North Star Funds operates a fund called The North Star Micro Cap Fund (MUTF:NSMVX). The fund seeks capital appreciation by investing in micro-cap securities, which it defines as companies with market capitalizations of under $500M. The company has outperformed the Russell 2000 since inception, (although not in the 5/10 year comparisons).
I came across the fund through a 13G filing on a position I had taken and written up for my subscription research service, the Microcap Review. Northstar Funds holds a very large combined position in Truett-Hurst (NASDAQ:THST). I first wrote it up in December of 2016 when it traded at $1.68. The company has since appreciated 23%, although they still trade below what I would consider the sum of the value of their net current asset position and the value of their winery property. I've sold my Truett-Hurst position after a quick gain, and note that their recent quarterly results were down. They are probably still undervalued here, but I have reallocated funds into other positions after a quick win.
Having come across a fund with one position I quite liked, I thought it made sense to see what else they had in the cupboard. Of course, the fact that the name of the fund had "Microcap" in it, suggesting they invest in my bread-and-butter segment of the market only increased my enthusiasm. While this is my first coverage of the North Star funds, I expect to update this once per quarter when they provide their regulatory filings, as I have done for other value-based investment shops here.
Now, unfortunately for me their SEC filings are completed at parent level and filed under North Star Investment Management. That means that positions owned by their other mandates are included. The manager's biggest position overall is in JPMorgan Chase (NYSE:JPM), which isn't likely something they've recently added to their microcap fund.
However, combining the SEC filings with quick screen for market capitalization and the recent fund information sheet for the microcap fund yielded some interesting finds.
Their biggest position in the microcap space is Acme United Corporation (NYSEMKT:ACU). The company is a bit of a roll-up, with operations ranging from cutting instruments (pencil sharpeners, scissors, etc.) to first aid supplies. They trade at a not especially demanding, but not especially cheap valuation of 16X earnings with an EV/EBITDA of 10. That being said, they are still an active acquirer, recently buying a producer of absorbent powders for spill clean-up for 5X EBITDA, which is obviously accretive. If the company can continue executing on accretive acquisitions, it may end up with a growth company premium, which would provide potential appreciation. Vince Martin has a full look at the company here.
The next largest position in the microcap fund is A.H. Belo (NYSE:AHC), which is best known as the publisher of the Dallas Morning News. While print journalism isn't a hotbed of economic growth, the company has significant real estate assets in Dallas, as well as some elsewhere. They have announced they intend to move their headquarters into leased premises, which would allow them to sell that building. They have also put an owned parking lot in Dallas under contract, so these assets are moving. The company also has a significant ($78M) cash balance, so there is significant asset backing, although the pension deficit is a bit worrisome. The other factor that may prevent value realization is the 10 votes per share class B stock that effectively prevents activism here.
The third largest position North Star has that would qualify as a microcap is Orion Energy Systems (NYSEMKT:OESX). This maker of lighting platforms sells its products through distributors, and has been rather consistently losing money. That being said, the company trades only 11% in excess of book value, and revenues have begun growing as the LED business has effectively supplanted their previous fluorescent business line. While the transition has been painful to say the least, it appears that North Star thinks shares have finally bottomed. Arthur Frentzel has more on the company.
The final North Star position I will cover in this report is their Escalade Inc. (NASDAQ:ESCA) holding. The company imports sporting goods under a widely diversified set of brands for everything from pickleball to archery to basketball to table tennis. The company has booked rather consistent growth on the revenue line, but net income has actually been declining recently. This position appears to be a bet that the company can improve its net margins. The company has a 3.4% yield, which gives investors a return while they wait for earnings growth to materialize.
I believe Northstar's filings are worth following as the company has demonstrated long-term outperformance in a niche (microcaps) that has naturally higher performance from the small-cap effect. This suggests they are taking advantage of the inefficiency in the smaller areas of the market, making their picks worth watching.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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