Sixty Companies, A Two Day Conference in Dallas And Ten That Made The Cut

How did the ten companies that I narrowed down after the Midwest Ideas conference perform? Using the closing pricing for the date I published my last article (September 3, 2024), the group generated returns of 14.04%. This is well above the 8.23% generated by the S&P 500 and marginally above the 13.62% generated by the Russell 2000 index, measured using the SPY and IWM ETFs respectively.

The best performer was the electrical distribution company Powell Industries (POWL) with a gain of 83.87% and the worst performer was consumer products company Hamilton Beach Brands (HBB) with a loss of 29.88%.

This year, more than 60 small and micro-cap companies presented at the Southwest Ideas conference. Since they hold three presentations simultaneously, I can only attend a maximum of 20 presentations. To narrow the list of companies I want to check out, I usually create a spreadsheet looking at 20 metrics, including growth, management effectiveness, balance sheet strength, valuation, etc.

This time around, since we had just finished building a quantitative scoring model for InsideArbitrage, I also used the IA Score model to help me narrow the list of presentations to attend. Interestingly when we ran our quant model for the entire universe of U.S. listed stocks, the top two companies were Powell Industries (POWL) and Energy Services of America (ESOA). Both these companies had presented in Chicago and while I missed the ESOA presentation in Chicago, I made it a point to attend the presentation in Dallas. 

For the companies that pass my quantitative filter, I dig deeper before, during and after the presentations. Conversations with fund managers and other attendees during and after the presentations help surface any interesting companies that didn’t look good based on the numbers but were potentially at an inflection point.

The ten companies from the conference that really stood out to me were: 

1. Atlas Energy Solutions (AESI): $23.72

Market Cap: $2.60B

EV: $3.02B

When it comes to boring business models, it doesn’t get any less exciting that Atlas’ business of delivering sand to oil & gas producers in the Permian basin. To spice things up, they decided to add an extra trailer to their trucks to deliver more sand faster to their customers. When that worked like a charm, they went all-in with three trailers per truck. But that was not enough for the experienced management team at the helm of Atlas and they had another exciting trick up their sleeve. They decided to build a 42 mile conveyor belt called the Dune Express to deliver even more sand at a lower operating cost right into the heart of the Permian. The project was completed on time and on budget. It is  expected to go into commercial service in Q4 2024 and should start moving the needle for Atlas in 2025.

The company expects adjusted EBITDA of $400 million in 2025 and mentioned that founder and Executive Chairman Ben “Bud” Brigham likes dividends. The company had a series of issues in 2024 including a fire at their Kermit facility and lower sand prices but the stock managed to generate returns of over 40% and the dividend yield is still 4.54%. I purchased shares after attending their presentation in Dallas last year and continue to hold it both in my personal portfolio as well as the InsideArbitrage model portfolio. The irony that I am writing this in the Silicon Valley, where everyone and their dog are focused on semiconductors, while I focus on a sand company is not lost on me.

2. Energy Services of America (ESOA): $15.43

Market Cap: $253.53M

EV: $273.42M

Had this company not scored very high on the IA Score quant model, I would have likely skipped this presentation just like I did in Chicago. An energy services company in a range-bound WTI crude oil environment didn’t sound very exciting. Wake me up when WTI futures hit $100 a barrel.

But I am glad I didn’t skip the presentation this time. Contrary to what the name of the company implies, it derives more of its business from water and wastewater projects than oil & gas (they construct natural gas pipelines). The company has also been growing through a series of strategic tuck-in acquisitions that has allowed it to expand into adjacent opportunities like road paving projects. As the CEO mentioned during the presentation (I am paraphrasing),

“we have been hitting singles and growing the business the last 10 years”

The market noticed and the stock is up 1,957% over the last five years. Starting in penny stock territory and uplisting to the Nasdaq certainly helped along with excellent execution by the management team. The model and playbook can continue to work as long as there are additional tuck-in acquisition opportunities for the company and energy prices don’t crater.

3. Howard Hughes Holdings (HHH): $86.12

Market Cap: $4.17B

EV: $9.14B

We have written about Howard Hughes multiple times over the last year both before and right after its spin-off of Seaport Entertainment Group (SEG) and the potential deal by Bill Ackman’s Pershing Square Capital to take the company private. If you are not familiar with the company, I wrote the following about it our August 2024 Mid-Month Update:

Getting back to our regular programming, an interesting special situation playing out right now is the pre-merger event where Bill Ackman’s Pershing Square indicated in a 13D filing that they are considering making a bid for Howard Hughes (HHH).

We covered Howard Hughes in our December 2023 Special Situations newsletter and once again in our May 2024 mid-month update after I had a chance to meet with their SVP, Investor Relations in San Francisco.

To reiterate the situation briefly, Howard Hughes builds master planned communities in places like Hawaii, Texas and more. This was an interesting situation all around because multiple strategies we follow came together.

Howard Hughes was spun out of the retail REIT General Growth Properties 13 years ago when Bill Ackman got involved in the company. We started tracking the company after noticing a series of insider purchases by Bill Ackman through Pershing Square in November 2022.

Pershing Square Holdings, a closed-end fund that Mr. Ackman took public in 2014 and which is now listed on London Stock Exchange (LN: PSH), was trading at a huge discount to its net asset value and Howard Hughes was trading at an even larger discount to NAV.

There was not a whole lot of additional information in the presentation at Dallas but I came away feeling that the company is seeing increased momentum in condo sales in Hawaii and overall they seemed optimistic about their future. This is a story that will likely take a long time to play out unless Pershing Square decides to acquire the company in the near-term.

4. Hammond Power Solutions (TSX: HPS.A): CAD $141.78

Market Cap: $1.69B

EV: $1.68B

Hammond is a company focused on commercial and industrial power transformers. They specifically build “dry type” transformers and service multiple industries including data centers, EV charging, microgrids, healthcare facilities, mining, utilities and more.

The company has a 10 year dividend CAGR of 11% and is targeting an EBITDA margin goal of 12% – 15%. They passed on input cost increases to their customers through six price increases. They have seen significant increases in revenue, gross margin and EBITDA and the market said “more power to you” by rewarding this performance with a 1,672% share price increase over the last 5 years.

5. IDT Corporation (IDT): $51.16

Market Cap: $1.29B

EV: $1.12B

When I first came to this country as a grad student more than two decades ago, I recollect buying IDT calling cards to call home as their international rates were well below those offered by AT&T. When I decided to attend the presentation by IDT, I was expecting to hear about a telecom company with stagnant revenue growth but was pleasantly surprised.

Over the last several years, IDT has been growing by selling a POS solution to independent retailers in a segment called NRS. They have also been offering international remittance services through a segment called Boss Money. Both these segments have a lot of competitors including Block (SQ), Par Technology (PAR), Toast (TOST) and Fiserv (through its Clover division) for POS systems and Remitly Global (RELY), Western Union (WU), Wise and PayPal (through its Xoom division) for international remittances.

IDT has differentiated itself in the POS segment by focusing on independent retailers like a corner market or bodega like Toast does by focusing on restaurants. IDT has also spun off several companies over the years and they mentioned Strait Path Communications, which brought back a fond memory. I wrote the following about Strait Path in my book The Event-Driven Edge in Investing:

“It is not uncommon to see competing offers for deals, and the pace of competing offers has increased in recent years given easy access to cheap capital. Sometimes this triggers a bidding war that lasts several rounds, much to the delight of arbitrageurs.

Another bidding war that erupted was the battle between AT&T (NYSE: T) and Verizon (NYSE: VZ) for Straight Path Communications. This saw the stock price nearly double from the original deal price. Critics of the merger arbitrage strategy often focus on deal failures and forget the upside provided by deals that end up in bidding wars.”

I look forward to diving deeper into IDT either as one of the spotlight ideas for our next monthly special situations newsletter or as a potential candidate for our model portfolio.

6. International General Insurance Holdings (IGIC): $25.88

Market Cap: $1.15B

EV: $991.4M

Founded in 2001, IGIC went public exactly when the COVID-19 pandemic hit U.S. shores in March 2020. The company went public through a SPAC right before the SPAC bubble kicked into high gear. The company is an international specialty insurance and reinsurance company that covers a vast range of events from ports & terminals to political violence. Waleed Jabsheh, the current CEO has been with the company since 2002 and took over the CEO role from his father Wasef Jabsheh in July 2023. Wasef Jabseh who founded the company in Jordan has over 60 years of experience and remains the Executive Chairman of the company. COO Hatem Jabsheh is the current CEO’s brother.

About 10% of their business is reinsurance and the rest is short-tail like property insurance and long-tail like medical malpractice. In short-tail their biggest industry is energy but they also write aviation insurance. The company has a 10 year average combined ratio of 84.6%. Their investment portfolio is very conservative with mostly A rated fixed income securities with an average duration of 3.5 years. It appears that the focus of the company is underwriting risk instead of generating excess returns from the insurance float. The stock is up more than 120% in the last year and is now trading at 1.76 times tangible book value.

7. Knowles Corp. (KN): $19.28

Market Cap: $1.67B

EV: $1.81B

Knowles was spun out of Dover Corporation (DOV) more than a decade ago in February 2024. As is often the case, the company was gifted a bunch of debt ($400 million to be exact) in the separation. Knowles has done an admirable job of paying down that debt to the point where it now only represents just 1X EBITDA. The company might add debt as they continue growing through acquisitions. Knowles has also sold multiple businesses including their consumer microphone business, with the transaction expected to close in Q4 2024 or Q1 2025.

The company’s business segments for 2024 are med-tech (24%), defense (20%) and industrial (40%). They manufacture parts used in MRI machines, pace makers and hearing aids for their med-tech division. They also make high performance  capacitor and RF / microwave components used both for industrial applications and aerospace & defense. Since 2021 Knowles bought back $120 million of stock and as of September 30, 2024 the company had $68.2 million remaining in a $150 million share buyback plan announced in April 2022. The transformation of Knowles over the last few years was interesting and this is another company I plan to explore further.

8. Lincoln Educational Services Corp. (LINC): $16.35

Market Cap: $508.39M

EV: $625.37M

I was planning on skipping the last presentation of the second day in order to catch my flight back home but I was glad my flight got delayed and an analyst who covers Lincoln convinced me to stick around and catch the presentation by this for-profit education company. Some of the lower quality for-profit education companies got hit hard when the Obama administration cracked down on them nearly a decade ago. The survivors emerged stronger, especially the ones like Lincoln that focused on the trades and specific skills that are in high demand.

A friend had already mentioned Universal Technical Institute (UTI) to me a few months ago and I wish I had followed him into it because it has performed admirably, up 120% over the last year. Smaller competitor Lincoln has been no slouch either with both its revenue and stock chart heading up and to the right. It was interesting to hear the CEO start the presentation by mentioning that the current CEO of Intel, Pat Gelsinger, was a Lincoln graduate. I had to verify this and found that Mr. Gelsinder does list Lincoln in his LinkedIn profile. He also then went on to get an engineering degree from Santa Clara University and a Masters degree from Stanford.

Lincoln has been in the tri-state area for 75 years and with their New York City campus bursting at the seams, they are opening new campuses including one in Long Island. The company focuses on outcomes and placement rates post-education are in the low 80s. All faculty come from industry and are trained to be educators instead of the other way around. They don’t see community colleges as a threat to their business. Tesla had a training program with community colleges and expanded to Lincoln to meet demand. The company is thinking about acquisitions but haven’t done one yet. CEO Scott Shaw has been at the company for over 20 years and at the helm since 2015.

9. Miller Industries (MLR): $73.66

Market Cap: $842.55M

EV: $867.61M

Not a whole lot has changed at Miller since I attended their Chicago presentation except for the fact that their stock went up 26% since early September. After I got back from the conference, I tried to look up U.S. traded competitors for peer comparison purposes and there isn’t a company quite like Miller. Here is what I wrote about Miller after the Chicago conference:

“The largest manufacturer of towing and recovery equipment in the U.S., U.K. and France that  exports its products to 60 companies worldwide. As of last week, the stock was up 52% this year and 100% last five years. Industry drivers are miles driven and age of vehicles. We are seeing an increase in age of vehicles on the road. Natural disasters also create a need to recover vehicles. Last year the company surpassed $1 billon in revenue for the first time. The company is “Debt averse” and carries very little net debt on its balance sheet. Chassis sales are low margin, which is dragging down overall gross margin. Low gross margin and growth are key concerns. P/E at a ten year low.”

10. Willdan Group (WLDN): $43.01

Market Cap: $607.51M

EV: $665.71M

Willdan is an engineering and energy solutions company that works with utilities, government, data centers, healthcare facilities and more. Their business is mostly driven by utilities and government with California utility PG&E as a top 4 customer. Despite the issues related to wildfires at PG&E, Willdan expanded its business with the utility over the last three years.

Willdan acquired Enica engineeering with $10 million in revenue recently and their M&A pipeline for future acquisitions is strong. Willdan is paying down debt, improving cash flow and EBITDA margins are 18% to 19%. Overall, in keeping with the theme of the businesses covered in this article, yet another boring business that is executing well and that the market is rewarding this year with a 103% stock price increase year-to-date.

I will most likely expand upon one of these companies as a spotlight idea in our upcoming December 2024 Special Situations newsletter.

Disclaimer: I hold a long position in Atlas Energy Solutions (AESI).Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.