December 4, 2023

When it comes to investing in the stock market, we live by the rule that time is more important than timing. If you own a business long enough, your investment returns will compound at the rate in which that business is compounding value per share.

This is one of the reasons why the global small companies universe is so compelling for the long-term investor.

However, seeking to identify and evaluate businesses that can compound intrinsic value at high rates over the long term isn’t easy.

Without extensive research and due diligence, high-quality cash flows and talented and long-term oriented management teams, most small caps will compound nothing but your portfolio losses.

So, I want to highlight two small companies that we think have the attributes to be great long-term investments for the patient investor. 

Uni-Select (TSE: UNS)

Uni-Select is a Canadian-listed automobile parts supplier and automotive-paint distributor.

The firm’s three businesses include Canadian Automotive Group (operator of well-known Canadian auto-parts chain Bumper to Bumper), GSF Car Parts (a large U.K car-parts retailer), and FinishMaster (the largest auto-paint distributor in the United States).

The company is in the midst of a business turn-around and we see strong growth prospects under a new leadership team.

Uni-Select’s CEO, Brian McManus, joined the company last year after an 18-year stint as CEO at Stella-Jones Inc. – one of the largest suppliers of pressure-treated wood products in North America.

McManus has taken steps to improve Uni-Select’s balance sheet and has embarked on making acquisitions.

Uni-Select recently purchased 13 auto-parts shops in Ontario and we believe FinishMaster has a great opportunity to consolidate paint distributors in North America.

Competition can be a risk, but Uni-Select is among the top three players in each of its business areas and is likely to take market share from smaller players.

All three businesses of the Group have attractive recession-resilient attributes.

Uni-Select’s stock trades at 16 times forward earnings and 13 times forward free cash flow.

We expect this business to compound its earnings and free cash flow at 10 to 15 per cent over the long term, with acquisitions a contributor.

Focus Financial Partners (NASDAQ: FOCS)

Focus Financial Partners is an investor in wealth management firms.

The New York-based company has been acquiring stakes in mainly U.S.-registered investment advisory (RIA) firms since going public in 2018. It operates as a network of partnership firms by buying a 50 per cent stake in them.

It currently has 75 partner firms across the US, Canada, the U.K, and Australia.

RIAs are the fastest-growing platforms in the U.S. – much faster than broker-dealers and wirehouses.

Focus has built a robust business, resulting in revenue being compounded by about 25 per cent a year over the past five years.

While we expect organic revenue growth will be negative this year due to the steep correction in stock and bond markets, its overall revenue will still grow 10 to 15 per cent from acquisitions.

Focus trades at just 7 times forward earnings and 10 times forward free cash flow. The business does use leverage, which is affected by rising interest rates, but the term structure of its debt makes us very comfortable.

Follow Greg Dean to keep up to date with the latest global small cap investing insights from Langdon Equity Partners, an affiliated investment boutique of Pinnacle Investment Management.

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