Back in February, I took a page from the Buffett playbook and looked at Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) 1972 purchase of See's Candies, a West Coast purveyor of chocolates, toffee, and other things that stick in your teeth.
Buffett picked up See's, by then a well-established franchise with formidable pricing power, at a reasonable multiple of 10 times earnings. Arguably most critical to the investment's success, however, is that the business subsequently required that very little additional capital be reinvested into the business. This allowed a staggering stream of owner earnings to flow to Berkshire over the decades that followed.
A screen I concocted back then to prospect for the next See's led me to PetMed Express (NASDAQ:PETS), which has seen its net income soar from less than $1 million in 2002 to almost $25 million over the past 12 months. This capital-light company, which has outperformed the market by more than 76 percentage points since I gave it the thumbs-up in Motley Fool CAPS nearly two years ago, still looks like a pretty good, if not bulletproof, bet.
I told you I'd bring you additional names with See's-like characteristics, but failed to follow up. Until now. Here are three more businesses that have caught my eye.
Immucor (NASDAQ:BLUD) is the leader in blood bank automation in the United States. The company appears to have created the entire category, which is always a good place to be in terms of competitive dynamics. That said, I've yet to figure out how much money it will take to maintain a moat to fend off rivals, so I can't say with any great conviction that this blood diagnostics baron will generate excess returns for decades to come.
Balchem (NASDAQ:BCPC) is also an innovator, having developed microencapsulation techniques used to deliver certain food ingredients and pharmaceutical compounds. As spelled out by longtime Balchem shareholder Larry Goldstein in this interview, the company boasts monopolistic attributes and strong pricing power. There's a reason this stock trades for 26 times trailing earnings.
Cass Information Systems (NASDAQ:CASS) may be more appealing to the cheapskates among you. This business-process outsourcer handles "complex payables" like freight invoices and utility bills. Scintillating stuff! The company achieves excellent returns on capital, and is swimming in cash. The company has doubled its quarterly dividend payout since 2002.
The fact that Cass has a bank subsidiary makes any analysis a little more complicated, but the books look relatively clean compared to most financial institutions. Fools looking for a cheap, proven small cap with long-term promise may want to take a closer look.
