Uncovering Hidden Value in Overlooked Small-Cap Companies

During their recent episode, Taylor, Carlisle, and Whit Huguley discussed Uncovering Hidden Value in Overlooked Small-Cap Companies. Here’s an excerpt from the episode:

Jake: What do you think that does with a large amount of indexing then that’s happening? Do you feel like in the amount of time that you’ve been managing money that markets are more or less efficient right now?

Whit: I’ve noticed– So, I started River Oaks Capital in 2020. I left private equity and moved back home– I left California and moved back home to New Orleans to start my own fund. And I’ve noticed it definitely getting more inefficient in micro-cap and small-cap. I can’t really comment on large cap, but it’s just– there really is very little index funds that buy ownership in micro-cap and small-cap companies.

So, when I started my fund in 2020, I really used that private equity businessowner long-term mindset and was investing, and still am investing, in micro-cap and small-cap publicly traded companies. Since I’ve started my fund, I think I’ve had two aha moments. The first was visiting management teams. As I mentioned, I started the fund January 1st, 2020. So, it took a little while till I could visit management teams in person because of COVID.

Jake: Right.

Whit: But the first management team I visited, I wore a nice shirt, got all dressed up. It was a $100 million market cap, or $200 million. The average size of the company we have ownership in is $250 million. And they were like, “You’re the first person that’s been here in like four or five years.” And I would go to shareholder meetings and show up early. And I’m one of two investors. Sometimes, it’s just me. I couldn’t believe that the due diligence that we were doing in private equity wasn’t happening in micro-cap and in small-cap public companies, because the private equity companies, we were buying ownership, and we were about the same size. I just couldn’t believe that due diligence wasn’t happening.

I think for visiting companies, it’s good for two reasons. One, you see a company that is trading at five times earnings, you’re eager to get on a plane, you’re like, “Oh, my gosh, I can’t believe how cheap this is.” And you get there and you realize that it should be trading at zero. It’s trading at five times too much, that none of those cash flows are ever going to see the shareholders’ pockets. They’re either going to go to board fees, increase the salary of employees, or a poor acquisition. So, that’s one area that’s been very valuable in visiting management teams.

The second area is once in a while, you’ll fly out to Fort Worth. I flew out there, visited Dayton Judd, a company we have ownership in called FitLife, and he could run a Fortune 500 company. He just, at the time, was under the radar. And that’s what makes the traveling all worth it, is finding these wonderful companies that are just totally undiscovered. I think partially because of what you mentioned, Jake, people just are passively investing and totally ignoring these areas of the market. Some of it is they’re just small companies and people just ignore them for whatever reason.

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