Niche Small-Cap With A Very Attractive Valuation

2023 has been a much better year for the major market averages, with the Nasdaq Composite sporting a 15% return after coming off one of its worst performances in years.

However, the small-cap and especially micro-cap space hasn’t seen nearly the love and many names continue to plumb new lows despite improving fundamentals.

One name that fits this bill is a newer issue that had its IPO debut in Q4 2021 and has plunged over 70% since going public.

However, this is a case of the stock being priced for perfection and the sell-off being justified for this reason vs. the fundamentals being poor.

The good news is that the company has doubled sales since going public and after this ~70% decline, the valuation is becoming much more reasonable and it’s actually one of the cheapest names in the Packaged Foods industry group following its recent sell-off.

So, with small-caps due to begin outperforming with tech names no longer as attractively valued and lots of value hiding in plain sight in the space, I think this is the time to start looking at select small-cap names for potential investment.

Checks The Boxes For Growth And Value

The Real Good Foods Company (RGF) is a $105 million market cap name in the Packaged Foods industry group that is carving out a niche in an untapped portion of the frozen foods market, selling high protein and low carb frozen foods.

This separates the company from other brands like Dr. Praeger’s, Jimmy Dean, Caulipower, and Tattooed Chef that either have moderate protein and relatively high carbs, or the even less favorable mix of low protein and high carbs.

The Real Good Foods Company (“Real Good Foods”) offers products across breakfast, lunch and appetizers/desserts, with meals that include Chicken Enchiladas, Orange Chicken, Sausage Breakfast Bowls, Jalapeno & Cheddar Chicken Nuggets, and even ice cream.

As noted by the company in its most recent investor presentation, the company has barely scratched the surface in terms of its total market opportunity, with its products being offered in just ~17,000 stores with 10 items per store vs. the leading competitor that has a significantly larger footprint with nearly 1 million distribution points.

At the same time, its social media presence is growing rapidly, with 1.5 million social media followers and 500,000 email subscribers, dwarfing Digiorno, Tyson, Stouffers, Eggo, and Jimmy Dean combined.

Lastly, its repeat purchase rates are impressive, clocking in at 32% for December, up 500 basis points vs. December 2020 levels.

In regards to the long-term opportunity, Real Good Foods is confident that it can grow net sales to $500 million with a 35% gross margin and an adjusted EBITDA margin of 15%, translating to nearly ~$80 million in adjusted EBITDA.

Other frozen food companies currently trade at ~5x EV/EBITDA like Nomad Foods (NOMD), suggesting that the stock could more than triple from current levels if it can command a similar multiple and execute on its goal.

The Fundamentals

Real Good Foods ended 2022 with $8 million in cash and $38 million in total liquidity and reported 68% sales growth in FY2022, with sales coming in at $141.6 million.

Its Q4 performance was quite solid as well, with revenue of $35.7 million, up 39% year-over-year despite lapping tough comps with 129% growth in the year-ago period.

Despite this incredible growth and guidance to grow revenue by an additional 42% this year, the company is currently trading at just 0.52x forward sales, a massive discount to peers in its industry group like Nomad at ~1x sales despite Nomad having much lower growth.

In my view, companies gaining market share in a niche part of the frozen food market should trade at a premium to more established names that lack growth, and one could argue that the right price for a company like Real Good Foods is 1.0x sales or better.

Plus, the company has a significant tailwind from a health/wellness standpoint as it offers high-protein, low carb meals but with the added benefit of convenience for those that don’t always have time to cook for themselves.

So, from a growth and valuation standpoint, Real Good Foods certainly checks both boxes.

The Technical Picture

Looking at Real Good Foods’ technical picture, it isn’t pretty, with Real Good Foods declining to new all-time lows and breaking key support at $6.10 earlier this year – a level that was defended for a year following its IPO debut.

However, the stock has now completed its measured move down from its failure at $6.10 support, and it’s becoming extremely oversold as it comes down to re-test its prior low in late February where the stock found immediate support at the $3.60 – $3.70 level.

See the Full Technical Analysis Report for RGF

Obviously, there’s no guarantee that this level is defended again, but the combination of depressed sentiment, a very attractive valuation, and an extreme oversold reading suggest that any positive news could lead to a strong rebound in RGF.

Given that I see a better than 60% probability that support holds in the $3.50 – $3.60 region, I may start an initial position at $3.90 and would consider adding to my position into further weakness to make it a full position.

The Bottom Line

Based on what I believe to be a fair multiple of 0.75x sales for Real Good Foods and FY2024 sales estimates of $256 million, I see a fair value for the stock of $191 million [US$6.80 per share].

This translates to a 72% upside from current levels to its 18-month target price, a very attractive valuation for a company that could ultimately see ~200% sales growth from FY2022 levels.

So, for investors willing to step out on the risk curve into a more speculative and lower-priced name, I would view any pullbacks below $3.89 in RGF as a buying opportunity.

Disclosure: I have no position in RGF, but may start a position in the next 72 hours.

The above analysis of The Real Good Foods Company (RGF) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. Given the volatility in the small cap space, position sizing is critical, so when buying sub $500 million market cap names, position sizes should be limited to 3% or less of one’s portfolio.

Is The Real Good Foods Company (RGF) A Buy or Sell?

Based on MarketClub’s technical analysis tools, The Real Good Foods Company (RGF)) is in a strong downtrend that is likely to continue. While RGF is showing intraday strength, it remains in the confines of a bearish trend. Traders should use caution and set stops.

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