Today, I want to tell you about a small-cap investing opportunity I’ve discovered that takes advantage of one of the most consistent, reliable growth investing trends going. But first, I have a very important question for you.
How Fast Can You Run?
There are two fundraising events I plan to participate in this summer. The first is the Falmouth Road Race, a seven-mile run that follows the ocean from Woods Hole to Falmouth in Massachusetts. I’ve run it a few times before, with mixed results, and it’s always a good time. This will be the 44th Falmouth Road Race, and over 11,000 runners join the fun every year.
My wife’s family has a little cottage right near the finish line, and in the days leading up to the event, we see runners from Kenya streaking past as they get ready. They look like they could run forever without breaking a sweat. In the men’s event, a Kenyan has won 20 out of the last 25 times (the other five winners were from Ethiopia and Morocco). In 2004, Gilbert Okari from Kenya posted the fastest time to-date: 31:08. That’s the equivalent of seven consecutive 4:44 miles!
The second event will be more challenging for me. It’s the Save the Bay swim across Rhode Island’s Narragansett Bay. The 1.7-mile swim starts in Newport and ends in Jamestown, Rhode Island, and it typically takes an hour and twenty minutes, though some swimmers do it far faster.
I have no idea how long it will take me given tides, waves and conditioning, and it’s fair to say I’m somewhat intimidated by the event. I drive on the bridge over the bay quite often and it seems pretty long! Thankfully, there will be 500 other swimmers and a number of kayak “chase boats.”
But what does that have to do with investing?
Being in the Right Place at the Right Time
At its essence, growth-investing success comes down to playing the right trend, at the right time, and with the right stocks.
The bigger and the more durable the trend, the better.
And one of the most durable growth-investing trends is giving to charitable causes!
It’s not rampant growth—it grows a couple of percentage points faster than GDP—but it’s consistent. It’s been going on for decades. Research shows that while people tend to give more in good times, they don’t cut back much in downturns.
A 2011 paper published in the Journal of Economic Perspectives by John List, the Homer J. Livingston Professor of Economics at the University of Chicago, finds that since 1968, growth in charitable gifts of money roughly doubled the growth of the S&P 500. Adjusting for splits and dividends, the S&P began 1968 at 90, and has risen over 2,000% since. If Professor List is correct, charitable giving has gone up by nearly 4,500% since 1968. Now that’s what I call a growth market!
The sheer value of all the dollars being gifted around the globe is astounding. In the U.S. alone, annual contributions now top $358 billion.
Even so, competition for constituent attention is high, as is the need for nonprofit organizations (NPOs) to create engaging fundraising events while keeping operating expenses down. The more money they can deliver to the end cause, the better supporters will feel, and the more likely they’ll be willing and able to give again in the future.
To get the job done, NPOs are increasingly turning to industry-specific, cloud-based software solutions.
One Small-Cap Stock to Play the Growth-Investing Trend
One might not think there’s much money to be made in an industry where giving is the name of the game. But philanthropy and capitalism aren’t mutually exclusive.
There are a number of software options for businesses in the nonprofit and charitable giving industry, ranging from basic, stand-alone software programs for small organizations, to more sophisticated, integrated product suites that serve large, international clients.
Abila, Bloomberg, Campus Management, Ellucian, FrontStream Payments, Microsoft (MSFT), Oracle (ORCL) and Salesforce.com (CRM) all have a small slice of the pie. But one company in particular stands out. It’s a small-cap stock. I think it’s the best in the business, and it’s making money while doing good.
Revenue growth over the last four years has averaged around 15%. It even grew through the latest recession, and has been profitable for years. The company can be this consistent on earnings because it enjoys a healthy gross margin of 52%, and customer retention is nearly 90%.
The company’s software is delivered either on-premises via a perpetual license, or over the cloud as a subscription service. It helps clients do all the things they need, from promoting their cause and managing relationships and finances, to automating business operations, conducting marketing and social media activities, and analyzing market opportunities.
If you’re interested in learning more about this company, you can join me this August and swim the Bay! The company supplies the fundraising software for the event, and I’ll tell you all about it once we reach our destination.
Or, you can just subscribe to Cabot Small-Cap Confidential, and gain access to my in-depth report and ongoing coverage!
Your guide to small-cap investing,
Chief Analyst, Cabot Small-Cap Confidential 2.0