Hidden Gems - First Edition
Hidden Gems - First Edition
Uncovering three under-the-radar small-mid caps hidden gems
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Hello, reader!
Thank you for stopping by my blog, and welcome to the very first edition of “Hidden Gems”!
Unlike my “Monthly Specials” posts—such as the two I shared for October, Part 1 and Part 2, which highlight stocks with strong fundamentals and technical setups for long-term investing or swing trading—in these Hidden Gems posts, we’ll be diving into small- and mid-cap companies that are often overlooked by investors. Each of these companies possesses, what I consider to be, a unique edge—whether it's exceptional business quality, underrated quantitative fundamentals, or outstanding growth potential with strong technical setups.
Today, I’m excited to highlight three gems, each with its own distinctive appeal. We’ll start by traveling to Italy, where two of these companies operate in the high-end luxury market. Then, we’ll move to the U.S. to look at a young growth company that addresses complex financial needs for some of the world’s biggest corporations.
While, we may argue, all three shine in their own way across qualitative and quantitative fundamentals as well as technicals, each has one standout trait that makes it truly special.
Let’s dive in!
The Italian Sea Group: Building Big Luxury Yachts with Great Fundamentals
The Italian Sea Group (TISG) is an Italian €430 million small-cap and a key player in the high-end yacht industry, constructing and maintaining luxury yachts over 50 meters. Founded by CEO Giovanni Constantino in 2012 from the merger of the historic Tecnomar and Admiral brands, TISG has further expanded through partnerships with Armani and Lamborghini, as well as the acquisition of Perini Navi and Picchiotti, funded by its 2021 IPO.
With demand for luxury yachts rising alongside the 5% CAGR growth in high-net-worth individuals, the company is well-positioned to capitalize on it with their current strategy. Its vertically integrated model ensures control over every phase, from design to delivery, which allows for a premium quality and customization that high-net-worth clients seek.
The company recently expanded its production capacity, enabling it to take on larger projects with reduced lead times and capitalize on its still big order backlog. Although this backlog grew considerably during the COVID years, recent normalization and economic uncertainty has caused the stock price to dip.
What makes TISG very interesting at current price levels is their quantitative fundamentals:
FY2024 Growth: +14.8% Revenue growth and +21.6% EPS growth.
Valuation Metrics (NTM): P/E of 8.85, PEG of 0.4, and P/FCF at 7.5.
Capital Efficiency:
Profitability (LTM): ROCE at 26.4%, ROIC at 16.6%, with a net profit margin of 10.7%.
Capital-light business model (CapEx/Rev close to 0) given its vertically integrated approach and backlog-driven revenue stream.
Financial Health: Low leverage with Net Debt/EBITDA at 0.6
The company’s backlog high visibility has allowed them to reaffirm FY2025 and FY2026 guidance, expecting +9% revs growth and +16.5% EPS growth.
Main Risks:
While the backlog ensures some stability through 2026, slowing new orders have raised concerns about potential demand softening in the mid-term, particularly given TISG’s longer lead times and luxury-focused, low-volume sales model.
Brand deterioration is a high risk. The recent incident involving a TISG yacht sinking, resulting in the death of Mike Lynch (news here), challenges the brand’s image. The luxury yacht business depends heavily on reputation, client trust, and safety perceptions. For high-net-worth clients, brand trust is most important, and this type of events can lead them to shift to competitors, impacting TISG’s low-volume sales model.
Brunello Cucinelli: High-End Quality with an Hermès Vibe
Hermès is universally known for its craftsmanship and exclusivity, with a 10-year CAGR of 24.34% largely driven by its famous Birkin bags. However, many might not be as familiar with Brunello Cucinelli ($BC.MI), the "King of Cashmere."
This Italian brand, worth €6 billion, is also family-owned and founder-led, offering a unique approach to luxury similar to Hermès dedication to timelessness and quality. Below, I’ll explain what sets Cucinelli’s brand apart as a high-quality business in the absolute luxury market.
Positioning in "Absolute Luxury"
Brunello Cucinelli has carved out a place in the “absolute luxury” segment, emphasizing heritage and timeless quality rather than transient fashion trends. For Cucinelli, luxury is about consistency and improvement built on a foundation of “decades of experience, history, and tradition.”
“The luxury market is independent of time and is based on a solid tradition.” - Brunello Cucinelli, 2011 Shareholder letter
A Culture Grounded in Humanity and Talent Retention
Drawing from his roots in Umbria, Cucinelli has cultivated a culture that prioritizes employee well-being and transparency. Employees finish work at 6 PM to preserve creativity and energy. With over 80% of production in Italy, artisans are paid 20% above the industry standard, motivating them to sustain the brand’s high standards.
“So these people can earn €80, €85 instead of €60... there lies our strength for the future.” - Brunello Cucinelli, Q1 2012 ER Conference call.
Mindful, Sustainable Growth
Cucinelli stands for sustainable growth that values quality over rapid expansion. Stores are opened only in prestigious locations, and growth is steady and purposeful to maintain exclusivity and high standards.
“We waited for 4 years in order to land a great location in Miami. I believe in a company that grows always maintaining high quality, high craftsmanship, and hopefully high taste.” - Brunello Cucinelli, 2019 Shareholder letter
Products Designed for Generations
Cucinelli products are created to be cherished and passed down, emphasizing durability and reparability rather than disposability. Each item is crafted with the intent of becoming a heritage piece.
“Contribute to the creation of unique items, which can be handed down and repaired, as they are part of the human-life cycle.” - Brunello Cucinelli, 2019 Shareholder letter.
🧠 Final Thoughts
Brunello Cucinelli reminds me of a “little Hermès” in its focus on craftsmanship, quality, and thoughtful growth. The brand represents more than fashion; its commitment to quality and heritage makes it a unique and differentiated business in the global luxury market.
🧐 Fun fact
Top tech execs like Mark Zuckerberg and Jeff Bezos are known for their casual uniforms—simple T-shirts or polos that look low-key but with an unreal high price tag. Jeff Bezos, for instance, reportedly spent over $500,000 on Brunello’s clothing in one shopping spree, a testament to his commitment to understated luxury and Cucinelli's philosophy of quality.
Clearwater Analytics: Growth through Automated Financial Management with Strong Technical Setup
Clearwater Analytics, a $6B cloud-native software company, delivers clarity and control over finances for institutional clients through daily accounting, data analytics, and customized portfolio reporting. Their platform enables informed decisions on performance, compliance, and risk, all while simplifying and automating financial management by replacing outdated legacy systems like SAP with a single, cloud-based solution. This approach not only enhances data integrity but also offers clients a competitive edge— enabling them to take faster and smarter decisions in a fast-paced financial landscape.
Founded in 2004 in Boise, Idaho, Clearwater now manages over $7.3T in assets for over 1300 clients, including JPMorgan, Snowflake, Dell, and Spotify. Since its 2021 IPO, the company has delivered +20% CAGR revenue growth, doubled cash flow, and a strong 32% FCF margin coupled with a 110% net retention rate.
What also makes Clearwater stand out is its current technical setup, let’s take a good look at it.
Technical setup
Chart shows a large U-shaped base forming since the 2021 COVID windfall, coinciding with their IPO (bad timing, to say the least). The base completed with a recent retest of its previous high at $28 in October.
MACD has been gaining momentum since mid-year and looks ready to pause as the stock consolidates near ATH. The weekly RSI is in overbought territory, supporting a possible handle formation for a classic Cup and Handle pattern.
A natural floor for the handle would be near the $24 price tag coinciding with a past strong resistance, broken out in August 2024.
🧠Final Thoughts
Clearwater’s IPO at the end of 2021 came at a challenging time, but they have continued to post 20% y/y revenue growth, with improving free cash flow and, recently, positive net income margins.
Although the financial management market may not seem so sexy, its estimated $11B TAM by 2030 is ready for disruption given the prevalence of outdated systems. Institutions have taken notice, accumulating shares while the stock has flown under the radar of individual investors.
Following the recent ATH retest at $28, I believe Clearwater's best days may still lie ahead with a potential Cup and Handle formation and strengthening fundamentals
That’s it for today.
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