TPS Trade Alert – February 27, 2015
Recommendation:
Buy Flexible Solutions International (AMEX: FSI) up to $1.35 per share.
Trade Rationale:
Finding good microcap stocks to invest in can be a challenge. After all, they wouldn’t be trading so cheaply if they were well-known companies with few issues.
The question is, what sorts of problems should you overlook and what types of issues should be a red flag?
Obviously, if a company is having legal/accounting issues, it’s the sort of business to avoid. Another red flag is a company with no cash on hand, especially if they have a lot of debt.
Otherwise, you can basically find good in almost any situation. For instance, a company with low revenues may be very young or still in development stage. A company with no earnings may be focused on reinvesting in the business.
That being said, there are still certain aspects I really tend to favor when searching for a microcap investment.
A very simple example of an attractive company can be one with no debt and a fair amount of cash. Another variable which I like to see is consistent year over year revenue growth.
Here’s the thing…
Not every investment factor needs to be fundamental. Sometimes, it can just be about the product itself.
Does the company have a compelling product? Is there a lot of competition? What’s the potential market size?
It’s the search for an intriguing product which led me to Flexible Solutions International (AMEX: FSI).
FSI develops specialty chemicals that slow the evaporation of water. The company offers chemicals used in swimming pools and spas, as well as products for agriculture and water storage.
Basically, FSI’s primary product is a chemical that forms a transparent layer on water to slow evaporation. This product is used mainly by residential and commercial swimming pool owners – the main source of income for the company.
However, the company also makes a product used for agriculture and water storage. The chemical keeps water from evaporating in such places as reservoirs, irrigation ditches, and livestock watering ponds.
Here’s what I like about FSI…
It’s the ultimate niche company.
There’s no one else who specializes in this type of product. In fact, no other company was able to create a reliable, inexpensive chemical like this until FSI made it possible.
Meanwhile, the company has used its uniqueness to carve out a profitable niche. FSI generates about $15 million a year in revenue, and continues to grow slowly year over year. The business also earns over $2 million a year in net income.
Despite the positive fundamentals, the stock is trading at just 5.7x earnings and 1.0x revenues. FSI may be small, but that doesn’t mean the shares have to be so cheap!
The way I see it, FSI makes for a perfect acquisition target. The company isn’t currently set up to become a big player. It would need to raise significantly more funding. However, it’s ideal as a buyout candidate given its proprietary technology.
Given the cheap stock price, I could see an acquisition occur at any time. So, go ahead and grab the shares now for your portfolio.
Remember to use limit orders when placing your trades. And stick to your position sizing rules.
Key Facts:
| Company: | Flexible Solutions International |
| Ticker: | FSI |
| Recent Price: | $1.20 |
| Buy Up To Price: | $1.35 |
| Market Cap: | $15.9 million |
| Avg. Daily Volume: | 105,730shares |
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Category: TPS Trade Alert
