Buying This Small-Cap Stock with 100% Upside Potential!
Growing small-cap company at a no-brainer valuation.
Where does the investment success come from?
Most investors make the mistake of answering this question in the following way: It comes from buying the best businesses possible.
I have always been a quality investor my whole life. All the money I made in the market was made by buying quality companies. I have never bought a bad company because it could become good. Yet, I can’t tell you that investment success comes from buying good businesses.
If not quality, where does it come from? I think Howard Marks answers it best:
This brings about one consequential implication—you have to be a contrarian.
It only makes sense, as you can rarely buy things well when they are in demand and everybody is bidding up to own them.
At the beginning of the year, this meant diversifying away from the US market, AI trade as the market had reached peak concentration levels seen in prior bubbles. As a result of this capital flow into the US and the AI trade, we were able to find opportunities to buy lesser-known things, i.e., small-caps, well in global markets.
This strategy worked very well for us. We achieved 35% average returns from the small-caps we bought, and they now occupy over 20% of our portfolio.
This proved to be the right decision as small-caps outperformed both the S&P 500 and the Nasdaq year-to-date:
Into the year, the market decided it no longer liked mega-caps and capex, so opportunities to buy exceptional businesses at attractive prices emerged.
We took the chance by buying Microsoft at lows. That position is now up over 35%.
Then, recently, the market didn’t like compute as much as it used to. Just before the Neo-Cloud earnings, we published a piece and said it was time to be bullish on compute again:
That has also played out very well, as Coreweave was up 15% and Nebius up 50% last week. We had an opportunity to buy these well.
The point here is not to brag, but to lay out the pattern: We have the opportunity to buy things well when other people don’t look or don’t want to look.
So, the question is simple: What do people ignore now?
After hyperscaler and neo-cloud earnings, especially Microsoft and Nvidia, people are once again concentrated on compute and how the AI trade will go. The market concentration has risen again as hyperscalers like Microsoft and Amazon have been re-rated, and Nvidia is up 10% from its lows.
Thus, I think it’s once again time to turn to small-caps, as fewer and fewer people are allocating money into the space.
I have been rigorously looking for an opportunity in this space, and I think I have found one:
Revenues have grown by 13% annually since 2020.
Free cash flow almost doubled in the same period.
The latest disclosed backlog is 3x annual revenue.
Actual contract backlog is way higher, as it recently announced a new contract but didn’t disclose the contract value. Once the next quarterly update comes, we’ll see a jump in backlog.
What’s even better is that it’s trading at just 3.25x 2027 EV/EBITDA.
There are clear catalysts ahead, and if they play out as expected, there is 100% upside potential from the current levels.
I am a buyer at these levels and will be opening my position within the week.
So, let’s cut the intro and dive deep into this hidden gem opportunity.
🏭 Understanding the Business
Service businesses are sticky. If the service is for mission-critical industries, it becomes even stickier.