EVION GROUP GENERAL DISCUSSION, page-1224

We Will Find You

Companies and shareholders will end up deserving each other, and our job is to find the ones that deserve to be found.

Adam Wilk

Aug 6, 2024

• 4 min read

“I know there’s joy at the other end, at the finish line. But I also know I’ve got to earn that happiness.”

The quote above is from Sha’Carri Richardson, the fastest woman in the world -or possibly your favorite microcap.

Microcap investing can at times feel like both a sprint and a marathon. Whichever one it is, there are two things in common. There is a finish line at the end, and both companies and shareholders must earn the right to cross it.

When I was working in the NBA, I once heard a reporter ask my boss, the General Manager of the team, how it was possible for scouts to find obscure players in obscure places around the globe? His response was, it doesn’t matter where someone is from. If they’re good enough, we’ll find them.

Giannis Antetokounmpo

Back then, I was also privy to the first scouting tape ever released for NBA All-Star Giannis Antetokounmpo. It was a grainy film recorded in a most likely non-air conditioned high-school gym in Athens, Greece, and to make a long story short, there were plenty of questions raised about Giannis’ prospects. However, none of those questions included wondering how he would get noticed by the NBA.

In meetings with prospective investors, after highlighting a business we own with the tagline of quality, cheap and insufficiently researched, a question I’m often asked is, “Why won’t this just stay cheap forever?” I have come to like this question less and less over time. The idea is that if a company is small, doesn’t benefit from indexation, and is too small for larger funds to own, how will the stock price appreciate? I think of Giannis whenever this question comes up.

The answer I’ve historically given is that company size doesn’t matter. The market mechanism that reprices revenue and earnings growth is not broken, no matter how small the business. One of the reasons I love microcaps is that I regularly come across examples (sometimes in my own portfolio) of sub-$20mm or sub-$10mm market cap businesses that experienced significant price appreciation on the back of positive changes in fundamentals. These have included food distribution companies, Mexican mining businesses, manufacturers of gas storage equipment, and even companies that forego investor communication altogether. Although investors may not see huge step changes all at once, over time, good results can’t be ignored. If earnings power grows, size is not an impeding factor.

This idea is just as important when viewed through the lens of companies themselves. Microcap management teams have to realize (and often don’t) that the best shareholders, and significant share price appreciation, is earned. One of the things I like to do prior to and during the ownership of our businesses is develop relationships with our management teams. As a result, I’m occasionally asked a version of the question I’m posed above, especially by the businesses that are executing well, and not yet seeing the fruit of their labor. When will the market notice? What more could we be doing?

My response to them is along the same lines. If you’re good enough, investors will find you. That’s my answer from now on. Companies that grow earnings power and don’t dilute give themselves a great chance of getting noticed, no matter how small. That’s because we, as stock pickers, are looking, and we will find them.

If you grow organically, investors will find you.

If you don’t dilute, investors will find you.

If you allocate capital responsibly and for the benefit of shareholders, shareholders will find you.

If earnings power grows, investors will find you.

A great example of this is Warren Buffett’s purchase of Grief Bros. Cooperage in 1951. Buffett purchased Grief at a single digit multiple of earnings, when the entire company had a market cap of $6mm ($70mm today, adjusted for inflation). As a manufacturer of bulk packaging equipment, Grief was a simple business with a clean balance sheet and a long history of profitability. With an average purchase price of around $18, Buffett likely experienced a strong return as the stock traded into the $60s in the ensuing years. I was surprised to learn that not only does Grief still exist, but is still public, and sports a market cap of $3 BILLION today. How does a business grow from being a $70mm market cap to a $3 billion dollar company? There are many ways, but mostly because they earned it.

• Referring to my NBA scouting story, it seems funny to imagine today’s version of Giannis, with all of size and skill, stuck in Greece, never having garnered the interest of any NBA team, simply because he started his career in a small country not known for producing NBA stars. It would also be funny to imagine a non-cyclical business that consistently grew its revenues and earnings power without dilution, and made smart capital allocation decisions, but the stock never appreciated simply due to a small market cap.

Buffett has said companies ultimately end up with the shareholders they deserve. I couldn’t agree more, and taking that a step further, shareholders end up with the results they deserve. In other words, when investing alongside great management, with a willingness to go along for the ride, through ups and downs, you get the results you deserve. When investing alongside bad actors making poor decisions for short term gain, you get the results you deserve. It doesn’t matter if you run a $10mm dollar business or a $10B dollar one. Companies and shareholders will end up deserving each other, and our job is to find the ones that deserve to be found.

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EVG we have found! Glad ya topping up Rep96