Kits Eyecare (KITS.TO)

Kudos to management. Online model continues to grow, both in glasses and contacts. Fairly aggressive revenue targets, and right now that's $500M (at which point they'll probably sell the company). Choppy stock. Lumpy around quarterly reporting on expectations vs. reality.

Now has its own manufacturing facility, allowing it to lower costs further and increase margins. On recent earnings, stock sold off on margins -- but $$ is being used to grow existing business. About 30% compounded revenue growth since IPO. Still not on radar of most investors. No dividend.

Because of its management pedigree, execution and growth potential, KITS gets a premium valuation. "Waiting" for a better valuation can be risky, as either two things generally happen: 1) The company earnings simply 'grow into' its valuation and the stock never gets a really cheap valuation and investors miss it, or 2) Growth slows significantly or there are other problems which crunch the premium valuation. In this case investors may not want to own it anymore. 

Of course, a high valuation in a small cap does add risks. But we would have called KITS expensive a year ago, and it has doubled since then. It has a relatively short history of profit, but P/E has never been below 90X so far. EPS is expected to more than double in 2026, which drops P/E to 57X if it hits its targets. We think this is a classic case of 'own it or don't own it' and not one to worry too much about current valuation. The buyers today are not buying to lose money. Insiders have bought a bit this year as well, and own 26%. We would consider them one of the more 'reliable' management teams. We like the stock. Don't get us wrong: it is a small cap stock and has risks. But so far it has grown almost flawlessly.
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Are opening stores now, though you can order glasses online. He's bought some. The business is an excellent concept. Warby Parker is their main competitor. The stock had trouble out of the gate, but rebounded nicely. The company is investing a lot, so profits aren't as high as he expected, but it is a younger company. Has a lot of runway. Well run.

Targets online market for both contacts and glasses. Can't argue with the management team. Facility in Vancouver lets them produce more cheaply. Margins tend to be fairly low, and these get squeezed temporarily with each new stage of company expansion, even though that increases revenue. Next goal is $500M in revenue. Suspects it will be taken out in a few years.

On his radar. He keeps tabs on it every quarter.

This is the second time around for management. They focus on online retailing and can produce glasses at a fraction of the cost. On track for $500 million in revenue.

There is not enough cash flow but the revenue growth is higher than they expected so he is watching it and has met with them. Trades at over 100X earnings. Be leery of using P/E for investing in growth companies. He uses EBITA to profit growth or sales.

Neat business. Glasses and contacts, but online only. Very good job growing business. Management composed of industry veterans. Big move in the stock, valuation's gone up. On his radar. Will continue to grow and profitability will improve.