Gad: Small-Caps With Big Futures
By Sham Gad 08/28/12 - 06:00 AM EDT
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NEW YORK (Real Money) -- We all want to find the next small company with the next big business idea.
Warren Buffett picked up American Express (AXP) back in the 1960s when it was a small-cap business. Today AmEx holds a market cap of $65 billion. When Amazon (AMZN) went public in 1997, it was valued at $620 million -- 15 years later, it boasts a market cap of $111 billion. In those 15 years, shares in Amazon have appreciated by 180x. I wish I had some ideas that were remotely as fantastic as these two, but Wall Street seems overconfident these days. After all, Facebook (FB) went public at a valuation of nearly 130x earnings, whereas Amazon was valued at 20x earnings at its IPO. If Facebook's valuation was more realistic, it would have come public at around $15 billion, not $100 billion. So, I don't have the next Amazon, but I do have some interesting small-caps that look to do very well over the next several years. TESSCO Technologies (TESS) is perhaps one of the more intriguing names. The company has a market cap of $150 million, but you could mistake it for a bellwether blue-chip stock trading at 9.5x earnings and yielding nearly 4%. TESSCO generates excellent free cash flow, which has grown from $12 million in fiscal 2010 to over $16 million in fiscal 2012. The company sells products and solutions that help organizations build, maintain and grow wireless broadband systems. Each year that goes by, the U.S. demand for wireless Internet access grows rapidly. Thanks to smartphones and tablets, people are coming to expect wireless signals everywhere they go, and organizations such as hospitals, schools and the like are all migrating to wireless access. TESSCO finds itself in a very lucrative market and is poised for success: Analysts see EPS growing from $2 in fiscal 2013 (ending March 31, 2013) to $2.72 in fiscal 2014. I doubt such growth is deserving of such a conservative 9.5x multiple. At a very fair 15x multiple, the stock would trade for over $40 compared with the $19 at which it trades today.