There’s going to be certain times when you need to think twice before believing bullish commentary from management teams. You need to understand that that bullish commentary can change on a dime. I learned this lesson when considering investing in some technology stocks right before and during the dotcom bust. At that time, as risk was escalating, many technology company management teams I interviewed commented that they saw no problem with their industry. They assured me that they’d be able to navigate an economic slowdown. Well, that couldn’t have been further from the truth as many of these companies pivoted on their bullish stance just weeks after these interviews.
There was a good amount of optimism within the company’s 2021 10-K and 2021 Q1 communications about the prospects of a post-pandemic normalization, which led to our favorable take on the valuation on what we thought was a reasonably valued stock with some upside if certain things played out:
“VIDE is trading at 0.7x TTM price to sales multiple which we believe is not that unreasonable if the company can reach consistent profitability, considering the positive growth outlook management has communicated for the remainder of its 2021 fiscal year. We also like management’s shift to focus on cyber security which could also be a reason to assume that shares could eventually trade at a price to sales multiple well in excess of 4x.”
Long term price appreciation never materialized, but to be fair, as seen below, the company’s fiscal 2021 results did actually come in at an aggregate year over year increase, sending the stock to a brief high of $3.10. You could say, if just for a short moment, that the results supported the company’s outlook. However, investor conviction in the stock waned almost immediately, with the price settling back to its pre-financials levels.
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We’d like to visit another story that could just as well have been part of our last weekly segment to prove that some management teams just get it right. We wanted to offer it up as another example of an almost perfect implementation of the use of capital, be it raised funds or cash on hand, to grow a company in an accretive manner through acquisitions.
It’s basically a testimony on the fiduciary responsibility of public companies to handle the funds the way a public company should, as expected by shareholders..
The company in focus today is UFP Technologies, Inc. (NASDAQ:UFPT). The Company is a designer and custom manufacturer of components, subassemblies, products and packaging utilizing highly specialized foams, films, and plastics primarily for the medical market.
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Our monthly newsletter series continues with our new, alternative format of highlighting insightful video clips and discussions that give you a glimpse into personalities that have paved the way for many investors to approach various investing strategies to find what best suits your preferences based on your own goals.
From education and strategies to case studies, below we have lined up three personalities today to help you further understand a particular theme we have been highlighting which we believe is particularly relevant in today’s market environment – GARP (Growth At A Reasonable Price), It’s a topic we have heavily focused on throughout 2022 and in the past have described it as follows:
On most occasions, our microcap company standard of 50 million or less shares outstanding is and will always be unwavering. Now, you’re probably saying, ”it’s not the number of outstanding shares that matters, it’s the value per share of certain statistics like earnings per share and valuation ratios like price to earnings and price of sales multiples that matters when determining if a stock is undervalued.”
While this may be technically true, think about it this way – A company that has a lot of outstanding shares may be giving you a clue that multiple offerings came about because the company was unable to use the money it’s been raising to grow cash flow, potentially raising red flags on the effectiveness of management.
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