Micro-cap stocks (and small-cap stocks for that matter) have been trailing the broader indexes all year. As measured by the Dow Jones U.S. Micro-Cap Total Stock Market Index, they’re flat in the last year.
Now, that’s true for much of the market given the narrowness of the recent rally, but micro-cap stocks are trading at an attractive discount even when compared to stocks other than the meg-cap tech stocks.
Before I share my three favorite micro-cap stocks, let’s take a step back and discuss why micro-caps are interesting.
I think they are interesting for three primary reasons:
1) Potential for high returns: Micro-cap stocks are typically companies with small market capitalizations, which means they have significant room for growth compared to larger, more established companies. If a micro-cap stock successfully executes its business strategy and experiences rapid growth, investors can benefit from substantial returns on their investments. Historically, micro-cap stocks have outperformed larger stocks.
2) Undervalued opportunities: Micro-cap stocks are often overlooked by institutional investors and analysts, which can lead to undervaluation. This creates opportunities for individual investors to identify undervalued gems before they gain wider attention. By conducting thorough research and analysis, investors may uncover hidden value in micro-cap stocks that the market has yet to fully recognize.
3) Less analyst coverage: Micro-cap stocks tend to receive less analyst coverage compared to larger companies. While this may be a disadvantage for some investors, it can also present an opportunity for those who are willing to conduct their own research. By diving deep into a company’s financials, business model, competitive landscape, and growth prospects, investors can gain a deeper understanding of the company’s potential and make more informed investment decisions.
With that out of the way, let’s dive into three micro-caps that look interesting today:
My 3 Favorite Micro-Caps
Currency Exchange International (CURN)
Currency Exchange is a Canadian company that specializes in selling foreign banknotes through their retail and wholesale channels while also offering payments solutions to integrated banking customers.
The company is benefitting from a post-pandemic travel boom that shows no signs of slowing.
Last quarter, Currency Exchange showed 32% revenue growth and beat consensus expectations across the board.
Insider ownership is high, and the company has a rock-solid balance sheet.
Finally, Currency Exchange has a hidden asset (payments business) which is highly valuable.
Currency Exchange’s valuation looks attractive at 9x forward earnings and 7x forward free cash flow.
Merrimack Pharma (MACK)
Merrimack Pharma is a unique company.
On April 3, 2017, Merrimack sold itself to Ipsen.
Ipsen paid $575MM in cash plus up to $450.0 million in additional regulatory approval-based milestone payments.
Merrimack currently has zero employees and relies on contractors to minimize costs.
Its sole purpose is to receive milestone payments from Ipsen related to the drug Onivyde.
Onivyde will likely be approved for first-line metastatic small-cell lung cancer in early 2024 which will trigger a $225MM royalty payment. Merrimack has committed to distributing any milestone proceeds to investors.
I expect Merrimack to distribute $15 per share to investors within ~12 months, representing more than 125% of its current share price.
Additional upside can be achieved through future milestone payments.
Finally, insider ownership is high, and insiders have been buying recently on the open market.
RediShred (RDCPF)
RediShred is a Canada-based, leading document destruction services company.
Insiders own more than 30% of the company.
It has grown revenue at a 31% CAGR and EBITDA at an 80% CAGR over the past 10 years through organic and inorganic growth.
Future growth is poised to continue yet the stock trades at just 5x forward EBITDA.
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