Rocky Mountain Chocolate Factory
I’ve been looking for a fantastic micro-cap investment for a long time. While I’m quite confident that stocks like Marvel and Dreamworks will make me a decent profit, it doesn’t change the fact that they are billion dollar companies. No matter how fantastic the business, simple mathematics puts a ceiling on growth. The bigger the company, the closer that ceiling is. With this in mind, it’s no wonder that I’m going after a smaller company (though CAPS won’t let me rate it unfortunately).
Supposedly, smaller companies are riskier because their is a higher likelihood of bankruptcy. I’m not business expert, but the only argument I’ve heard for this is “just because they’re small”. In my opinion, good finances are good finances regardless of company size. A big company with horrible finances can still go bankrupt because they need more money to keep their business afloat. I suppose one could argue that bigger companies are more “diversified”, but over diversification and poor management can bankrupt a company as well. Poor expansion from over diversification also limits growth.
So while browsing micro-caps with solid balance sheets, I came across Rocky Mountain Chocolate Factory. The company has no long term debt. Zero. Not only that but it has 10 million in current assets vs 3 million in current liabilities. Total assets amount to 17 million vs 4 million in total liabilities. That’s a fantastic balance sheet in my eyes.
I also love the management style of the company. The company owns very few company owned stores, 7 out of over 350. I like the idea of having mainly franchised operations. The fact that the franchisees own their store both serves as an incentive for them to work harder and provides a fair compensation: a cut of the profits. This is my ideal form of capitalism and I think it works. Senior management must also approve every location so their expansion is limited, but it also ensures that their rate of growth is controlled. The company also closes down any franchisee that is damaging the company’s brand. Expanding quickly may be great for the stock temporarily, but it comes with the risk of the company over-expanding and I’d have to somehow know when they’ve over expanded and sell my stock before other people realise it. That’s not exactly something I’d want to do.
The company also does not do nation wide advertising. They limit advertising to in store advertising materials and place stores where there’s a lot of foot traffic. The store windows are decorated to provide a cozy feel that entices people to come in. New franchisees are usually referred to from other franchisees. This is a great way to save on costs and if you’re trying to keep expansion slow, then nation wide advertising is a waste of money anyway.
