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Finding Value In The Small-Cap Space

 

Meson Capital is a small-cap activist investor. They share our appreciation for the small-cap industry, where small-caps tend to outperform large-caps over time. But in truth, Meson is more like an micro-cap activist investors, taking a 1-3 year time horizon on their holdings. They operate on the long and short side, with a notable short in FreshPet. They see the current market as indicative of the market behavior from the 2000 tech bubble.

Still, we think there’s value to be had in the traditional value space. With that in mind, Meson’s long portfolio is what’s most interesting right now. One of its top holdings, Heska (HSKA) is down 30% this year. The fall comes after a weak earnings report, despite executing a solid turnaround. Still, 2015 fiscal year revenues were up 22% year-over-year and operating profit has doubled.

Heska is a maker of veterinary products, namely in the canine and feline markets. The company has been a turnaround story since 2014. It decided to change its business model from primarily selling equipment to generating recurring revenues via rental and other sources.

Heska should continue to see the benefits of past investments in 2016 finally paying off. As Meson notes, they focus on a private equity style, where they invest in companies that stick to their long-term strategy despite having to sacrifice short-term profits..

Its core customer is veterinary clinics, which it’s managing to win over with its blood analyzer product, despite the competitive market. Now Heska is expanding beyond the blood analyzer business, buying up the digital radiography and imaging tech company Cuattro Veterinary last year. Then there’s international opportunities, where it’s expanding into Mexico, Europe, Latin America and Canada.

Also in Meson’s portfolio is Capital Southwest (CSWC), which is a $220 million market cap investment company. Shares are flat for the year. 

The company is a focuses on acquisitions and investments across industries. It invests in various private companies, namely debt, in companies that generate $5 million to $20 million in earnings before interest, taxes, depreciation and amortization. Its goal is to assist management. Despite the lackluster stock performance the company has brought in new management in hopes of breaking up the investment holding and operating companies following the founder's passing.

If you’re not already on it, sign up for our free small-caps newsletter - that’s how you get insights like the above. With this, we’re already gearing up for the second edition of our quarterly subscription service - Underrated Small-Cap Stocks - set to drop next week.

It’ll profile an under the radar hedge fund manager and his top underrated small-caps. The idea is to fish in a pond where there are less fishermen. We’ll be profiling managers that have a history of outperforming - the April issue features a manager that’s generated ~15% annualized returns since inception and has a proven track record of finding micro-caps with impressive upside - learn more here.