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The small cap market, as measured by the Russell 2000 index and other related ETFs, has been trading in a narrow range recently. This week, the iShares Microcap ETF (IWC) slid by 0.52%, and the iShares Russell 2000 Microcap ETF (IWM) followed suit at down 0.43%.

However, despite the weekly dip, the MSM Microcap Quality Index (MSMqi) remains significantly up since its inception, outperforming the major indexes by a wide margin.

MSM Index Performance Inception to June 12 2024

Although the news flow in GeoInvesting’s coverage universe was somewhat subdued, we did observe some noteworthy developments across a few stocks, which were covered in our morning emails. Before diving into those updates, we want to share our experience at the inaugural MSM Microcap Starting Five Virtual Conference held on June 12, 2024. Each company’s presentation and Q&A built on our understanding of their stories and in some cases strengthened our conviction in the four presenting companies. 

I led the event by talking about the mission of the MSMqi and how stocks are selected to be included in the index.

Key Takeaways from the MSM Microcap Starting Five Virtual Conference…

Lakeland Industries, Inc. (NASDAQ:LAKE): We were reassured about Roger’s qualifications for the CFO position, especially his capability to support Lakeland’s tuck-in acquisition strategy. We emphasized the importance of the recurring revenue element in their latest, yet-to-close acquisition of the fire and rescue division of German based LD Group. Additionally, we discussed the company’s progress towards its 2027 revenue goal of approximately $170 million and high teens EBITDA margins. The new recurring revenue business should significantly contribute to achieving EBITDA goals, improving from recent EBITDA margins that have been as low as 12%. Lakeland Industries manufactures and markets industrial protective clothing for the safety and protective clothing industry, serving sectors such as chemical, healthcare, and firefighting.

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First Acceptance Corporation (FACO): The Starting 5 event marked FACO’s debut in discussing their operations with investors, where the CEO, CFO and Vice President were present.

Speaking of company “coming out” moments, this is a good chance to give Bobby Kraft some kudos for when he hosted an interview with the CEO of $GLGI, Warren Kruger, his first ever public interview. GLGI Manufactures and distributes plastic pallets and resides on our Run to $1.00 Model Portfolio.

A major topic we dove into with the FACO team was the current bullish upcycle in the automobile insurance industry, driven by regulatory-approved price increases. Management expressed strong confidence in its near- to mid-term prospects, bolstered by the $120 million asset sale of their retail brokerage firm.

This sale enhances their regulatory position, enabling them to write more policies and shift their business model to one with more variable costs, which is advantageous in the volatile insurance industry.

You might find it interesting that while we often praise operating leverage in the companies we analyze, we have to look at both sides of the coin. Operating leverage can significantly boost earnings when revenues increase, thanks to a stable fixed cost structure. However, if revenues decline and expenses remain constant, losses can accelerate faster than the decline in revenue. In the insurance industry, a variable cost structure can be preferable due to the sector’s inherent unpredictability and reliance on insurance policy pricing cycles. This variable cost model helps mitigate the impact of price volatility.

First Acceptance Corporation offers non-standard personal automobile insurance, catering to high-risk drivers in the insurance industry.

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EQUATOR Beverage Company (MOJO): The fireside chat with Equator Beverage’s CEO highlighted his deep industry understanding, honed from his experience at Coca-Cola. He elaborated on the value of offering an all-natural product without chemicals, which positions MOJO favorably against competitors like Celsius and Monster Beverage, currently facing criticism over some of their ingredients, leading their stocks to fall sharply. Equator Beverage develops and distributes natural and organic beverages for the health and wellness industry.

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Fitlife Brands, Inc. (NASDAQ:FTLF): CEO Dayton Judd shared his journey into activism and his transformative role at FitLife, driving over 2,000% returns since mid-2017. This fireside chat provided insights into his expertise in developing a successful on-line sales strategy and what he’s looking for in future acquisitions.

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Special Guest Investor

We also had a guest appearance by Sebastion (Seb) Krog, a GeoInvesting Premium Subscriber and Contributor who runs his own financial commentary column at Substack, Treasure Hunting.

During the mid-conference conversation, Seb reinforced his conviction in a few of his favorite picks, Cornerstone FS (CSFS.L) and $IVFH, which have been closely covered and highlighted on GEO. We also talked about his great call on Spar Group, Inc. (NASDAQ:SGRP), which got acquired within weeks of his bullish article on the company at a very nice premium from his initial write-up.

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Research Coverage Highlights

I also shared some of my research pipeline, including Perma-pipe International Holdin (NASDAQ:PPIH), which recently joined the MSMqi Index. Serendipitously, PPIH reported earnings on 6/13, the day after our event, showing an EPS increase to $0.18 cents from a loss of $0.14 in the prior year, on a 15% revenue rise. The key to PPIH’s success will be its ability to transition from lumpy project-based revenue to consistent growth, supported by new long-term infrastructure projects in the Middle East.

In our 6/12 morning email, we highlighted the strong quarter posted by Environmental Tectonics (OOTC:ETCC), with EPS coming in 17 cents vs. $0.10 on an 86.4% increase in revenue. Our goal now is to determine if ETCC can sustain this performance by replenishing its backlog at high margins. With a run rate approaching 80 cents in EPS, the stock appears undervalued, but the market remains cautious until consistent growth is demonstrated. A big shout out to long time Geoinvesting Subscriber  Dennis Bottjen for bringing this company to our attention in July 2023. Since his pitch, the stock has risen 119%.

We noted a stock buyback by Adf Group Inc (OOTC:ADFJF) from some board members. Shares have risen 128.65% since we added the stock to GeoInvesting’s Infrastructure Screen on January 14, 2024.  We also made available a replay of Todd Schuh’s thorough questioning of $USAQ management via our first ever Member-Hosted Management Deep Dive. Kudos to Todd for a job well done and for getting through his 22 questions.

Abbreviated June 2024 Monthly Forum

Finally, we don’t want to leave out a summary of an abbreviated Open Forum that preceded all of the above during the same webinar. To prime attendees on the upcoming conversation with FACO, I provided insights into the turnaround of this auto insurance company, First Acceptance Corp, since the COVID-19 pandemic. He elaborated on how the pandemic challenged auto insurance companies.

The discussion also covered current events that have implications for KonaTel, Inc. (KTEL) – namely, the Affordable Connectivity Program (ACP), a critical initiative aimed at closing the digital divide by providing affordable broadband access to low-income households. Despite the program’s success in enrolling over 23 million households, funding has recently expired, and efforts are underway

Thank you for your continued engagement. Have a great rest of your day or night, and see you next week!

~Maj Soueidan

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