Ichor Holdings (NASDAQ:ICHR)

14 months post-IPO, this semiconductor-services engineering company has gobbled up two competitors who work for its main customers and made them immediately accretive to earnings. Debt of 330M on a market cap of 644M looks ominous - until you realize that in 5 months they squeezed 80M in earnings - accretive earnings, not revenue - out of one of those acquisitions. There are different ways you can calculate, but right now they're running a trailing P/E of 10 and annual earnings growth is running 80%.

They're looking for more acquisitions right now, and their CEO got a bit of flak for pointing out he wants to use the debt markets and earnings, not equity, to get that goodwill onto the balance sheet. He also pointed out that a dividend is the last thing on his mind. You can throw stones at that if you want, but I will not - this kind of aggressive organic growth strategy is just what I want to see in a company. If I wanted 7% returns, I'd buy the S&P; I want better, and this is exactly how it is made.

The bear pitch is that this is an engineering company, highly specialized; its moat is its engineering talent and project experience, which can be costly to retain and not valuable during a downturn. As far as I can tell, this company sits between Praxair and AMAT, the way GHM sits between an oilfield/refinery operator and the customers of refinery products; they get involved in the design stage and use their process know-how to help the company use a variety of gases and liquids to build a better semiconductor more cheaply.

Could *you* do that job? I doubt it. I sure couldn't. That's a moat, and if they're buying up their small competitors that moat can only broaden.

The real bear pitch is that it's easy to see where a large semi like AMAT is offloading macro-risk onto a little firm like this; like GHM, the overhead could get really rough during a downturn, especially if a customer chooses to look elsewhere. This is called risk. It is why we invest in stocks, not fixed income. I like the economy, I like the sector, I like the operational strategy, and I *really* like the valuation, so I am aboard for the ride.