Tags: small | market | leaders | long-term | returns

For Fantastic Long-Term Returns, Buy Small Market Leaders

For Fantastic Long-Term Returns, Buy Small Market Leaders

By    |   Friday, 19 January 2018 10:27 AM

Plenty of factors go into investing. One that I’ve found works wonders over time for patient investors is buying a company that leads its market.

Leadership can mean many things. It can mean market capitalization. Or it could mean profitability. Or it could mean having a powerful brand.

But the funny thing about market leaders is that they don’t have to be huge behemoths like Apple (AAPL).

Can you see a company of Apple’s size doubling easily? That’s probably not going to happen with their current product offerings. And that’s OK.

Investors should instead look to smaller companies that can continue to make a bundle—and ideally return a lot of that in cash along the way as well. That strikes a fine balance between making capital gains at this stage of the market rally and getting paid money no matter what the market does.

Market leaders take all shapes and sizes. It really depends on how you define your market. There are plenty of small market leaders out there that can offer great returns and still have some major growth ahead.

Here’s a perfect example:

In Orange County, California, the state’s last bastion of capitalism, lies the sprawl of civilization. Amidst the rolling hills and dry brush, in one of many office parks just a few minutes’ drive from an airport named after actor John Wayne, lies one building that’s just as unassuming as the rest.

Yet it houses the kind of security you’d expect at Fort Knox. While the entry level looks like most other office buildings— a few rows of cubicles adorned with busy workers, the lower level contains a vault that would make the one at your local bank branch easy to breach.

This is the home of Collector’s Universe (CLCT). This small company—with a market cap of a mere $250 million—makes its money by authenticating and grading collectibles. Their main areas include sports memorabilia, autographs, and coins.

For a modest fee, clients send in items to be itemized and graded. For instance, a coin collector may send in some high-quality coins, which are then graded and “slabbed” in airtight plastic containers to prevent any further loss of quality.

Collector’s Universe is the home the Professional Coin Grading Service brand (PCGS), the most-respected name in the industry for U.S. coins. A coin graded by PCGS will have a higher price on the open market compared to one with the same grade from one of its few competitors. This is the kind of quality that separates a decent investment from an excellent long-term one.

At this stage in the economy, with a booming stock market and investors looking for places to invest, Collector’s Universe continues to see a growing level of revenue. And, thanks to a partnership in China, earnings growth is on a tear, up over 129 percent in the most recent quarter, with revenue up over 25 percent as well. Profit margins are 14 percent, an above-average number for any industry. That reflects the company’s leading reputation among the myriad of lesser collectible grading agencies.

The collector’s market is a slow-growth industry, although China’s growing middle class is creating new demand for collectibles. While it should continue to attract attention as the economy continues to grow, it won’t see the kind of fast-paced growth that a technology stock might. That’s why the company pays a generous dividend— right around 4.8 percent at current prices. They don’t need to reinvest their capital continuously. That’s the benefit of being a leader in a niche market. As a result, shareholders can benefit from ownership with relatively high cash payments right away.

In my mind, however, one of the most important traits of the company is the high level of insider ownership. The company’s management team—which still includes its founders—owns over 14.5 percent of the business. In any company where management still owns at least 10 percent of the firm, there’s as strong argument to be made that their long-term interests will be aligned with those shareholders who aren’t privy to the company’s inside information.

That’s just one example of a market leader. It should continue to do well, and is worth buying on any day where shares are down 5 percent or more. As a small-cap company, that kind of one-day move can happen more often than you think.

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.

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Investors should instead look to smaller companies that can continue to make a bundle—and ideally return a lot of that in cash along the way as well.
small, market, leaders, long-term, returns
Friday, 19 January 2018 10:27 AM
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