15 High Quality Small Caps 📈

Happy Sunday! (Unless you’re on Wendy’s marketing team 😬)

In this edition of the FinChat Newsletter we’ll roundup the big earnings from the week, take a look at some high-quality small caps, and examine Wendy’s ill-fated attempt at a new pricing model.

Let’s get into it.

Earnings Roundup

• Anheuser-Busch InBev: Bud Light maker AB InBev reported weaker than expected sales in the 4th quarter. While profits were still strong, the alcohol giant is still struggling to revitalize its Bud Light brand in the US. AB InBev’s stock was down 5% this week.

• Salesforce: The world’s largest pure software-as-a-service company beat on both revenue and profit estimates this quarter. After several rounds of layoffs earlier this year, Salesforce’s operating margins jumped from 14% a year ago to 19% in its most recent report. Salesforce shares finished up 8% this week.

• Celsius: The burgeoning energy drink maker continues to surpass even the most optimistic expectations. Revenue for the full year came in at $1.3 billion, up 102% from last year. Along with the rapid rise in sales, operating margins expanded from -24% in 2022 to 20% for 2023. The strong results to wrap up the year pushed Celsius’ stock up 21% for the week. $10,000 invested in Celsius in 2015 would be worth $2.2 million today. 🤯

• Snowflake: Cloud software company Snowflake delivered an underwhelming outlook for 2024. To add fuel to the fire, Snowflake’s CEO since 2019 Frank Slootman announced that he is retiring effective immediately. The uncertainty around the outlook and prompt resignation from Slootman sent the stock down 18% for the week.

• Beyond Meat: The largest producer of plant-based meat products announced an improvement in demand from customers outside the US this quarter. The company also announced that they plan to raise prices and greatly reduce operating expenses in 2024. This positive outlook, coupled with ~40% of shares being sold short, helped the stock jump as much as 80% after the report.

• Axon Enterprise: The original company behind the Taser delivered yet another impressive quarter for shareholders. With cloud and services revenues up 52% versus last year, the company now generates ~$700 million in software-based annual recurring revenue. Axon’s stock, which has been a 15-bagger over the last 10 years, jumped 13% this week. 

• Coupang: Often called the “Amazon of South Korea”, Coupang has delivered impressive results since coming public in 2021. The company which is well-known for its fast shipping speeds, reported better than expected revenue and profits for the 4th quarter. Coupang’s stock was up 17% this week.

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15 High-Quality Small Caps

The FinChat development team launched a couple awesome upgrades that make screening for “quality” stocks much easier.

Here’s one simple screener that can help investors find high-quality small cap businesses:

• Market Cap: $50 million to $3 billion

• 10-Year Average Returns on Invested Capital (ROIC): 15%+

• 10-Year Revenue CAGR: 10%+

• 10-Year EPS CAGR: 10%+

• Net Debt/EBITDA: Less than 5x

Only 15 companies in the US meet this criteria. Here are the Top 5:

1.) XPEL, Inc.

XPEL offers automotive surface and paint protection films, headlight protection, and window films.

• 10-Year Return: 2,996%

• Market Cap: $1.54 billion

• EV/Operating Income: 22.6x

2.) IES Holdings

Designs and installs integrated electrical & technology systems, and provides infrastructure products and services in the US.

• 10-Year Return: 1,733%

• Market Cap: $1.99 billion

• EV/Operating Income: 12.3x

3.) OTC Markets Group

Provides critical market infrastructure that broker-dealers rely on to facilitate trading on over 12,000 US and International securities.

• 10-Year Return: 1,018%

• Market Cap: $682 million

• EV/Operating Income: 19.1x

4.) EACO Corp

Sells electronic components and fasteners through its wholly owned subsidiary, Bisco Industries.

• 10-Year Return: 812%

• Market Cap: $165 million

• EV/Operating Income: 6x

5.) VirTra

Provides force training simulators & firearms training simulators for law enforcement and the military.

• 10-Year Return: 764%

• Market Cap: $113 million

• EV/Operating Income: 11x

Here’s the full list.

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Meme of The Week

“Wendy’s selling a Baconator for $29 to a single parent running late to pick up their kid.”

This week, reports came out that popular fast-food franchise Wendy’s is considering deploying an “Uber-like” surge pricing model.

That would mean Wendy’s locations would have the ability to change menu prices on the fly depending on demand at the time. Naturally, this means Wendy’s could charge its highest prices to those who are most in need of a quick cheap bite.

Wendy’s has since backtracked these plans, but it hasn’t stopped customers and the world at large from pointing out how ill-fated this idea was from the start

Studies show that “Price” is one of the primary reasons most customers elect to eat fast-food to begin with. Taking away any sort of price predictability would likely cause hesitancy among customers to visit.