At the time of writing this article, the S&P is down -13% year to date. The NASDAQ is down -33%, give or take. In a market such as this with the downturn we’re currently experiencing, Selective high-quality microcap stocks should outperform exactly for the reasons people have shied away from the sector in the past.
It’s easy to invest in a market that only goes up. For the last 6 or 7 years, we could just buy large-cap, make 35%, and have less drawdowns year after year. As market environments change so does portfolio composition and where everyone can find the best opportunities.
An example of a microcap company to add to a portfolio is SCWorx (Nasdaq: WORX)
Investing in equities with a focus on small and microcap stocks, there is a vast investment universe of under-researched quality stocks that have been ignored, overlooked or temporarily beaten up. The fact that most institutional money isn’t even looking in the microcap space allows an investor to identify stocks that offer superior performance potential. There is an old phrase “digging where the taters are”.
An enormous advantage to investing in microcap is 100% a stock picker and digging deep into the company, the management, competitive advantage, client base, valuation, etc. can choose what companies want to invest in within a microenvironment. In this sandbox the investor has control. When an investor loses control is when all of their portfolio positions are dependent on which way interest rates are going, whether there is inflation, a war, or if exposure is contingent on global economies. In markets such as the one we are currently in as an investor niche down and get laser focused. To win with microcap investors should look for a company with a domestic focus, and identify these companies that serve markets in need of disruption where their customers can’t live without their products in any economic environment. Niche down in researching these smaller companies with large total addressable markets that have seemingly been overlooked in the previous run yet are still building good businesses as the carnage of big tech envelops the business news cycle. It is fair to say these smaller domestic stocks tend to be in a defensive posture as well.
The Opportunity
Because there is less liquidity involved, the valuation of a microcap stock may be disjointed from its stock price. Microcap stocks tend to be an under-researched area. Larger-cap stocks dominate the overwhelming majority of US equity trading and as a result, the brokerage firms commit their research capabilities in that direction, leaving the microcap space largely unattended. This is where the opportunity to identify, research and accumulate a position lies. The confluence of being under-researched, and low trading volume is a unique opportunity that increases the odds of discovering and profiting from attractive investment opportunities.
With microcap stock investing, the goal is outsized gains. To some investors, this isn’t achieved through an index. Fund Managers in the microcap space look for a single business that meets their initial screening and then get granular. The microcap company must be unique in their business. This reduces the risk of competition bringing a pricing race to the bottom. Next, look for a valuation where it can at least double the money or at least have a good opportunity to double the investment within three years. The company must have great leadership that has a track record of success in the space.
SCWorx is an example of a strong candidate for inclusion in a well structured portfolio.
SCWORX is a NASDAQ company- symbol WORX which provides SaaS solutions to hospitals that directly impact operational efficiencies for accurate billing, cost savings, and revenue capture. Their proprietary software solutions allow hospitals to use existing systems to build a single source of truth for their data. This data can then be used to establish interoperability between their critical business systems (Supply, Clinical, and Finance). Over 1,300 hospitals are currently using SCWorx including world-class centers such as Mayo, NY Presbyterian. Over 12,000,000 items in the hospital supply chain are tracked by SCWorx. Here is a thorough overview of Healthcare SaaS tech.
Covid forced hospitals to realize that the supply chain in the health system is broken with supply shortages, staff shortages, and cost increases bringing an essential mandate of technology and processes to the forefront for greater automation, digitization, and analytics. SCWorx is solving the most critical component which is access to real-time, accurate data across the entire hospital organization.
Another key to $WORX positioning is its ability to replace the management consulting industry’s foothold on healthcare operations. No longer does a hospital need to hire outside high priced consultants to tell them how to save money or become more efficient. SCWorx Displacing Management Consultants like Mckinsey is discussed here.
SCWORX has the ability to see revenue per client increase as its clients grow with them. Recently, a major New England hospital system renewed its contract with SCWorx from an annual to a four-year term and increased its investment in SCWorx services by nearly double. In addition, SCWorx also announced they have enhanced its sales model with a tiered access solution allowing for shorter sales cycles, higher margins, greater adoption, and increased lifetime value per client. A SaaS business that provides outsized benefits to hospital administrations which can exponentially increase its supply chain visibility, pricing, contract bidding, and more through the hospital activating(and paying) for additional SCWorx features is a B2B business with an opportunity for growth and lower marketing and sales cost.
From a valuation perspective, a typical health tech SaaS valuation in this market is around 7x ARR which would value WORX significantly higher than current levels. Researching the company, its history, and learning the nuance of its past 2 years while building its sustainable business has brought an understanding as to what role the lack of announcements and coverage, low trading volume, and the pandemic has played in its share price.
SCWorx is a business that can grow through a recessionary environment. The hospital and healthcare industry is a quagmire that is evolving rapidly where costs are increasing and transparency becoming critical to survival. Data is the lifeblood of this evolution. The hospital information systems market is expected to grow to $151.21 billion in 2026 at a CAGR of 8.6 percent. according to Healthcare Facilities Today. SCWorx is well positioned within this expanding market to execute its strategy.
Looking at management, CEO of SCWorx Tim Hannibal has 30 years of experience in building SaaS companies including a successful exit to a public company. The independent board consists of respected corporate finance executives, C-suite, and healthcare officers.
Microcap companies are intriguing. They are often in growing industries, with greater room for growth and a higher return than their large-cap counterparts. These companies can benefit from the Law of Large Numbers. They can expand their business tremendously with a small market share. Large markets also reduce their risk profile. Microcap companies like SCWORX that serve large markets can experience tremendous growth with only a small market share.
WORX valuation seems disjointed. Looking at current revenue, intellectual property valuation, data monetization upside, and growth potential, the valuation may be significantly discounted. Coming off the pandemic, WORX is poised to build its position in healthcare SaaS and be an investment worthy of strong performance.
To read more details on SCWorx go to Lionseeker.com
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