As I promised yesterday, I've got two potential small cap
winners that could see shares move as the X-Games gets broadcast
around the world. Let's jump right in...
Extreme Small Cap #1: QuickSilver Inc (NYSE: ZQK )
Alan Green of Victoria, Australia founded Quicksilver in 1970.
Since then the company has acquired several brands along way and
has moved its headquarters to Huntington Beach , CA . I've never
been to Huntington Beach , but one of my staff members, Michelle,
has said it's one of her favorite places in the U.S.
Incidentally, Michelle will be at the games this weekend and
helped with the research for this issue. When walking around the
X-games, she'll most certainly find evidence of QuickSilver's
clothing dominance - not only represented by its own line, but
through its other brands, which include: Roxy, Hawk brands, and DC
Shoe Company - a perennial crowd favorite.
You may have mixed feelings about QuickSilver if you pull the
company profile up on Yahoo! Finance.
At first blush it appears Quicksilver has an out of control
trailing P/E of 168, despite a negative annual earnings growth rate
of -17 percent over the last five years.
But there is more than meets the eye going on here...
In the past five years QuickSilver has been busy with
acquisitions, one of the largest being DC Shoe Company in the
middle of 2004. The company bought DC Shoe Company from founders
Ken Block and Danny Way , to the tune of $100 million.
By the way, you might catch a glimpse of these guys on TV
competing in the X-games. Ken Block races rally cars, formally for
Subaru Rally Team U.S.A. and currently for Ford, and Danny Way is
one the most decorated skateboard champions of all time…they have
certainly done well for themselves.
As a result of this acquisition, and others, Quicksilver has
taken on a good amount of debt in its pursuit of growth. How much
debt? At the end of 2009 the company had $911 million in long-term
debt on its balance sheet. As of the end of the most recent
quarter, this has been reduced to $818 million - but the enterprise
value of the company is still a whopping $1.36 billion. That's
pretty hefty, in fact more than two times the heft, for a company
with a market cap of just $603 million.
In 2009, QuickSilver announced it would embark on a new
financial restructuring plan. And just two weeks ago, Moody's
Investor Services said it may raise its corporate bond rating on
$400 million of the company's debt - which is currently at 'B3', or
The potential ratings bump came just a day after QuickSilver
announced an agreement with private equity firm Rhone to exchange
up to $140 million in debt for stock.
If this company can get its balance sheet in order, the stock
could be a strong performer. Sales growth is essentially projected
to be flat for the next two years, but analysts expect earnings per
share to grow by 200 percent next quarter, by 350 percent next
year, and by 56 percent in 2011.
That projected earnings growth brings the company's forward PE
down to a much more palatable 16. Shares have more than doubled
since February when the stock was trading at $2.00. You can expect
some support between $3.75 and $4.00 and conversely, resistance at
$5.00 But a break above $5.00 could target the $5.50 to $6.00
The impact of the restructuring plan is a potential upside
catalyst - maybe not quite as high as sponsored motocross athlete
Travis Pastrana will fly at the X-games - but higher nonetheless.
Look for high-flying sponsors at this year's X-games to help sell
Quicksilver's brands - and take a look at the company's most recent
if you're interested in buying shares. It just filed on June 9
Extreme Small Cap #2: Hansen's Natural Corporation (NASDAQ:
With athletes running (literally) wild and fans soaking up the
rays as they watch their favorite sports idols this weekend,
refreshing beverages are sure to be on everybody's minds.
At an event like this however, Pepsi and Coke are not the drink
of choice - nor would anyone care to debate which of these
pop-stars is better. A raging debate will ensue in L.A. , but it is
more likely to be which
Red Bull and Monster Energy Drink lead the pack. While Red Bull
surely represents a great company with sponsored athletes pulling
in huge fan bases, it is still privately owned, and thus out of our
realm of investment opportunities.
But Hansen's Natural is public, so we have our winner!
Monster Energy Drink stormed onto the scene in 2002. Hans
Natural Corporation of Corona, CA - already well known for
preservative free sodas - decided to try and cash in on the nearly
$2 billion a year energy drink market with the debut of Monster
Monster has had success competing with the veteran energy drink
Red Bull. In 2008 Hansen's made great strides by partnering with
Coco-Cola to distribute its product internationally, and has since
inked deals with Pepsi to distribute in even more countries, most
notably Red Bull's home turf of Europe.
The potential to use energy drink infused rhetoric to describe
Hansen's stocks is very tempting - but would likely make me an
outcast in the eyes of the extreme athlete elite, so I'll ignore
Besides, by most measures Hansen looks pretty tame. The stock is
trading with a trailing P/E of 20, a forward P/E of 16 and a PEG
ratio of 2.1. That last valuation metric seems a little lofty, and
is the result of a rather lackluster five year expected earnings
growth rate of only 8.7 percent.
The major growth for Hanson is most likely in the rear-view
mirror - the company was trading around $0.50 back in 2002 but has
rallied to a over $40 in the eight years since. Analysts expect
Hansen will grow earnings 5 percent this year and 11.6 percent next
However, with big name athletes on its side, Hanson has rallied
(no pun intended) over the last year, rising more than 45 percent
and handily beating the broad market.
The company sponsors Kyle Loza (back to back championships in
free style motocross), pro skateboarder Rob Dyrdek (has his own
show on MTV), and of course, our rally racing friend Ken Block.
Monster Energy, and subsequently Hansen's Natural, will likely get
all of the coverage it could hope for during this year's
From a technical perspective, the stock is a great buy at $40
(if it breaks below this look for dip to $37 and change). However,
I wouldn't be surprised to see the stock move higher ahead of
earnings - those are due out next Thursday, August 5
***So there you have it, action sports and investing all mixed
into one great issue of
Small Cap Investor Daily
. As always, do your own research if you're considering buying
shares. These companies will receive great exposure this weekend,
with ESPN broadcasting 31 hours of X-Games events, an increase over
last year's 20 hours.
X Games 16 will be delivered to more than 382 million homes and
will be telecast live to 175 countries and territories, including
Africa , Asia , Australia , Brazil , Canada , Caribbean , Europe ,
Israel , Mexico , Middle East, South America , New Zealand"
Will you be one of the 382 million homes watching?