Most Big Winners were Ugly Ducklings

Once upon a time, in a peaceful meadow, a mother duck sat on her nest, waiting for her eggs to hatch. One by one, the eggs cracked open, revealing fluffy yellow ducklings. 

However, one egg, larger than the rest, was the last to hatch. When it finally did, out came a duckling unlike the others. He was big, gray, and awkward, quite different from his siblings.

The other ducklings laughed at him, calling him ugly. The poor duckling felt lonely and sad. Even the animals around the farmyard taunted him. Seeking solace, he wandered far from the farm, finding refuge in the wild.

Autumn came, and the ugly duckling observed a flock of majestic swans flying south. He longed to join them but felt unworthy. Winter was harsh, and he struggled to survive the cold. However, kind-hearted farmers found him and took him in, nurturing him back to health.

As spring arrived, the duckling had grown stronger. One day, he saw his reflection in a clear pond and was astonished. He had transformed into a beautiful swan. Suddenly, a group of swans flew by and landed near him. To his delight, they welcomed him, recognizing him as one of their own.

The swans took the ugly duckling, now a magnificent swan, with them. He had finally found a place where he belonged. As he glided gracefully across the pond with his new friends, he felt a deep sense of joy and acceptance.

The ugly duckling had discovered that what he had perceived as flaws were simply the traits that made him special, and the swan lived happily ever after. 

The tale of the ugly duckling is something we microcap investors encounter every day. As microcap investors we are drawn to businesses and situations that are small, obscure, unloved, and under-estimated because of inherent flaws. 

When I reflect on all my big winners and most of the top performing companies profiled on MicroCapClub - EVERY SINGLE ONE was an ugly duckling at one point. 

They all had flaws and imperfections. They all would have been laughed at by 99% of investors. If you go back far enough they all were ugly.

+8,868% profiled by Paul Andreola - XPEL, Inc. (XPEL) was an ugly duckling. Niche provider of paint protection film transforms under the leadership of an unproven new CEO. The stock traded under a weird symbol on the Canadian Venture Exchange even though operations are based in the United States.  

+4,898% profiled by Ian Cassel - Napco Security Technologies, Inc. (NSSC) was an ugly duckling. A physical door lock company which accumulated a lot of debt from an acquisition started paying down that debt and executing on a recurring revenue alarm business. 

+3,391 profiled by CleverLongboat - Celsius Holdings (CELH) was an ugly duckling.  In 2017, the company prevailed in a court case challenging the validity of their claims that Celsius drinks increase the body’s metabolism and burn calories for up to three hours after consumption. The CFO of the company steps into the CEO seat in 2018 and transforms the company.

+2,585% profiled by Ptec - Willdan Group, Inc. (WLDN) was an ugly duckling. A money losing consulting company right sizes their expense structure right when industry tailwinds kicked in. 

+2,440% profiled by dsmoak - HemaCare (HEMA) was an ugly duckling. An unprofitable but growing company that didn’t post financials with the SEC or OTC Markets suddenly transforms into a very profitable niche player in the healthcare industry. 

+2,271% profiled by smarshall - US Concrete (USCR) was an ugly duckling. A producer of ready-mix concrete exiting bankruptcy with a new CEO turns the corner at the right time. 

+1,990% profiled by NeilCataldi - Heska Corp (HSKA) was an ugly duckling. A sleepy tertiary player in the veterinary market transforms under the vision of a new CEO Kevin Wilson. 

+1,587% profiled by littlefish - Smith Midland (SMID) was an ugly duckling. A slow growth pre-cast concrete maker starts growing faster, earning more money and not diluting. 

+1,575% profiled by MikeDDKing - BioSyent Inc. (RX.V / BIOYF) was an ugly duckling. A quirky insecticide business suddenly pivots and in-licenses an iron supplement into the Canadian market. 

+1,445% profiled by MikeDDKing - FitLife Brands, Inc. (FTLF) was an ugly duckling. A mismanaged fitness/nutriceutical products company selling into GNC stores and franchises transforms under the leadership of a new CEO. 

+1,400% profiled by kgrae - UFP Technologies (UFPT) was an ugly duckling. A company that produces custom molded foam and plastic undergoes a 3 – year facility consolidation plan masking short-term earnings power.  

I could go on and on with examples. 

90% of microcaps are turnarounds in some shape or form.

Everyone hates turnarounds because Buffett said - “Turnarounds seldom turn.” 

I got news for you. They do turn. You cannot be a microcap investor and not invest in turnarounds. If you don’t like the term turnaround (negative connotation), then reframe them as transformations (positive connotation). 

Most big winners were ugly ducklings that transformed themselves into beautiful swans.

I was recently interviewed on The Meb Faber Show. Give it a listen if you would like to learn more about my journey and the investing merits of microcap investing. [Apple Podcast] [Spotify] [YouTube]

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