February 15, 2023

For the first time that I can remember, I didn’t watch the Super Bowl.

We had been skiing all weekend in New Hampshire, and I was EXHAUSTED.

I think our entire household was asleep by 8 p.m.

It sounded like an incredible game, but I’m not upset I missed it.

An amazing night of sleep was worth it. Maybe that means I’m getting old?

If you are a Chiefs fan, congrats! I think you have many more Super Bowls in your future.

Unfortunately, I don’t think my Patriots are going to be back any time soon.

In market news, the S&P 500 pulled back last week but is still off to a very strong start year-to-date (+8%)

But beware: The second half of February is usually a time of weakness in the market.

In terms of our micro-cap portfolio, there were two updates that I wanted to highlight this week (full updates below):

1. No news with Liberated Syndication (LSYN) but I was able to schedule a call with the CEO this week. Also, I learned that revenue has been growing rapidly.

2. M&F Bancorp (MFBP) reported quarterly results that showed 115% growth in EPS. The investment case remains on track.

3. Medexus (MEDXF) reported record earnings last week but the stock had a muted reaction. I think it’s because all investor attention is focused on the refinancing of its debt.

The next issue of Cabot Micro-Cap Insider will be published on Wednesday, March 8. As always, if you have any questions, please email me at rich@cabotwealth.com.

Changes This Week
Increasing buy limit for Esquire (ESQ) to Buy under 45.00.

Updates

Atento S.A. (ATTO) announced that it has raised capital from existing investors in order to strengthen its balance sheet further. Details haven’t been revealed yet, but we will learn more once Atento reports earnings. The stock remains incredibly cheap and is demonstrating progress in its turnaround. Original Write-up. Buy under 10.00

Cogstate Ltd (COGZF) had no news this week. The company will report F1H23 results in late February, and we will get an updated growth outlook for the remainder of the year. Given positive results from Lecanemab from Eisai (Phase 3 data), I expect strong growth in 2023 and beyond. Phase III results from Eli Lilly’s Donanemab should read out in Q2 2023. Positive results would be another catalyst for Cogstate. The Cogstate thesis remains on track. Original Write-up. Buy under 1.80

Copper Property Trust (CPPTL) paid out $0.084330 per trust certificate on February 10. This distribution doesn’t include any proceeds from asset sales and implies an 8% yield while trust holders wait for more assets to be sold with proceeds to be distributed. Copper Property Trust continues to look attractive. Original Write-up. Buy under 14.00

Currency Exchange International (CURN) reported another excellent quarter on January 23. Revenue increased 96% to $19.7MM, beating consensus by $3.5MM. The company continues to benefit from a booming travel market. The banknotes business grew 108% while the payments business grew 53%. EPS increased to $0.68 in the quarter, up over 100% from $0.25 a year ago. Despite rapid growth, the stock is trading at just 8.7x earnings. The investment case remains on track. Original Write-up. Buy under 16.00

Epsilon Energy (EPSN) had no news this week but has been lagging the market due to weak natural gas prices. Nonetheless, I believe the natural gas weakness will be short lived and believe Epsilon remains a compelling long-term play. Epsilon reported an excellent quarter on November 10. Revenue increased 6% sequentially. In the quarter, Epsilon generated $9.6MM of net income and $11.2MM in free cash flow. This is quite significant for a company with a market cap of $130MM. The company continues to buy back shares and pay dividends. Due to the strong cash generation in the quarter, Epsilon currently has $40MM of cash on its balance sheet and no debt. The stock continues to look attractive. Original Write-up. Buy under 8.00

Esquire Financial Holdings (ESQ) reported Q4 results on January 25. Net income increased 18%. The company generated an industry-leading ROA and ROE of 2.8% and 24%, respectively. Loan growth and strong underwriting are driving the excellent results. Non-performing loans remain at 0%. Despite strong fundamentals, Esquire trades at just 10x forward earnings. Given strong results and a cheap valuation, I’m increasing my buy limit to 45.00 Original Write-up. Buy under 45.00

IDT Corporation (IDT) reported another good quarter on December 5. Revenue was down 13% y/y, mainly due to tough comps from last year. The two most important value drivers continue to chug along. NRS revenue grew 107% y/y to $17.6MM. Net2phone subscription revenue increased 33% to $15.5MM. During the quarter, IDT repurchased 203,436 shares (~0.8% of shares outstanding). Eventually, both of these divisions will be monetized (either through a spin-off or an asset sale). The investment case remains on track and my price target is 55 based on an updated sum-of-the-parts analysis. Original Write-up. Buy under 45.00

Kistos PLC (KIST: GB) reported an operational update on January 18. By my math, Kistos generated €100MM in the second half of 2022 or €200MM on an annualized basis. As such, Kistos is trading at a price to free cash flow multiple of 1.6x. Further, Kistos has 40% of its market cap in cash. Management stated that the regulatory environments in the Netherlands and the U.K. have made investment decisions more difficult (excess profit tax). Nevertheless, the company is evaluating acquisitions outside of the Netherlands and the U.K. It is also considering returning cash to shareholders. Kistos continues to look compelling to me. Original Write-up. Buy under 7.50

Liberated Syndication (LSYN) continues to have limited news, but I was able to schedule a call for this Friday with the CEO. He also shared some interesting statistics via email. Audited financials are complete for 2019, 2020, and 2021. Auditors are currently working on completing 2022 results (they have until March 31). He estimates revenue grew from $42MM in 2021 to $57MM in 2022. On a pro forma basis (full year of Julep) revenues are over $60MM. My main questions (which I will dig into next week) are 1) dilution; theoretically shareholders that participated in the last PIPE are accruing shares for every month that the company remains private, and 2) profitability. Growth is one thing, but the market isn’t really rewarding growth companies right now, and the original thing that attracted me to Libsyn was the stable, high-margin hosting revenue. Original Write-up. Hold

M&F Bancorp (MFBP) reported quarterly results on February 10. EPS increased 115% to $0.82. Return on equity increased to 34% from 12.2% a year ago. As expected, M&F is benefiting from new funds from the Emergency Capital Investment Program. M&F’s balance sheet remains strong with 0.2% non-performing loans. Stockholders’ equity represents 26% of total assets. The investment case is on track. Despite an appreciating stock price, M&F is trading at just 7.7x annualized earnings. I expect EPS to grow to $4.74 in 2025. Assuming M&F continues to trade at its average P/E multiple of 9.3x, the stock should hit 44.00 by 2025, implying significant upside. Original Write-up. Buy under 21.00

Medexus Pharma (MEDXF) reported record earnings on February 8. Revenue of $28.7MM grew 35% y/y. Adjusted EBITDA grew to $5.2MM. The company is currently trading at 1.1x annualized revenue and 6.1x annualized adjusted EBITDA. Despite the strong quarter, the stock had a muted response. My best guess: All eyes are on the imminent debt/debenture maturities in 2023. I also had a chance to talk to the CFO last week after earnings. Medexus has a $10MM term loan and $20MM asset back loan maturing on July 17, 2023. $50MM US of debentures will come due in October 2023. Medexus would prefer to find a non-dilutive financing option to address both maturities, but the first priority is the debt coming due in July. Medexus is exploring all options and is running a process to secure the most attractive financing option. While Medexus does have a good amount of debt on its books, my sense is the company will be able to refinance it at a reasonable cost. Based on $20MM of annualized EBITDA, the company has 4x of gross debt. This is high but not outrageous in my opinion (PE deals get done with 5-7 turns of leverage). All in all, my conviction level remains high. An attractive refinancing will be a major catalyst for the stock. Original Write-up. Buy under 3.50

Merrimack Pharma (MACK) had no news this week. It is a biotech company that has no employees. It relies on contractors to minimize costs. Its sole purpose is to receive milestone payments from Ipsen related to the drug Onivyde. Onivyde will likely be approved for first-line metastatic small-cell lung cancer in early 2024 which will trigger a $225MM royalty payment. Merrimack has committed to distributing any royalty proceeds to investors. I expect Merrimack to distribute $15 per share to investors within ~15 months, representing more than 125% of its current share price. Additional upside can be achieved through future milestone payments. Finally, insiders are buying stock in the open market. Original Write-up. Buy under 12.50

NexPoint (NXDT) had no news this week. It filed its 10-Q to report earnings on November 14. The results looked good. Operating cash flow is healthy. NAV as of September 30, 2022 is $28.17 so the stock is still trading at a big discount to fair value. The company generated $0.55 of funds from operations in the quarter. As such, it’s trading at ~7x, a discount to peers who trade closer to 12x. NexPoint has underperformed recently, but it remains a high-conviction idea. Original Write-Up. Buy under 17.00

Opera (OPRA) is a niche web browser company that has been growing at a 20% CAGR. The company has been generating gobs of cash and using it to reward shareholders with buybacks (over 20% of shares outstanding) and special dividends. Finally, the company has minority investments worth ~40% of its current market cap that will be monetized in the near future. Despite these attributes, the stock trades at just 5.7x EBITDA. It’s a classic growth for a value price situation that is only available to micro-cap investors. Finally, insider ownership is high. I see 100% upside. Original Write-Up. Buy under 8.00

P10 Holdings (PX) had no news this week but will report earnings in early March. P10 announced on December 27 that it increased its share repurchase authorization by $20MM (2% of its market cap). P10 is fairly limited in how much stock it can buy back given its low float (high insider ownership), but I view this announcement very favorably. The company is growing like crazy yet trades at just 12.5x adjusted earnings. The investment case is on track. Original Write-up. Buy under 15.00

RediShred (RDCPF) had no news this week and will report year-end 2022 results in March. The company announced good quarterly results on November 27. Revenue grew 50% y/y to $14.7MM CAD (47% constant currency growth). EBITDA increased 27% to $3.6MM CAD. On an organic basis, EBITDA grew 13% y/y. Organic growth is being driven by increased demand for shredding by businesses. Higher fuel costs and driver costs hurt margins. However, the company plans to pass through price hikes which will help offset these headwinds. RediShred is also active on the acquisition front. The stock continues to look incredibly cheap at a 5.1x EV/EBITDA multiple and a 7.4x price to free cash flow multiple. I continue to see 100% upside over the next 12 months and significantly more upside looking out a few years. Original Write-up. Buy under 3.50

Transcontinental Realty Investors (TCI) had no news this week. It disclosed its quarterly earnings on November 10. The sale of the joint venture (JV) has closed, and Transcontinental reported that it intends to use $182.9MM of the proceeds to “invest in income-producing real estate, pay down debt and for general corporate purposes.” The company hasn’t disclosed what it intends to do with the second installment of proceeds from the JV sale ($203.9MM). The company continues to look attractive with 96% of its market cap in cash. Insiders own 86% of the company and could make an imminent move to buy out remaining shareholders at a large premium to the current stock price. Original Write-up. Buy under 45.00

Truxton (TRUX) reported Q4 earnings on January 26. For the full year, diluted EPS increased 15% to $5.02. Credit quality and loan growth continue to look good. Most importantly, Truxton authorized a $5MM share repurchase, raised its dividend by 12%, and declared a $1 per share special dividend. Truxton continues to look attractive at 14x earnings. This isn’t the most exciting stock, but it’s a slow and steady winner. Original Write-up. Buy under 75.00

Unit Corp (UNTC) recently announced a capital return program. It paid a special dividend of $10 per share on January 31. Better yet, the company announced that it will pay a $2.50 per share quarterly dividend starting in Q2. This works out to a ~20% yield. Not bad! Unit continues to look attractive at ~4x free cash flow. Original Write-up. Buy under 65.00

Zedge, Inc. (ZDGE) reported Q1 2023 earnings on December 13. Revenue increased 14.5% y/y. However, EBITDA decreased 71% y/y to $1.0MM and operating cash flow decreased 60% y/y to $1.1MM. The decline was due to lower advertising revenue and expenses related to the integration of GuruShots. The quarter was disappointing, but management commentary suggests that advertising rates have already improved. Further, the stock is ridiculously cheap. It trades at 3.0x annualized EBITDA and 9.5x FCF. And it has 66% of its market cap in cash. Original Write-up. Buy under 6.00

Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain and hold on to the rest until another ratings change is issued.

Disclosure: Rich Howe owns shares in KIST:GB, LSYN, MEDXF, PX, IDT, APVO, NXDT, COGZF, RDCPD, TCI, ZDGE, and MFBP. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members.