One of the benefits of being a small investor is that one can take advantage of small or more thinly traded stocks that would not be available or efficient for a large institutional investor. Such is the case, to some degree, with F C Stone Group (FCSX), which provides risk management consulting and transaction execution to commodity users and producers.
Although the company has only been public for a few months, some of its clients have been with the firm for over 30 years. As volatility has increased in commodities markets, the company’s business has picked up quickly and the future continues to look bright. The company benefits from increases in volatility and also increases in interest rates. Arguably, these are two forces that should be around for the months and years ahead.
Producers of commodities such as farmers, miners, and energy producers have been finding it more and more difficult to determine the current and future demand for their product, which makes planning, investing and running their business more and more risky. The same is true for end users such as food producers, utilities, construction companies and any number of other industries. F C Stones customers typically have $5 million or more of commodity exposure a year and prefer to outsource the management of this exposure to risk. As volatility increases, more companies are becoming aware of their exposure to price swings and are willing to hire an outside consultant.
The barriers to entry are not extremely high in this business, but FCSX is able to compete through its highly trained consultants. The company has years of experience and is constantly researching new ways to help their clients avoid or even benefit from the volatility. Furthermore, the company has trading and clearing services available so clients are able to use FCSX as a one stop shop developing the strategy and executing each portion of that plan through the company’s infrastructure. FCSX makes a profit on the consulting, execution, clearing, and financing; the full process of mitigating customer risk.
The stock is not a cheap name (as very few stocks with good growth prospects are). It trades at a 32 multiple to 2007 estimates (Year ending August), and 29 times 08 expectations. However, the expectations should not be thought of as concrete numbers. If we continue to see rates rising, inflation concerns, and volatility in prices, one can assume the company will land many new profitable clients and those expectations will likely be proven conservative. There is some speculation that the company will be added to one of the Russell indexes but I would not trade on such rumors. It is clear that institutions are beginning to take notice as volume has picked up on some strong days in the stock which helps me know that I have some deep pockets betting with me. The future looks bright and I’m anxious to see the long-term prospects for this quality company.
Disclosure: Author has long position in FCSX
FCSX 3-mo chart