Key metrics:
6.4x earnings
1.5x EV/EBITDA
Growing margins
I like small stocks. They’ve always been my favorite hunting ground, I’ve found some of the most outstanding anomalies there.
You won’t see billion-dollar companies trading below net cash.
The downside, of course, is liquidity. It can be hard to get filled, and building a position takes patience.
That’s why I often focus on the $20M - $100M market cap range.
These stocks are still too small for most institutions and usually have little to no analyst coverage, which means you can still find plenty of bargains, sometimes even real net-nets.
Not as many as in the sub-$10M space, but enough to deliver very solid returns.
There’s another reason I like them: the value trap risk is smaller.
See, these businesses are small enough to trade below fair value, but they’re not completely invisible. If something changes in a major way, the market usually figures it out sooner or later, and the stock price adjusts.
That gap -- the time between when the business improves and when the market finally catches on -- is where the opportunity lies. If you do the work, you can find a stock in that window and profit from the inefficiency.
That’s pretty much the case with today’s stock.
It’s a business with a market cap of roughly $100M that went through major internal improvements a few years ago. Since then, it’s been running far more efficiently and margins have improved a lot. Earnings are growing year after year.
But the market hasn’t fully caught on. The stock still trades way below industry averages, at just 6.4x earnings and 1.5x EV/EBITDA.
The price has started moving up, but nowhere near as fast as earnings. Still, it has moved, which makes me wonder how long this window of opportunity will last.
Let’s dive in.