Monarch Cement Company (MCEM) was founded in 1908 and is based in the Midwest U.S., serving Kansas, Iowa, and parts of Nebraska, Missouri, Arkansas, and Oklahoma. MCEM engages in the production and sale of Portland cement and other cement and concrete products. The U.S. is the third largest cement producer behind China and India. With the Trump administration adamant on imposing an economic policy dependent on tariffs, domestic cement producers may see an increased demand over the next few years. Cement and concrete products are a unique industry due to their rather expensive transportation costs. As a result, contractors and other building material dealers often look to source by proximity. This has been the case for MCEM as they have continued to grow and expand from Kansas into other Midwest states, their share of the market has grown correspondingly. Additionally, as the U.S. infrastructure continues to degrade, companies providing raw building materials will be poised to benefit from the recent push towards revitalizing decrepit roads, highways, and bridges.

Cement production, like many other industries, is feeling the pressure of climate change initiatives. With larger companies investing in carbon capture units (CCU), smaller companies are left to fend for themselves as the CCU are extremely expensive and tend to integrate better with larger scale operations. MCEM, one of the smaller cement producers in the U.S. has already taken steps to achieve carbon neutrality by 2050. With a 20MW solar field to be completed mid-2025, MCEM looks to reduce their grid dependence by 25%. This alternative has proven cheaper, but more effective for a smaller, more nimble company like MCEM.

At the end of Monarch Cement Company’s letter to the shareholders in their 2023 annual report, the company CEO writes “if any of you, at any time, consider selling your Monarch stock, please contact me” and the chairman proceeds to list his contact information. If you have ever found yourself performing due diligence on a company, you may have perused several annual reports, and I would wager a guess you rarely came across a variation of those words. Why would the CEO and Chairman of the board specifically want to contact a potential seller of the company’s stock? Well, it likely has to do with the extremely small daily trading volume of the company with many days seeing just 1 share exchanged, while on the busier days the volume is closer to around 1000 shares. For the cement company with a $800 million market cap, any large selloffs can be rather impactful for the small company’s share price.

Why invest in such a small company anyway? In the book How to Retire on Dividends Tom Jacobs and Brett Owens state “our nimble size is our edge as individual investors. We smartly focus on investment vehicles that have market caps between $1-10 billion.” These small cap companies are much less susceptible to institutional investors. Most investment funds are simply too large to partake in the successes of smaller businesses. Both Benjamin Graham and Peter Lynch saw the benefit of discovering stocks that had few institutional investors. In One Up on Wall Street, Peter Lynch states “if you found a stock with little or no institutional ownership, you’ve found a potential winner.” What defines little or no institutional ownership though? The Intelligent Investor calls out institutional ownership <60% as ideal, with ownership over 60% indicating the stock is probably over owned. MCEM currently has about 1% of its 3.66M outstanding shares held by institutions. The contrarian perspective would ask the question, if a stock is a “winner” wouldn’t the institutional investors already own it? The answer goes back to the inability of large money managers to invest in small cap companies. These large money managers often will make trades in excess of 10,000 shares, the size of which would likely be unable to be met due to the small supply of these small cap company shares, and they may have tangible effects on the company share price. Consequently, it may not be that the institutional investors do not see the company as a “winner” but merely that they are unable to partake in the “winnings.”

From a balance sheet perspective, few companies boast stronger financial statements. The company has been debt free since 2021. Peter Lynch sees debt reduction as a sure sign of prosperity and with MCEM, this is no exception. MCEM has a current ratio of 5.5 (current assets to current liabilities), which, compared to the ideal 2:1 ratio, MCEM has an extremely healthy balance sheet. With about $54M in unrestricted cash at the end of 2023, the company has had many opportunities to return value to its shareholders. Aside from paying a dividend that has been consistently growing over the past 10 years, MCEM has recently engaged in consistent share repurchase programs. The chart below shows the change in shares outstanding since 2019, demonstrating the companies’ commitment to regularly reducing the number of shares.

An approximately 5% outstanding share reduction over the past 5 years has resulted in shareholder equity increasing and a corresponding increase in overall share price. Share repurchases are often a great use of excess cash for companies. Instead of acquiring other businesses that may or may not relate to the core business (as is often seen with other companies that are not used to having excess cash), MCEM has made investing in their core business and returning equity to their shareholders a top priority.

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