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Winmark - >>> 3 Mighty Micro-Cap Stocks to Make a Move On in Q4


Investor Place

by Will Ashworth

Sat, Nov 18, 2023


https://finance.yahoo.com/news/3-mighty-micro-cap-stocks-192758186.html


Barron’s recently published an article discussing the promise of small-cap funds heading into 2024. The rationale behind the thinking is that it’s possible any recession next year will be a small one. Small and micro-cap stocks do poorly in extended recessions.

It’s hard to know what’s going to happen next week, let alone next year. However, even when buying micro caps, it helps if you look for quality. The stronger the business, the more likely it will survive any recession that comes our way in 2024.

As the Barron’s article points out, micro caps are less likely to get bank financing in a recession, or if they do, the interest rates would be much higher than what large cap could obtain.

So, it makes sense to look for micro-cap businesses that self-finance their operations through cash flow. It doesn’t hurt if they also have business models that won’t be hurt by lower consumer spending. I would say these are businesses with high return on equity.

Who are these businesses? I’ll find my trio of micro-cap stocks to buy from the iShares Micro-Cap ETF (NYSEARCA:IWC), which tracks the performance of the Russell Microcap Index, a collection of very small U.S. public companies with market capitalizations between $4 million and $4.6 billion.

Winmark (WINA)

If there is any business positioned for a recession, it would be Winmark (NASDAQ:WINA). The Minnesota-based franchisor operates five brands that focus on resale retail: Plato’s Closet (39% of stores), Once Upon A Child (31%), Play It Again Sports (22%), Style Encore (5%) and Music Go Round (3%).

Throughout the next couple of years, its revenues will fall, but not for the reason you think.

In the nine months ended Sept. 30, Winmark generated nearly $4 million in revenue from leasing income earned from its middle market equipment leasing business. In May 2021, it decided to get out of this business.

“Winmark Corporation (Nasdaq: WINA) announced today that it will no longer solicit new leasing customers and will pursue an orderly run-off for its middle-market leasing portfolio,” Brett D. Heffes, Chairman and Chief Executive Officer stated.

So, for example, while it generated nearly $4 million in revenue in Q3 2023, 32% less than a year ago. It will be lower in the fourth quarter and every quarter after that until it has no revenue.

But consider this, in the first nine months of 2023, its gross profit from the $4 million was approximately $578,200. Its operating profit in these same nine months was $40.8 million, or 65% of its $63.2 million in revenue.

The leasing business simply wasn’t cutting it. Worse, it was a distraction from its resale operations. Not surprisingly, its stock’s appreciated by 121% since that decision 29 months ago. If you are looking for micro-cap stocks, start here.

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