KeyStone’s Stock Talk Show Episode 278.|
Great to chat with you again this week. I will start with a segment on the Trump Bump following the US election and answer a question on whether The Donald is good for small-cap stocks specifically ahead of my speech at the virtual Money Show this Wednesday. In our YSOT segment, Brennan answers a viewer question on Mama’s Creations Inc. (MAMA:NASDAQ), which manufactures and markets fresh deli-prepared foods primarily in the United States. It is a company we have interviewed several times and Brennan gives you his take on the strong gains over the past year and the current valuations on the stock. Finally, Brett answers a viewer inquiry on Quest Resource (QRHC:NASDAQ), a provider of waste and recycling services to customers across multiple industry sectors that are typically larger, multi-location businesses. While Quest has an interesting business, this micro-caps growth has stalled and Brett gives you his take on whether it is a BUY/SELL or HOLD today.
Let’s get to the show –my cohost, Mr. Aaron Dunn, is away this week but the killer B’s, Brett and Brennan are here to save the day!
Our Poll Question this week?
Which size of company do you believe will perform the best over the next year?
Trump Trade & Small Caps
In the wake of Donald Trump’s election win, and given that one my areas of focus is Small-Cap Stocks, I was asked by several sources to answer a simple question.
Is Donald Trump Good for Small-Caps?
Following the Trump win, markets generally and, small caps specifically received a bump.
The broader markets moved higher – as measured by the S&P 500.
Small-cap received a real boost…
While the bump has leveled in terms of the broader market, the Small-Cap market, as measured by the Vanguard Small-Cap Index Fund ETF, paused, then continued to move forward and now is up over 11% this month, basically with all the gains in the wake of the U.S. election results. Certainly enough to be considered a sizable short-term bump. This is notable, and we will talk about it further in a minute.
Let’s quickly look at the historical “post election” market returns to see if there are any conclusions to draw:
Historically, if we look across the Dow, S&P 500 and NASDAQ, the day following an election, on average, has been negative, similar in terms of the week, but by year’s end, on average, the markets were higher –
This is likely driven by the fact that stock investors love certainty rather than by any potential favourable policies from the incoming President.
A couple of items to note, from these post election numbers
Generally, if the day and week following the election were positive, the gains by year-end were above the average gain.
Following the Trump win in 2016: the markets ended positive and held a solid gain to year end.
The biggest gains over the last 11 elections by year’s end actually came in 2020, following the Biden win – go figure.
Let’s take a quick historical look at election outcome senarios and market performance following the election – one might think that Scenario one and 5 would have a statistically significant outcome, scenario one and five being White house and congress control by one party – but the numbers say otherwise – it is scenario 2, 3 and 4 which are more divided that provided statistically significant impacts on market performance. We are in scenario one, which statistically indicated there could be little impact.
Over the coming weeks, months and even year, you will hear many theories on what a Trump Presidency may or may not due for the stock market. You will also witness many pundits picking winning sectors and individual stocks they believe will outperform based on how they believe Donald’s second term will play out.
There is a commonly held belief that
Trump is good for commodities – oil & gold as primary beneficiaries.
Many believe he is good for bitcoin (crypto), bad for vaccine stocks and a significant positive for smaller companies.
For many well documented reasons, I am generally skeptical on the value economic policy “predictions” can add in terms of real returns to any portfolio long-term. Nevertheless, we will quickly examine some of the more popular current predictions, including the potential for small cap outperformance under Trump.
In the immediate aftermath of the Trump victory, investors began buying up stocks of
financials, smaller U.S. companies and cryptocurrencies as they laid bets on the winners coming out of Trump’s preference for higher tariffs, lower tax rates and lighter regulation.
Why have small caps benefitted most from this buying?
For one, as apposed to the Canadian financial market which is dominated by 5 banks,
the U.S. is littered with hundreds of smaller regional banks, many of which are public and themselves small caps.
Talk of lower regulation helped the buying in financials, but due to the sheer number of U.S. small-cap banks, small cap indices have benefitted disproportionately from this bump.
Looser regulation also tends to make mergers and acquisitions easier in the financial arena — a tangible potential boon for these smaller banks.
Why have small caps benefited most from this buying?
Secondly, higher tariffs are thought to be positive for smaller U.S. companies – industrials specifically.
Industrials which are also heavily weighted in small-cap indexes and could be another driver of small-cap gains, thanks to Trump’s policy focus on the domestic economy.
In theory, small to mid sized manufacturers that competed with China (those scant few that are left), should be benefactors.
Third, a significant increase in tariffs will make many goods cost more which could create inflation which is generally bad for most companies. But it can be good for commodities
– with surging costs, whether this actually translates to better cash flow in commodity stocks (often assumed) remains in question.
Low-cost providers are best positioned.
A quick look at some headline commodities:
In October, gold surged past a record US$2,700 per ounce. Many link this rally to inflation concerns, aggressive central bank buying and rising global tensions. While the gold-inflation relationship isn’t an exact science, many believe the gold price increase reflects inflation fears. But, gold actually moved lower initially in the wake of the Trump win – go figure.
Energy stocks, including oil exploration and drilling names, had rallied since Donald Trump won the presidential election. He is thought to be more petroleum production friendly with his “drill, baby, drill” campaign slogan. While an extremely short sample size, crude has declined since the election.
We caution that a supply increasing “drill, baby, drill” policy could actually be a significant negative (unless costs are reduced massively) for producers if oil prices drop on higher supply. A robust drilling environment will help energy service companies but in almost every period of falling energy prices in the past, drilling naturally declines. This is bad for energy drillers and service stocks. It remains to be seen what affect if any Trump will have near, mid and long-term on oil companies.
It has also been reported that Trump is good for defence spending which should be good for defense stocks. But I have also heard the Donald state that he has a plan to help end the conflict in the Ukraine and other regions. Great for soldiers and people who are dying in the conflicts, but not great for the defense business.
Proceed with caution when basing your portfolio on election results. In the end, every prediction is dependent on each of the policies driving the optimism moving forward having the desired effect. This is most often easier said than done. In an interconnected world, despite protectionist efforts, predicting how global events (pandemics, wars, China, a debt crisis etc.) that can massively affect a sitting government’s policy will play out over the next 4 years is a fool’s game.
What should you do?
We advise investors focus on the earnings quality of the business they are buying rather than a pundit’s prediction on what any sitting governments policies may bring. In most cases your holding period, even in small caps, should vastly outlast the staying power of the current President or Prime Minister and his or her policies.
As for small-caps specifically,the outperformance trend was already in place. Small caps have been quietly gaining momentum for the better part of a year. The stock market’s gains are no longer concentrated in a handful of mega-cap technology stocks, and “de-globalization” has been a market buzzword for months.
As we have detailed on to clients and on this podcast, the opportunity in small-cap stocks has truly been centered around the valuation gap between small and large stocks. And while it has narrowed, driving the outperformance in 2024, average multiples on profitable small-caps remain at a significant discount to their large-cap and, in particular, mega-cap brethren. Purely from a numbers perspective, the multiples continue to favour the small. The ten largest constituents in the S&P 500 index account for ~36% of the overall index and trade at a forward P/E of 32x. The remaining 490 stocks in the S&P 500 trade at a forward looking 21x. The S&P 600 Small-Cap index currently trades around 15.8x. For the first 20 years of this century, small caps traded with premium multiples relative to large caps. If this ratio were to reverse, there remains plenty of room for growth in high quality small-cap names, Trump bump or not.
Mama’s Creations Inc.
(MAMA:NASDAQ)
Price: $9.21
Market Cap: $344M
Yield: N/A
YSOT from a commentor on YouTube – @FinanceLyk – “Can you guys do an updated view on MAMA please?”
Description:
Mama’s Creations manufactures and markets fresh deli-prepared foods primarily in the United States. The company offers beef and turkey meatballs, meat loaf, chicken, sausage-related products, and pasta entrees; and hot bars, salad bars, prepared foods, sandwich, and cold deli and foods-to-go sections. It sells its products directly to supermarkets, club chains, and mass-market retailers; and food retailers and distributors, as well as through website.
Slide 2
The stock has performed quite well since 2023, and this is generally due to commodity prices easing, leading to improved margins. As well as the company’s new CEO Adam Michael’s taking over in late 2022 from Carl Wolf, who then rebranded the company and cut costs.
So since early 2023 the stock is up over 400%, driven by a rebound and acceleration in financial results.
Slide 3
Now looking longer term, we can see that revenue has had a positive trajectory and has grown since 2018 with a CAGR of 25%, and operating income and net income have trended positively with the exception of 2022 and 2023 when margins were reduced with elevated beef and chicken prices.
Now looking at the recent quarter of Q2 2025:
- Revenue increased 14% to $28.4M.
- Gross margin was 24%, down from 30% during the same period last year. The difference in gross margin was primarily attributable to significant commodity cost increases from historical averages as well as a non-recurring impact from construction surrounding the now completed installation of strategic CapEx projects, which management estimates negatively impacted corporate gross margins by approximately 500 basis points.
- These capex investments include installing grills, doubling chicken capacity, and increasing labor efficiencies through reduced over time.
- Adjusted EBITDA was positive $2.7M, down 9% from $3.0M for the same period last year.
- Net income was a gain of $1.1M or $0.03 per share compared to $1.7M or $0.05 per share for the same period last year.
Slide 4
Here is what the company’s margins have looked like over the longer term and you can see we have seen a good rebound from the 2022/23 lows…. Despite margins being a little depressed recently due to investments and commodity prices increasing.
Now the company doesn’t have guidance, but some targets include:
- Normalized gross margins are expected in the upper 20% range with the potential to reach low 30% driven by investments and operational improvements.
- Adj. EBITDA is expected to be in the teens % range over the medium to long term.
- And management says that they are committed to paying down debt using cash flow which obviously is a good thing to hear.
And looking at the balance sheet….
Slide 5
It remains quite healthy with cash of $7.4 million, and debt and leases of $8.6 million providing a slight net debt position of $1.2M. The change in cash and cash equivalents was primarily driven by $3.5 million in capital investments and $2.0 million of debt paydown.
Slide 6
Looking at the valuation the stock trades at 70x trailing earnings, with an EV/EBITDA multiple of 30x and 36x trailing cash flow. So keep in mind margins were somewhat depressed over the past 12 months, buttttttttt the stock still isn’t expressly cheap.
And if we were to compare this to a peer like Armanino Foods of Distinction (AMNF:OTC) – which is about half the size of Mama’s and has grown at a slower pace with a revenue CAGR of 9% from 2018-to-2023…. But it trades with much more reasonable multiples of 18x trailing earnings, 12x trailing cash flow, pays a dividend yield of 2% and has a net cash position of over $20M. So although the growth is slower… it is attractive.
And as I show here over the past 5 years, Mama has traded with a median pe of 29x while Armanino’s has been around 20x.
Slide 7
Conclusion:
- Mama’s Creations is fundamentally attractive, and management indicates there is room for further revenue growth and margin expansion.
- But the company is a price taker when it comes to inputs (Chicken/Beef) which can negatively impact margins as we saw in 2022 and 2023.
- The balance sheet remains healthy and is in a slight net debt position now.
- The company is investing to expand margins & capacity long term which has hurt margins near term and led valuation multiples higher than typical but even in a normalized environment the business has never been expressly cheap.
YSOT QRHC Quest Resource Holdings Corp.
1)
Quest Resource symbol QRHC on the Nasdaq. The company is a provider of waste and recycling services to customers from across multiple industry sectors that are typically larger, multi-location businesses. Quest creates customer-specific programs and performs related services for the collection, processing, recycling, disposal, and tracking of waste streams and
Recyclables.
2)
The stock is trading at $7.26 with a $150 million market cap. The stock did trade quite a bit higher earlier in the year but has since fallen off.
3)
Looking at the last quarter Q3 2024.
Revenue came in at $72.8 million a 3.3% increase over the prior year.
Gross profit fell by 5.9% to $11.7 million as gross margin fell to 16.1% from 17.7%.
Adjusted EBITDA came in at $2.5 million compared to the prior year’s $3.7 million.
The company had a net loss of $3.4 million compared to a net loss of 2.1 million. Or a loss of $0.16 and $0.10 per share respectively.
The quarter and year to date have been relatively flat overall, but the company did note for the third quarter that the cost of revenue as well as SG&A was negatively impacted by transitioning to their new vendor management system. Also, some customers have a weaker volume which they believe is temporary and the relationships remain strong.
4)
Looking at a longer-term view, we can see there has been little growth since 2022. In the 2021 period, the company conducted acquisitions which is why you see such sharp growth and the prior consolidation of revenue was done to shift to higher margins. However, we are not seeing any material-sustained organic growth since.
A couple of positive factors which management highlighted..They expect in 2025, more than $20 million in incremental revenue from net new clients. As well the company expects to be able to save 2 to $3 million in recurring costs once their new automated vendor management program is fully implemented.
5)
Shifting to the balance sheet it has significant debt. The company has $71.9 million in net debt. Which off the trailing EBITDA of $16.3 million is a net debt to EBITDA ratio of 4.4 times which is quite high. The debt is quite high with $53 million of the debt being at 11.8% for the last quarter, barring down on the company’s potential profitability. The company is in process which it expects to complete by the end of the year to refinance at a lower rate. As well as the debt is floating so they will benefit from any interest rate cuts regardless of any refinancing.
6)
A quick look at valuation.
The company is trading at 14 times EV/EBITDA. Given the lack of growth at this time, it is expensive.
7)
In conclusion,
Growth is weak and has been for a couple of years.
Near-term customer adds may add some growth, but at the same time some customers are seeing economic weakness, so we will need to see where that balance ends up.
The balance sheet isn’t great partly due to the high interest rate on a large chunk of the debt as well as being overall quite leveraged at this time.
The valuation is pricey given the current lack of growth.
The company is really in the stage where it needs to show the results of both revenue growth and bottom-line growth but hasn’t yet.
For now, we will continue to monitor the company for more appealing financials.
