An age-old argument rages among the investing set – is it wiser to put your money on the horse or the jockey of a given enterprise? Consider the horse a stand-in for the company’s industry and operational model. The jockey? Well, that’s the senior management squad – especially the CEO – calling the shots and charting the course.
Can a dynamite business model or robust industry be so compelling that any leader could steer it to glory? It’s a captivating question. Both elements surely influence success, but certain investment camps prefer to play up one over the other.
This very quandary is freshly in the limelight with Starbucks (SBUX) watching a changing of the guard in its C-suite. Such shifts are not uncommon, with retail outfits often tapping fresh leadership to breathe life into timeworn brands.
Here, we spotlight two small-caps under the watchful eye of Zacks. These companies embody the debate, giving potential investors a choice based on their personal leanings.
Kingsway Financial Services (KFS): A Studied Gamble
Kingsway Financial Services (KFS) takes its stand through two principal divisions: Extended Warranty and Kingsway Search Xcelerator (KSX). The Extended Warranty arm dishes out vehicle service agreements (VSAs) and warranty products nationwide for autos, HVAC systems, and commercial cooling rigs. Revenues clocked in at $68.2 million from service fees and commissions in 2023, down by 7.8% from the prior year.
The KSX leg, zeroed in on business services, saw 2023 revenue reach $35 million (an 81.9% rise from 2022). Kingsway is banking on this arm to grow as a revenue juggernaut. Anchored by a ‘search fund’ model, KSX leans on a 2022 Stanford Business School study that touts the outperformance of search funds from 1984 to 2021.
To be fair, KSX does have its bets placed on the ‘horse,’ picking industries that meet specific growth criteria. However, it’s the outsized emphasis on the ‘jockey’ that raises eyebrows. Targeting CEOs from elite MBA programs and often military backgrounds, the company aims for proven leadership mettle to steer the ship.
Kingsway Financial Services (KFS) looks to be on the cusp of an operational upswing. Our Neutral rating hinges on evidence that acquired companies are being adequately absorbed and hitting performance targets.
TSS Inc. (TSSI): Galloping Towards Growth
TSS Inc. (TSSI) is the living embodiment of the horse analogy, entrenched in the burgeoning realm of data centers and their symbiosis with AI’s meteoric rise. The company delivers intricate IT solutions, handling everything from rack and systems integration to configuration services, data center management, and strategic procurement. Catering to a wide clientele spectrum – from data center operators to modular data center venues – TSS Inc. is positioned to tackle the evolving needs, primarily in the AI and accelerated computing infrastructure spheres.
The upsurge in AI-driven infrastructure demand has proved serendipitous for TSS. The firm bolstered its production capacity in Q2 2024, primed to stoke revenue growth. In June 2024, TSS began rolling out AI-enabled rack integration solutions, with expectations high for a sustained uptick throughout the year and beyond, positioning TSS as a frontrunner in AI-backed data center infrastructure.
Net income took a giant leap, ascending by 345% year-over-year to $1.4 million, propelled by enhanced profitability in core operations. Adjusted EBITDA mirrored this trend, surging by 62% to hit $2 million. TSS’s pivot to high-margin segments seems to have offset revenue declines in the procurement slice, heightening overall profitability.
