The reason that I love investing in micro caps so much is because you can find growth companies trading at value prices, asserts Richard Howe, editor of Cabot Micro-Cap Insider.
To buy a fast-growing large-cap stock, you have to pay up. Instead of paying 15x earnings, you have to pay 30x earnings, or if it’s a tech company, 30x sales.
In the micro-cap world, it’s possible to find tiny companies growing at 40% per year trading at just 10x earnings. Let me introduce you to Medexus Pharma (Vancouver: MPD) (MEDXF).
Medexus Pharma is a Canadian specialty pharma company that is growing at a rapid clip. Its drugs treat chronic conditions and as a result its business had limited headwinds from COVID-19.
In March 2020, it completed a transformative acquisition of a drug call XINITY, which treats hemophilia.
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The transaction was transformative because Medexus got to acquire all the gross profits that the drug generates but only had to hire a few additional employees to support it. As a result, Medexus instantly transformed from a break-even company to a wildly profitable one.
Revenue is growing at 44% per year and the company is on pace to generate $8 million of free cash flow. As such, the stock is trading at 11.6x free cash flow, an incredibly cheap valuation for a rapidly growing company. On an EV/Revenue basis, MEDXF trades at 1.1x while slower-growing peers trade at 3.6x.
When cheap, fast-growing micro caps can get discovered by larger institutional investors, and it’s very easy to get multi-baggers. If Medexus traded in line with peers, it would be a $15 stock, implying almost 200% upside from its current price.
