Wednesday, December 21, 2016

Microcap Club Thesis TIXC

Microcap Club Thesis

Hey readers. I decided today to try and apply for membership in the Microcap club.  They require you to write a thesis on a great investment idea that could double in 12 to 24 months. I worked for about 3 hours and uncovered what I thought was a great microcap stock using MFI analysis. Guess what?  I am not eligible to be a member (when I read the fine print).  Seems a waste. So I have decided to share with you.

Stock Thesis For Microcap Club
Thank you for the opportunity to present my best microcap stock idea.  I would like to first speak about my process, as I believe that is as important as the pick itself.

I use the approach discussed in-depth by Joel Greenblatt in “The Little Book That Beats The Market”.  As you may know, this is a book on value investing (MFI) which uses a formulaic approach to identify stocks that have a high earnings yield and a strong return on capital. However, I believe I bring some additional important elements beyond his book to the table.

I am an actuary by training and am a great believer in creating databases and analyzing statistics.  When I first read Greenblatt’s book in 2006, I began to keep a detailed database on stocks that were in the MFI screen.   I suspect I have one of the most complete databases back through 2006 on stocks making the MFI screen and their performance.

The next step I performed was to create a spreadsheet that screened stocks in the same manner as the website. I put a great deal of effort into this and I believe I match the official screen as well as any person.  But by running the screen myself, I am in good shape in event website ever goes down and I often identify some good stocks not on the official screen. In addition, I can run for market caps lower than the official screen (it stops at $50m).

Finally, after 6+ years of tracking MFI and trying my hand at it, I sorted through all my data to attempt to identify stocks from the screen that have a higher probability of performing well.  My efforts have worked.  I keep a blog (MFI Diary), which I post to at least once a week.  My reboot in August 2012 has an annualized IRR of about 19%.


So, let us discuss my universe of stocks for this thesis along with the stock I ultimately select.  I started with about 2000 stocks with market caps under $500m (and above $20m).  I ran them through my workbook.  Here are the best 11 per MFI criteria:


Ticker Rank  Stock Price  Market Cap Earnings Yield ROIC
THLD 1            0.47               34 449% 17529%
FH 2            2.05               32 71% 4844%
NTIP 3            3.15               79 45% 5687%
CHMI 4         18.61            140 26% 9240%
NHTC 5         26.65            299 25% 4473%
SNYR 6            0.37               30 23% 3884%
ACHI 7            2.19            224 77% 998%
PDLI 8            2.08            342 63% 487%
CALL 9            7.05            112 20% 562%
TRLPF 10            0.11               23 76% 226%
TIXC 11            1.53               28 15% 1182%


Stock Selection
Reviewing some of the names at the top of this list, I believe that TIXC at $1.53 represents a good opportunity.  This is a company that specializes in selling same day tickets. Obviously quite small at just 28 million market cap.

One important element I look for after I have screened stocks is whether the income stream in lumpy.  I have found that more predictable income translates to a stock being much less likely to be a “one hit wonder”.  Operating income here meets that criteria. Past four quarters: 
  1. 0.694 
  2. 0.809    
  3. 0.745    
  4. 1.156.

Now think about that. Those total to $3.4m, for a $28m market cap.  You can already see that this is a relatively cheap stock.

Now switching from income statement to balance sheet.  They have $7.3m of cash.  Reviewing their liabilities, I estimate that $5.7m of that is excess, with the first $1.6m being needed to run the company.  I find it is great to have excess cash – it certainly provides flexibility and can be used to fund growth, dividends or buybacks.  So earnings yield for me is operating income / enterprise value – a very strong 15% here.  But what really makes this a great opportunity in my view is the minimal required capital. Property, Plant and Equipment is just $290,000.  So this business has a very high return on invested capital.

Therefore in Tix, we have (1) a cheap company, (2) a high ROIC company and (3) a company that has had a decent steady earnings stream (given it is a microcap.  Honestly, that might be enough for me to make it part of a portfolio.

Additional Thoughts

In my analysis of MFI stocks, I have found a strong correlation between results and payment of a regular dividend. Guess what? I am saving the best for last.  TIXC pays a regular quarterly dividend of 5.5 cents. That is 22 cents a year, which for those math challenged, is a 14% yield.  I also look for longevity.  This can be tougher with microcaps.  But looking at Fidelity (I use them as they use Compustat – most reliable for data) – they have steady revenues for past five years.  Share counts have decreased from 25,000 ,000 to under 18,000,000 over five years. So TIXC is clearly buying back shares and not diluting via EE options.

Summary

Thanks for reading. I expect my approach is not traditional – but I think you’ll find my screening approaches come up with some very interesting names. I am active in social media and blogging and will certainly give my opinions if made a member.  And hey, I don’t know about you, but TIXC looks great.  I may just buy some shares if it is liquid enough.

2 comments:

John Carney said...

Marsh,

The bad & The Ugly appears to be a nice Christmas Present. Thanks

Marsh_Gerda said...

John, yes it is. I actually wrote a follow up... but it was so powerful I saved it as a draft. I'm all in on this approach, starting to add January 1st.