Jump In Early for the Biggest Multi-Baggers
Ian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Wouldn’t it be great to have bought Berkshire Hathaway, Microsoft or Dell at an early stage and bagged huge returns? Of course, there’s no such thing as a free lunch and if you base your entire investment strategy on investing in small, risky companies then the result is not likely to be a happy one.
But, just for fun, it doesn’t hurt to put a small amount aside and make a speculative investment in a hidden gem with huge potential in the hopes that it will become the "next big thing." I have unearthed three. Two of these were recently listed on the NASDAQ, and the other has been around for a while with turnaround potential.
The natural gas innovator
Power Solutions International (NASDAQ: PSIX) manufactures engines that run on natural gas or propane. The company's engines support a wide range of equipment such as pumps, generators, fork lift trucks, delivery vans and buses. There is huge momentum building for natural gas because it is much cheaper than diesel and more environmentally friendly. Power Solutions was first listed on the NASDAQ in May and with a market capitalization of $300 million has significant growth potential.
Revenue grew at a steady 9% in the first quarter, but the company is in a consolidation phase and is predicting a period of strong growth starting in 2014. Excluding non-cash warrant revaluations, the company is profitable and produced an adjusted earnings per share of $0.21 in the first quarter.
It is interesting to compare Power Solutions against a competitor with a much bigger public profile, Westport Innovations (NASDAQ: WPRT). Westport has yet to make a profit and in the last quarter revenue actually declined.
Westport’s main focus is on larger engines for trucks, heavy plant and railway engines. Despite the unfavourable comparison with Power Solutions, many investors see a bright future for Westport. With a growing number of refilling stations, the trucking industry could see a significant migration from diesel to natural gas this year. And this should translate into significant sales for Westport’s new 12-liter engine.
With general market momentum on its side, Power Solutions has prospects for significant growth and may surprise its better-followed competitor.
The robotic spine-tingler
Mazor Robotics (NASDAQ: MZOR) makes robotic guidance systems and complimentary products to carry out spinal surgery. The Israeli company has a market capitalization of $200 million and was first listed on the NASDAQ in May.
Revenue more than doubled to $4.9 million in the first quarter of 2013 as compared to $2.4 million in the first quarter of 2012. The increase was due to the sale of just six systems. The company reported a net loss of $10.5 million, but this was largely due to a fair value financial adjustment and on a non-GAAP adjusted basis this fell to a loss of only $0.4 million. On the basis of its successful NASDAQ listing, the company will receive a second tranche investment of $7.5 million from institutional and accredited investors.
This is an exciting company in a very early phase. The next big thing? Who knows, but if you are looking for a highly speculative punt, this must be a candidate.
Mako Surgical (NASDAQ: MAKO) was flying high with a stock price at $45 in March 2012. But a succession of bad quarterly reports sent the stock crashing down to lows of $10.30.
Like Mazor Robotics, Mako produces robotic surgical equipment, in this case for knee and hip surgery. Robotic surgery has been an area of interest since Intuitive Surgical produced huge returns – over 1,100% for investors following David Gardner’s Stock Advisor service. Peter Lynch advised that looking for "the next" was usually a mistake, but despite the recent price crash it seems that Mako has a chance of being the exception to this rule.
Mako is at a much later stage the Mazor, but it still has a little way to go before reaching profitability. It follows a "razor and blades" model: once a system sale has been made it produces a stream of consumable sales.
When Mako gets enough system sales out in the field, it will become cash flow positive on consumables alone. At this point, all future system sales become "gravy" instead of "necessity" – a very juicy situation from an investor’s point of view. If the company is successful, this will take about three years.
Stage one is to reach basic profitability. If Mako meets its sales targets of increasing its current installed base from 161 systems to just over 200, this will happen in about a year.
Given the company’s record of bad surprises and price crashes in the past, investors are sceptical that this can be achieved. But the company has restructured its management and sales operation and the early signs are encouraging.
The bottom line
Power Solutions, Mazor Robotics and Mako Surgical are all risky, early stage investments that have potential for big gains. Westport Innovations has a higher profile, but is also risky and a potential multi-bagger. In the words of Fool contributor Thomas Engle (TMF1000), “if it’s the next big thing a little is all I want, if not a little is all I need.”
If you decide to speculate on these potential multi-baggers, I can offer no better advice.
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Ian Richards owns shares in MAKO Surgical, Westport Innovations, Power Solutions and Mazor Robotics. The Motley Fool recommends MAKO Surgical and Westport Innovations. The Motley Fool owns shares of Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!