Sparks Fly for These Small-Caps

 | Mar 20, 2013 | 10:00 AM EDT  | Comments
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There's no better way to dig up small-cap ideas than by going to a conference, and few of these are better than the Roth Conference for great small-cap growth stories. I made the quick drive down to Orange County for three days of nonstop presentations, 1x1s and informal discussion sessions. Since I have already christened LD Micro as the "Woodstock" of small-cap conferences, I will have to christen the Roth Conference as the "Coachella" in honor of its SoCal roots. The best description of the conference is that line from the Macklemore & Ryan Lewis song Thrift Shop, since they were the entertainment last night at the conference: "This is [redacted] awesome!"

The names catching my attention are a mix of some new names and others for which the story keeps getting better. Below is the first installment, and I will have a couple more in my Friday post.

I first highlighted Vertex Energy (VTNR) last September, when I saw company management present at the Craig-Hallum Alpha Select Conference. Since then, the stock has rocketed from $2.18 to more than $3.50 -- a pleasant 61% return for six months' work. At that point, my thesis boiled down to this: "Vertex recycles industrial wastes, most importantly used motor oil. The company both collects motor oil that is delivers to re-refiners and produces its own feedstocks from used hydrocarbons. Vertex grew from $39 million in revenue in 2009 to $110 million last year, earning $0.39 a share. Despite spectacular growth, the company has only a $22 million market cap and is trading at 5x trailing EPS."

Vertex is on track to post $139 million in revenue for 2012 (not yet reported) and grow it again to $146 in 2013, according to Street consensus. More important, gross margin is set to expand from 8.3% to 14.6%, fueling strong growth in earnings per share. The stock is trading at only 6.5x the 2013 EPS estimate.

Meanwhile, Vertex continues to find new markets for recovered motor oils beyond basic re-refining. The company's proprietary Thermal Chemical Extraction Process (TCEP) is used to economically convert used motor oil into a diesel "cutterstock" for marine fuel. This business has now been proven with a demonstration plant producing commercial quantities, and new plants will help grow this higher-margin opportunity. The industry leader Safety Kleen was acquired by Clean Harbors (CLH) a few months ago -- so, with Vertex's low valuation, a take-out could be its endgame. If not, earnings should grow and the multiple should expand over time.

Meanwhile, a new name I've learned about is UniPixel (UNXL), a maker of engineered films that can be used in touch sensors and protective cover layers for displays. The company's Diamond Guard film is a glass replacement in smartphones and the like, with an annual addressable market of 325 million square feet. The Uniboss touch sensor film goes over the liquid-crystal-display (LCD) display on smartphones and other touch display devices. (This competes with the current standard for touch sensors, called indium-tin oxide, or ITO.) Management claims Uniboss has better cost at scale, performance and so on.

The company has a partner in a personal-computer company -- signed in December -- that will start using Uniboss in the next year. That will move UniPixel from the pre-revenue development stage to one of a high-growth product company. That PC partner has evidently been helpful in endorsing Uniboss throughout the supply chain. It is building a production plant for around $20 million that could do $250 million of high-margin sales a couple years out, assuming customer demand. High-margin licensing fees will provide the capital to build the production plant.

Because UniPixel is has high market capitalization -- $280 million -- for no revenue, it is naturally a highly controversial stock. 40% of the outstanding shares are sold short, creating the potential for a massive short squeeze if things work out. Major institutions, such as Fidelity and Wellington, are long the stock. There is substantial risk in the name, as the company will need to sign supply agreements with several touch display vendors. But if that happens, the stock should work.

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