When looking for small growth companies it’s often advised to find companies that occupy a niche in the marketplace. After all if a company doesn’t have a presence in a niche, they are probably not even a profitable business. Even a behemoth like Wal-Mart can be thought of as a niche – big box stores with a large variety of merchandise at everyday low prices. In some ways every business is a niche. Even if the product or service is the same, all businesses are looking to differentiate themselves from the competition and have a niche appeal.
In stocks, especially small caps, what matters most is occupying a scalable niche. A company that has a niche but cannot continue to grow and scale is a dead in the water stock. I write about this because I am debating with myself about a stock I own; my concern is about the scalability of their niche.
The stock is International Barrier Technology (IBH.v). They specialize in fire proof building products and coatings. Almost all their sales are into the US residential and commercial market. Positives first – Revenues are trending up nicely. They were profitable last 3 quarters. New license agreement with Russia/Euro client. All time high square footage sales. Margins improving. No analyst coverage/ unknown by institutions. Negatives – They have only 3 big customers who are distributers of their product. Any loss of these customers would affect the stock greatly. They have never proven to be consistently profitable. Though the company is profitable, the market cap is only $8 million so be warned, this is an extremely speculative stock.
My main concern is, can they scale the niche in this up cycle and consistently grow the bottom line? Is the technology offered by IBH capable of driving profitability over the next 3-5 years? Or is it too small of a niche to be a growth stock? The appeal here is if revenues and earnings continue to trend how they are, the opportunity is there. I am leaning towards the ‘too small of a niche’ and am thinking hard about selling my position for something better. The market for IBH’s products may just be too small to earn 2-3 cents a share over the next 4 quarters, which is what I think they need to do to propel the stock higher.