⚙️ The Small-Cap Money Machine
Hello Friend 👋
I stumbled across this interesting chart this week:
‘Small Value Stocks’ provided the highest return over the past 60 years.
Here’s what you would have if you invested $10.000 in 1964:
US Large Growth Stocks: $577,000
US High Profitability Stocks: $1.2 million
US Large Value Stocks: $17.5 million
US Small Value Stocks: $54.9 million
These results are phenomenal.
But you know what’s great? It can get even better.
Step 1: Invest in small caps
Small companies tend to outperform the market.
Here’s what you would have if you invested $10,000 twenty years ago:
Large Caps: $64,870 (9.8% return)
Small Caps: $89,800 (11.6% return)
The first key lesson to draw from this?
Every serious investor should have some small caps in his portfolio.
Step 2: Buy the highest quality
You now learned that small caps outperform the market.
The second step is to only pick high-quality ones.
You should focus on two things:
Only buy profitable small caps (positive Free Cash Flow)
That are allocating capital well (high Returns on Capital)
This strategy tends to do really well in the long term.
You could define it as ‘Small-High Quality’:
If you invested $10,000 twenty years ago:
Large Caps: $64,870 (9.8% return)
Small Caps: $89,800 (11.6% return)
Small-High Quality: $181,000 (14.5% return)
Step 3: Buy them at a discount
The third and last step?
Buy these Small-High Quality stocks at a discount.
This way you combine the best of both worlds.
Those are exactly the stocks we’re looking for at Tiny Titans.
Stocks that have the potential to go from Tiny to Titan over time.
Companies that match these criteria
The big question is how you should start looking for these kind of companies.
In the past there have been quite some success stories.
Here are just a few examples:
The art is to find these companies before Wall Street notices them.
You could start your journey by looking for companies matching these criteria:
🏢 Market Cap < $3 billion
⚖️ Net Debt/EBITDA < 3
💵 Free Cash Flow Margin > 10%
🏆 ROIC > 15%
🚀 Revenue (5-year average growth) > 9%
💰 EPS (5-year average growth) > 11%
📈 Return stock price over the past 5 years > 12%/year
You can easily do this via a stock screener such as Fiscal.ai:
In total, 45 companies match all criteria.
Here are 10 companies that stand out if you ask me:
One of my favorite success stories from the table above?
Napco Security Holdings ($NSSC)
Napco Security Holdings is a U.S. company that builds security systems for schools, offices and apartment buildings.
In other words: they have very sticky clients.
But the real magic is not its hardware.
It’s the recurring subscription revenue behind it.
They use simple but powerful model that has quietly been compounding for decades:
Recurring revenue: Nearly half of the company’s revenue is recurring in nature.
Exceptional profitability: Napco generates a ROIC above 50% and a Free Cash Flow Margin close to 28%.
Owner mindset: CEO Richard Soloway founded the company in 1969 and still runs it today.
The stock of Napco Security Holdings is up +4.400% since its IPO.
You only need a few success stories like this to be very successful on the stock market.
Today’s Action Item
Your feedback means the world to me.
Last week, it became clear that most of you are strongly considering joining Tiny Titans:
Here’s today’s action item:
Here’s an email I received this week:
In case you have any feedback, you can email me any time via pieter@compoundingquality.net.
I guarantee you I’ll personally answer every single email.
Tiny Titans
Tiny Titans opened its doors on the 16th of September last year.
In less than 36 hours, all available spots sold out.
On the 9th of June at 2 PM ET, the doors will open again for Cohort 2.
You want to discover whether Tiny Titans is something for you?
You can do so here:
Small Companies. High Quality. Big Potential.
Team Tiny Titans
P.S. Tiny Titans will launch on the 9th of June. Don’t forget to add it to your calendar here.
P.P.S. Already sure you’ll join? Leave your email here to get in 1 hour earlier than everyone else.