| Small & micro cap project / Activism insight

Edgebrook Partners: A PM, who meets 100 CEOs in a year, shares insightful thoughts on XPEL, Atlas Engineered Products and LiqTech

by | May 12, 2020

Edgebrook Partners is a micro-cap PE fund.

Well, what’s interesting? Andy Preikschat, the CIO, meets 100 CEOs every year and invests in public and private companies. The fund’s mid-year letter is very interesting – a must read for micro-cap investors.

Each year, we meet in person with over 100 CEOs of small public companies in our search for “big fish.”

A lucrative investing approach can be to find a company that is: 1) the #1 market leader in a niche category and 2) in the early innings of significant earnings growth that is ignored or misunderstood by investors. XPEL and LiqTech are two recent examples of how this approach can work. As their earnings growth became increasingly understood, both companies’ stocks soared – in a single year! – from valuations below $40 million to valuations above $200 million. When a company rapidly goes from being misunderstood to celebrating a NASDAQ listing and receiving invitations to give a presentation at institutional investor conferences, we are probably looking to exit our position for, hopefully, a very nice gain. As the late John Neff, CFA observed, “When you feel like bragging, it’s probably time to sell.”

At Edgebrook, we sit on the edge of a brook, patiently waiting to seize that big fish. What does a “big fish” look like? To us microcap investors, a “big fish” is a microcap company with all three of the following necessary criteria: #1 Market Leader in a niche category, with Incentivized Fanatics who won’t bamboozle us, with the potential to Grow Earnings (and the stock price) at least 3- 5x over 3-5 years.

Even though the fund has published its annual 2019 letter, we find the fund’s mid-year 2019 letter interesting – a must-read for micro-cap investors. To be clear, as per its annual letter, the fund has exited its position in the below three stocks.

A few interesting companies:

XPEL (M. Cap: $411 million)

XPEL pioneered the “self-healing” paint protection film category for the automotive industry and profitably grew sales from $11 million in 2012 to $110 million in 2018.

Atlas Engineered Products (M. Cap: $17 million)

Atlas Engineered Products (“Atlas”) – After a series of acquisitions, Atlas is emerging as the only national supplier of engineered floor and roof trusses, as well as wall panels, in Canada. Atlas currently has six facilities in three provinces (British Columbia, Manitoba, and Ontario) and expects sales of C$50 million this year. In roof trusses, Atlas enjoys local monopoly dynamics, particularly on Vancouver Island, as evidenced by its strong organic growth and gross margin of 37%. We visited the Vancouver Island facilities and recently met with the new CEO. We see significant opportunity for Atlas to profitably grow, both organically by reaching new customers and introducing new product lines and inorganically by acquiring and integrating other companies at very low multiples of cash flow. Importantly, management and company culture are of high energy and high integrity. Based on continued execution of its growth plan, Atlas arguably has the potential to triple cash flow (and the stock price) by the end of 2021. Meanwhile, the debt level is manageable at about two times EBITDA. The Fund currently owns about 3.7% of Atlas.

LiqTech International (M. Cap: $133 million)

LiqTech International Inc. (“LiqTech”) – We sold our position in LiqTech, our third-largest holding, for a gain. After spending eight years and $60 million on development, LiqTech pioneered the leading silicon carbide membrane filter for marine scrubbers. We met twice with the CEO and spoke with several industry insiders to validate the company’s growth prospects and technology. As the IMO 2020 regulation deadline drew nearer, LiqTech built a significant backlog of potential orders. Similar to XPEL, LiqTech had the potential for a 3-5x increase in earnings (and share price) within three years. As the company executed on its plan and caught the attention of numerous institutional investors, we sold our position in the late spring.

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