Two Turnarounds Added To The MS Microcap Quality Index

One [subsea] has inflected to growth; The other [tech] is in the early stages of turnaround

Yesterday morning, we sent out a premium chat, mentioning that we added two new stocks to the MS Microcap Quality Index (MSMqi): #103 and #104.

For the many new subscribers to our Substack, the MSMqi is the first microcap index that qualifies stocks that fall into one of the following categories:

• High-quality stocks meeting multibagger markers.

• High Probability turnaround stocks meeting multibagger markers.

New subscribers can learn about the MSMqi here and view all the MSMqi holdings here. You can view all of our Cliff Notes here.

Both of these stocks are turnarounds.

Turnarounds are one of our favorite areas of the microcap space to hunt for multibaggers.

Microcaps are already ignored and turnarounds can add another element of difficulty for investors to analyze, since they often look ugly before they look “investable.”

So, the more ignored, the better for us…

We like to find theses types of stocks that are anywhere from a few quarters away from the turnaround inflecting to at the point of inflection.

What follows are Cliff Note Briefs on these two new MSMqi turnaround additions, one that has just inflected to profitable growth and one that is in the process of inflecting.

We have used these Cliff Note Briefs from time to time to summarize new stocks being added to the MSMqi through a few sentences to bring you ideas quicker. We may then follow up with a written or video Cliff Note.

So, here are the briefs…

Cliff Note #103 Brief:

The first company operates in the subsea industry, which is a hot topic these days as nations and certain industries step up efforts to shore up marine infrastructure and adopt technologies to monitor the sea bed, not only for maintenance purposes, but also for national security matters.

The MSMqi currently already holds two stocks in the subsea industry:

• CODA: Cliff Note [BRIEF] #37 and up 44% since being added to the MSMqi in October 2022. You can view the Cliff Note Brief here.

• KLNG: Cliff Note #92 and up 137% since being added to the MSMqi in June 2024. You can view the Cliff Note here.

Another popular stock in the subsea sector is Canada based, Kraken Robotics: PNG.V KRKNF. Although Kraken is not in the MSMqi, it’s up 334% in 2024.

Cliff Note #103 Turnaround is simple. Prior to recent moves made by the management, three things prevented the company from growing consistently:

1. Too much dependency on the on-shore oil and gas industry.

2. In general, not enough focus was spent on expanding target markets that were less vulnerable to the traditional oil and gas industry.

3. A weak cap structure prevented the company from generating cash flow that it could use to grow the company, including expanding into other markets and introducing new products.

The company has addressed all three of these issues and now is ready to attack new growth opportunities that should provide some revenue consistency and target market diversification.

This is evidenced by the company's turn to profitability over the last few quarters, with extra emphasis being put on recurring revenue services.

The end result should result in a substantial expansion of the company’s run-rate price to earnings multiple (currently around 9x), at the same time that its earnings per share is growing, a cookie cutter multi-bagger set up.

Cliff Note #104 Brief:

Cliff Note #104 Makes technology that allows its customers to imprint “code” or product specifications into product offerings. The company sells the capital equipment that makes all this happen, as well as accessory products that are used in the capital equipment to “distribute the imprints.”

It’s been a dead stock, but now has a new CEO who has a few levers in play to turn the company around.

We’ve always liked what this company does, but were unimpressed by past management’s attempts to expand into more markets and offer new products that it could sell into a very loyal customer base. We got the sense that the company was being run as a “lifestyle company” for the benefit of management.

We like the chances of this turnaround, not only because the CEO knows the industry incredibly well, being that he had once run a company that had used the company's services, but because the turnaround plan by the new CEO makes perfect sense:

1. There is no question that the company has a very high reputation in its industry. So, with the right plan, it should be fairly easy to expand into other markets and within the company's current customer base.

2. Changing the way the company reaches end customers. Part of that plan means amending the way the company goes to market with capital equipment products. More specifically, use more partnership and distributor relationships to reach end customers, as opposed to just going to the end customer directly.

3. Obviously, the old management team has exited the company.

4. The accessory product offerings are recurring revenue-ish in nature and represent around 50% of revenue. The new CEO’s plan to considerably increase distribution of capital equipment should generate additional recurring revenue.

5. Offering new recurring revenue type products.

Please be cognizant that, as opposed to the Cliff Note #103, this turnaround story is in the very early stages and will take a few more quarters to catalyze. The company is still losing money and we are still building our model.