5 Microcaps in 5 Minutes (#4)

I present five interesting Microcaps, worth a further look

May 26, 2024

In my idea generation post, I wrote that 18% of the stocks I look at are somewhat interesting. Somewhat interesting means I keep an eye on them and if X happens, they would have a place in my portfolio. X can be defined as either getting cheaper or more likely, an event that unlocks value, or a new development that is likely to increase earnings. Typically, 1-2% make it into the portfolio. These are written up as deep dives. The other 18% of interesting stocks can be found here in this format. This does not mean that these are bad ideas, it just means that I am not invested in them at the time of writing. Sometimes it is maybe a mistake. SOWG 0.00%↑ for example was profiled in this format in January and returned 80% since then. So I think this format is a great hunting ground for new ideas. That said, let's get right to it.

1. Pioneer Power Solutions PPSI 0.00%↑

Market Cap: $38 million (as of 05/23/2024)
Share count: 9.93 million
P/E ‘24: 12

TradingView chart — Created with TradingView

It's rare to find a stock with the highest earnings in years trading near a 52-week low. But that is exactly what has happened to PPSI. They sell electrical power systems, so it's a bet on increased demand for electrical power, which will be needed for the transition to electric vehicles and also to power the data centers that support the growth of AI. So you have two very interesting macro tailwinds. However, after getting excited about the story, the stock tanked on weak Q4 numbers.

In particular, their new product E-bloc is expected to be a growth driver. Based on their guidance for 2024, they trade at less than 12x earnings. The CEO owns 20% of the company.

2. Strattec Security Corporation STRT 0.00%↑

Market Cap: $105 million
Share count: 4.07 million
P/E ‘2024 FY: 20x

Strattec is an automotive supplier. Like all automotive suppliers, they were hit hard by COVID followed by high inflation. They typically have fixed contracts with car companies for years to produce parts for specific lines. When input costs rise, they lose money on those contracts. Last year, they renegotiated all their contracts, and this, along with their cost-cutting program, resulted in an increase in earnings.

The stock is still trading below retained earnings. Value investor fund Gate City Capital owns nearly 10% of the company, and Gebelli has put two members on the board. Seems like a very low-risk bet, given that the market cap is backed by its real estate.

3. American Shared Hospital Services AMS 0.00%↑

Market Cap: $21.46 million
Share count: 6.33 million
P/E ‘24: 9

American Shared Hospital provides radiosurgery and radiation therapy equipment to healthcare providers. Recently, they announced the 60% acquisition of three radiation therapy cancer centers in Rhode Island. They are shifting their revenue from just renting their products to these clinics to partial ownership of three clinics. While this will increase their revenue and EPS, it will also potentially lower their margins. Nevertheless, the stock is cheap and the CEO's outlook is optimistic.

”So with that, I'd like to thank everyone who joined us today. I really believe AMS is at an inflection point. We're excited about the future. And I hope you all stay tuned.”
- Raymond Stachowiak CEO, Earnings Call Q4 2023

Maybe it is the change the stock needed to finally trade above book value.

4. Enterprise Group $E.TO

Market Cap: $71 CAD
Share Count: 58 million
P/E ‘24: 6

Enterprise provides specialized equipment and services to the energy, pipeline and construction industries. Their customers are typically tier-one oil companies. They have benefited not only from the huge upturn in the industry, but also from their new product that enables the transition to natural gas power instead of diesel fuel. This reduces emissions for their customers and is also a higher margin product for Enterprise.

I first looked at the stock last summer at $0.45CA. Since then, the company and the stock have done very well. Revenues grew 24.6% from CA $26.89 million to CA $33.50 million, while operating income more than doubled from CA $3.52 million to CA $7.93 million. Earlier this year, they raised additional capital, primarily to fund their working capital needs for continued growth. Over the past twelve months, they have generated nearly 10 million in operating income, so despite the run-up, the stock still trades cheap - and further spending by oil companies does not appear to be over yet. Unfortunately, my anchoring bias does not allow me to enter the stock at this price...

5. BK Technologies Corporation BKTI 0.00%↑

Market Cap: $46 million
Share count: 3.53 million
P/E ‘24: 9

BKTI manufactures and sells Land Mobile Radios to wildfire and emergency departments. Since the new CEO took over, and they overcame supply chain issues, this has been a story of gross margin improvements.

They just outsourced their manufacturing, which should further increase their margins, and launched a new product, their BKR9000, which also has a higher margin than their flagship product. However, it remains to be seen if the new product can take market share from the dominant Motorola radio. Joshua S. Horowitz, who has a seat on the board of Limbach Holdings, also sits on the board and owns BKTI.

Thank you for reading this edition of 5 microcaps in 5 minutes. In June, I will probably publish only one article because I am preparing something for the blog for July.