3 Quality Small Caps I'm Interested In
TMDX, ASPN, & ALAR
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I don’t invest in many small caps because it’s generally harder to gather all the information, research, and historical evidence or proof of concept. However, for the exact reason, amongst some others, small cap stocks tend to become more mispriced and therefore offer some of the best risk to rewards in the market.
I would never advise any beginner investors to invest in small caps, but with experience, I do believe it’s never a bad idea to allocate a fairly small portion of a portfolio towards smaller caps…especially when you develop some pretty high conviction in those stocks like I have done here.
Here’s 3 small caps I actively am looking to start a position in when the time is right:
▶ TransMedics Group (TMDX)
Introduction
TransMedics Group (TMDX) has created an innovative Organ Care System (OCS). It’s a technology that has incredible potential to revolutionize organ transplantation as it’s a big advancement over the more traditional cold storage or warm perfusion methods (such as Organox).
I don’t own TMDX although I wish I had. It’s gone up 78% just this year alone with most of that move just over the last 3 months. To be honest, I didn’t pay enough attention to it as I should have until a good portion of that move had been made. I do believe it has a lot more room to go (as you’ll see by my investment model below), but I’d love to be able to get in on a pullback which hasn’t really happened yet for as long as I’ve been following it closely.
Brief Investment Case
TMDX is currently unprofitable, but at current rates of net margin expansion, I expect (as does management) profitability in 2025. It’s extremely impressive how management have been able to expand margins whilst continuing to invest heavily in growth. Of course, this trend continuation depends on R&D costs, sales and marketing costs, hiring costs, and any other additional expenses related to building out their operations.
The key focus for management is on the expansion of the National OCS Program (NOP) which essentially goes hand in hand with the adoption of TMDX’s OCS Technology. To increase the growth of NOP, TMDX need to focus on improving the OCS technology with innovations such as automation, cloud connectivity, and remote control.
The other key focus for management is on the growth of the aviation operations. TMDX are now building their own transportation fleet, as opposed to relying on private jet brokers for the transportation of the organs and technology. This allows them to fulfil the aim of controlling the entire logistics process from donor to recipient.
A final growth driver for TMDX depends on the success of their expansion globally in Asia-Pacific and Europe. Europe has so far been a difficult market for TMDX to crack due to the reimbursement processes in the area, but the company are currently developing specific strategies and conducting trials to assist in this expansion.
Numbers
TMDX are expected to surpass $1 billion in revenue in 2030.
Gross margin figures rose to 62% vs 59% in the previous quarter. Management expect further gross margin expansion as they achieve further leverage of scale in both product and in operations.
Annual revenue guidance has been increased to $400 million in FY24.
Graphic
Investment Model
My investment model outlines a potential 242% increase through to 2030, or 40% annually. You could argue that I may be using a slightly inflated PE multiple but I believe this is cancelled out by my more conservative revenue growth numbers and net cash and debt numbers.
▶Aspen Aerogels (ASPN)
Introduction
Here’s another regret of mine. I first heard about ASPN when it appeared in a few screeners that I ran about 12 months ago but for one reason or another I decided to post about it on X, but never even consider initiating a small position. Of course, the regrets started seeping in when ASPN rallied around 200% over that period. Oh well.
ASPN is a materials company specializing in energy, transportation, infrastructure and auto (EVs specifically) operating in the aerogel insulation niche. This insulation saves on energy consumption and protects assets such as machinery, equipment, and even workers.
Investment Thesis
It’s definitely been a bumpy ride so far for ASPN with the stock IPO’ing at $11 per share in 2014 before surging to $60 per share during the Russia Ukraine war, and then to lows of $8, and now to $27. Nevertheless, ASPN has tested and refined their technology seamlessly to now create arguably one of the best insulation materials in the world.
They now boast clients such as the world’s largest oil producers (ExxonMobil, Shell & Reliance Industries) and leading auto manufacturer (General Motors & Audi in 2025). The Audi partnership is perhaps one of the biggest catalysts I see for ASPN because of the PyroThin technology they created which allows them to serve EV and energy storage markets. The PyroThin technology is essentially a thin, light, thermal insulation barrier to protect against lithium-ion batteries.
P.s. It’s not just Audi. ASPN have agreements with Toyota, Scania, Honda, Volkswagen and Acura and I’m certain there’s many more in the pipeline that we aren’t aware of yet. Anyway, this PyroThin thermal barrier is growing rapidly, yet it’s currently still the smaller part of ASPN’s revenue with energy industrial making up just over 60% of revenue currently.
My favorite aspect of ASPN is simple. ASPN thermal barrier (mainly auto) sector is the leading player in a $1.7 billion market estimated to grow at 27% CAGR until 2030. That alone is incredibly exciting. But then add on the fact that the core business of energy industrial insulation still has much more growth and margin expansion and you’ve got a company that I’d hate to not own.
For me (outside of the lower margins and small cap nature) the biggest risk for ASPN is if they can’t manage to demand they have which is currently outpacing the supply. New facilities are needed to boost the capacity and maintain themselves as a leader in this somewhat boring, but extremely high growth industry.
Numbers
Q1 2024 revenues were $94.5m (vs estimates of $75.3m).
EBITDA came in at $12.9m in Q1 (vs estimates of $2.3m) meaning EBITDA margins increased from NEGATIVE 30.6% to +13.6%. Management believe EBITDA margins will double from here.
Graphic
Investment Model
Here’s my investment model for ASPN which shows a potential 342% increase through to 2030. I don’t believe there’s any overly ambitious or overly cautious assumptions in here.
Alarum Technologies
Introduction
I was first introduced to ALAR from no other than Kyle Adams on X. You can see his profile here (very worth a follow). He’s been talking about ALAR for months now and it’s only been over the last couple weeks that I’ve seen ALAR pop up around X and other social medias more. Anyway, we’re still early and the company is amazing.
ALAR is an Israeli company with 96% of their revenue coming from NetNut, their enterprise data collection solutions business. NetNut offers IP Proxy tools that help enterprises access websites anonymously, and scrape (extract) data from them. As the AI trend continues, so does the need to collect data. This is where ALAR comes in.
Investment Thesis
After a 1,500% price increase over the last year many investors think they’ve missed the boat but if we dig in to the numbers, I’d have to disagree. ALAR is a SaaS company trading at ~18x Fwd P/E with revenues estimated to grow at 90% next year. Compare this multiple to companies like Snowflake (SNOW) which trades at 15x P/S (not P/E) with ~25% predicted revenue growth and you’re all of a sudden thinking ALAR is massively undervalued.
Driven by AI, the data collection market is growing at incredible rates expected to hit $17 billion in 2030 ($2.2 billion today) meaning an annual CAGR of 29%. I don’t have any specific numbers on market share just yet, though I will add to this investment case at some point in the near future. But simply looking at gross margin expansion (139% YoY), it’s pretty evident that ALAR has some nice pricing power in the market. There’s certainly no issue with the demand.
On top of this, ALAR have recently launched new products including their first data collection product called SERP Scaper API, their first Website Unblocker, and a new AI data collector product line. Although these are all in early stages, it’s evident that management are still “playing to win” as I like to see. I don’t think we will see much revenue impact over the course of 2024, but certainly in 2025 these products will continue to keep revenue growth extremely high I believe.
Numbers
Revenue for Q1 2024 was $8.4m, up 47% from Q1 2023 of $5.7m.
Gross profit increased to $6.5m which is 75% up from Q1 2023 of $3.7m.
ALAR stopped their cybersecurity loss making segment which increased gross margin to 78% from 66% 12 months ago.
Net retention rate of 166%
Graphic
Investment Model
I was least confident building my ALAR investment model out of the 3 here just because of the revenue growth figures. Therefore, I went extremely conservative and still came out with a 327% price increase over the next 6 years. To be honest, I see much stronger growth than this but I think going conservative shows you just how undervalued ALAR is today.
It’s my favorite stock out of these 3 and I’ll definitely be initiating a position at some point. I’ll of course let you know when I do.
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