Stock of the Week: A Small Cap Defense Darling
Alpesh Patel|September 5, 2023
It doesn’t take a lot of good news to push a small cap stock higher.
And when that small cap works in the government and military sectors…
It’s just a matter of time before one solid contract makes the stock soar.
That’s what could happen with this week’s Stock of the Week.
It designs and manufactures frequency and spectrum control products. While those terms may make many of us scratch our heads… what I like is that the company works in commercial markets, such as the military, aerospace and defense sectors.
Revenue and profits are growing briskly… yet the forecast P/E is dirt cheap. And the stock is undervalued by 75%!
Now, this one comes with a warning. Since its market cap is just $42 million… it is quite volatile. It’s a high-risk stock with the potential for big rewards.
Get all the details on the company – including its ticker – in my latest video.
Click on the image below to watch it.
Hi, friends. Welcome to another fantastic Stock of the Week.
I say fantastic because, as ever, my team has put together a shortlist of stocks, and then I’ve picked the one that I find the most interesting to share with you.
I’m Alpesh Patel, hedge fund manager. And the company we have for you this week is M-tron Industries.
Now, the company designs and manufactures – this is the bit where it gets complicated – frequency and spectrum control products. Yeah, it means nothing to me.
What does mean something to me is the company provides solutions for communications and control products, including satellite communications, radar, electronic warfare, guided munitions, test and measurement, computer service networks, and energy management applications.
Those words, whilst they mean a lot to me and I can see those areas growing… It’s really the numbers which interest me, and I will get to those numbers.
The company works in military, aerospace, defense, space and other commercial markets as well. It’s based in Orlando, Florida. And it has manufacturing locations in North America, in India and throughout Asia as well. So it is well positioned.
You’ve seen the Indians just put a rover on the dark side of the moon. This company’s already out there, so hopefully this is helping M-tron get contracts in one of the largest growing markets in the world as well. So it’s got that kind of diversification.
Revenues have been growing strongly, at 27% per annum. Profits have been growing at 42% per annum. Those are numbers I like… numbers I very much like.
Let’s take a deeper dive into some of those numbers.
Well, first of all, M-tron has a Growth-Value-Income rating of 8. Remember, that’s my proprietary algorithm, which measures companies based upon their valuation – such as share price to profitability – their growth, their dividend yields. A score of 7 or higher meets my minimum requirements, which this does.
It’s got a forecast P/E ratio of only 13.1. In other words, at the current price, shares are trading at a multiple of only 13 times future profits, future forecasted profits… which seems a bit cheap for a technology company in all those areas I just mentioned.
Cash return on capital invested (CROCI) comes in at 7%, which isn’t phenomenal. Not one of the greatest that I’ve seen, but still not too bad.
And also, it’s been performing quite well in the recent past. So some other numbers are being hit.
The stock’s risen from just over the $10 mark up to $16 at the time of speaking, so I’m pretty happy with the momentum and the direction it’s going in.
And here’s the interesting bit…
On a discounted cash flow basis, it’s 75% undervalued. Yet, as I’ve mentioned, profits are forecast to grow – well, depending on which metric you use – 25% per annum. And they grew 42% over the past year.
Yes, the share price is volatile. And yes, it’s a small cap company, at $42 million.
But you can imagine with a small company like that, you only need one contract, one big push… and boom.
So anyway, that’s my Stock of the Week.
I thought I’d give you some of the insights into some of the factors that I look at for. I hope you found it very useful.