This Microcap Has the Right Stuff

Perhaps I am in the minority on this topic, but I believe that the bull market as we know it is over.  This statement should not be inferred as the end of the bull market. Rather, the type of bull market we have enjoyed for the past few years, which has been long on momentum and plays and short on fundamentals, has shifted. This means that stocks exhibiting more traditional and fundamental valuation characteristics will likely rule the day for the foreseeable future. One interesting example of a stock that could benefit from the trend is a microcap stock with the generic name TeleCommunications Systems Inc. (NASDAQ – TSYS - $2.64).  It is trading at a discount to the market’s average P/E and its own EPS growth rate.

Telecommunications Systems, Inc. (TCS) is a world leader in highly reliable and secure mobile communication technology. In fact, the TCS infrastructure forms the foundation for market-leading solutions in emergency 911 calls (E9-1-1), text messaging, commercial location and deployable wireless communications. TCS is at the forefront of new mobile cloud computing services, providing wireless applications for navigation, hyper-local search, asset tracking, social applications and telematics. Millions of consumers around the world use TCS wireless apps as a fundamental part of their daily lives. Government agencies utilize TCS' cybersecurity expertise, professional services and highly secure deployable satellite solutions for mission-critical communications. 

With over $350 million in annual sales and 349 awarded patents, it is easy to see that this $150M market cap stock is no small player. The company weathered a difficult 2013 that saw a drop in its key government business line and subsequent write-offs and restructurings. However, beginning late last year, TCS was awarded a number of new E-911 and military contracts which should begin to kick in this year. Moreover, the environment for government sales appears to be more favorable now than a year ago and the restructurings will enhance profit margins.

What makes TSYS a unique opportunity is the fact that it can appeal to a wide range of investors. These include turnaround players, technology investors, GARP (Growth at a Reasonable Price) investors and those who are strict adherents to technical analysis.  The Street is projecting the company's EPS will leap from $0.09 in 2013 to $0.15 this year and to $0.22 in 2015, despite only a modest rise in revenue growth. Higher margins are clearly the key driver here and at current levels, the stock trades less than 18x FY14 EPS, which is a nearly 20% discount to the FY14 P/E for the Russell 2000 Index and well below its projected EPS growth rate. Plus, as one of the few stocks trading solidly above its 20-day, 50-day and 200-day moving averages, the technical aspects of its shares are also appealing.

While Telecommunications Systems is at risk of potentially announcing a soft Q1 on May 1, I believe that new contract wins, greater operating performance, low valuation and its strong yet uncorrelated technical trading qualities will drive the shares toward the $4-a-share mark by year-end. 

Read More