I write about ‘hidden gems’ in small cap value stocks based on extensive primary research. This includes 30 page reports (with 1 page summary) after speaking with ~20 industry experts, and insights from attending trade shows. Learn more at: hiddengemsinvesting.com

What have you added to your research process today that you wish you did 5 years ago?

You learn the most about a CEO during a crisis. Ryan Pape became XPEL's CEO in 2009 when it had $10mm of revenue. Pape guaranteed a $25,000 debt on his own credit card. XPEL today generates $508mm of revenues and the stock is up about 1,000x since 2009.

Some good CEOs here:

Covid created a boom and then a bust in boats, bikes and housing. Malibu Boats was selling 9,900 boats a year and is now selling 4,700. That is below the rate the existing fleet wears out, and is starting to turn. The stock trades on 4.5x my estimate of mid-cycle EBIT. You'll find my full Malibu write-up in 'My Top 20 Ideas', on the front page of Hidden Gems Investing.

What is key to your investment process that few others bother with?

Sometimes a small cap is cheap because investors don't understand the business model. E.g. some investors see XPEL as just a supplier of automotive protection films. But when you speak to its installers they tell you they get the customer leads, brand, software, and training from XPEL. The relationship is closer to a franchise-franchise. That's why I speak to ~20 industry sources and go to trade shows before publishing writeups on small caps.

Capital-intense businesses can be better than capital-light ones. Suppose two companies both earn 20% ROICs. One can only reinvest 10% of earnings at those rates whereas the second reinvests all of it. The first company grows at 2% whereas the second grows at 20%.

Most small caps are ruled out before anyone looks at them: 1. A fund will not hold a position below a certain size 2. It cannot own more than a set share of any one company 3. Multiply those two limits and you get a market cap floor Hidden Gems Investing works below that floor, on niche leaders under $1bn earning 20-30% on capital.

What's the most useful thing scuttlebutt research told you that the filings never would?

A comment from one industry source is just an anecdote. Real insight means hearing the same thing from former employees, competitors, and customers . That's why each of the four reports I publish a year is based on conversations with ~20 industry sources.