Edward H. Heller, the famed venture capitalist of the early 20th century, had a knack for spotting small-cap stocks that would make their investors a lot of money as they grew to become mid-cap stocks. Heller said that he invested in companies that could be described as “vivid spirits”, which he further defined as companies focused on maintaining low costs with robust product improvement lines and an insatiable appetite for gaining market leadership.
If Heller were around today, I suspect he would put serious money into WD-40 Company (WDFC), the San-Diego based company known for its eponymous oil-based spray cans.
It is the largest distributor of canned sprays direct to consumers, and elects to charge a slight premium compared to generic Sam’s Club / Wal-Mart / Target brands. When the product was first sold in its familiar packaging to consumers in 1969, the profit margins were only 4.5% (with the profit margins of only 3% on bulk sales to Delta Airlines, California farmers, and mechanics in England). Today, WD-40 sports a net profit of 16% (i.e. they sell $405 million worth of specialty chemical products per year, and about $65 million remains as profit after all costs and expenses are paid).
The “vivid spirits” can be found in WD-40’s extreme cost advantage over its peers, its willingness to buy out any regional competitor and give it new branding under the WD-40 while also acquiring any intellectual property and improvements that can be incorporated to spread across the WD-40 portfolio, and the company has been ruthless about managing the share count as the 16 million shares at the start of 2000 has been reduced to 13 million shares outstanding today. Over the past twenty years, the profits per share have almost quadrupled.
And my favorite part? WD-40 is nearly recession-proof. During the financial crisis, WD-40 went from earning $28 million to $26 million to $36 million peak-to-trough-to-post-recession. If you need to prevent corrosion and rust, it doesn’t matter what the overall economy is doing, you’re going to buy WD-40. It costs $5-$25 a can, depending on the version you select.
Occupying small market niches can build great wealth. WD-40 has delivered 14% annual returns for its investors since 1978, turning a $10,000 investment into $2.6 million over the last forty years. Since 2000, a $10,000 investment has grown into over $110,000. It’s crazy. It’s rarely discussed, because it is a relatively small company compared to most others covered on the site. It doesn’t appear on most dividend growth lists because the dividend was frozen in 2003 and 2004, and the starting dividend yield is low compared to what most income investors like. And the industry is decidedly unsexy from the financial media’s point of view. And yet therein lies the opportunity. Hardly anyone knows it except for the WD-40 millionaires that have been quietly watching their holdings grow and grow over the years.