Weathering The Storm In A Bear Market

When a telecom company called APA Enterprises was rechristened as Clearfield on January 2, 2008, it was close to extinction as one of a laundry list of companies that crashed . It had raised $40 million during better days but never had any operating profit, and its stock was trading at just $1 per share, down 98% from its 2000 peak at $54.50.

In came newly appointed CEO Cheri Beranek, carrying decades of experience as an executive at telecom and networking companies, to try to bring the company back from the brink. She refocused the company on “community broadband,” betting the fiber technology it manufactured to deliver high-speed internet and cable TV to neighborhoods around the U.S. would be the key to its future.

Beranek built Clearfield during the heart of the Great Recession, but it quickly returned to profitability and benefited when the 2009 Recovery Act signed into law by Barack Obama included billions of dollars in stimulus to expand broadband access. Based in Plymouth, Minnesota, a Minneapolis suburb, Clearfield was back on its feet in time to become one of the pandemic era’s biggest winners. It’s up tenfold since March 2020 to $95 per share after revenue grew more than 70% two years in a row, with $210 million in sales in the last 12 months. Those metrics contributed to its third straight appearance on Forbes’ annual list of America’s Best Small-Cap Companies, slotting in at No. 4 this year.

Clearfield sells its fiber products to hundreds of distributors and small operators that helped residents get the high-speed internet access they needed to work from home during the pandemic. Beranek says Clearfield’s fiber can reach more homes in a day and connect homes to broadband networks faster than competitors, and it benefitted from another $65 billion allocated to broadband in last year’s infrastructure law.

“This is a once in a lifetime opportunity for fiber,” Beranek says. “This is like building out electricity 100 years ago or the telephone.before that.”

Clearfield’s stock appreciation has bucked the trend among most small caps, which generally underperform entering recessions and periods of economic weakness. The Russell 2000 Index of small cap stocks is down 23% from its peak last November, while the S&P 500 Index of large cap stocks has declined 17% from its highest point.

In the long-term, the increased risk associated with investing in small caps has produced a higher reward. Yale professor Roger Ibbotson and financial consultancy Duff & Phelps estimate that between 1926 and 2020, small-cap stocks returned 11.9% annually, outperforming the 10.3% performance of large companies. To rank the 100 best of the last year, Forbes analyzed more than 1,000 companies with market capitalizations between $300 million and $2 billion, screening for stock return, sales growth, return on equity and earnings growth in the last 12 months and five years.

To qualify for the list, a company had to have positive sales growth in the last 12 months, and 97 of the 100 also grew their earnings per share in that span, but the strong income statements weren’t always appetizing to investors. Only half of the stocks have increased in the last year.

“We’ve been in this environment that’s been entirely driven by market psychology and valuation and not at all by company fundamentals,” says Rayna Lesser Hannaway, portfolio manager of Polen Capital Management. “No one’s actually discriminating between what are the good ones and what are the bad ones, which is where the opportunity lies.”

The top company on the list is SIGA Technologies, a pharmaceutical firm producing antiviral treatments for diseases like monkeypox which soared during the summer outbreak but is down 63% since its peak in August. Next is Vaalco EnergyEGY
, a Houston-based firm which drills for oil in West Africa, primarily in the small country of Gabon. Vaalco has benefitted from this year’s rising energy prices and has ramped up its production capacity from about 5,000 barrels per day to 20,000 barrels per day in the last 18 months, in part thanks to a $307 million acquisition of Canadian oil producer TransGlobe it announced in July.

Vaalco’s revenue has grown 150% in the last year, and the company recently approved a $30 million share buyback program and nearly doubled its annual dividend to $0.25, representing a current yield of 4.5%.

“We try to offer the market something slightly different from our peer group. We’re looking to be purely an pan-African investment opportunity,” says CEO George Maxwell, who splits time between Houston and London. “We want to be attracting energy funds, emerging market funds, and demonstrating how we’re helping developing countries exploit their resources in an efficient and effective way.”

Many companies on the list have sailed through plenty of downturns in the past and are adapting to thrive through this one. Electrical engineering firm Richardson Electronics, No. 21 on the list, was founded by Arthur Richardson in 1947 in a barn in Wayne, Illinois, about 10 miles from its current headquarters in LaFox in the Chicago suburbs.

Arthur’s son Edward Richardson, 80, joined the family business 61 years ago and has been CEO for nearly a half-century since taking over from his father in 1974. Richardson makes microwave tubes that create heat at high power, which can be used in more than just microwave ovens. One of its largest customers, an Indian company called Carbon Craft, uses them to turn carbon from used tires into tiles.

But what Richardson is most excited about is the company’s new green energy solutions segment. It landed a $10 million order from NextEra EnergyNEE
last year to replace lead acid batteries in wind turbines with more reliable and longer-lasting ultra capacitors and is accelerating its production of energy storage systems to use in all types of renewable energy grids. Its sales in the last 12 months are up 24% to $238 million, and Richardson thinks its green energy products will help revenue grow 15% to 20% annually for the next five years, which would push it over $500 million. Its stock is up 85% this year.

“My mother worked in the company until she was 95 years old, and my ambition is to work longer than she did,” Richardson says. “Right now it’s the most fun it’s been in the business for years and years.”