GEO Investing

By Maj Soueidan

There may not be a cookie cutter approach to finding multibaggers, a term that defines stocks that rise 2x or more. While nabbing a stock that doubles is nice, we invest in microcaps because they present lots of opportunities to find stocks that can rise 5x to 10x over time.

Still, with about 10,000 microcap stocks trading in North America, there are some traits or factors that continue to pop up in past multibaggers that you can reference during your research process to find the next one. 

For example, companies that don’t issue an excessive amount of additional shares over time protects investors’ ownership interests in the company by limiting dilution.

At the very least, if a company issues shares to raise capital, it’s imperative that earnings per share grow faster than the increase in share count.

These companies have a better probability of achieving multibagger status versus a scenario in which companies dilute their earnings per share (EPS) by continually issuing new stock.

In fact, combined with other growth factors, limiting dilution is arguably the #1 criterion that enhances the odds of equities achieving increases in price by many multiples. 

Engineering software company Rand Worldwide Inc (OTC:RWWI) is a great example and one of our best-performing stocks. Since we profiled the company in 2018, EPS rose by over 2000%, while the price increased by 575.67% at its peak.

To drive the point home, RWWI’s shares outstanding  grew by just over 1% since 2018.

Once it’s established that it is unlikely that a company will issue an excessive amount of shares to execute its business plan, other factors, as intimated above, can be sought out that will favorably affect its stock price.

We use a Tier One 10 checklist to increase our odds of finding great companies to invest in:

  1. Long operating history of ~20 years or longer.
  2. Strong Management.
  3. Focus is on managing the business, not on pumping the stock price.
  4. Generating revenue.
  5. At or near profitability.
  6. High probability turnaround stories, when applicable.
  7. High insider ownership.
  8. Manageable debt burden.
  9. Ability to grow without excessive (dilutive) equity raises.
  10. Shares outstanding are not excessive.

A favorite combination from the above list (points 1, 6 and 9) embodies a scenario from which many multibaggers are born –

…turnaround/restructuring candidates that have been around for a long time that are forced to find new ways to grow without dilution. 

Since 2008, we have added a consistent flow of stocks to our coverage universe, giving us a great playground to gain and build knowledge. Over 200 of these stocks have become multibaggers.

That brings me to a stock that checks off the aforementioned three traits that I believe is teeing up a multibagger move. 

It’s in the same industry as Fitlife Brands, Inc. (NASDAQ:FTLF), a nutritional supplements and wellness products company that’s well storied in our research archives that has itself experienced an incredible multibagger journey of its own.

FTLF has increased 510% since 2016, when it was first profiled by one of our GeoInvesting contributors.

Over the course of the next couple of years, the price receded a little bit, giving us a chance to profile it ourselves and hop in at a lower price in 2018.

At any rate, investors would have been able to enter the stock at any point between 2016 and 2023 and still been ahead, showcasing the plethora of time to consider FTLF as a portfolio candidate after our contributor’s profiling of the company.

FTLF Percent Increases

In 2016, Fitlife, founded over 18 years ago, was on the verge of bankruptcy, selling its nutritional supplements through brick and mortar channels, with GNC as their biggest customer.

Brick and mortar revenue can become unpredictable since, in the case of smaller companies, distributors and retailers can dictate pricing, what products to carry and how the product is marketed to customers, potentially the degree of success these smaller companies may achieve, a scenario FTLF was facing with GNC.

So, when an investor/activist, Dayton Judd, entered the picture, he bought a large percentage of the company’s stock and eventually took control of the company, becoming CEO, where he began his efforts to turn the company around.

He improved the balance sheet by selling off receivables at a discount to bring cash into the company, instituted new ways to market the company’s products, and developed an online direct-to-consumer strategy.

Eventually, the company got to a point where it was strong enough to look for acquisitions, culminating in the company buying two nutritional supplement businesses over the last 12 months.

Since Judd took over, revenues have increased from $17 Million to $45 Million, and Earnings Per Share have increased from losses to a current annual EPS run-rate of $1.44. Today, on-line revenues represent 68% of total revenues.

Finally, outstanding shares are about 4.5 million today, versus what they were when Judd took over in 2016, 4.2 million – an only 7% increase.

So, what’s so special about the company I’m looking at right now whose story is so similar to that of FTLF’s?

For starters, this company’s outstanding shares have actually decreased 12.8% since the mid 1990s (the earliest SEC filings we could reference).

This company is in the same industry as FTLF and has been around since 1985 (to reiterate, this checks off the long operating history criterion).

Previously, shares traded at ~$13, and the stock is now well under $1. The company was on the verge of debt-induced bankruptcy and struggled to maintain relationships with its retailers and distributors. 

The old CEO’s tenure was riddled with mis-executions, as well as related party transactions and shareholder battles, also similar to FTLF.

Now, with the leadership of a new CEO and a turnaround plan (6th trait above), the company sold one of its assets to pay off all of its debt and has one of the highest cash balances in its history. He has also embarked on an aggressive online marketing strategy where they are already seeing this revenue grow by almost 50%

The company is also concentrating on its higher margin products with the belief that they, combined with all of the turnaround moves, will result in the company quickly returning to profitability.

What I find interesting here is that the stock has fallen to bankruptcy price levels because of the once weak balance sheet. However, the stock has barely moved upwards after it announced that it restructured its balance sheet. 

I think investors have become sick of the company’s past management narrative of overpromising and under delivering. But, what they might not realize is that the company is now being run by the new CEO.

It appears the new management team is much more shareholder friendly, and is executing on turnaround initiatives that previous management could not bring to the finish line.

This set-up is almost an exact blueprint to FitLife.

It’s such a blueprint that I’m going to introduce the CEO of FTLF to this company to see if he might be interested in joining their Board of Directors. 

If this opportunity makes sense to you, then please join GeoInvesting Premium today to follow my due diligence journey and receive access to all of our premium content.

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Geoinvesting is a research platform founded in 2007 to publish premium research on microcap stocks that meet a certain set of criteria that we have proven leads to superior returns. Empirical evidence proves that investing in microcap stocks beats the returns of larger cap stocks by 8.24% per year. Even Warren Buffett and Peter Lynch have said that if they were to invest in one type of stock, it would be microcaps. We provide our subscribers with an even bigger edge by combining the microcap investing edge with our own tested strategies to find the best stocks that are undervalued relative to their growth prospects or other positive catalysts. Our approach is based on qualitative and quantitative factors that finds stocks a point where they are going through significant changes that the market has yet to identify. This opportunity is only available in the Microcap world, an area ignored by institutions, Wall Street and the financial media.

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