Microcap moat ideas?

[blainehodder]

I was hoping to start a list of strong moat, sub 100 mill market cap ideas.  It certainly would be nice to get in on the next Starbucks microcap.  Are there any well managed stars you've spotted in your hometown that are well managed and publicly traded?  Sadly, I don't really have any ideas to get the ball rolling, but I'd be interested in hearing yours :D.

[alpha231616967560]

Nice thread idea!

 

ADVC is one that I like: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/advc-advant-e-corp/msg95886/#msg95886

 

and AUTO is another one that I have been looking at lately and have a starter position in. Both are (in my opinion) companies with potential to develop significant moats.

 

 

[blainehodder]

Yes,

 

I looked at AUTO before and it is a very compelling high ROIC growth story... AND it is dirt cheap.  Sadly I just can't bring myself to buy OTC stocks right now while I have space in tax sheltered accounts.  In Canada we are not allowed to buy OTC in the TSFA (zero cap gains) or RRSP (writeoff) accounts.

 

Great start though!  Here is a decent writup on AUTO.

 

http://montesolcapital.com/wh2/

 

It also should be a magic formula stock due to the cheapness and returns on capital but it is too small to hit Greenblatt's screen.  I think whopper wrote it up for the newsletter he runs.

 

I'll be sure to check out ADVC as well, but it looks as though my conclusion will be the same.

 

I really am missing the boat by avoiding OTCs, but the 30+% tax return I get from the RRSP, or alternatively the 30+% cap gains avoidance really handicaps them in my book.  Does anyone have any thoughts on this?  Do you fellow Canadians max your tax sheltered accounts before you venture in OTC land?

[Palantir]

This stock is not cheap, but Bolt Technologies, BOLT, a maker of undersea seismic data acquisition apparatus is a good company with a moat. Basically boats take their sensors and string them out under them and go off to sea. They collect seismic data to form a picture, and oil companies use this info. It used to be Sub 100M, but is still basically in that neighbourhood.

 

 

 

I strongly considered buying it at 9, but forgot.

[Capitalist World]

Not under $100 M mkt cap but compelling  and misunderstood.  Yellow media after restructuring.  Y.CA.

 

see posts Feb 4-5th

[LC]

This stock is not cheap, but Bolt Technologies, BOLT, a maker of undersea seismic data acquisition apparatus is a good company with a moat. Basically boats take their sensors and string them out under them and go off to sea. They collect seismic data to form a picture, and oil companies use this info. It used to be Sub 100M, but is still basically in that neighbourhood.

 

 

 

I strongly considered buying it at 9, but forgot.

I passed on BOLT because I didn't (and still don't) have a clue about the Oil & Gas industry. Interestingly I found the company when looking for "Bolt Bus".

[Ross812]

aegn. formerly insituform. I'm on my phone so i can't get into it to much but they are the only company today with the size and ability to repair failing water and sewage pipes on the scale that will be required in the next few decades. their technology is 5x cheaper than the next alternative. research slip lining and you will understand ;-)

[ragnarisapirate]

I know that this seems to be all I talk about, but...

 

Defense parts manufactures... SODI and MPAD are two of my favorites. If there is anything that Americans like, it is making weapons to tell other people what to do with. Even if the budget gets cut, their balance sheet and nimble operations provide safety. The sector has been beaten down relentlessly. And yes, I do consider both of them to have moats in their industries.

[LC]

shameless plug for the co I know most about, FHCO. Has one competitor who isn't nearly at the scale FHCO is in terms of production to satisfy global demand. demand which has been all but guaranteed at the London Summit by the Gates Foundation. not a Micro cap ($213m market cap) though.

[infinitee00]

Thanks for starting this thread.

 

My suggestion would be Simulation Plus ( SLP) although it is not by any means at a cheap valuation. They design simulation softwares for the pharmaceutical industry and have practically no competition. They license their software to pharmaceutical companies and to govt agencies like the EPA, FDA etc, and have very high renewal rates. They have a nice niche and growing at a decent pace. I do not have an idea about the size of their market as the industry is probably still at a nascent stage ( I think a reason why it has little competition is probably because the market size is not that big, which discourages larger players from entering the market) .

 

They have eye popping margins (yes, all of them - GM, OM, NM) which goes to prove their dominance.  They have pretty good ROE/ROIC ( ~avg. of 18% in the last 5 yrs) and no debt. Owners/insiders control 45% of the stock and are very conservative. There hasn't been much if any dilution in the last decade and the salaries are very reasonable. I owned the stock for almost 5 years but I finally sold last year after they started paying out pretty much their entire earnings as dividends( last Q they paid more in dividends than NI), which to me indicated lower growth in the future and little increase in retained earnings or BV. The high valuation also was making me nervous as I couldn't justify holding onto it with reasonable growth and DCF estimates. The owners are getting old ( in their 70s) so they may very well be trying to sell the company, but I didn't want to hold on to it based on hope. However, if there is market sell-off, the stock may become attractive again for me.

 

[Guest Schwab711]

Thanks for starting this thread.

 

My suggestion would be Simulation Plus ( SLP) although it is not by any means at a cheap valuation. They design simulation softwares for the pharmaceutical industry and have practically no competition. They license their software to pharmaceutical companies and to govt agencies like the EPA, FDA etc, and have very high renewal rates. They have a nice niche and growing at a decent pace. I do not have an idea about the size of their market as the industry is probably still at a nascent stage ( I think a reason why it has little competition is probably because the market size is not that big, which discourages larger players from entering the market) .

 

They have eye popping margins (yes, all of them - GM, OM, NM) which goes to prove their dominance.  They have pretty good ROE/ROIC ( ~avg. of 18% in the last 5 yrs) and no debt. Owners/insiders control 45% of the stock and are very conservative. There hasn't been much if any dilution in the last decade and the salaries are very reasonable. I owned the stock for almost 5 years but I finally sold last year after they started paying out pretty much their entire earnings as dividends( last Q they paid more in dividends than NI), which to me indicated lower growth in the future and little increase in retained earnings or BV. The high valuation also was making me nervous as I couldn't justify holding onto it with reasonable growth and DCF estimates. The owners are getting old ( in their 70s) so they may very well be trying to sell the company, but I didn't want to hold on to it based on hope. However, if there is market sell-off, the stock may become attractive again for me.

 

I'm interested to hear what others think about some of my watchlist. Some of these I barely "passed" on:

OTCM

MSON

PFHO

PLOW

PSSR

MKRS

DHIL

OPRX

ANFC (low-cost O&G producer)

ELMD

 

I don't hold any of these (only interested in top 2 at this point, though they are considerably more expensive than I'd be willing to pay). All have "moats" or potential moats, though I doubt any of them have real pricing power (PSSR and MKRS should, but never have).

[spartansaver]

UG although heavy insider selling scaring me away lately.

[gary17]

Thanks for starting this thread.

 

My suggestion would be Simulation Plus ( SLP) although it is not by any means at a cheap valuation. They design simulation softwares for the pharmaceutical industry and have practically no competition. They license their software to pharmaceutical companies and to govt agencies like the EPA, FDA etc, and have very high renewal rates. They have a nice niche and growing at a decent pace. I do not have an idea about the size of their market as the industry is probably still at a nascent stage ( I think a reason why it has little competition is probably because the market size is not that big, which discourages larger players from entering the market) .

 

They have eye popping margins (yes, all of them - GM, OM, NM) which goes to prove their dominance.  They have pretty good ROE/ROIC ( ~avg. of 18% in the last 5 yrs) and no debt. Owners/insiders control 45% of the stock and are very conservative. There hasn't been much if any dilution in the last decade and the salaries are very reasonable. I owned the stock for almost 5 years but I finally sold last year after they started paying out pretty much their entire earnings as dividends( last Q they paid more in dividends than NI), which to me indicated lower growth in the future and little increase in retained earnings or BV. The high valuation also was making me nervous as I couldn't justify holding onto it with reasonable growth and DCF estimates. The owners are getting old ( in their 70s) so they may very well be trying to sell the company, but I didn't want to hold on to it based on hope. However, if there is market sell-off, the stock may become attractive again for me.

 

I'm interested to hear what others think about some of my watchlist. Some of these I barely "passed" on:

OTCM

MSON

PFHO

PLOW

PSSR

MKRS

DHIL

OPRX

ANFC (low-cost O&G producer)

ELMD

 

I don't hold any of these (only interested in top 2 at this point, though they are considerably more expensive than I'd be willing to pay). All have "moats" or potential moats, though I doubt any of them have real pricing power (PSSR and MKRS should, but never have).

 

I own DHIL.  It's a fantastic company.  I would also add WHG to that list.  Also these:

 

MLAB

KONA (next Cheesecake Factory in the making?)

 

Hey Berkshire101 - Can you please let me know why you like DHIL ?  And what do you see is the intrinsic value for this business and risks...  I came across this a few years ago but did not pull the trigger!

[Jurgis]

Thanks for starting this thread.

 

My suggestion would be Simulation Plus ( SLP) although it is not by any means at a cheap valuation. They design simulation softwares for the pharmaceutical industry and have practically no competition. They license their software to pharmaceutical companies and to govt agencies like the EPA, FDA etc, and have very high renewal rates. They have a nice niche and growing at a decent pace. I do not have an idea about the size of their market as the industry is probably still at a nascent stage ( I think a reason why it has little competition is probably because the market size is not that big, which discourages larger players from entering the market) .

 

They have eye popping margins (yes, all of them - GM, OM, NM) which goes to prove their dominance.  They have pretty good ROE/ROIC ( ~avg. of 18% in the last 5 yrs) and no debt. Owners/insiders control 45% of the stock and are very conservative. There hasn't been much if any dilution in the last decade and the salaries are very reasonable. I owned the stock for almost 5 years but I finally sold last year after they started paying out pretty much their entire earnings as dividends( last Q they paid more in dividends than NI), which to me indicated lower growth in the future and little increase in retained earnings or BV. The high valuation also was making me nervous as I couldn't justify holding onto it with reasonable growth and DCF estimates. The owners are getting old ( in their 70s) so they may very well be trying to sell the company, but I didn't want to hold on to it based on hope. However, if there is market sell-off, the stock may become attractive again for me.

 

I'm interested to hear what others think about some of my watchlist. Some of these I barely "passed" on:

OTCM

MSON

PFHO

PLOW

PSSR

MKRS

DHIL

OPRX

ANFC (low-cost O&G producer)

ELMD

 

I don't hold any of these (only interested in top 2 at this point, though they are considerably more expensive than I'd be willing to pay). All have "moats" or potential moats, though I doubt any of them have real pricing power (PSSR and MKRS should, but never have).

 

Sorry to say, but out of these OTCM might be the only one interesting and possibly the only one with a moat. Not cheap though, especially since they will get hit in equity downturn.

 

The rest - well, your definition of a moat is probably very different from mine.  ;)

[Guest Schwab711]

Haha, it probably isn't Jurgis. You can read through my past posts that rant about its use. The word "moat" has lost most of its meaning from overuse and I really try to avoid it altogether now. However, I don't know why you wouldn't include MSON or PSSR as a moat if you believe OTCM has one. Nearly all of my ideas below could, in theory, be defined as having a moat. ELMD is one of 3 options someone with MS has to improve their condition (removing mucus from the lungs). Although they are #3 with market share, depending on an investor's opinions of the product they may see upside that I missed. Basically, if you are just checking current margins to determine the presence of a "moat" then you are going to miss out on most of the great companies and nearly all of the great companies selling at cheap prices (you might even get roped into quite a few value-traps along the way)!

 

Background on some of the ideas posted (There's threads on PSSR and MSON as well):

* PSSR has provided in-flight location data for nearly every major airline and airport for decades

* MSON has patent-protected surgical devices of various surgeries along the spin (as well as other surgical applications) and one of their devices is considered to be the safest and most effective surgical tool for its particular application.

*MKRS should have pricing power as their Navy defense systems are extremely vital to certain types of ships (don't have notes in front of me) and provide high-margin service contracts. They may not look appealing at first glance because they've installed just 1/3 of these systems so far. The remaining 2/3 is likely to come in the next 24 months. They may not have margins like MCO or something, but they certainly have a business that is understandable and extremely predictable.

 

The way the word "moat" is now used (not that I am qualified to define its use), it seems like it's defined as the "competitive advantage" of a company. Obviously, this is a very broad definition because that is the way it is used. Just because a company has a "competitive advantage" doesn't mean they are or will be profitable and it certainly doesn't mean they earn outsized profit margins. Even if a company has outside profit margins, it doesn't mean there exists a moat. My own definition of a moat requires more than a paragraph or two of explanation :).

 

In reality, microcap "moats" are like unicorns (at least as you or I would define the word). Maybe a handful exist at any given time, but they are generally expensive and don't stay a microcap for very long. Along those lines, if I did know of a microcap with a truly wonderful moat, I certainly wouldn't share it on this board [i made that mistake with my first post :)]. I'm sure others feel the same way, since that information is much too valuable to give away so easily.

 

Also, this specific thread was never likely to get much discussion since the original post provided no research, but requested another poster to give up what is likely their best idea. OTC stocks are difficult to screen for (which is why people ask about them more often), so to find a microcap stock with a "moat", especially one previously not discussed in major value forums, requires 100's or 1000's of hours of research. I am definitely not referencing you or anyone else specifically (I've learned a lot from your posts), but this thread was bound to fail since the OP requested way too much based on what they provided (I've done this many times with the same results).

 

OT, but the board as a whole doesn't seem to have as many active threads on small or microcap stocks lately and a lot of the microcap posts just request information without providing any on the company posted. Although I've been guilty of this as well, even this thread resulted in more ideas instead of any actual discussion of the listed ones. Without more balanced discussion, I don't really want to give away any of my great ideas (it should be at least closer to a fair trade - there are numerous investors I do trade these ideas with privately because it is balanced). I am extremely conservative in my analysis of companies, so when I do find great microcaps businesses (extremely rare occurrence), they literally represent at least a few hundred hours of research, each...

[CorpRaider]

Dhil is an interesting bidness, but too rich for my blood so far.  chuck akre owns it and i think gayner has a little placeholder position.

[Guest Schwab711]

Dhil is an interesting bidness, but too rich for my blood so far.  chuck akre owns it and i think gayner has a little placeholder position.

 

I stole this idea from berkshire101

[Jurgis]

Haha, it probably isn't Jurgis. <snip the rest>

 

Fair enough.

 

You are right that I might miss some gems with the way I look at stocks. C'est la vie.

 

Thanks for the list anyway. :)