi Sam, I enjoyed your article. I especially like the top down approach (macro views) and your way of thinking. I am not 100% convinced of the 3 concrete ideas, as upside seems relatively limited. Melrose I like best out of the three fit its lower valuation and growing revenue stream. I particularly enjoyed your intro about purchasing power, very important perspective on the reality of society and monetary policy. And about scarcity - think FICO, the effect on earnings is brutal. Thank you for sharing
sounds like this article was inspired by finding bottlenecks like the AI build out trade. airplanes have been backlogged for years. its not a new phenomenon with insane demand. just keep in mind the purchasers of these parts can be under significant financial restrictions leaving their wallets light.
The scarcity framework is the real contribution here, more than any individual trade. "When there is an enforced control point which prevents supply from expanding to meet demand, there is scarcity." That one sentence is a better investing education than most books. The engine aftermarket stacks three layers of scarcity on top of each other: the fleet is aging faster than production can replace it, the backlog won't clear until the 2030s, and certification requirements block new entrants from competing for the work. All three have to break simultaneously for the thesis to fail.
What makes this structurally different from the AI trade everyone is watching is that none of it depends on a narrative holding. The aging fleet is physics. The production bottleneck is industrial capacity. The certification barrier is regulation. A chatbot isn't going to overhaul a turbine engine. The scarcity here is the kind that technology can't dissolve, which is the opposite of the kind of scarcity most of the market is paying 94x sales for right now.
Hey Sam, good find here. I have a few quick questions:
1. This is a cyclical trade (reminds me of a 'Capital Returns' strategy), but I'm curious why you see this as a trade and not a multi-year investment? Perhaps the stocks are not 'value' as in very cheap, but it feels based on your analysis they could be good mid term holds.
2. As you are trading, is this a spot or leveraged trade?
Thanks!
$VSEC
I would pledge the founders if that is a lifetime subscription, whenever you decide to charge.
Because it says /year, I am hesitate to pledge anything at this time.
Your article is about 3 times longer than it needs to be. Get to the point sooner.
I read that Berkshire’s second largest incremental add in most recent filing was Delta Airlines. If you’re right that the fleet is old and locked into the 2030s, that’s mildly bearish for Delta’s cost line but bullish for its revenue, but these names are the cleaner, higher-margin way to own the scarcity / Delta more cyclical / messier / more capital-intensive which is what WB historically avoided 🤔
I made a lot of money years ago with Heico HEI. They sell FAA-approved replacement parts for components and engines to the big airlines. They had the best price, Andrew management held a substantial stake. It's probably been way back before covid since I sold them. I'll have to look at them again. It was (hopefully still is) a great company
This just means that the airline fares will be going up soon.
Btw, we recently did a very dive into pricing of airline fares as a hedge fund analyst.
Great article Sam, how do we join the early bird subscription?
Fiscal and monetary policy together have worked to reduce the share of GDP going to wages. Inflation by itself doesn't destroy wages (except when wages fail to keep up with inflation). This is really what has happened and the fiscal and monetary policy (monetary primarily) has been responsible for it.
Hi Sam, I enjoyed your article. I especially like the top down approach (macro views) and your way of thinking. I am not 100% convinced of the 3 concrete ideas, as upside seems relatively limited. Melrose I like best out of the three fit its lower valuation and growing revenue stream. I particularly enjoyed your intro about purchasing power, very important perspective on the reality of society and monetary policy. And about scarcity - think FICO, the effect on earnings is brutal. Thank you for sharing
sounds like this article was inspired by finding bottlenecks like the AI build out trade. airplanes have been backlogged for years. its not a new phenomenon with insane demand. just keep in mind the purchasers of these parts can be under significant financial restrictions leaving their wallets light.
What about the GKN Aerospace chemical plant accident in California, which may lead to fines by the state authorities? How would that impact Melrose?
Or you can own FTAI and get their AI turbine business for free
I don't buy your thesis. Once the Great Depression hits, people will not be flying.
Your thesis is just another invest in tech pitch.