Where to Find Alpha?
Some simple current Bloomberg screens show that there are roughly 500 small and micro cap U.S. public companies with 2 or fewer analysts covering them (stocks listed on the Nasdaq or NYSE-no pink sheets allowed). Companies with 3 or fewer analysts covering them? Just over 700. 4 or fewer? Just over 900. These are real public companies, real businesses, real trading ranges, and real management teams trying to build and grow stronger businesses. It’s a group of companies that represents an incredible area for smart investors to find alpha. Traditional large sell-side firms can’t touch covering these companies with their cost structures. Smaller, regional brokerages give it a shot, but company managements may not even realize that buysiders may have zero exposure to those shops.
So active managers need to dig, do the research, find the opportunities, create valuation frameworks, and make investments that they think are smart—using whatever underlying strategies they trust. Small and micro cap public equities with limited coverage are a beautiful area to focus on to find alpha opportunities. Opportunity Equity Research wants to bring a number of opportunities to you over the year and help you find a few that can potentially lead to outperformance-it’s that simple. We may offer up 6 names before that 7th name hits your style, but if we can help make next year’s numbers for you, we will!
Our model is built on small, fee-based company sponsorship (yes, “paid-for research”). Yet with decades of buyside experience coming to the forefront, we hope a quick read of any of our initiation reports will show you this isn’t historical fluffy paid-for garbage, but rather a very specific high-quality blueprint and map for any potential investor to use to efficiently ramp on the current status of any company we follow. We want to bring underfollowed small companies to the attention of smart investors that are constantly looking for upgrades and potential alpha opportunities-that is our goal, and our ramp continues.
So with that ground staked-out, we bring two specific equities to your attention this time around. Sportsman’s Warehouse (SPWH) is a $230 million market cap company with 86 outdoor sporting goods stores across 22 Southeast and Western states. Fears of the Amazoning of the entire retail space, tough ttm gun and ammo sales, and industry noise including Gander’s bankruptcy and the combination of Cabelas and Bass Pro Shops have taken the stock from the $13-$14 level in early 2016 to $5 and change now. Trading at just over 5.5 times FY17s normalized EV/EBITDA numbers, valuation and rebound potential are attractive in here. The company is finally walking into much easier comps starting in the upcoming quarter and has been paying down debt with the goal to do more on that front. You can learn more about it here: www.opportunityequityresearch.com/coverage-list, SPWH
Good Times Restaurants (GTIM) is a $31 million microcap restaurant stock. The quick take—management uses their cash cow Good Times concept and a secondary raise to buy the Bad Daddy’s concept back in 2015. Mature Bad Daddy’s are pulling in 20%+ restaurant level operating profits with unit volumes coming in around $2.6 million. They gain control, ramp units hard in their Colorado base, then are hit by a large minimum wage increase in Colorado this past year. Unit economics in Colorado are hit hard—EBITDA growth is derailed. Management changes unit growth focus to lower wage states (NC, OK, GA, TN) and presses forward. The stock is trading at .5 times EV/revenue and around 8 times cap/adjusted TTM EBITDA (with renewed EBITDA growth guidance at 32% on the low end this upcoming year). Learn more about Good Times here: www.opportunityequityresearch.com/coverage-list, GTIM
Attached for your use are PDF versions of the GTIM report mentioned above as well as our JYNT initiation (the stock has pulled back a bit since initiation, it’s an interesting company worth knowing—like the set up as a specialized retail-based growth story for the future). Keep pressing and good luck into year-end!
The discussion of specific securities is for research purposes only and is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned. Please see our disclosure page on www.oppequity.com for a full list of disclosures.
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