First, the business. Cherokee is strictly a brand licensor. It owns the Cherokee, Sideout, and Carole Little brands (among others), which it licenses to selected retailers. The company does no product design, no production sourcing, and no marketing - this is left to the licensees. In effect, Cherokee replaces private label brands for these licensees. This is what's known as a "light" business model, requiring next to no capital investment and little expenses save for paying the few employees and maintaining the brand trademarks in various countries. Every dollar invested into capital spending returns several hundred percent in earnings (return on tangible capital).

There's no problem with Cherokee's financial health either. There is almost 14 million in cash on the balance sheet, and no debt. Free cash flow margin has averaged 42% or higher over the last 5 years. The company doesn't horde this cash... it pays out nearly all of free cash as dividends, currently sporting a dividend yield over 10%. The dividend alone makes Cherokee an attractive investment candidate.

The next thing to examine is management - a crucial component of small cap success. Robert Margolis is CEO, and has been with the company since it's founding in 1981. He owns a healthy 12% of the shares, which aligns him with shareholder interests. However, there are some governance issues. Margolis has final say over any additions or subtractions to the Board of Directors. His base pay cannot be cut. The proxy goes so far as to say that his employment agreement must compensate him for any "inconvenience".