Is it just me or does small cap, “the kids”, seem to be underperforming their large cap parents? I’ve been following a few small cap names that are trading at half the multiples of their big brother counterparts. Most of the “parent” companies are at or close to 52 week highs while the “kids” have lagged considerably. Here are a couple names I’ve been following:
US Home Systems (USHS) vs. Home Depot (HD): USHS manufactures or procures, designs, sells and installs custom quality specialty home improvement products. The company markets its home improvement products under the brand name of The Home Depot Kitchen and Bathroom Refacing. The company’s only customer if I’m not mistaken is Home Depot. USHS just came off its best fourth quarter in recent memory (minus non reoccurring charges). The company is expanding its relationship with the Home Depot with new in store marketing strategies, and expanding its products into the Home Depot Do-it-Yourself program. It is expected that the DIY program will be available in all The Home Depot stores by the end of the second quarter of 2010. Companies like HD do very well when the economy starts to recover since people are looking to fix up or update their homes rather than purchase a new home. Although USHS isn’t too far away from a 52 week high, I expect the company could earn 30-40c in 2010, thus trading at a very low multiple when compared to Home Depot.
INX Inc (INXI) vs Cisco (CSCO): INX Inc. provides technology infrastructure solutions for enterprise-class organizations in the United States. Its solutions include network infrastructure solutions, such as network routing and switching, wireless networking, and network security solutions; unified communications solutions, including Internet protocol (IP) network-based voice or telephone solutions, as well as IP network-based video communications solutions; and data center solutions, such as network storage solutions and data center server virtualization solutions. INXI is a reseller of Cisco equipment so when Cisco succeeds so does INXI. The company is currently late on filing their YE 10K due to possible accounting errors, so I believe there could be some downside left in the stock maybe to the $4.00 level. They currently have over $1.00 in cash, and I expect INXI’s Q1/Q2 to be record revenue quarters. Once transparency is given into this accounting issue the stock could rebound nicely towards $6, and higher by year end. M&A activity in the space values INXI at much higher levels.
Global Axcess Corp (GAXC.OB) vs NCR Corp (NCR) Coinstar (CSTR) and Cardtronics (CATM): Global Axcess Corp currently owns, manages or operates more than 4,500 ATMs and other self-service kiosks in its national network spanning 43 states. The company is also rolling out a DVD kiosk offering and feels over 1,500 of its ATM clients represent potential DVD kiosk clients. GAXC is currently trading at half the multiple to its big brothers NCR, CSTR, and CATM. With GAXC currently bidding on over $40 million in annual ATM/DVD business, any major win would have substantial impact on top/bottom lines of the company thus putting it on the radars of investors/analysts/institutions following NCR, CSTR, and CATM.
Bullion Monarch Mining (BULM.OB) vs. Royal Gold (RGLD): Bullion Monarch Mining is a resource royalty company with core royalty assets in the Carlin Trend Nevada. The Carlin Trend has produced roughly 80 million ounces of gold since the 1950’s and is expected to produce over 100 million ounces of gold in the future. Royalty companies have been all the rage on Wall Street recently due to their low risk high reward profiles. RGLD currently trades at a 70 PE while BULM trades at a 10 PE when you back out non reoccurring charges. BULM has a growing royalty stream with royalties down strike from major producing mines. BULM has further blue sky upside from pending litigation with Newmont Mining (court date likely in Q3 2010) over royalties owed to BULM covering a 250 sq mile area of interest in the carlin trend.
Gold Resource Corp (GORO.OB) vs Agnico-Eagle (AEM): Gold Resource Corp is positioning itself to be a low cost (sub $100 ounce) gold producer with production starting imminently. Given $1,100/oz gold, GORO is expected to earn $70 million in operating income in Year 1 and $100+ million in Year 2. With other low cost producers like Agnico-Eagle trading at 30x 2010 EPS estimates, GORO could make a substantial move once low cost commercial production is achieved.
Quepasa Corp (QPSA) vs. Facebook (private): Quepasa Corp owns Quepasa.com which is one of the fastest growing trilingual social networking websites with over 12 million members and adding 1.0-1.5 million members per month. The company is targeting 23-25 million members by year end 2010. Facebook is currently being valued at roughly ~$45 per member based off of employee sales of stock to institutions. Now I’m not for one second saying Quepasa.com deserves to have the same premium as Facebook.com But…. Other M&A activity in the social networking space has seen other social networking sites valued between $20-60 per member. If QPSA is successful in getting 25 million members by YE 2010, let’s use a ultra conservative $10/member valuation, or $250 million market valuation. $250 million / 25 million shares FD = $10 share price. QPSA is currently the only publicly traded social networking website, and with the anticipated Facebook or Twitter IPO (likely in 2011), more awareness will find its way to QPSA.
AML Communications (AMLJ.OB) vs Industry: AML Communications is a designer, manufacturer, and marketer of specialized amplifiers and integrated assemblies that address the defense electronic warfare markets. Its key customers include Raytheon, Lockheed Martin, Northrop Grumman, L-3 Communications, BAE, and others. AML Communications is one of the most fundamentally sound companies I’ve found in a while. AMLJ trades at a $14 million market cap, produced $1 million in cash in the last quarter, has $3 million cash on the balance sheet, and has $17.5 million Assets vs $3 million liabilities. The company will likely produce $16 million in revenues (up from $13 million) and earn 13c Fully Taxed (up from 10c) for their YE March 31st 2010. I expect the company to likely produce $19 million and 18c for FY 2011 (which already started). The company has really good visibility looking out 2-5 years given the nature of its contracts. I couldn’t find one larger company to compare it too so I looked at the industry it operates in. The average PE for the industry is 250 which tells you that not many companies in the industry are profitable, and the ones that are trade at 30+ PE’s. AMLJ has consistently grown revenues and net income the last three years. AMLJ is one to watch.
I believe small cap names will play catch up later this year. Just as kids yell, “Are we there yet?!” from the backseat of the car. The parents yell back, “soon soon.”.
Disclosure: Long GAXC, BULM, GORO, QPSA