WarEconomy

I love investing, and almost as much, I love the stories behind it — how a company got started, how a fund manager made his name, the one early bet that set everything in motion. Growing up, one name I heard again and again was Templeton. Templeton Investments. It later merged with Franklin and became Franklin Templeton, the firm you still see today. Back then it was just a name on a brochure. It was years before I learned where it came from.

John Templeton was 27 in 1939. The week war broke out in Europe, he borrowed money and told his broker to buy 100 shares of every stock on the New York exchange trading under a dollar. All 104 of them. Thirty-four were already bankrupt. His logic was simple: a war has to be supplied, and the half-dead factories nobody wanted were about to get more work than they could handle. Four years later, only four had gone to zero and he had quadrupled his money. That trade built the name I’d hear on television fifty years later.

I keep coming back to it this year, because I think we’re standing somewhere similar. The world is rearming. And if Templeton got one thing right, it’s what comes next: the orders.

Here’s the one that got my attention. Volkswagen has a plant in Osnabrück, Germany that’s been building convertibles since the 1950s — Beetles, Karmann Ghias, Golf cabriolets. Cars stopped selling, and the plant was headed for closure. Then in April, VW agreed to hand it over to Rafael, the Israeli company behind Iron Dome — the system that shoots incoming rockets out of the sky. The plan is to retrain roughly 2,300 car workers to build engines for interceptor missiles. The German government is helping it along. The deal isn’t fully signed yet, but sit with what it means: a car factory becoming a missile factory, with the state cheering it on.

And it’s happening everywhere at once. In January, China cut Japan off from rare earths — obscure metals that go into the magnets inside almost everything modern, missile guidance systems included. China refines more than 90% of them, so there’s no second tap to turn. Ukraine has been flying cheap drones a thousand miles into Russian oil refineries, and more than half of Russia’s regions are now rationing gasoline. The Strait of Hormuz, where a fifth of the world’s oil sails through, has been a shooting gallery since February, and the traffic through it has dried up to almost nothing.

I like what Templeton did, and I want to do a version of it. He worked out what a war would have to buy, then bought the people who would supply it. So that’s what I look for now: small companies, still cheap and still ignored, that stand to collect orders out of this rearmament. This issue is about one I found. I bought it.

The budgets are the easy part. A government can vote money through in an afternoon. Building the weapons is the hard part, and that’s where I started reading. For thirty years after the Cold War, weapons factories closed. Production lines were dismantled. Machinists retired and nobody replaced them. What survived was built to make a few expensive things, slowly.

Then Ukraine showed everyone what a real war consumes. Shells. Wiring. Connectors. Circuit boards. Ordinary things, burned through by the container load. Europe’s defense firms now hold the fattest order books in their history, and they keep saying the same thing out loud: they can’t produce fast enough.

That's what stuck with me. A factory told to double its output needs two things fast: more parts, and a way to build quicker without more workers. Both come from suppliers — so that's what I went looking for.

I found one that answers both needs. It supplies the parts that go inside the weapons, and it builds the machines that let the factories make them faster. It's called B.O.S. Better Online Solutions — BOSC on the Nasdaq. It's worth about $30M, which is essentially nothing. It's run out of a town south of Tel Aviv. It has been in business since 1990. I hadn't heard of it either.

It sells the small stuff that goes inside defense equipment — connectors, wiring, electronic components. It buys from hundreds of manufacturers, bundles it together, and puts its own engineers next to the customer’s engineers so the parts get designed into the product from the start. It doesn’t build the missile. It supplies what’s inside it.

Its customers are the three big Israeli names: Israel Aerospace, Elbit, and Rafael — the same Rafael that’s buying the Volkswagen plant. Around 70% of what it sells goes to defense. It’s pushing the same parts into India and the United States now as well.

It does something else too, and this is the part that made me sit up. It builds robotic production lines — the machines that let a factory make more with fewer people. Almost all of that work is for defense manufacturers, and its main customer there is Elbit. It has already built lines inside Elbit’s Israeli plants, it’s installing one at an Elbit factory in Europe this year, and another overseas order is already booked.

So go back to that factory being told to double its output. It needs more parts coming in, and it needs to build faster without people it can’t find. This company sells the first and installs the second. That’s the whole idea, and it’s why I like it: it doesn’t have to pick which weapon wins. It gets paid on how much everyone builds.

What makes me comfortable holding this for years rather than months is that the spending isn’t a mood. It’s legislated. Every NATO member now spends at least 2% of its economy on defense and they’ve committed to head toward 5% by 2035. Germany has put €500B behind it. Israel, where this company lives, still spends about 97% more on its military than it did in 2022 — it eased back a little last year as Gaza quieted, but the level it settled at is nearly double the old one. That plateau is what a supplier actually lives on.

The second thing I’m watching is India, and it might end up mattering more. To be clear, the company doesn’t build anything there — it sells its parts into India through a local partner it appointed early this year. India is racing to make its own weapons instead of importing them, and it has become a hub for assembling defense electronics. The numbers moved quickly: $3.3M of Indian orders in the first quarter alone, against $172,000 in the same quarter a year before, and $7.1M from India and the US combined in the first five months of the year.

Now the part I have to be straight about, because it’s where I could talk myself into something. This company does not make the drones hitting Russian refineries. Its parts aren’t in them. What it has is a seat in the same economy — supplying and automating the defense industry of a country that has been at war — while the rest of the world decides it needs to arm. That’s a real connection. It’s also an indirect one, and I’d rather say that plainly than let the war headlines do the arguing for me.

There’s a bit of free optionality on top. The company holds about $9.5M more cash than debt and is hunting an acquisition of up to $20M that it says it can fund with cash and bank loans without issuing a single new share. Management talks about getting to $100M of revenue over the next several years. That’s their ambition, not a promise, and I’m not paying for it — but I’ll take it if it happens.

Three things I like, and then the one that keeps me honest.

What it costs. The whole company goes for around $30M, and it’s sitting on about $9.5M more cash than debt. Strip that out and I’m paying roughly $21M for the actual business, against $4.6M of yearly cash earnings. That’s under five times. It trades near book value while the small-cap index trades at more than twice book. Management’s own explanation for the gap is blunt: almost nobody knows the company exists. Having spent a while trying to find anything written about it, I believe them.

What’s already sold. The order book is the number I actually care about, because it’s the one that’s hardest to spin. Signed orders went from $24M at the end of December to a record $31M three months later — more than half a year’s revenue, booked before the year really started. The wrinkle is that it only ever covers about half the year up front. The rest has to be won as the months go by.

What bothers me. Sales are being guided up and profit isn’t. Management now expects to beat its $51M revenue target and in the same breath left the profit target sitting at $3.6M. The reason is the currency. It earns in Israeli shekels and reports in dollars, and the dollar fell about 14% against the shekel, so the same work converts into fewer dollars while the costs at home don’t move. You could see it in the first quarter: sales of $11.4M against $15.0M a year earlier — though that older quarter had a one-off $2.5M order in it — and profit per share down from $0.23 to $0.11. It missed, and the stock fell about 10% that day. I’d rather own the problem knowingly than be surprised by it in November.

I don’t know how Ukraine ends. I don’t know what happens at Hormuz, or whether China and Japan patch things up, or where the next flashpoint turns out to be. I don’t need to. Templeton didn’t know how the war would go either. He knew the world had committed to fighting one, and that a fight has to be supplied. That part wasn’t a guess then and isn’t now.

What I keep coming back to is that Volkswagen plant. Someone has to retool it. Someone has to supply the parts that go into whatever comes off the line. Multiply that by every factory in Europe being handed the same instruction, and the interesting question stops being which weapon wins and starts being who fills the orders. That’s a much smaller, duller, more knowable question — and it’s the kind I’d rather bet on.

This one isn’t safe. It’s a micro-cap, the quarters lurch, a currency it can’t control is chewing through the profit right now, and the tools to dilute me are sitting on the shelf. It’s an early, cheap seat on a long trend, and that’s all it is.

But the world is rearming, almost nobody is looking at the companies that will have to do the actual building, and this one is profitable and on sale. Templeton’s story tells me what to do with that. So I did it.