How Small Companies Keep Big Advantages
A tip for those trying to pick from the rankings
My approach to investing has a quantitative foundation because the evidence is clear: systematic models tend to outperform human judgment. Data-driven models are consistent and efficient. For people who want strong results without spending hours on research every week, a rules-based approach works.
But people still want to pick winners. While I think it’s best to stick with a strictly quantitative strategy, I also understand that we all feel inclined to choose one stock over another. Over the years, I have learned there are certain qualitative characteristics that small/microcap winners have in common, and I would like to highlight one of these characteristics today: the competitive advantage of Greenwald-style niche dominance.
I’ll explain what niche-dominance is, how Bruce Greenwald frames it, and walk through two examples where I detected niche dominance early and it influenced me to hold on. Over the years, I’ve made plenty of mistakes overriding the quantitative model. But when I’ve done it for this reason, it’s usually worked.
When It Makes Sense to Override the Model
The setup I’m looking for is territorial control: a company that serves a well-defined customer base in a way that makes competition inefficient. That control might come from long-term relationships, local knowledge, specialized fit, or the simple fact that the market is too small for larger players to bother with.
Bruce Greenwald explains this dynamic clearly in Competition Demystified. Strong returns, he argues, don’t require scale or speed or innovation. They require insulation. When a company defends a position that’s costly to attack and not worth the effort for most competitors, it can earn high returns for a long time.
This kind of dominance doesn’t show up directly in a screen or ranking system. But the financials often hint at it. High returns on capital, recurring cash flow, and stable margins without excessive reinvestment are signs that the company already owns its space.
The Structural Power of Niche Dominance
In Greenwald’s framework, the most defensible businesses don’t win by growing the fastest. They win by holding ground others can’t easily enter.
That advantage often comes from geography or specialization. A company might dominate a region because it’s built trust over decades and knows the local environment better than anyone else. Or it might operate in a vertical too narrow or too operationally complex for larger companies to bother with.
This kind of setup shows up sometimes in microcaps where customers value reliability and responsiveness over brand. Here switching costs are built into relationships, and those are harder to dislodge.
These businesses aren’t protected by patents or regulatory moats. They’re protected by position. They’re known, they’re integrated, and replacing them would be more trouble than it’s worth.
Greenwald’s point is that durable control doesn’t have to come from innovation or scale, it can come from entrenchment. A company that serves its territory well, and gives competitors no reason to attack, can produce high returns for a long time. This is one advantage small companies can have over large companies.
Case Studies: Two Companies Where it Worked
This kind of structural advantage doesn’t show up often, but when it does, it’s worth some research. I’ve seen a few companies where the business was so entrenched, so protected by geography, relationships, or fit, that I was willing to override the model.
Here are two examples: Limbach Holdings and XPEL Inc. In both cases, the ranking system worked exactly as designed, but a closer study of the business revealed something deeper.
Limbach: Service Density and Embedded Relationships
Limbach Holdings (LMB) first showed up at the top of my rankings near the end of 2022 at around $9. It was a standout based on the numbers alone. But what kept me paying attention was something the model couldn’t capture: the growing strength of its owner-direct service business.
Historically, Limbach was a project-based contractor, bidding for large HVAC and plumbing jobs, competing on price, and facing all the volatility that comes with it.
That began to change when new leadership shifted focus away from general contracting and toward long-term service relationships. These were recurring maintenance and upgrade contracts with institutions like hospitals, data centers, and universities, places where system failure is expensive and trust matters more than price.
Limbach started building deep regional coverage. The technician maintaining a system often had a history with the facility. Smaller competitors couldn’t offer the same scale or responsiveness. Larger ones didn’t care to chase mid-sized local work.
You could see this shift show up in the financials—better margins, steadier earnings—but understanding why required a closer look (there were analysts online who had discovered this and written about it). By the time the stock crossed $60 in 2024, it had dropped below the model’s sell threshold. But a case could be made for holding on, because the core business had become more defensible.
That’s the dynamic Greenwald describes. It wasn’t innovation or brand. It was local dominance. And it made the business far harder to displace than it appeared from a distance.
XPEL: Controlling a Narrow Vertical
When XPEL, Inc (XPEL) first appeared near the top of the rankings, it wasn’t widely known. The company made paint protection film, a niche product in the automotive aftermarket, and sold it through a network of independent installers. The product was great, but it was the business structure behind it that was really interesting.
XPEL developed proprietary software that mapped vehicle panels with precision. It trained installers on how to use its film, integrated them into its system, and backed them with responsive support. Once a shop adopted XPEL, switching meant retraining staff, updating workflows, and taking operational risk.
The niche itself added to the advantage. Paint protection film required hands-on application, technical knowledge, and support. The market was too small and operationally messy for large competitors to prioritize. That gave XPEL room to establish control before others even showed up.
Greenwald would call this classic niche dominance. XPEL didn’t need to win the entire automotive aftermarket. They needed to lock down one slice of it and use that foothold to expand, which they did.
It’s one of the clearest examples I’ve seen of a company building defensibility through fit, support, and focus, rather than scale, price, or tech.
Durable Advantage Doesn’t Always Look Like Scale
Large-cap investors are trained to look for scale: national brands, broad distribution, massive markets. But at the small end of the market, that mindset leads you straight past some of the best businesses.
Plenty of exceptional companies thrive by owning a narrow space. They serve a specific customer set, do the work better than anyone else, and become the default choice over time.
What sets them apart is consistency, fit, and control over their immediate environment—measured execution in a space they already understand.
I don’t override the model often. But when I’ve done it for this reason, when a company clearly controls its space and is positioned to keep doing so, it’s gone well a few times. You don’t need many of these. Just one or two can change your returns significantly.
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Disclosure and Disclaimer
I/we do not currently own shares of Limbach Holdings (LMB) or XPEL, Inc. (XPEL). This post reflects my personal views and is provided for informational and educational purposes only. It is not investment advice, a recommendation, or a solicitation to buy or sell any security. Always do your own due diligence and consider your financial situation, investment objectives, and risk tolerance before making any investment decisions.