Tucows (TSX:TC)(NASDAQ:TCX) has been ripping higher over the past few months, soaring 38% from its November bottom — a time when I strongly urged investors to double down on the stock, which I believed was severely undervalued at the time thanks in part to pressure applied by a short-seller, who had his fair share of allegations against the company, many of which I thought were baseless.
“Short-seller allegations are a definite sign of smoke, but more often than not, there’s usually no fire that accompanies the smoke that shorts draw the public’s attention to. Nonetheless, shorts will pull out all the stops to try to make a business appear worse than it actually is because a falling stock is money in the bank for them,” I said back in November. “…many shorts have been crying wolf of late, especially with Canadian stocks, which appear to be in the crosshairs of various U.S.-based [short] firms.”
While Tucows’s domain business had been under pressure due to up-and-coming competitors like Namecheap, short-seller involvement only served to severely exacerbate the negative trajectory of a stock over a concern that was more short term and benign in nature. The fact was that Tucows was still well equipped to enjoy significant growth, but the Street was losing sight of the longer-term picture, as they narrowed in on short-seller comments, which, while alarming, had little to do with the deterioration of the longer-term thesis that looked to be still intact.
When short-sellers smell blood, they go in for the kill, but fortunately for Tucows, the company clocked in an encouraging quarter that allowed investors to shrug off short-seller concerns and regain confidence in the name that had been unfairly targeted.
You see, few other names out there are able to offer investors the same blend of growth and stability as Tucows. The domain registrar business serves as a rock-solid foundation for Tucows, and the rapidly growing Ting business should be seen as the growth engine that can take the company to the next level. With that in mind, it’s not just the growth that should warrant a premium multiple on Tucows stock, but the relative stability in its internet services business — a cash flow-generative backfall that few other small-cap growth firms possess.
Foolish takeaway on Tucows
Tucows has been flying high of late, and while it’s not the worst idea in the world to wait for the stock to fall back to the mid-to-high $60s, growth investors with a long-term mindset may want to get a bit of skin in the game today, because Tucows’s recent breakout could be just the beginning.
At over 30 times trailing earnings, the stock isn’t cheap, but when you consider the quality of growth you’re getting, I’d say the premium multiple is well worth the price of admission.
Stay hungry. Stay Foolish.
