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What’s Ferris’ “Smallest Extreme Value Stock in 7 Years?”

Checking out the latest teaser presentation from Dan Ferris for Stansberry's Extreme Value

By Travis Johnson, Stock Gumshoe, August 16, 2021

I like Dan Ferris. I’m sure I disagree with him on a lot of things, I don’t know him personally, and I don’t know what his overall long term track record is at Extreme Value (the stocks we’ve covered have included both hits and misses, with more of his best returns that we’ve looked at coming from buying “world dominators” during market declines, like 2009-2011, than from his smaller and more obscure value-oriented picks), but he’s got an interesting and charmingly stubborn focus on value investing, I’ve found some of his recommendations compelling over the years, and he usually does a good job with his Stansberry podcast… and that makes him a fun counterpoint to a lot of the silliness in the investing world these days. We at least know he’s not going to get all hot and bothered about the latest hot NFT, or some sexy growth stock that’s spending $10 to make a dollar in sales and defying all logic.

And he’s been running a big promo campaign for Extreme Value subscribers lately, a group that I think he said now numbers 40,000 (which would be very good for a high-priced letter — $1,500 for two years, no refunds, in this particular deal — so maybe that’s an overstatement or I misheard, that would mean Ferris’s newsletter, by itself, is generating something like 10% of the revenue of now-public Stansberry/Palm Beach/Investorplace/Empire/Brownstone/Casey parent MarketWise (MKTW), which is very unlikely). This is the first big push for Ferris that wasn’t built around his tease of Sprott that I can remember in recent years (that’s what he called “the hands down, #1 pick of my career” for about three years, I saw the ads from early 2018 through the beginning of this year), so who knows, maybe this one will stick around for a while, too. (That Sprott pick, by the way, has had its ups and downs but is currently doing a little better than other gold names, on average).

But anyway, the tease is not necessarily about his current recommendation, but for a “special report” on what he says is his “Smallest Extreme Value Stock in 7 Years” — a company with a market cap below $300 million. Here’s how they introduce the spiel…

“This is the smallest company I’ve recommended in Extreme Value in seven years. Its market cap is currently less than $300 million. But it won’t stay that way for long…

“This company checks all the boxes that Mike and I look for in a great business. And our research has led us to believe that this stock could triple (or more) over the next two years.”

What are those “checkboxes” that Ferris uses? Here are my notes of the part where he goes over his “five criteria” —

Five criteria for finding a good value investment

1. Tons of cash generation. Good free cash flow, which is the excess profit left over after paying expenses and reinvesting enough to maintain and grow the business. Equity holders get paid last, so you need to make the company generates a lot of money to reward them.

2. Consistent margins. Need to control your costs and know what you’ll pay — it’s normal for margins to erode with competition, so a consistent profit margin (he mostly refers to operating margins) is an economic anomaly that tends to favor investors.

3. Iron clad balance sheet. You want a company that’s never worried about going bankrupt, and has a lot more cash than debt, or at least earns enough money to easily cover their debt payments.

4. Shareholder rewards. “What’s in it for me?” Do they pay cash dividends or repurchase shares?

5. Return on Equity. Return is the earnings of the business, the net income… “equity” is “net worth” (assets minus liabilities). Consistent ROE of 20% or higher is pretty fantastic.

So that’s the general backdrop, nothing surprising or stupid there, of course, the rub is that you have to find these companies and buy them at sensible prices… and understand them well enough to know when or if the company changes for the worse.

So what clues do we get about this particular pick from Extreme Value, the idea that he’s pitching as his “My No. 1 value play today could TRIPLE your money in under a year… but you need to take action NOW” stock?

“… for the 40 years they’ve been in business they’ve done TWO very important things.

#1. They design and sell thermal equipment used for manufacturing activities, like forming metals with precise heating and/or managing extreme temperatures. And…
#2. They design and sell products used primarily by semiconductor companies to automatically test the chips they manufacture for defects.”

So that semiconductor bit is where the urgency comes in, I guess — he says “you’re getting a little-known, small-cap stock, just as the next big upturn in the semiconductor industry is beginning.”

Other clues? He refers to it as a “$14 stock”, and he goes through the five criteria I noted above — the company has had excellent and pretty consistent free cash flow every year, except for 2019, and his note about that counts as another clue:

“I understand there was a dip in 2019, but after I dug into the company, I learned it was an “earnout” payment related to an acquisition they made in 2017.”

What else? He also talks about “consistent margins” with this one, but switches over to gross margins when he highlights that consistency (perhaps because their operating margins and net margins have not been as consistent), and to highlight that he shares a chart of their margins from 2011-2020, so we get a few more clues to feed to the Thinkolator — including that hte gross margins for the last five full years were 44.8, 48.2, 50.2, 51.9 and 50.7. And that their worst year was 35, back in 2012, the only one that didn’t really stay in that same range.

And we’re told that they have a “pristine, debt-free balance sheet,” with “$10.2 million in the bank.”

And that they do not pay a dividend, but do share repurchases most years.

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One final clue? That key metric Ferris cites, return on equity (ROE), was negative last year, with the downturn in the semiconductor market while supply chains went kablooey (my words, not Ferris’), but we also get a chart that indicaates it has mostly been between 5-10%, and pretty consistent, with 2017 the only other “below 5%” year since 2011. From the ad:

“With the VERY low supply of semiconductors out there right now and the demand skyrocketing, I expect this firm’s ROE to once again shoot way back up… perhaps even beating out its 2011 numbers this year.”

And that would indeed be a big deal, this company had an ROE in 2011 of over 45%, dramatically higher than any of the subsequent years.

Which means we’ve now got enough to feed to the Thinkolator… a few shovels full of clues, a couple swift kicks to help them make it down the hopper into the cogitationizer, and once she gets to chugging our result comes back pretty quick: This must be InTest (INTT), which I had previously mentioned as a more lightly-teased pick from Ferris back in June. So it looks like they’ve taken a recent recommendation and build up a “special report” around it to fuel a big promotional push… a pretty common strategy among newsletters.

The good news? If Ferris recommended this one in June, then it is currently well below the price where he recommended the shares — it opened up at a little over $12 this morning, and it appears that the promo push over the weekend might be working because the stock jumped up a bit this morning. That could be anything, of course, it’s a little $150 million company so pretty much anything could make it rise or fall 10% (the day that it was first recommended in Extreme Value, it popped by something like 20%).

Here’s how the company describes itself:

“inTEST Corporation is a global supplier of precision-engineered solutions for use in manufacturing and testing across a wide range of markets including automotive, defense/aerospace, energy, industrial, semiconductor and telecommunications. Backed by decades of engineering expertise and a culture of operational excellence, we solve difficult thermal, mechanical and electronic challenges for customers worldwide.

“Our products are used by semiconductor manufacturers to perform development, qualifying and final testing of integrated circuits (ICs) & wafers, front end wafer manufacturing, and for other electronic test across a range of industries including: automotive, defense/aerospace, energy, industrial, and telecommunications markets. We offer induction heating products for joining and forming metals in a variety of industrial markets, including automotive, aerospace, machinery, wire & fasteners, medical, semiconductor, food & beverage, and packaging. Specific products include temperature management systems, induction heating products, manipulator & docking hardware products, and customized interface solutions. We have established strong relationships with our customers globally, which we support through a network of local offices.”

If you didn’t catch my earlier story about this one in June, here’s a bit of what I wrote at the time:

In some ways inTEST is a much smaller competitor for a company that’s in my portfolio, Keysight Technologies (KEYS), another provider of testing equipment and services, and is the kind of company Keysight has been buying up to consolidate the industry over the past decade. That’s not an intent to set a rumor stirring, to be clear, there are lots of small companies in this space and I don’t know which ones might be bought or sold next, it just came to mind as interesting because I was reading some Keysight materials a few days ago (KEYS reports later this week, FWIW).

How do things look now? Well, the big driver of optimism is their growing bookings and backlog numbers that should support pretty solid revenue growth — their customers started revving up early in 2021, it appears, and bookings were up 43% and backlog grew 49% just from December 31 to March 31, after a similarly nice bump up in the previous quarter. That’s encouraging. And while the growth in bookings for the second quarter was not as dramatic, bookings just about doubled over last year but were pretty flat from the first to the second quarter, they did continue to do well with solid growth in revenue and earnings, continuing that recovery from the chip sector doldrums last year. And the chip sector is still the big driver for them, it was 72% of their revenue and 66% of their bookings last quarter.

When Dan Ferris initially hinted at this pick it was EV-related — he said they were pushing into the electric vehicle market, and that’s still true, though it’s also still not really part of the income statement yet… they are trying to sell their thermal products to carmakers (battery cooling and manufacturing) and cannabis extraction companies (chillers for CBD/THC extraction systems). That’s not the high-growth part of the business, though, it’s still the test systems for semiconductor manufacturing that drive the bus.

2020 was a down year on the revenue and earnings front, but inTEST seems to think they’ll bounce back well and the first half of the year was a nice start. Analysts now expect them to earn about 92 cents a share in 2021 and $1.03 in 2022, up from expectations of 60 and 90 cents a few months ago, with revenue bouncing back to better than 50% growth this year and then probably settling in at about 10%.

I don’t know what the competition looks like, other than Keysight, but they’re small and pretty nicely levered to a chip industry that’s spending wildly to expand and increase production right now, so that’s a nice backdrop. At $17, when Ferris first recommended the stock, you were paying almost 30X forward earnings for INTT, and that’s a little bit of a leap of faith compared to their historical valuations… but if they can get back to those 2018-2019 numbers and resume their growth trajectory, it may well work out fine. And now, a couple months later, the stock has fallen and the earnings expectations have risen substantially (only a few analysts cover the stock, so we shouldn’t write those numbers in stone), so you’d be paying more like 14X current-year earnings and 12X forward earnings for INTT.

That’s pretty easy to justify. It’s a small company, and it might fail or have a bad quarter or year, and since they’re selling into the semiconductor industry more than half of their sales go to Asia, which means the next trade fight headlines will probably hurt, but the business is doing pretty well and is reasonably valued. I haven’t bought these shares, and I don’t know that there’s any urgency to do so, but it is very small, growing nicely, exposed to some high-growth industries where capital spending is very high right now, and could certainly be well positioned for the return to “normal” in the semiconductor industry. And in these days of wild growth stocks and hot stories it is nice, for a change, to look at a small company that’s currently growing well and is solidly profitable, but is also valued much more cheaply than the overall market (the S&P 500 has a forward PE of about 21 right now, the S&P 600 small cap index has a forward PE of about 16).

That’s just my reaction, though, and you’ve got to build your own case if you’re going to invest your money — do you like the setup for INTT here? Willing to go with a real microcap value stock and see if they can grow into something? Let us know with a comment below.

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fxcruiser
Irregular
August 16, 2021 8:56 pm

Travis! Aloha Nui Loa! In my humble opinion/experience Mr. Ferris has been soooo bad over the years I wouldn’t go near any of his picks! I’ve always figured he married Franks u&*y sister or something along that line. Only one more incompetent than him would be that Blanco dude. The two of them could spin a 20 page narrative that would sound like the script for a new Indiana Jones/Star wars movie and then “PLUNK”!!

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Joe
Guest
Joe
August 18, 2021 3:34 pm
Reply to  fxcruiser

Yo! Are you from Hawaii fxcruiser?

bravobill
August 16, 2021 9:57 pm

As MarketWise (MKTW) was coming out, there were a number of promotions for lifetime ‘partnerships’ within companies like Stansberry, Investorplace, and Empire. The goal was to get it all under one roof, level the financial playing field, as they like to say. and be just one happy MarketWise, but collect some money while they’re at it.

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Normally Dubious
Irregular
August 22, 2021 12:38 am
Reply to  bravobill

I got those calls, but when I said I wasn’t liking the Legacy products I subscribe to, so why would I want to be a lifetime member, they hung up pretty quickly….only to have someone from another branch call offering their version a few days later.

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sct2ali
sct2ali
August 16, 2021 10:49 pm

Stansberry and Associates awards “grades” for all of its analysts each year on the advisory services they run (Porter himself even gets a grade). It wasn’t too many years ago that Ferris got the only F in the group for the “performance” of his recommendations over the previous year. Thus, I don’t personally pay much/any attention to Ferris. I read some of S&A’s free stuff, but refuse to shell out big bucks for any of their services. They have been ‘very’ heavily hyping several of their services in recent months (for like $2,500 a year, with maybe a “free” second year thrown in, no refunds): a new crypto service; a service using “naked” put selling – if that’s the term for it); maybe one or two others. They all have their hits and misses, but it’s not easy to pick which will be “hits,” and they put out too many recommendations to rationally invest in them all. And you have to put up with all the hype – not worth it to me.

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Normally Dubious
Irregular
August 22, 2021 12:41 am
Reply to  sct2ali

They don’t tell you until you’ve paid, that much of their Alpha Edge “profiting” is selling naked puts. The hype was “make 10 years of profits in 18 months “

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William Brown
Member
August 17, 2021 7:50 am

INTT has both declining revenues and net income over the last 3 years according to Morningstar. If this is a value play I’m the Pope.

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Chuck Ciolino
Member
Chuck Ciolino
August 17, 2021 11:49 am

Avoid Stansberry unless you want ENDLESS spam, alerts, “just in” announcements, and your email sold to about anyone selling anything! I’m very bitter about these guys and think stock picking is actually a side hustle for their real business of selling your data.

R K LAKHOTIA
Guest
R K LAKHOTIA
August 21, 2021 12:48 pm
Reply to  Chuck Ciolino

The worst selling line was ‘We’ve waited 22 years to make this big announcement’.

Josh Cohen
Member
Josh Cohen
August 21, 2021 4:24 pm

As a relatively new Extreme Value subscriber, yet longtime fan of Ferris, I’d say you didn’t miss the mark. Nice take!

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JackInTheBox
August 22, 2021 12:08 pm

Travis the 40k number includes about 2-3 thousand of his subscribers and Alliance members who get to chose a couple of services…

We know a value newsletter doesnt get that type of attention. And I agree with you that from the newsletter industry, he sound the most normal and human on his podcast…

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clarkf
clarkf
August 22, 2021 12:48 pm

Thanks again for your insightful analysis Travis! As much as the the out of control marketing is a real nuisance, the rule that the Stansberry analysts cannot invest in the stocks they recommend is a problem for me. Wouldn’t they invest their own money in the best stocks? Certainly some of them may buy FL real estate or wineries, but many of them must be buying stocks they believe are the best in their respective industries.

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pach62
August 22, 2021 4:08 pm

I’m straying off topic here but I’m extremely frustrated. I keep reading that Sila Nanotechnology will IPO in Q2 or Q3. Well we’re halfway through Q3 and there’s not even a hint of a timing for their IPO. I know there’s still September but I was hoping someone would have a better idea as to an actual date or at least know the ticker symbol. Thanks, Pach

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pach62
August 23, 2021 3:41 pm

Thanks Travis for your info I really appreciate it. Just one question or observation really, I’m sure I read and saw an application to the SEC for their initial request for IPO, but since I’m a veteran with severe PTSD and Post Concussion Syndrome my memory is not good to say the least so I can’t remember where I saw it I’m thinking possibly on their website while I was doing research but I definitely wouldn’t put money on that!

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david bromberg
Member
david bromberg
August 23, 2021 8:59 am

what is the $3 stock Oxford Club is touting…..patents, a dividend, all the right stuff? thx

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wayne holmes
Guest
wayne holmes
August 23, 2021 5:57 pm
Reply to  david bromberg

one that you need to stay away from. IME and opinion. You can find many other good stocks to put your $4000 plus in – it’s more like a $4 stock -don’t believe the hype- this thing has been plugged for years and has many a sucker, as I fail for it. (God help you because it won’t be easy to get rid of it either, although you will be able to,) The only talking head that I trust and I have weakened with the most, is Travis(not really a talking head) and Jon Markman- Jon shares his own portfolio and he has put me on the best stock(s) I have purchased. I haven’t been in investing very long but I am an old fart with an extremely high BS factor. You have more scammers in pushing stocks than will will believe. Believe me. Travis post this please?

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