I’m a bottom-up investor. That means that I’m looking to invest in individual stocks that look attractive based on their fundamentals and valuation. I’m not looking to make sector calls. I think certain investors can be good top-down investors, but that’s just not my game. With that being said, I do think that micro-cap financials look quite attractive. How did I come to that conclusion? It comes back to bottom-up analysis.
Let me explain.
The two most attractive attributes of What I look for in a micro-cap idea:
- Strong fundamentals.
- A cheap valuation (both relative and absolute).
Once a month, I screen the entire micro-cap universe to identify the most attractive stock to recommend to Cabot Micro-Cap Insider subscribers (my most recent idea came out on April 11). And again, I’m looking for strong fundamentals and an attractive valuation.
I’m not necessarily looking for a “good energy idea” or a “good financials idea” but rather, I’m letting the best idea come to me based on fundamentals and valuation.
Over time, I’ve built a list of 17 micro-cap stocks that are on my Recommendation List. As I look at my Recommendation List, it just so happens that 3 of my highest-conviction ideas (disclosure: I own all three) are all micro-cap financials. I didn’t plan it, but they just happen to look compelling.
Without further ado, let’s get right into three of my favorite ideas (that just happen to be financials).
The 3 Best-Looking Micro-Cap Financials
BBX Capital (BBXIA)
When I initially recommended BBX Capital in October of 2020, it was an obscure micro-cap spin-off that was trading at a negative enterprise value yet generating positive free cash flow.
The stock is up 207% since then but still looks attractive.
BBX’s is a conglomerate but its main business is real estate. It owns and develops single family and multi-family real estate in Florida, which is booming. Besides real estate, the company also owns a confectionary subsidiary and a manufacturer of closet doors, wall décor, and fabricated glass products.
The company currently has net cash of ~$7 per share and trades for 9.31. Its book value per share is over $20 and the company has a share repurchase authorization of $15MM. It has already bought back 16% of shares outstanding since going public.
Given the booming real estate market in Florida, I expect the company to continue to generate gobs of cash for the foreseeable future.
NexPoint Diversified REIT (NXDT)
NexPoint is a closed-end fund that is transitioning into a real estate investment trust (REIT). It trades at a 40% discount to NAV and is significantly below where it traded pre-pandemic.
Once the transition to REIT is complete, it will be eligible for many more investors to own including funds and ETFs. This will likely drive indiscriminate buying pressure. The CEO owns 14% of the company and has been buying the stock in the open market relentlessly.
A near-term re-rate to NAV could drive 50%+ upside, but longer term, a bigger opportunity could materialize as the REIT is repositioned to capture value.
P10 Holdings (PX)
P10 is another big winner in the Cabot Micro-Cap Insider portfolio. It’s up since 288% since I originally profiled it in April 2020. And it has grown into a small-cap (no longer a micro-cap).
P10 Holdings has equity stakes in six private equity-focused strategies: 1) RCP Advisors, 2) TrueBridge Capital Partners, 3) Enhanced Capital, 4) Five Points Capital, 5) Hark Capital, and 6) Bonaccord Capital Partners.
All these managers have strong track records which will enable them to continue to raise additional assets under management. This AUM growth will continue to drive revenue and earnings growth. P10 is currently trading at just 15x 2022 adjusted EBITDA, a discount to its closest peer, Hamilton Lane, at 18x. It also looks attractive on an absolute basis given that the company should be able to grow assets under management and revenue at ~30% per year.
What micro-cap financials are currently on your radar?