Three Small Caps That Should Be on Your Radar

Here are three small-cap companies you probably haven't heard about that you should add to your watchlist today.

Jul 23, 2014 at 4:43PM

Some of my favorite businesses to find and follow are small caps -- businesses valued by the market at roughly between $200 million and $2 billion -- that typically aren't on the radar of very many analysts or investors. These smaller businesses are certainly volatile, but amid the short-term volatility, gems can exist for patient investors. Here are three small caps that recently found their way onto my watchlist and that I think you will also want to keep on your radar. 

1. The Chefs' Warehouse
The Chefs' Warehouse (NASDAQ:CHEF) distributes gourmet and high-grade specialty food products to more than 20,000 locations in the U.S. and Canada. Through its sales force of approximately 300 professionals (many of whom have culinary degrees and backgrounds) in 14 geographic markets, Chefs' Warehouse focuses on meeting the specific needs of chefs who own and/or operate venues such as independent restaurants, country clubs, fine-dining establishments, hotels, caterers, cruise lines, casinos, and other specialty-dining establishments.

Chefs' Warehouse's product portfolio of 30,000 stock-keeping units, or SKUs, is composed of gourmet foods and ingredients that are classified as gourmet because of their uniqueness, exotic origin, or particular processing method used. More than 1,600 different suppliers from North America, Asia, and Europe supply these ingredients, which gives Chefs' Warehouse an edge. For instance, most broadline food distributors (such as Sysco) carry five to 10 types of olive oil, while Chefs' Warehouse provides a selection of more than 160 olive oil varieties.

Going forward, Chefs' Warehouse sees the potential for increased sales from current customers and an expanded customer base within its existing markets. In 2013 alone, the company entered six new markets. Over the past four years Chefs' has implemented an internally developed Web-based platform that provides real-time sales, pricing, and profitability analysis to its management and sales professionals, which should help scale the business in the years ahead. The company has also made five acquisitions that totaled $152 million since 2012 to expand its market penetration and product categories (including the direct-to-consumer market). 

Chefs' was co-founded by two brothers -- Christopher and John Pappas -- who together own more than 21% of its shares outstanding. This high level of insider ownership, combined with a niche business and recent expansion, is a good reason to put Chefs' Warehouse on your watchlist today. 

2. Paycom Software 
Paycom Software
(NYSE:PAYC) provides a cloud-based platform for employers to manage employees in areas such as payroll and HR. Paycom developed its human capital management, or HCM, platform in-house to manage "the entire employment lifecycle" from recruitment to retirement. The platform does not need to access or integrate with multiple databases and it also collects data (in a single database) that employers can access and analyze in real time.

Paycom provides personalized service to its 10,000-plus clients, as it assigns a trained specialist to work with each client. Paycom has clients in all 50 states, and the company itself has 30 sales teams in 20 states. Management believes the company can expand in existing markets while adding up to 100 sales teams in the coming years. Paycom plans on opening six to eight new sales offices over the next two years. The company has an average annual revenue retention rate of 91% for existing clients for the three years ended Dec. 31, 2013. 

Paycom's revenue grew from $57.2 million in 2011 to $107.6 million in 2013, with net income increasing from $1.4 million to $7.7 million over the same period. Founder and CEO Chad Richison owns 11% of the shares outstanding. 

3. Inventure Group 
Inventure Group (NASDAQ:SNAK) manufactures and markets a variety of specialty snack foods -- including healthy/all-natural snacks and "indulgent" snacks -- in the frozen food and snack food segments. This includes a diverse line of snack products, frozen berry products, frozen vegetable products, and smoothie kits through its own brands as well as through licensing agreements.

I see these licensing agreements as the greatest competitive advantage of Inventure Group in what is otherwise a very competitive industry that includes larger players such as PepsiCo and ConAgra. While Inventure Group is also engaging in some acquisitions in addition to expanding its own line of products, take a look at these licensing agreements with bigger names for yourself:

  • In 2000 Inventure Group entered a license agreement with T.G.I. Fridays, which expired in May 2014 but was extended to 2024. In 2013, 18% of Inventure Group's revenue came from T.G.I. Friday products (down from 28% in 2011). 
  • It entered a license agreement with Jamba Juice in 2009, which is good through 2035. 
  • In 2011, it entered a license agreement with Nathan's Famous, which expires in 2031. 
  • In 2012, it entered into a license agreement with Vidalia Brands, which expires in 2019. 
  • In November 2012, it entered into a license agreement with Seattle's Best Coffee of Starbucks, which is good through November 2017, and which will automatically extend for another five years if minimum sales targets are met. 

These licensing agreements with bigger players in the snack food industry are reason enough for me to keep Inventure Group on my watchlist. What is key is whether Inventure Group is building enough of a sustainable competitive advantage to flourish in a very competitive field and deliver market-beating returns to investors in the coming years. 

Foolish bottom line 
Small businesses are often volatile in the stock market and investors should only buy them after careful consideration. Rather than getting emotionally tied to short-term market movements, however, patient investors who are focused on following the underlying strengths of a business have a good chance of outperforming the market over the long haul.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

David Kretzmann owns shares of Starbucks. You can follow David on his Foolish discussion board, Pencils Palace, on CAPS, or on Twitter @David_Kretzmann. Learn more about David's Pencils IRA Project at The Motley Fool recommends Apple, PepsiCo, Starbucks, and Sysco. The Motley Fool owns shares of Apple, PepsiCo, and Starbucks. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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