In my last article, I developed a Stock Screen to find a wide range of income stocks that could be used to build a diversified income portfolio. Many of the companies from that screen are too large for an individual investor to be able to gain an analytical advantage over the market. Instead, investors in these companies are obtaining a behavioural advantage by thinking longer term than the average market participant. However, smaller companies are often overlooked by the market and allow both a behavioural and an analytical advantage to be gained. This week I take a look at one of the smaller companies from the income screen: Somero Enterprises (LON:SOM)
Somero is a manufacturer of laser concrete screed machines. These are used by concrete contractors to ensure that concrete surfaces, typically flooring spaces, are flat. This is particularly important for warehousing, where the flatness of the floor determines how high racking can be built and, therefore, the storage capacity of the shed.
Although the main selling point of the machines is the flatness tolerance, they also provide labour savings compared to manual concrete screeding with boards. The machine was developed by a concrete contractor, Dave Somero, in the mid-80s, who ended up with a massive amount of rework on a floor that didn’t meet his client’s specifications. He had to manually grind the concrete floor - a laborious and time-consuming job. Vowing never to have to do this again, he invented the laser screed and set up Somero Enterprises with his brother Paul to manufacture and market their idea. In 1987 they were awarded a patent for their invention. It wasn’t all easy in the early days, as Dave described in a 2013 interview:
Coming up with new ideas was easy, getting a patent wasn’t bad. Getting the prototype built and the engineering for the improved telescoping model cost about $500,000. All that was doable. But the one thing I was not prepared for was the marketing.
We had an awful time getting a contractor to buy a machine. We bought a twin-engine plane and offered free rides to New England to watch the screed work. We only had one taker, and I don’t know if he ever did buy one. We tried discounting, but that still didn’t help. Finally, we sold a machine to a contractor in England. Then two went to Canada.…
