Looking for 'hidden gems' among small cap value stocks. Founder at Hidden Gems Investing. Founder & PM at Plural Investing. Posts are not investment advice.
Joined November 2020
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I write about ‘hidden gems’ in small cap value stocks based on extensive primary research.
This includes 30 page reports (with 1 page summary) after speaking with ~20 industry experts, and insights from attending trade shows.
Learn more at: hiddengemsinvesting.com
Chris Waller retweeted
Daktronics is a hidden gem.
Daktronics $DAKT makes the video boards and scoreboards in US stadiums:
1. 50-70% share of US major-league and college screens
2. Net cash is about 15% of the market cap
3. First outside CEO hired in its 58-year history
4. A plan to lift EBIT margins from 7.3% to 10-12%
5. Hardly any sell-side analysts cover it
The stock is not pricing in any structural improvement in my view.
⬇️ See the link in the first comment for a new writeup I published today.
Daktronics is a hidden gem.
Daktronics $DAKT makes the video boards and scoreboards in US stadiums:
1. 50-70% share of US major-league and college screens
2. Net cash is about 15% of the market cap
3. First outside CEO hired in its 58-year history
4. A plan to lift EBIT margins from 7.3% to 10-12%
5. Hardly any sell-side analysts cover it
The stock is not pricing in any structural improvement in my view.
⬇️ See the link in the first comment for a new writeup I published today.
At some point a marketplace becomes impossible to copy because of how strong network effects are.
Liquidity Services runs GovDeals, which 15,000 government agencies use to sell surplus items.
Its scale means more customers and so agencies get 15% to 20% higher prices selling there.
And vice versa, with more customers showing up because more agencies sell on the website.
Liquidity Services is a great business and you can read my writeup in the Idea Book, which sits at the top of Hidden Gems Investing.
A product with a lower margin can still earn a better ROIC.
Watches of Switzerland earns a lower gross margin selling Rolex than other watches.
But the Rolex section in a store sells 6x more volume per square foot than the other brands.
That is one of the reasons why it has a lower margin but higher ROIC.
You learn the most about a CEO during a crisis.
Ryan Pape became XPEL's CEO in 2009 when it had $10mm of revenue.
Pape guaranteed a $25,000 debt on his own credit card.
XPEL today generates $508mm of revenues and the stock is up about 1,000x since 2009.
Chris Waller retweeted
A small company needs to raise debt or equity for sell-side to cover it.
So the best small caps that funded by their own FCF are the least likely to be covered.
Ignored small caps that trade for 10x FCF and dominate a niche are what I write about.
Covid created a boom and then a bust in boats, bikes and housing.
Malibu Boats was selling 9,900 boats a year and is now selling 4,700.
That is below the rate the existing fleet wears out, and is starting to turn.
The stock trades on 4.5x my estimate of mid-cycle EBIT.
You'll find my full Malibu write-up in 'My Top 20 Ideas', on the front page of Hidden Gems Investing.
Sometimes a small cap is cheap because investors don't understand the business model.
E.g. some investors see XPEL as just a supplier of automotive protection films.
But when you speak to its installers they tell you they get the customer leads, brand, software, and training from XPEL.
The relationship is closer to a franchise-franchise.
That's why I speak to ~20 industry sources and go to trade shows before publishing writeups on small caps.
Capital-intense businesses can be better than capital-light ones.
Suppose two companies both earn 20% ROICs.
One can only reinvest 10% of earnings at those rates whereas the second reinvests all of it.
The first company grows at 2% whereas the second grows at 20%.
