OPPORTUNISM IN ACTION.
“I was seldom able to see an opportunity until it ceased to be one.”
Mark Twain
Reptilian brains are hardwired by evolution to recognize movement, which is useful when your survival depends upon your ability to catch flies. Similarly, the easiest way for a public company to command the market’s attention is to go up a lot, the faster the better. Only big moves make headlines, and fear of missing out is the surest way to create urgency in the investing public.
This momentum is often self-reinforcing, especially in small caps where early-stage companies are harder to value and the range of outcomes especially wide. Instead of being put off by this volatility, speculators seem drawn to it, demonstrating a consistent preference for quick payouts over long-term compounding because “I made 100% last year” is a better story than “I made 20% a year for a decade,” even though the latter is more lucrative.
Small cap performance bears this out. Over the last decade almost 700 companies in the index delivered a 100% annual return at least once, but only 75 have managed to compound 20% for a decade. People tend to forget that stocks with the most upside rarely lack downside, and no company exhibits this better than Applied Digital (APLD), a former crypto miner now data center developer and the best performer of the lot. It rose 119-fold in 2021 ($0.21 to $25), fell 93% in 2022 and today trades for $47. One intrepid speculator may have held on for the entire ride, but it certainly wasn’t me.
Investing needn’t be exhilarating to be effective, in fact, some of my best ideas have been of the get-rich-slow variety, but occasionally I make my investors a lot of money in a relatively short time-period. While not my explicit goal, I can think of worse outcomes.
This month I’d like to highlight one of the fund’s more dynamic holdings and explore the fascinating world of orthopedic power tools (I almost wrote riveting but thought better of it). Pro-Dex (PDEX) is a contract medical device manufacturer located in Irvine, California that makes drills, drivers and shavers (i.e. power tools) and end effectors for robotic surgery. There’s a significant amount of technology in these devices, as they must be sterilized via autoclave (imagine a battery-operated drill that can survive the dishwasher). They also have torque-limiting technology that stops lead-fingered surgeons from overtightening screws (which is frowned upon when drilling into bone).
Pro-Dex isn’t like most contract manufacturers. For starters, their technological differentiation yields margins that look more like an OEM than contract work. Sales have grown 11 years in a row, averaging almost 20% per year without the benefit of acquisitions. Since present management took over in 2015, the stock has appreciated 14-fold or roughly 28% per year, putting them in the top 1% of all Russell 2000 constituents. While still a microcap, they’re obviously doing something right.
Every day, I look at the largest movers in the market, compare them to what I know about each and ask myself why. Pro-Dex wasn’t on my radar until October 13th, 2025 when it fell 20% in a day, rare for a company not reporting earnings. Almost half a million shares traded (one-quarter of its public float) and volume was seventeen times normal. It seemed someone wanted out badly and wasn’t very particular about price.
What I found next perplexed me; there was no news. Their last press release was an earnings announcement 39 days prior. None of their customers had made comments about weak procedure volumes and as far as I could tell, no one had developed a bionic exoskeleton that put orthopedic surgeons out of business. When a stock moves this much on no news, my curiosity insists on knowing why.
So, I began digging. The first thing I discovered was that Pro-Dex has massive customer concentration (one unnamed customer accounts for 75% of their revenue). True, their end markets are also concentrated (Stryker, Zimmer Biomet and DePuy Synthes have 60-70% share depending on who you ask), but I’ve never seen concentration this high outside of the defense industry. I also learned that revenue dropped 55% from 2011-2014 due to a significant customer loss. Given the stock’s reaction, it appeared someone expected a repeat.
Their largest customer (who is unnamed but is almost certainly Stryker) signed a supply agreement in 2021 to co-develop their next-generation end effector for Mako robotic surgery units. While Intuitive Surgical has dominated laparoscopic surgery for decades, only 25% of orthopedic ORs have a robot and Stryker plans to remedy this. Pro-Dex shipped limited quantities in the first quarter, began commercial production in the second and had this to say in the third.
“As can be common with new product launches in the industry, the customer’s internal design of the next generation handpiece continues to evolve, and the customer has recently informed us that it is holding off on next generation handpiece shipments in favor of continued shipments and enhanced repair of the legacy handpieces as the customer continues to refine the next generation handpiece’s design.”
By the time fourth quarter earnings were released in September, the issue had been resolved.
“During the fourth quarter of fiscal 2025, the customer released the hold that it had placed on shipments of the next generation handpiece in the third quarter of fiscal 2025, and we resumed production and shipments of the next generation handpiece late in the fourth quarter of fiscal 2025.”
Are you following the timeline? The hold is announced in May, removed by September, but the stock fell 20% in October, 39 days later. This sudden panic would seem at odds with the facts. Pro-Dex has served this customer for fifteen years, built a sizable backlog and while their customer may decide to insource someday, that’s not a pivot you make mid-product launch. The little I know about FDA approvals is that they’re onerous, legacy manufacturers tend to enjoy regulatory lock-in and shifting suppliers midstream could pose significant risk to the franchise. Said differently, switching costs are high.
Because of the market’s delay (and confusing response) I immediately began buying. It took two days to arrange a call with management, but when markets present a fat pitch, it can pay to act with less than perfect information. I don’t usually buy securities with market caps sub $100 million but made an exception for Pro-Dex given its quality, high returns on capital and consistent growth in earnings. One of the few advantages of my size is I’m able to take large positions relatively quickly. Over the next 11 days, PDEX became an almost 2% position and subsequently rose 140%.
While I recognize this sounds a lot more like “I made 100% last year” than “I made 20% for a decade,” I believe Pro-Dex could feasibly do both. You’ve heard me explain my preference for businesses with low economic sensitivity and boring business models, and robotic surgery could seem racy in comparison. I should point out the company was purchased at eleven times trailing earnings, has excellent fundamentals and I’m very content paying a value price for a growth business. I don’t dislike growth stocks per se, it’s just that they seldom trade this cheap.
Subsequently, Stryker highlighted their ambition for the Mako franchise at an analyst day on November 11th. On December 19th, Pro-Dex announced a contract renewal with their largest customer, essentially derisking revenue through 2028. High insider ownership, adept capital allocation and extreme levels of customer intimacy are all excellent raw material for my process. Add the ability to purchase it 55% below where it traded three months prior, and it has all the hallmarks of an Epigram investment.
Of course, this example has been cherry picked and few of the fund’s holdings work this dramatically or this quickly. But for those of you who think markets are efficient and that research can’t possibly add value, I humbly submit this as a counter argument.
Sincerely,
Dan Walker
P.S. This is not a recommendation to buy or sell any security. Always conduct your own research.