Interesting article and research here on Livewire from this week, re the most shorted ASX stocks and poor future returns returns from these companies on average. https://www.livewiremarkets.com/wires/guilty-until-proven-innocent-how-we-treat-the-asx-s-most-shorted

It is a concern to see PWR Holdings on the list as I am a current holder on SM and IRL. Who knows exactly why - the multiple is high at around 100 times trailing earnings or even around 50 times my expected earnings for the next couple of years. Or it could be the health issues around Kees and slow process to appoint a new CEO, ultimately going with an in house candidate in Sharyn Williams the current CFO.

I don't love high multiples but think that ones solvable over a couple of years, if they execute plans now that the big investments in the new factory etc are made.

I'd be gilding the lily though if I said I was thrilled with the CEO appointment. My interactions with Sharyn have been excellent and from what I have seen she is a great CFO and culture fit. So, I get they like her for these reasons and maybe she can get the job done. But...she doesn't have much industry experience when taking the CFO role only a couple of years ago and I was hoping for an experienced aerospace and defence person to take the role, given thats such a crucial part of their growth story for the next 5 to 10 years.

I'm not selling at this point but it's at the top of my trim list, if a better opportunity comes along, before the short interest subsides. It's possible the shorters are wrong...but it's not probable based on the last 5 years of history.

Pleasingly PWR was up 10% yesterday on news of a $9 million contract win from an existing US government customer, so that is a great sign at least.

@PhilO Good question but to be fair, you could apply that to every single business. What's to stop a new competitor coming along and taking away anyone's business?

My answer to this is usually the moats that a business has - a good or a few good moats and you have a better than even chance. No moat and it's much more likely or at best you'll only be able to compete on price.

So, specific to PWH, I think their moats (or competitive advantages) are -

• High level of technical and industry knowledge (the Founder ran his own motorsport team).
• Vertical integration - they design and then manufacture it all in house and across three different geographies (expensive to set up from scratch).
• Strongest brand and reputation (who wants to go first using an unproven cooling option and risk the whole team operations). On this one, perhaps PWH got "lucky" in that the year Red Bull first tried them, they also won the championship although I am sure that wasn't just down to great cooling systems.
• Founder led with lots of skin in the game, so they care and have more to lose than a company that may mass produce things but doesn't have as much at stake.
• They have generated ROE, ROC and Net Profit Margin all in the 20% + range for over 10 years, which are all great signs of genuine moats and pricing power.

No doubt there are other things they are doing well too and none of this is an iron clad guarantee but it's enough for me not to lose sleep about a quick and total end to their business.

Bottom line - a new, aggressive, highly skilled competitor is a definite high consequence risk for PWH but at this point it's low likelihood for me.