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Macro Themes Lead to Micro Ideas

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One common strategy among investors is “thematic” investing, whereby investors identify major trends occurring in the economy which look sustainable. This is also referred to as “top-down” investing. The line of thinking continues with determining which specific companies should benefit from these trends. There are more obvious, consumer/retail trends like yoga pants or Electric Vehicles.

But there are also less obvious trends which we highlight here. Additionally, there are Microcap companies, somewhat lost in the complex ecosystem of commerce, that will also benefit but are not as well known by investors due to their lack of attention from Wall Street.

The themes we’ve identified include Federal infrastructure spending, cyber security, and increased global military spending. The dilapidated state of our country’s infrastructure is well documented and includes highways, bridges, airports, etc. Recall that the IIJA (Infrastructure Investment and Jobs Act) was passed into law in November of 2021 with a 5- year authorization period extending into 2026.

As Brookings’ analysis concludes, another $346.8 B or nearly 59% of the original allocation to Transportation has yet to be awarded. It appears that there is still a decent runway for this funding to flow directly into shovel-ready projects via direct Federal funding or via Federal dollars into State coffers.

Gencor Industries, Inc. (GENC - Free Report) is one microcap that we believe should benefit from this infrastructure spending. The company manufactures asphalt plant equipment sold into the highway construction industry. The company recently reported a 44% increase in backlog as well as a balance sheet containing $104.8 m of cash and marketable securities with $0 debt. The greatest risk factor is the timing of backlog conversion to sales which could result in lumpy sales.

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Another theme which continues to be top of mind is cyber security. The data breaches appear to be becoming more frequent and larger in scope highlighted by record setting ransom payments. And there are more worries around critical infrastructure attacks like the nation’s electric grid.

Grandview Research projects that the global cyber security market will grow at a CAGR of 12.3% through 2030. It should also be noted that the SEC adopted a new rule in July of 2023 requiring companies to disclose any material cyber security incidents so a more heightened awareness around cyber security as it relates to brand preservation may ensue.

We believe CSP Inc. (CSPI - Free Report) is a microcap name that could benefit from these industry tailwinds. The company’s higher margin software business serving the critical infrastructure of industries or OT (Operational Technology) like pharma and utilities is gaining momentum and represents over 10% of revenue.

Some deals were pushed out of the December quarter resulting in a YOY sales decline but are expected to land this quarter. The biggest risk factor is the intense competition in the cyber security software space and ongoing worries that a major tech player could develop their own software.


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Lastly, and unfortunately, we note the growing level of military conflicts around the world. While US defense spending remains robust, highlighted by the recent $886 B defense policy bill, we find recent NATO spending and body language especially remarkable. Eighteen of the member states have pledged spending 2% of GDP in 2024 on defense vs. only seven states back in 2022.

We believe M-tron Industries (MPTI - Free Report) should benefit from this increased military spending. The company manufactures the electronic components focused on frequency and spectrum that are supplied to the large US defense companies which ultimately contract with the US DOD and foreign allies. Backlog increased 14% YOY to $50.3 million and Gross margin has improved 1040 bps YOY to 42.8% due to efficiencies and the exit from low margin businesses.

The company has also launched on average 260 new products per year over the last 5 years and is now producing more $1 m revenue products. The main risk factor is the over-reliance on defense customers as defense/aerospace comprises 58% of revenue.


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