Recent Bullish Stock Pick Draws a Little Skepticism; Featured Clip–New Focus Stock Pick [GeoWire Weekly No. 173]

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Highlights Responding To A Disagreement: Not ALL dilution is bad: it’s a subject we’ve covered in the past, but there’s a reason to bring it up…again. The GAAP vs. non-GAAP debate is still alive and well. New addition to our Forum Focus Model Portfolio.

Last Thursday, we held our February 2025 Live Monthly Open Forum, where we discussed the news in our coverage universe and model portfolio updates of the prior month. 

We were particularly excited to be able to highlight our Focus Stock of the month, something we try to do with every Open Forum event.

Why are we excited?

Because this practice is starting to yield some really nice results and proof that our decision to hyperfocus on the quality corners of the microcap universe is working.

Our open forum events often kick off with an introduction, where I talk about some things that are on my mind. February’s introduction was inspired by a conversation I had with a colleague.

Our decision to add a medical device stock to the Run to One Dollar Model Portfolio a couple weeks ago was met with some skepticism from a colleague who questioned our rationale, particularly regarding dilution and profitability metrics. We had just spoken with the management of the company and are fairly impressed with the direction that the company is heading, while acknowledging that there still may be some bumps along the way.

I bring this up, not only because I respect this colleague, but maybe because some of you share the same criticisms, especially since you’ve heard me talk about obsessing over quality and how much I dislike companies that continually dilute through stock offerings. But there are exceptions to these “rules.”

Some of the biggest multi-baggers will be the companies that other investors despise and go on to become quality enterprises, sometimes as a result of the injection of a new management team. The best money made in investing isn’t always about being popular, it’s about having the courage to go against the crowd.

And as Wayne Gretzky, said through this overused quotation when asked where he skates on the ice rink:

“To where the puck is going, not where it’s been.”

And most importantly, recognizing the many risks to this NEW run to one model portfolio holding, we still stand by our conclusion that the stock has the chance to be a nice multi-bagger in the area of the of the market we’ve enjoyed past success, medical devices, which produced 2 multibaggers and a takeover:

• Multi-baggers: 

• • Koru Medical Systems, Inc. (NASDAQ:KRMD), a peak return of 5191% and current return of 1825%.
  • Clearpoint Neuro Inc. (NASDAQ:CLPT), a peak return of 551.9% and current return of 327%.
• Takeover: CAS Medical Systems, Inc. (Old Symbol CASM) (And it’s worth noting that CASM’s capital structure was a mess), with a 31.06% peak and 17.47% final return.

In our February 2025 Monthly Open Forum, I took the opportunity to address my colleague’s concerns of capital structure and dilution, clarify our stance, and explain how we approach the valid points of dispute he raised when analyzing microcap stocks.

Dilution in Microcap Investing

One of the primary concerns raised was dilution—why invest in a stock that has raised capital multiple times in the past? This is a valid concern, but it’s important to differentiate between different types of dilution.

1. Desperation Dilution – Some companies raise money just to survive. These are often businesses on the verge of failure, where investment banks are willing to raise capital for them (peddling shares to hard-working retail investors) despite knowing that they are unlikely to succeed. This type of dilution is predatory, harmful to shareholders and where many “pump and dumps” live.
2. Unnecessary Dilution – Certain high-quality companies express that they want to raise money opportunistically (if their stock price goes up) even when they don’t need it. They may justify it as a safety net or “future-proofing”, but the reality is that it too can harm long-term shareholder value since it reduces earnings per share and ultimately where the stock would be trading, if not for the extra shares. 
3. Smart Dilution – Then there are companies that have a solid product/service but need capital to scale or fix problems of the past, often as a result of former management. These businesses raise money not necessarily for survival, but for growth, particularly for marketing and sales expansion or smart acquisitions, rather than product development. We actually wrote about this topic when analyzing the multi-bagger success of Ufp Technologies, Inc. (NASDAQ:UFPT). Companies in this category are able to grow earnings-per-share past that dilution, otherwise known as being accretive.

We believe the stock in question falls into this third category. The company has a strong product but lacked the necessary funds to expand operations. On top of that, past management did an inefficient job in preparing the company to scale or putting a plan in place to expand market presence. 

Fixing the problems of past management required capital and time.

We believe their most recent capital raise is a final step before achieving self-sustainability, making it a justifiable move. Does it require a little trust on our side? Sure, but sometimes you have to use the information you’ve gathered to get to that place. 

More often than not, we’ve passed on stocks for the simple fact that we just don’t believe them.

GAAP vs. Non-GAAP: A Key Distinction in Profitability

Another key point of contention was our statement that the company was profitable, while the subscriber pointed out that the company was losing money. This disagreement comes from the difference between GAAP (Generally Accepted Accounting Principles) earnings and Non-GAAP (Adjusted) earnings.

• GAAP earnings are mandatory for companies to report, but they do not always reflect the true earnings power of a business.
• Non-GAAP earnings adjust for one-time expenses/gains, non-cash charges/gains, and other distortions, providing a clearer picture of a company’s true earning power.

Companies often report both GAAP and non-GAAP earnings. While non-GAAP numbers can be abused to present an overly optimistic picture, they are also crucial for uncovering investment opportunities that may be hidden behind misleading GAAP losses or protect you from investing in a company that overinflated its earnings through a “legal” GAAP representation. I elaborated on this a bit more here.

Identifying Opportunity Before the Market Does

A critical part of our research is identifying companies that appear unprofitable under GAAP, but are actually turning the corner when adjusted for non-GAAP items. Many microcaps go through extended periods of GAAP losses before suddenly posting a profitable quarter on an adjusted basis, which can lead to a rapid re-rating of the stock price before the market figures all this out or the company reports its first GAAP profit. 

By carefully analyzing adjusted profitability, we can get ahead of the market and invest in these companies before the broader investment community recognizes their earnings power.

Again, the skepticism we encountered on the company that resurfaced this debate is understandable—microcap investing requires looking beyond surface-level metrics. However, we are confident in our thorough research and understanding of dilution and profitability. and believe in the effectiveness of our approach.

Below, view the segment from the forum that discusses this subject matter…

About GeoInvesting’s Monthly Open Forums At the beginning of every month, Maj, our founder, holds a live Video slide presentation session where he goes over what happened in our entire coverage universe over the previous 30 days. He discusses everything from the best earnings reports, new stocks we’re researching and most importantly, our NEW feature, where we highlight our favorite stock of the month. Geoinvesting Open Forums are archived for your convenience. Furthermore, the slide presentations, which have important information, as well as links that you may want to reference for your own research purposes, are made available to download

 

To See the full Interview and clips, as well as gain Exposure to our expanded coverage on Our 1500+ Microcap Universe, Subscribe below.

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The post Recent Bullish Stock Pick Draws a Little Skepticism; Featured Clip–New Focus Stock Pick [GeoWire Weekly No. 173] appeared first on GeoInvesting.

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