RE:SA Interview: QIPT a Top Pick- Small And Microcap Investing SA: What's one of your highest conviction ideas right now?
Aaron Warwick: My highest conviction idea right now is Quipt Home Medical (NASDAQ:QIPT). It's by far my largest position, not because of the potential upside-which is large-but because of the corresponding low risk. As I stated early on in this interview, I've really learned to manage towards risk, and so I love this name because I perceive it is low-risk.
Specifically, the company trades at around 4-5x EV/2022 AEBITA (based on current guidance). Management is extremely trustworthy and reliable. High quality, high character people. Fantastic operators. And they have a long runway in front of them, growing both organically and via accretive acquisitions. I believe 2021 was a transitional year for them, and that their stock price will be re-rated at some point in 2022.
As I've written about them, they had a real headwind going against them with a warrant overhang mid-year 2021. Then, I believe, you had some tax-loss and technically-driven selling the remainder of the year. And that's all on top of changing their name, their reporting (from CAD to USD), and their uplisting to Nasdaq.
In early 2021, the company traded in the $7-$8/share range, which at that time, I thought was a relatively reasonable price, although I expected them to continue to grow to a higher valuation as the business grew. But now, the company trades for lower, despite the business being stronger than ever. They would be a cash cow, if not for the fact that they put their operating cash flow into accretive acquisitions, almost immediately turning low-margin businesses into high-margin businesses, thus increasing their own cash flow in the long run.
I am completely comfortable with this investment, even if it continues for years to trade at 4-5X EV/AEBITDA, because the company will continue to grow via accretive acquisitions and organic growth. Their AEBITDA will grow consistently, thus increasing their EV. And at some point-even if it's only at a time when another public company or private equity eventually acquires them-they will get a much, much higher valuation than 4-5X AEBITDA. And on the risk side, their type of business is only increasing, and reimbursement rates are strong for the foreseeable future. And because of these factors, I see at least 200% upside potential over the next 3-5 years, with very low downside risk at current prices.