Top Ranked Manager Finds Value In European Small Caps

Jeff Meyers founded Cobia Capital, a value oriented long/short equity fund in 2008.  In the decade since, Meyers has carved out a niche and reputation for himself unmatched within the small cap technology space.  He has consistently been one of the top ranked analysts on SumZero, where he has generated a staggering median annualized return of 26.31% across 34 ideas.   Meyers has topped SumZero's Best All-Time, Long, and Value Rankings lists. Prior to launching Cobia, Meyers had a long career on the buyside, with roles as Managing Director at Intrepid Capital, Portfolio Manager at Ibis, and Portfolio Manager at Ivory Capital.

SumZero sat down with Meyers to hear about his European small cap strategy and his thoughts on value investing.

Luke Schiefelbein, SumZero: What attracted you and Cobia to the small cap space?  

Jeff Meyers, Cobia Capital: Our firm, Cobia Capital, has spent the last ten years investing in the small-cap technology space.  This space is ripe for the value investing style we apply. Most large market participants cannot play in the small-cap space due to size and liquidity constraints.  This leads to market inefficiencies as stocks are covered by fewer research analysts and there can be gaps in understanding their underlying businesses.

Schiefelbein: Why do you have an edge understanding technology small caps?  What geographies do you find the most inefficiency?

Meyers: From a technology perspective, many generalists do not have the technical background to fully understand these companies and the products that they produce.  This builds upon the small-cap inefficiency and results in a market where bargains can be found and exploited. In my experience investing in this space over the last 25 years, I have found that Western Europe can be an even more inefficient market than the US when it comes to small-cap technology stocks.

Schiefelbein: Is there anything that exacerbates these inefficiencies?  What and why?
Meyers: Retail investors in Western Europe are more risk-averse than those in the United States and rarely invest in what they perceive to be risky smaller technology stocks.  Furthermore, institutional investors in Europe also have a large-cap bias and rarely invest in stocks with less than a billion dollar market capitalization. Finally, for whatever reason, most US institutional investors primarily invest domestically and do not venture into other geographies.  The result of these factors is a market in which great businesses can occasionally be found at extremely discounted valuations.

Schiefelbein: What is the most interesting recent European small cap that you’ve looked at?

Meyers: One example of this is an Internet marketing company called XLmedia (XLM.LN) which is primarily based in Israel but trades on the London exchange.  XLMedia gathers potential customers for its clients from its own proprietary websites (it has 2,000 of them) and media campaigns it runs on social media and on the Web.  XLMedia initially served the online gambling markets in Scandinavia but now has diversified both geographically as well as by end market into financial services, social gaming, and cybersecurity.  It is one of the larger players in a fragmented business and has grown through bolt-on acquisitions augmenting robust organic growth.

Schiefelbein: How do you discover this company?  What makes it special?

Meyers: We discovered XLMedia through a valuation screen in early 2015 at a price of 50GBp.  At the time, the company was coming off a year of 40% total revenue growth (30% organic) and 30% EBITDA margins. However, the stock was trading at a mere 5x EV/EBITDA, an unheard of valuation for a company growing at that rate with potential margin expansion.  Since then management has executed on its business plan and nearly tripled revenue from 2014 to 2017. XLMedia’s stock has responded to the improvement in business fundamentals and now trades at 165GBp. While slightly improved from its 2015 levels, the current valuation of 7x EV/EBITDA is still very inexpensive and the company has a long runway of growth ahead of it. Screening for inexpensive European small-cap tech stocks and doing the leg work to fully understand their businesses is a time-consuming process but can be well worth it when you capture one of the many multi-baggers that are out there.

Schiefelbein: What other companies are you interested in and why?

Meyers: We also own Spirent (SPT.LN), a U.K. stock focused on the technology test and measurement industry.  They are approaching a new test cycle of 400G Ethernet that we think will drive revenue growth over the next two years.  They have also introduced two new products recently that will enhance their growth rate. One is a cybersecurity offering called CyberFlood that is used by enterprises to test their security levels.  The product generates both safe and malicious traffic and this traffic is used to gauge the thoroughness of the enterprise’s network security. The other new product is called VisionWorks and is a service assurance product sold to service providers to allow them to more quickly remedy service outages on their networks.  It is unique in that it is an active test product allowing the service providers to prevent many outages before they occur.