Note: This stock is below my usual parameters for market cap and trading liquidity. The market cap is less than $100 million. Recent average dollar volume is less than $100K/day. Other new ideas on deck for April are solidly in the small cap range and have greater trading liquidity.
This company has been in transition for a number of years, with management narrowing their focus on an asset light, high return on capital business with a clear path for growth.
Features that make this stock interesting:
Zero debt, cash is equal to ~40% of the current market capitalization
High return on invested capital
Majority of revenue is governed by a long-term contract with break fees equal to around the company’s current market capitalization, or ~1.4X of current enterprise value
Very high insider ownership
Tax asset will shield federal cash taxes for years to come (resulting from a closed/sold business)
While there are also typical micro-cap risks (related party transactions, insider control/ownership), I think the incentives here look good.
If management’s development plans stay on schedule, I could see the market cap rising substantially, moving from “deep under the radar” to an appearance on fund growth/momentum screens after breaching $100 million market cap. Index inclusion (Russell 2000) could be just a few years out.
Longer term, the current business provides a solid platform to build on. There is potential to substantially grow the current asset base over the long term and compound shareholder value.