A Small Cap Stock That Ticks Every Box
- Anthony Speciale
- Jul 3, 2024
- 3 min read
Hey Trader,
A Small Cap Stock That Ticks Every Box
If you've been following my content for a while, you know that I favor a "top-down" approach when researching and analyzing individual stocks.
This means starting with the big picture—geopolitics and the global economy—then narrowing down to the prospects for a sector, and finally to an industry.
Concurrently, I consider discrepancies in the recent performance of different styles and market caps in the stock market; value versus growth, or large-cap versus small.
Only then do I look at the record of companies suggested by those analyses, with the final step being a look at the stock chart.
Sometimes, however, the process begins with a random thought rather than an organized method.
This week, a conversation about the situation in Gaza reminded me that the conflict is the latest chapter in a roughly 4,000-year-old dispute.
The chances of a true resolution, rather than a temporary ceasefire, are virtually nil.
This situation is first and foremost a human tragedy.
Whether your sympathies lie with the Israelis who were attacked or with the Palestinians in Gaza witnessing widespread civilian casualties, it is an appalling situation.
While it may seem callous to see this as an investment opportunity, investing in a sector likely to benefit from the ongoing conflict won't affect the situation.
Profits can always be donated to charities aiding those affected or working towards peace.
One issue arising from the conflict is the restriction of maritime traffic in the Red Sea, a crucial shipping lane for crude oil.
This has pushed up tanker charter rates, creating a shortage of capacity.
Charterers have turned to longer-term charters, which makes sense now but will maintain the supply-demand imbalance for some time.
The next step is to identify a tanker owner and operator that is profitable, reasonably valued, and has good prospects.
This company is profitable, with a trailing 12-month EPS of 1.63, representing an operating margin of over 35%, and levered free cash flow of nearly $400 million.
Despite one-year gains of over 40%, the stock remains a value with a P/E of just over 5, a price-to-sales ratio of 0.6, and a price-to-book of around 1.
As the company with the second most tankers in operation, it is well-positioned to benefit from a tight tanker market likely to persist for years.
It is considered a small-cap stock with a market cap of around $800 million, and small caps have underperformed large caps for several years.
Reversion to the mean suggests they will catch up eventually.
Additionally, the stock has recently pulled back around 15% from a high, a pattern it has repeated on its way up before bouncing back strongly.
I will be looking to buy at around $9 with a stop at around $7, a level that held on three occasions during the last pullback.
To the upside, I aim for a break back above the psychologically important $10 level.
If achieved, the stock could continue significantly higher, potentially challenging $20.
This opportunity looks set to benefit from current market conditions, which are likely to persist for a long time.
This makes the stock a buy based on macroeconomic, top-down analysis, while a more microeconomic look at the company and its stock price also suggests upward movement from current levels.
In other words, this stock ticks all the boxes.
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Happy Trading,
Anthony Speciale
Speciale Analysis
About the Author:
Anthony Speciale is a seasoned market analyst with over 13 years of experience trading. Through his platform, Speciale Analysis, he offers in-depth market analysis, interpretation, and expectations designed to help all types of traders, at every skill levels reach their full potential.
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