Wide Moat’s Last Frontier

[Wide Moat Daily]( Wide Moat’s Last Frontier By Brad Thomas, Editor, Wide Moat Daily Longtime readers will know that I spent much of my career as a real estate developer. That experience taught me a lot. It taught me to identify businesses on solid financial footing, how to avoid the companies on shakier ground, and how businesses can leverage real estate assets to grow. I’ve carried those lessons over into the analysis I share with you. But the most important skill I learned was also the most obvious: Find companies that pay their rent on time. A single misstep could result in tens of thousands of dollars lost. This was especially true considering how, once I struck out on my own, I decided to focus on smaller businesses – the kinds that were trying to expand their operations and could use some help in that goal. This focus involved heightened risk but unbeatable rewards… if the contracts in question panned out. And it’s this basic premise – finding asymmetric opportunities with small businesses – that I’m going to start sharing with my readers. Let me explain… The Win-Win Possibilities With Small Businesses If you were lucky enough to have a large tenant (think a Walmart, grocery store chain, etc.) then you could almost always count on getting your rent checks. It was never a guarantee, of course, but it was pretty close. That wasn’t necessarily the case with the smaller operators. But it came with other perks. Here’s how I would operate with the smaller companies… After doing my due diligence and pitching my capabilities to them, I would locate suitable spots for their retail operations. Once they approved my findings, I’d get all the paperwork filed and red tape sorted. Then, I’d hire the actual construction companies and oversee all the work from the blueprint to the completed building. Finally, after all that was said and done, I’d rent out those buildings to small but growing businesses. Do a good enough job, and they start to become loyal to you. And because these businesses were solidly in “growth mode,” that meant a lot more business coming my way. If all went well, they’d hire me to set up another site for them. And another one. And another one. My objective was to become their preferred developer and partner in growth – the kind of expansive effort that could help them obtain an investment-grade rating. Whenever that happened, it would make my rent checks much more reliable. And as my tenants’ credit quality improved, so would the value of my buildings. It was a win-win all around. For instance, my first development client was Advance Auto Parts (AAP). Today, it’s a public company with a market capitalization of some $2.3 billion. But that wasn’t always the case. When I got involved around 1990, it was still privately held and based in Roanoke, Virginia. It had less than 100 stores at the time (there are about 4,400 today). But I knew I could help it grow its footprint in the southern section of the East Coast. Sure enough, over the course of about four years, I developed around 40 stores across North Carolina, South Carolina, and Georgia, not to mention Alabama. That’s the upside of dealing with smaller businesses – growth, sometimes rapid growth. Now, to be clear, I didn’t always win. At 26 years old, I still had plenty of lessons to learn. So, some of my tenants struggled, and a few even filed for bankruptcy. However, after 20 years of being a developer, I can attest to making millions of dollars investing in these smaller companies. And in the case of Advance Auto Parts, some of them went on to be publicly traded companies worth billions of dollars. Heck, I even invested in a few of these franchises myself, like Papa John’s (PZZA) and The Athlete’s Foot, where I became a multi-unit franchisee. It was just a matter of figuring out which ones had what it took. So… what am I trying to say? Wide Moat Does Small-Caps At Wide Moat Research, we have published analyses on nearly every type of asset or strategy: Blue-chip dividend payers, REITs, corporate bonds, put-selling strategies, and alternative assets, to name just a few… But there’s one area of the market that we’ve mostly avoided. That would be small-capitalization companies. I want you to hear it from me that this will change in the weeks ahead. In many ways, small-caps are one of the “last frontiers” for Wide Moat Research, and it’s a journey I’m excited to start with you. Our goal will be simple: Find small, publicly traded companies with high-growth potential. It’s simple, but that doesn’t mean it’s easy. There’s a lot going against a company that’s still starting out, whether private or publicly traded. Here’s just a smattering of their difficulties: - Lesser brand-name recognition and respect. Because they’re smaller, they’re often less known and trusted. - More complicated expansionary efforts. With less ground already gained, they often have to put in extra time and money to properly research growth opportunities. - Financial misgivings. Banks and other lending institutions charge them more interest on loans since they’re taking on a greater risk of not being paid. However, small caps’ smaller status also means there’s greater room for financial gain when they do succeed. It’s a lot easier for a million-dollar company to double or even triple its profits than it is for a billion-dollar company. One big deal could do the trick for the “little guy” operator. And that’s a very compelling prospect. Now, [as I wrote yesterday]( … no matter whether the bulls are running or the bears are roaring, I do believe in putting safety first. That means owning high-quality companies, buying into them at fair-value or discount prices, and diversifying… This includes across company sizes. I wouldn’t put the majority of my portfolio into small-cap assets, for the record. And retirees should consider the possibility even more carefully since their passive income means they have less financial wiggle room. But for someone in my position? A limited number of select small-cap positions can provide significant boosts to a portfolio that are hard to beat. Now’s the Perfect Time to Start a Wishlist Small-cap stocks have notoriously underperformed in the past few years. As shown in the chart below, the S&P 500 is up 84.68% in the past five years. Whereas the Russell 2000? It’s gained just 32.52%. Importantly, the Russell is still below it’s former highs. Small-caps remain unloved. A large part of their suffering is due to higher borrowing costs thanks to elevated interest rates. Remember, they tend to get charged even more than their bigger, more established business brethren. So growth is less likely under current conditions. And because many small businesses have to finance their growth, that can be a problem. But interest rates are set to fall in the coming months, making now an ideal time to identify small-cap opportunities. That’s why I’m focused on finding the best of the best “diamond in the rough” companies. The kind that are primed for sustained growth. They’ve got to have compelling management, a history of making intelligent gains – shorter though that history will be – and room to grow even more. I can tell you right now that I’m already compiling a list of intriguing assets… including those that could make ideal takeover targets by larger-cap competitors. Stay tuned for more information about that topic, perhaps as early as next week. It’s finally time for Wide Moat Research to enter the realm of small-cap investing. If my past experience with small-cap operators is any indication, the profit potential will make our efforts more than worth the wait. Expect to hear more soon. Regards, Brad Thomas Editor, Wide Moat Daily [Wide Moat Research]( Wide Moat Research 1125 N Charles St, Baltimore, MD 21201 [www.widemoatresearch.com]( To ensure our emails continue reaching your inbox, please [add our email address]( to your address book. This editorial email containing advertisements was sent to {EMAIL} because you subscribed to this service. To stop receiving these emails, click [here](. Wide Moat Research welcomes your feedback and questions. But please note: The law prohibits us from giving personalized advice. To contact Customer Service, call toll free Domestic/International: 1-888-415-6046, Mon–Fri, 9am–5pm ET, or email us [here](mailto:feedback@widemoatresearch.com). © 2024 Wide Moat Research. All rights reserved. Any reproduction, copying, or redistribution of our content, in whole or in part, is prohibited without written permission from Wide Moat Research. [Privacy Policy]( | [Terms of Use]( | [Unsubscribe](