An enduring question that echoes through the halls of the investment community is whether it’s wiser to place your bets on the horse or the jockey when it comes to a specific company. The horse symbolizes the industry and the business model of the company, while the jockey embodies the senior management team, particularly the CEO, who guides and drives the company forward.
Can a business model or industry be so robust that any leader could steer it to triumph? Although it’s acknowledged that both factors contribute to success, various investment strategies lean towards emphasizing one over the other.
The spotlight has recently fallen on this debate, notably with the recent CEO transition at Starbucks (SBUX) and numerous instances in the retail sector where new leadership was brought in to breathe new life into a brand.
Let’s delve into two small caps featured by Zacks that encapsulate this debate, allowing potential investors to make their choice based on personal preferences.
A Glimpse at Kingsway Financial Services (KFS)
Kingsway Financial Services (KFS) operates via two main segments: Extended Warranty and Kingsway Search Xcelerator (KSX). In 2023, the Extended Warranty segment raked in $68.2 million in service fee and commission revenues, showing a 7.8% decline from 2022.
The KSX segment, which is focused on business services, experienced a revenue surge to $35 million in 2023, marking an 81.9% increase from the previous year. This segment is based on the “search fund” model, backed by a 2022 Stanford Business School study revealing superior returns generated by search funds from 1984 to 2021.
While the KSX segment does pay attention to the horse, selecting industries meeting specific growth criteria, the significant emphasis is on the jockey. The company typically recruits CEOs from top MBA programs for acquired companies, with a preference for candidates with military experience and proven leadership abilities.
Kingsway Financial Services (KFS) seems poised at a turning point for operational performance. Our Neutral rating is contingent on further evidence showcasing effective assimilation of acquired companies and meeting performance targets.
The stock is presently trading at 2.1X trailing 12-month EV/Sales TTM, compared to 2.3X for the Zacks sub-industry, 1.2X for the Zacks sector, and 5.3X for the S&P 500 Index, reflecting a fascinating narrative of its trajectory.
Unpacking TSS Inc. (TSSI)
TSS Inc. (TSSI) embodies the horse analogy as it ventures into the burgeoning realm of data centers intertwined with the exponential growth of Artificial Intelligence (AI). The company provides intricate IT solutions, including rack and systems integration, data center management, and strategic procurement.
The burgeoning demand for AI-enabled infrastructure has been a significant boon for TSS, prompting hefty investments in expanding production capacity in the second quarter of 2024. The company has ventured into AI-enabled rack integration solutions since June 2024, anticipating continued acceleration in this trend throughout the year and beyond.
The company witnessed a substantial 345% year-over-year surge in net income to $1.4 million, driven by enhanced profitability in core businesses. Adjusted EBITDA also climbed impressively by 62%, reaching $2 million, underscoring the company’s strategic shift towards high-margin segments to bolster overall profitability.
TSS Inc. (TSSI) is currently trading at 1.80X trailing 12-month EV sales/TTM, contrasting with 2.10X for the Zacks sub-industry, 3.37X for the Zacks sector, and 5.13X for the S&P 500 index, painting a picture of its market positioning and potential.