Small-Cap Sunday Analysis: OTCM, High Tide, Perfect Corp, Portillo’s

The TDR Three Key Takeaways regarding small-cap stocks and small-cap companies:

1. Small-cap stocks like OTCM offer strong dividend yields, making them attractive investments.
2. Small-cap stocks like PERF show strong conversion rates and average order values.
3. High Tide’s ability to generate profits from sales underscores its market strength.

In Sunday’s episode of “TDR Small Cap Sunday,” we analyzed four small-cap stocks across diverse sectors. These companies—OTC Market Group, Perfect Corp, Portillo’s, and High Tide—offer unique investment opportunities with market capitalizations between $189 million and $678 million. Here’s a detailed analysis based on the latest financial figures and company insights discussed in the podcast.

OTC Market Group, with a market cap of $620 million, operates in a marketplace for over-the-counter (OTC) stocks. It trades under the ticker OTCM on the OTCQX. Last year, the company reported $101 million in revenue, showcasing a revenue growth rate of 15.6% CAGR over three years and 12.5% CAGR over five years. The company offers a dividend yield of 4.3%, with a three-year dividend growth rate of 21%. Additionally, OTC Market Group generated $31 million in levered free cash flow and maintained a gross margin of 57%, resulting in a net income of $26.8 million. The company’s credit score stands at 10.6. OTC Market Group has transformed significantly under the leadership of Cromwell Coulson, who holds a 34% stake in the exchange. The company’s diverse revenue streams—40% from data services, 40% from additional services to companies, and 20% from listing fees—position it as a tech-forward entity within the financial sector. The solid dividend yield, consistent revenue growth, and strong free cash flow make OTCM an attractive investment for those seeking stability and growth in small-cap stocks.

Perfect Corp is a Taiwan-based AI company changing the beauty industry with virtual try-on solutions. It trades on the NYSE under the ticker PERF and has a market cap of $189 million. The company reported $55 million in revenue last year, with a growth rate of 17.4% over the past year, 21.4% CAGR over three years, and 35.9% CAGR over five years. Perfect Corp boasts a gross margin of 80.4% and generated $13.2 million in levered free cash flow. Net income for the year was $5 million, and the company has a credit score of 5.7. Perfect Corp’s AI technology enhances online shopping experiences, boosting conversion rates and average order values for clients like Avon. Despite its high growth, it remains undervalued with significant liquid assets. The company’s high gross margins and substantial growth rates make it an appealing investment in the AI sector, offering a cost-effective entry point compared to other AI small-cap companies.

Portillo’s is a Chicago-based restaurant chain. It trades on the NASDAQ under the ticker symbol PLTO and has a market cap of $678 million. Last year, Portillo’s generated $689 million in revenue but faced high costs, with the cost of goods sold amounting to $7.58 per $10 spent. The company reported a negative $11 million in levered free cash flow and incurred significant CAPEX expenditures of $84 million, resulting in a negative net income. Portillo’s current credit score is 1.5. Despite its strong brand loyalty, Portillo’s faces high costs and low margins, resulting in a loss per transaction. Unlike larger competitors like McDonald’s, it has not been able to effectively pass increased costs onto consumers. Significant capital expenditures and negative free cash flow indicate financial challenges. While the brand’s loyal following and growth potential are positives, the current financials suggest caution for potential investors in small-cap stocks.

High Tide is a Canadian cannabis retailer with a market cap of $189 million. It trades on the NASDAQ under the ticker symbol HITI. The company reported $497 million in revenue last year, with a growth rate of 23.6% over the past year and 80.3% CAGR over three years. High Tide generated $19.1 million in levered free cash flow and, when adjusted for depreciation, demonstrated a solid financial position. The company increased the profit margin of $0.60 per $10 spent, six times higher than Walmart. High Tide benefits from a strong retail presence, with impressive margins and revenue growth. The company’s strategy of expanding its retail footprint and leveraging white-label products positions it well for future growth. High Tide’s ability to generate significant profits from sales, combined with its solid financial position, makes it a compelling investment in small-cap companies within the cannabis sector, especially as legalization gains momentum in the U.S.

These small-cap stocks each offer unique opportunities and challenges. OTC Market Group and High Tide stand out for their strong financials and growth potential. Perfect Corp provides an undervalued entry into the AI sector, while Portillo’s presents an intriguing yet challenging investment due to its financial struggles. Investors should consider their risk tolerance and investment goals before investing in these small-cap companies, as each presents a distinct value proposition and growth trajectory. Want to keep up to date with all of TDR’s research and news, subscribe to our daily Baked In newsletter.