Tag Archives: activist-stocks

Finding Value In The Small-Cap Space

Meson Capital is a small-cap activist investor. They share our appreciation for the small-cap industry, where small-caps tend to outperform large-caps over time. But in truth, Meson is more like an micro-cap activist investors, taking a 1-3 year time horizon on their holdings. They operate on the long and short side, with a notable short in FreshPet (NASDAQ: FRPT ). They see the current market as indicative of the market behavior from the 2000 tech bubble. Still, we think there’s value to be had in the traditional value space. With that in mind, Meson’s long portfolio is what’s most interesting right now. One of its top holdings, Heska (NASDAQ: HSKA ) is down 30% this year. The fall comes after a weak earnings report, despite executing a solid turnaround. Still, 2015 fiscal year revenues were up 22% year-over-year and operating profit has doubled. Heska is a maker of veterinary products, namely in the canine and feline markets. The company has been a turnaround story since 2014. It decided to change its business model from primarily selling equipment to generating recurring revenues via rental and other sources. Heska should continue to see the benefits of past investments in 2016 finally paying off. As Meson notes, they focus on a private equity style, where they invest in companies that stick to their long-term strategy despite having to sacrifice short-term profits.. Its core customer is veterinary clinics, which it’s managing to win over with its blood analyzer product, despite the competitive market. Now Heska is expanding beyond the blood analyzer business, buying up the digital radiography and imaging tech company Cuattro Veterinary last year. Then there’s international opportunities, where it’s expanding into Mexico, Europe, Latin America and Canada. Also in Meson’s portfolio is Capital Southwest (NASDAQ: CSWC ), which is a $220 million market cap investment company. Shares are flat for the year. The company is a focuses on acquisitions and investments across industries. It invests in various private companies, namely debt, in companies that generate $5 million to $20 million in earnings before interest, taxes, depreciation and amortization. Its goal is to assist management. Despite the lackluster stock performance the company has brought in new management in hopes of breaking up the investment holding and operating companies following the founder’s passing. Disclosure: None

Words Of Encouragement From Buffett

Let’s start with one of the best ways to think about small-caps, from none other than Warren Buffett. Here are Buffett’s thoughts on investing in small-caps: “If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50 percent a year on $1 million. No, I know I could. I guarantee that. The universe I can’t play in has become more attractive than the universe I can play in. I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in.” Now, the Russell 2000 index is off 5% year to date and now down 12% in just the last year. Meanwhile, the S&P 500 is only down 1% over both periods. But have no fear, small-cap stocks are fine. Over the long term, they’ll still treat you right, and if you pick the right ones, they’ll do just as well in the short term. This starts with focusing on value. From 1926 to the mid-2000s, small-cap value stocks grossly outperformed large-cap growth. Large-cap growth stocks posted an average return of 9.3% from 1926 to 2004. The small-cap value stocks meanwhile are up 15.9% over the same period. Ibbotson has put together some work that shows small-cap stocks have outperformed large-cap stocks almost 80% of the time over a 15-year period and 95% of the time over a 20-year period. Source: KeyStone Financial We’ve been through the reasons that small-caps outperform before – dubbed the Six Small-Cap Laws – which includes size and growth rates. It’s inherently easier for a company to double earnings from $100 million to $200 million, rather than from $1 billion to $2 billion. The best companies start out as small-caps. This includes the likes of Wal-Mart (NYSE: WMT ) and Microsoft (NASDAQ: MSFT ). But again, there are a lot of small-caps out there and the risk/reward profiles are all over the spectrum. Don’t get caught buying overpriced small-caps or hold onto looks for too long waiting for a turnaround. Disclosure: None