Hunting for Small Cap Gems

Welcome to a new series of posts I’m calling “The Small Cap Hunt”. In this series, I’ll be looking at small cap companies that either got enough attention in the investing community as great investments, or popped up on my screening radar. The guiding criteria are: less than $1 billion market cap, profitable, and in the United States. This will be sector agnostic, but I’ll put an emphasis on non-financial companies. I must emphasize that these are guiding criteria, not hard rules. This is especially important when looking at profitability. I’ll be looking at companies that are currently unprofitable, but have a clear path to profitability. The same can be said about market cap. I’ll try to keep it under $1 billion, but if I find a company that I think is a great investment, I won’t let a slightly higher market cap stop me from writing about it.

I’ll also be posting my findings on my free newsletter, so be sure to follow me there if you want to stay up to date. You can sign up here.

Before we get into the weeds, it needs to be brought into the open what constitutes a good reason to move on from an investment. It’s one thing to dive deep on a company in the face of one or two small red flags, but it’s another thing to dive deep on a company when red flags, sirens, air horns, and flashing lights are going off. I’ll be quick to move on from companies when it makes sense to do so.

The Companies

AstroNova, Inc. (ALOT)

AstroNova, Inc. designs, develops, manufactures, and distributes specialty printers, and data acquisition and analysis systems.

Right away we see some pretty abysmal numbers, but it’s an interesting company! The numbers are just terrible when comparing to bigger more established names, but in spirit of looking past red flags for potential gems, let’s discuss for a second about the absoluteness of why this is likely a poor investment:

This is a good example of looking good on presentations, but we look at the income statement things become a little more clear:

Two things stand out: revenues are declining and net income is increasing. While increasing efficiency is neat and wonderful, declining revenues are not. Let’s take a look at earnings per share growth over time:

Never mind. Not great, Bob. Let’s move on. It’s highly unlikely that we’ll see any green flags if we chose to dig deeper here, which we will not.

Amtech Systems Inc (ASYS)

Amtech Systems, Inc. manufactures and sells capital equipment and related consumables for use in fabricating silicon carbide (SiC), silicon power devices, analog and discrete devices, electronic assemblies, and light-emitting diodes (LEDs) worldwide.

Cool description, but those numbers don’t thrill me. Revenues are flat across ten years, and FCF is returning null due to a zero or negative number in the equation. No FCF, no investment. Let’s move on.

But before we do, I’ll humor myself to dig just a tad for 5 minutes to see what they do:

From their website:

“I am excited to take on the role of CEO and am looking forward to leading Amtech and driving efforts to fully capitalize on the exciting growth opportunities before us. In the coming quarters, we will focus our efforts on operational and supply chain improvements to ensure that we create meaningful value from the secular drivers influencing our business. We will be outlining our targets and plans in more detail on our next earnings call,” commented Mr. Bob Daigle, Chief Executive Officer of Amtech.

New leadership is one thing, but I’m doubtful that it will be enough to turn this ship around. Let’s move on after taking a look at this last nail in the coffin:

FCF per share over time is not even positive most years. Let’s move on.

TTEC Holdings Inc (TTEC)

TTEC Holdings, Inc., a customer experience technology and services company, that designs, builds, orchestrates, and delivers digitally enabled customer experiences designed for various brands.

Better numbers, and gross profit looks nice. FCF margins don’t look great. Initial thought is “maybe they’re investing in growth”, but let’s chart some income statement items to see if that’s the case:

While I see cash from operations increasing, I also see capex increasing. Let’s take a look at FCF per share over time:


This is getting a bit interesting:

Their final slide here touts that they are a “leading digital CX provider”. I wonder why their margins are so low then.

Ken Tuchman is the CEO and founder, and owns over half the company while keeping his salary low at under 70k annually.

This last bit is enough for me to keep an eye on the company.

Last note: I’m not a big fan of technical analysis, but I do look at past performance as a measure to see how the market is *weighing* the business. In this case, the market has been weighing TTEC less and less after a period of giving the S&P 500 a run for its money:

I’ll keep an eye on TTEC to see if their margins improve.

Infinera Corporation (INFN)

Infinera Corporation provides optical transport networking equipment, software, and services worldwide.

Not great fundamentals by any means, but that revenue growth is interesting if it wasn’t for the asset growth on top of it.

Let’s dig a little. From their website:

Infinera is revolutionizing telecommunications networks with innovative, industry-leading connectivity solutions including high-end subcomponent technology, systems for network infrastructure, automation software, and professional services.

This might be one for the “too hard” pile that Warren Buffett talks about.

Charlie says we have three boxes: In, Out, and Too Hard. You don’t have to do everything well. At the Olympics, if you run the 100 meters well, you don’t have to do the shot put.

– Warren Buffett

Here’s what we see when we zoom out and look at revenue and per share metrics:

Not great revenue growth last 10 years. Let’s look at per share metrics:

Not great per share metrics either. Let’s take a look at FCF/share lastly:

I can see INFN saying “look how much we’ve improved” but going from heavy nevagative FCF/share to slightly less negative FCF/share is not a good look. 🚩🚩🚩

The final nail in the coffin that caught my eye is the debt to equity ratio growth:

Growing debt, negative fcf, and negative earnings. I’ll pass. A good prive for a terrible business is like getting dog shit for a discount price. It’s still dogshit and you bought it.

Note: INFN came up on my radar because they reported profits in their latest quarter.

Clearfield Inc (CLFD)

Clearfield, Inc. manufactures, markets, and sells standard and custom passive connectivity products to the fiber-to-the-premises, enterprises, and original equipment manufacturers markets.

This would be a nice refresher if it wasn’t for the big zero for FCF 10y CAGR.

From their August investor presentation:

It’s nice that they make this understandable for the generalists like myself.

Then we hit this gem on the very next page:

Wow, annual revenue at 70% CAGR? That’s amazing! And those margins? Even better! Let’s take a step back and see for ourselves, shall we?

Ok this is actually pretty good:

1. Solid revenue growth.

2. Mostly positive FCF/share.

3. Improving operating margins.

It’s pretty clear that CLFD is investing in growth, and it’s paying off. I’ll keep an eye on this one.

Pretty reasonable LTM FCF:

Last note for this one on price action:

It looks like CLFD got some attention starting in 2021 and rose to bubble levels recently and now they’re coming back down. Not ideal. Finding overly hated businesses is better than deteriorating outlook businesses.

Closing Thoughts

It’s one thing to find good investments, but it’s another thing entirely to find good small investments. The vast majority of companies are terrible, and the vast majority of small companies are even worse. Good companies grow, and finding good small companies is like finding a needle in a haystack.

The best analogy here is the science of hitting. Ted Williams was the last player to hit .400 in a season, and he did it by only swinging at pitches in the strike zone. He knew that the vast majority of pitches were not strikes, and he knew that the vast majority of strikes were not good pitches to hit. He only swung at the pitches that were both strikes and good pitches to hit.

Saying “no” to a lot of pitches is the key to hitting .400, and saying “no” to a lot of mediocre companies is the key to finding great companies and great investments.

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