Trying To Find The Next Great Microcap?

by: Ian Cassel

There are currently 18,734 public companies on all US Exchanges (including OTC), and 9,120 (49%) are microcaps (<$300 million market cap). Market inefficiencies are the greatest the further down you go in the market cap spectrum. The great thing is there are plenty of companies to choose from. For example, there are currently 6,400 US public companies with market caps less than $50 million, more companies then trade on the New York Stock Exchange and NASDAQ combined.

MicroCapClub was formed to be an idea generator for its membership. We currently have 150 experienced microcap investors combing through the thousands of microcaps that exist trying to find the great ones. Over the last two years of the Club's existence our membership has profiled 200 companies in our members forum. Starting in 2013, we thought it would be fun to showcase a handful of companies to the public via The MicroCapClub Invitational. We try to showcase each company in a way that mimics an investor-company due diligence conference call, which many of us full time investors do on a weekly basis. This venue is also unique for three other reasons: 1. We aren't compensated. 2. We hand pick the companies. 3. We are long all the companies.

We are primarily trying to showcase those companies that are very under followed and have little to no institutional ownership. In January 2013 we showcased 12 companies and by year-end 2013 they averaged a 52% rate of return. This was good, but not great as you could have also passively invested in the Russell Microcap Index (NYSEARCA:IWC) and been up 45%. This year we showcased 9 more companies that we feel are unique in the microcap arena. Below is a quick pitch on each microcap we showcased with a link to their Invitational presentation.

FitLife Brands (OTCPK:FTLF): FitLife Brands is a profitable and fast growing nutritional supplements company that is the #1 vendor in the GNC franchise system. The company has showcased a 39% CAGR over the last three years, and expects to grow at a double digit CAGR over the next 3-5 years. John Wilson, CEO of FitLife, and his management team have successfully turned the company around since he joined the company in 2009. In September of 2013, the company completed a recapitalization, which cleaned up the share structure and balance sheet. We feel the perceived customer concentration risk with GNC Holdings (NYSE:GNC) isn't well understood by the market, and creates an interesting value proposition for investors. [PRESENTATION]

VolitionRx (NYSEMKT:VNRX): The cure for cancer still eludes us. The next best thing to a cure is the early detection of cancer. In most cases if you detect cancer early enough it can be treated successfully. The holy grail of cancer diagnostics would be a simple blood test with high specificity and sensitivity. VolitionRx is a clinical stage cancer diagnostic company working on a series of blood-based tests for a range of cancers, beginning with Colorectal Cancer (NYSEMKT:CRC). The company is starting a lucrative 11,000 patient clinical trial in early 2014 to validate their CRC test. The company expects to have multiple data points throughout 2014 and 2015. If early results prove successful, Volition's current $25 million valuation will likely expand closer to comparables such as Exact Sciences' (NASDAQ:EXAS) $950 million valuation. [PRESENTATION]

Xplore Technologies (NASDAQ:XPLR): Xplore Technologies manufactures two forms of tablet computers: Ultra rugged, which has been their core business for many years, and rugged, which is a new growth driver that expands their previously addressable market by a factor of 10. Their legacy, ultra-rugged product has customers on record such as AT&T (NYSE:T) and the US Military. This highly differentiated product is waterproof, can withstand a 7 foot drop, and can function in a temperature range of -40 to 167 degrees. One of the key reasons we became involved with the stock is their new rugged line of tablets, called Ranger X. In July of this past year, they unveiled the Ranger X, which the company just recently announced received its first multi-million dollar purchase order from a major U.S. telecom provider. We expect the Ranger X to be a major growth catalyst in 2014. Phil Sassower, Chairman and CEO, owns 33% of the company through his private equity vehicle, and has successfully led the company to the inflection point on which it stands today. [PRESENTATION]

Xpel Technologies (OTC:XPLT): Xpel Technologies sells paint protection products that protect vehicles from damage caused by rocks, gravel, salt, acid rain and sand. The company's Ultimate Film has driven significant sales growth since 2011. When we first looked at Xpel it reminded us a lot of ZAGG (NASDAQ:ZAGG) from back in 2008-09 when sales were just starting to ramp. Xpel has profitably grown revenues from $6 million in 2011, to ~$16 million for the LTM. The company has no debt, and a very clean share structure with only 25.7m shares outstanding with no options or warrants. We expect the growth trend to continue as more independent installers, new car dealerships, and international distributors, partner with Xpel. Several members on MicroCapClub have done exhaustive due diligence traveling to numerous dealers and attending car shows. As the company scales its business in 2014 and beyond we expect to start to see operating leverage drop more income to the bottom line. We also believe a possible up-listing to a major exchange in 2014 will bring many more eyes on the name. [PRESENTATION]

International Commercial Television (ICTL): International Commercial Television sells various health and beauty products through infomercials and other channels in the United States and internationally. Some of the best management teams I've invested in were those that successfully dug there way out of a hole and turned the company around without much dilution to shareholders. As an investor this is important because management has proven they can navigate the company through the worst of times. A few years ago ICTL was on the brink of bankruptcy, but the management team lead by Kelvin Claney and Richard Ransom would not give up. They felt they had a company-making product with the DermaWand. They ended up scratching and clawing to raise $300,000 to give it one last shot. With this little bit of capital they built the company from $3 million in revenues in 2011 to $30+ million and profitability in 2013. In 2014, the company is looking to continue its profitable growth trajectory with the launch of additional products. [PRESENTATION]

Avante Logixx (OTC:ALXXF): Avante Logixx has built its reputation as a preeminent security company by providing premium security services through the use of advanced technology and a focus on client service. Avante's security business provides a complete suite of security services ranging from system design, sales, installations, and monitoring to services such as alarm response, patrols, personal protection and secure transportation. We were initially attracted to the company because of the significant growth in both revenues and earnings. The company has shown consistent revenue growth over the last three years and was able to grow sales by 43% in the last 12 months from $6.15 million to $8.82 million and earnings from a loss of $57,000 to a profit of just over $1.3 million giving evidence to the leverage within the business. Management and directors are well vested in the company and own approximately 45% of the 59 million shares issued and outstanding. Shares in Avante currently trade at a price earnings ratio of 15.8 times, significantly below the industry average of 29. The company has a solid balance sheet and has accumulated over $1.5 million in cash and has zero debt. We expect growth to continue both organically and now with a healthier balance sheet through accretive acquisitions. [PRESENTATION]

ViryaNet (OTCQB:VRYAF): ViryaNet is a provider of mobile workforce and field service management software. Companies in field service intensive industries, such as utilities and telecoms, rely on ViryaNet's solutions to optimize their mobile workforce and respond to scheduling changes in real-time. We were first drawn to the company by its compelling valuation, blue-chip customer base, and niche positioning, where it has been recognized as an innovator in the $1.5B field service management industry. The company's flagship product, ViryaNet G4, has gained traction lately through the support of a key partnership with GE Energy, leading to an impressive 34% increase in revenues and 155% increase in total bookings for the third quarter of 2013. CEO Memy Ish-Shalom and Chairman Samuel HaCohen together own over 20% of the shares outstanding and have demonstrated their confidence in the business recently through open-market purchases. With ViryaNet's addressable market only 25% penetrated and a new cloud-based solution in the offering, we believe the company can continue its double-digit growth trajectory in 2014 and attract more attention as management tells their story to investors. [PRESENTATION]

OurPet's Company (OTCQX:OPCO): OurPet's Company develops and markets innovative products for improving the health, safety, comfort, and enjoyment of pets. The company sells over 1,000 products for dogs, cats, and domestic and wild birds. According to the most recent report from the American Pet Products Manufacturers Association (APPA) approximately 82.5 million U.S. households reported owning a pet with an estimated pet population of 83.3 million dogs, 95.6 million cats, and 20.6 million birds. US pet industry sales totaled $59.1 billion in 2012 and are expected to grow to $75 billion by 2017. This under followed nanocap has a very tight share structure of only ~18.6m shares outstanding FD. The company is starting to see significant operating leverage in the business growing EPS from 0.01 for FY 2012 to 0.05 for the LTM. The company is starting to show significant increases in sales in all of their primary sales channels. The company is launching several new innovative products this year supported by 225 patents issued or pending. [PRESENTATION]

Innovative Food Holdings (OTCQB:IVFH): Innovative Food Holdings is a leading nationwide provider of direct from source specialty foods, healthcare foods, gluten free foods, and artisanal foods. The company's specialty food platform powers some of the largest food distributors in the country. Innovative Food Holdings has showcased over 50 consecutive months of year over year growth while increasing profitability. A few of us MicroCapClub members visited the company's headquarters in Florida last summer and came away impressed with how management is positioning itself in the Specialty Food space. The industry is ripe for consolidation. In the month of January alone, there were 21 M&A transactions in the food distributor industry. In the specialty food distributor category The Chefs' Warehouse (NASDAQ:CHEF) and United Natural Foods (NASDAQ:UNFI) have been growing rapidly, mostly by way of acquisitions. With (NASDAQ:AMZN) now entering the direct to consumer space by way of amazonfresh, we feel Innovative Food Holdings is right in the sweet spot of the industry and also likely in the crosshairs of industry participants. [PRESENTATION]

Disclosure: I am long FTLF, VNRX, XPLR, XPLT, ICTL, ALXXF, VRYAF, OPCO, IVFH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.