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One of the classic gold nuggets for an investor is the micro-cap or small-cap company that is just starting to show up on radar screens, but with a strong history of growing revenue, and earnings that appear ready to break into positive territory. It’s a rare combination of qualities, offering investors one of the greatest potentials for substantial, short term profit. Once positive earnings are achieved, the effect on share price can be explosive.
There is a unique window of opportunity, and it doesn’t last long. As a company grows, drawing the attention of an increasing number of analysts, it becomes more a game of beating expectations. Eventually it’s no longer enough for the company to announce strong quarterly revenue and earnings numbers, the numbers have to beat analyst estimates. Also, when enough eyes are on the company, expectations can be built into the share price, allowing for a nasty tumble or major boost when earnings are announced. Everyone, including company executives, knows this, and companies do whatever they can to ensure that quarterly reports meet or beat expectations, out of concern that sudden well-publicized share price drops can send skittish investors away for good.
But, until that happens, while a company is still in that magic pre-blossom stage, an alert investor can line themselves up for a staggering short term gain. Even more desirable, of course, is when such a company is also positioned for continued long term growth, based upon efficient leveraging of an expanding market. Not every management team is smart enough to deal with the often hidden opportunities and challenges of market expansion. Companies can easily overextend themselves late in the cycle, generating an unsustainable financial burden just when the market turns south. If, however, management is able to stay ahead of the curve, taking advantage of low cost acquisitions before the boom, and understands how to grow and operate on increasing scales in advance of growing demand, the future holds few limits.
Take a look at AdCare Health Systems, an Ohio-based manager of senior living facilities. AdCare currently operates over 42 facilities in Ohio, Georgia, Alabama, Arkansas, and North Carolina, with new acquisitions continually being targeted. Facilities include independent living campuses, assisted living facilities, nursing homes, and dementia care facilities. The company also provides comprehensive home health care services. Facilities are either owned by AdCare, leased from third parties, or are managed for third parties.
AdCare revenue has grown steadily, more than doubling from 2006 to 2010, and, although fiscal 2011 is not yet completed, AdCare now appears to be on track for the biggest year-to-year revenue jump in the company’s history. Much of this is due to AdCare’s aggressive acquisition strategy, allowing them to spread their efficient operational model, and positioning them to serve one of the biggest demographic waves in American history, the aging boomer population. In addition, net income is now making its first intermittent forays into positive territory.
Besides being that rare beast, the emerging company that can offer a history of rising revenue along with on-the-cusp earnings, AdCare has set sail on a rising sea of industry growth. With improved healthcare virtually ensuring that many boomers will live well into their 80s and 90s, the demand for various forms of assisted living facilities and services is expected to explode to levels never before seen, providing a continually growing long term market.
But it’s important to remember that companies like AdCare represent an unusual combination of financials and market potential. It’s tempting to grab at developing companies that have a year or two of impressive revenues, or that seem to be oriented toward future markets, but very few companies exhibit five or more years of steadily rising revenues, together with earnings ready to break to the positive, together with a firm foundation in what can only be described as a tidal wave market that will stretch on for decades.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.