August 12, 2020

Today, we are getting defensive and recommending a micro-cap consumer staples company.

While this issue’s new recommendation is defensive, it has many other attractive attributes:

• Strong historic revenue growth (24% CAGR)
• Over 50% insider ownership
• A strong balance sheet
• A cheap valuation (P/E of 15.0x)

All the details are inside this month’s Issue. Enjoy!

Cabot Micro-Cap Insider 820

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Getting Defensive
This week, I’m on vacation in scenic Manchester-by-the-Sea, Massachusetts. We chose Manchester-by-the-Sea because of the beautiful beaches, but just as importantly, because that’s where my in-laws live.

My wife and I have learned (the hard way) that going on vacation isn’t much of a vacation with young children unless you go with friends (built-in entertainment for the kids) or family (free babysitting!).

We’ve spent a lot of time at the beach this week, and when I’m at the beach I have time to reflect and think about many things including where the market may be headed.

While I continue to be bullish on the micro caps that we own, I’m a little cautious on the outlook for the market over the next year or so.

Valuations are elevated, there are signs of speculative activity by retail investors, and volatility is low.

So I think now is a good time to add a more defensive name to the micro-cap portfolio.

Let me introduce MamaMancini’s Holdings (MMMB), a micro-cap consumer staples company.

MamaMancini’s makes healthy turkey and beef meatballs (as well as a variety of other products) and has been a beneficiary of the pandemic. Despite 24% historic revenue growth, the company trades at just 15.0x earnings.

Before we dive deep into MamaMancini’s, I wanted to remind you that our monthly webinar will take place this Thursday, August 13 at 2 p.m. ET. We will review all open recommendations and answer subscriber questions. Feel free to email questions to me ahead of time at rich@cabotwealth.com and I can answer them during the webinar.

Now let’s get into my newest recommendation: MamaMancini’s Holdings.

New Recommendation

MamaMancini’s Holdings: A Defensive Company with Strong Upside
Company: MamaMancini’s Holdings
Ticker: MMMB
Price: 1.76
Market Cap: $56 million
Enterprise Value: $60.7 million
Price Target: 2.50
Upside: 42%
Recommendation: Buy Under 2.00
Recommendation Type: Rocket

Executive Summary
MamaMancini’s (MMMB) is a defensive consumer staples company that is benefitting from COVID-19. It has historically grown revenue at a 24% CAGR yet only trades at a P/E of 15.0x. Management owns over 50% of the stock, ensuring that incentives are aligned, and the company has a clean balance sheet. My price target of 2.50 implies significant upside.

Background
MamaMancini’s is a manufacturer and distributor of a line of all natural, beef meatballs with sauce, turkey meatballs with sauce, chicken meatballs with sauce, pork meatballs with sauce, and other similar Italian products.

MamaMancini IPO’d at a share price of $2.00 almost a decade ago. While the company has performed well (see revenue and net income growth below), investor expectations were too high. As a result, the stock currently trades below where it traded at IPO.

Today, the stock’s outlook looks excellent. Business continues to boom but MMMB’s stock price is very cheap.

MamaMancini’s Overview
MamaMancini’s currently has 26 distinct products, packaged in both retail and bulk packages (for supermarket or food service).

Products are all-natural, containing as few ingredients as possible. The company tries to appeal to value- and health-conscious consumers who seek superior nutrition and try to avoid artificial flavors, colors and preservatives.

The company’s sales have been growing on a consistent basis as it expands its distribution channel, which includes major retailers such as Albertsons, C&S, Costco, Kroger, Publix, Roche Brothers, Safeway, Sam’s Club, Shaw’s Supermarkets, Stop-n-Shop, Whole Foods, as well as QVC, the world’s largest direct to consumer marketer. This strategy has paid off and has resulted in significant revenue and earnings growth, as shown below.

Business Outlook
Historically, MamaMancini’s has done a nice job growing revenue and net income. From fiscal year 2015 to fiscal year 2020, revenue has grown at a compound annual growth rate of 24%. Meanwhile, net income has grown from a loss of $4.1 million to positive $1.5 million over the same time period as MamaMancini’s has leveraged its fixed cost base.

Going forward over the next few years, I expect revenue to grow at a compound annual growth rate of 23% and EBITDA to grow at a 58% compound annual growth rate as the company continues to leverage its fixed cost base.

What will drive the growth?

MamaMancini’s primary strategy is to continue to penetrate major grocery stores and mass market retail stores. The chart below shows that the company has significant opportunity to increase penetration.

Importantly, the graphic above suggests that many grocery stores are fully penetrated. However, this is not the case. In most stores, MamaMancini’s only has 1-2 stock keeping units (SKUs) in each store. In total, the company has 29 SKUs and increased penetration of these SKUs will drive significant growth.

Importantly, COVID-19 has actually benefitted MamaMancini’s as revenue grew 50% (!!!) in the first quarter. While growth will moderate throughout the rest of the year, I’m still expecting very strong growth (30%) for the full year.

MamaMancini’s recently completed a major capex project to increase its capacity. As a result, the company has the capacity to double its sales without additional significant capex.

Another important point that I always look for when evaluating micro caps is whether insiders have “skin in the game.” In the case of MamaMancini’s, insiders own over 50% of the stock. This is an excellent sign as it means we are highly aligned with insiders. If the stock goes up, we all make money together.

Valuation and Price Target
MMMB has performed well in 2020, but the stock is still only trading at 15.0x my fiscal 2021 (calendar 2020) EPS estimate. This is very cheap for a defensive company that will grow revenue 30% this year.

Looking out to fiscal year 2022 (calendar year 2021), I expect MamaMancini’s to generate EBITDA of $7.5MM. Typical stocks in the consumer defensive industry trade at an average EV/EBITDA multiple of 15.0x. Given MamaMancini’s faster-than-industry growth, let’s assume a 12.0x multiple is fair.

This valuation multiple implies the stock is worth $2.50, significantly ahead of where it currently trades.

Make sure to use limits when buying MMMB as the stock is very illiquid.

My rating for MMMB is Buy Under 2.00.

Risks

1. Quality control issues. If MamaMancini’s were to have quality control issues, it would severely impact its stock price.
2. Key man risk. MamaMancini’s is highly reliant on its CEO, Carl Wolf, who has proved himself to be an excellent entrepreneur in the food industry. Dan Mancini is also a key man. Dan Mancini (his grandmother was Mama “Mancini”) is the face of the brand and the company would be negatively impacted if he were to leave.
3. Customer concentration. Walmart (20%) and Sam’s Club (30%) made up 50% of MamaMancini’s revenue in FY19.

Recommendation Updates
Changes This Week
Move Greystone Logistics (GLGI) to Hold.

Updates
Greystone Logistics (GLGI) was up slightly on the week. Last week, the company filed a Form 4 disclosing that its director, Larry Lebarre, sold stock in the open market. He sold 77,000 shares at an average price of $0.90. While it’s never encouraging to see insiders sell, he still owns over 320,000 shares. In terms of a signal, insider buys are generally more predictive than insider sells. Nonetheless, if we see a flurry of additional insider sells, my level of concern will increase. I expect GLGI to report quarterly earnings soon. You can review my investment thesis here. The company is a micro-cap manufacturer of plastic pallets. It has historically grown revenue at a 34% compound annual growth rate and is on pace to grow EPS 140% this fiscal year. Despite such strong growth, the stock trades at a P/E of 9.3. Management and directors own 44.1% of the stock and are well aligned with shareholders. Given that GLGI has increased significantly since my original recommendation, I’m moving the stock to Hold. Let’s see how GLGI’s next quarter progresses and then, perhaps, we can increase our buy limit. Hold.

HopTo Inc (HPTO) was down slightly on the week with no news. HPTO will likely file its second quarter 10-Q within the next couple of weeks. I will be looking at sales trends as well as an update on the backstop agreement. As a reminder, hopTo had a rights offering in March and as part of the offering, there was a backstop agreement whereby management and a consortium of accredited investors agreed to purchase at $0.30 per share up to $2.4 million of hopTo stock. Essentially, the backstop agreement is a massive insider buy and bodes very well for the outlook of the stock. That transaction was expected to close in April but the 10-Q indicated that it was not expected to close until May. We haven’t received an update on whether the backstop agreement has closed. If it fails to close, it will be a negative signal for the stock. Buy under 0.45.

Liberated Syndication (LSYN) has had a busy couple of weeks. Last week, the company announced that it has hired a full time CFO. This week, Libsyn announced that long-time CEO Chris Spencer will step down. While Spencer will receive a generous compensation package, this news is a significant positive as corporate governance has been weak under Spencer’s leadership. Further, Libsyn announced it has concluded its strategic review and will continue to pursue organic growth opportunities. In the coming weeks, Libsyn is expected to report Q2 results. I will be looking for a re-acceleration in revenue growth (Q1 revenue declined 0.5%).

There continues to be significant strategic interest in the podcasting space. SiriusXM recently announced that it is acquiring Simplecast, a podcast host for an undisclosed price. It also announced that it is acquiring E.W. Scripps’ unprofitable podcast business (Stitcher app and Midroll podcast network) for $325 million, or a 4.5x revenue multiple. Libsyn is very profitable and currently trades at an EV/revenue multiple of 3.4x. Buy under 3.35.

Medexus Pharma (PDDPF) continues to perform well. The company will host a conference call this morning (August 12) to discuss fiscal first-quarter results. I expect Medexus to report another good quarter. The company reported excellent fiscal fourth-quarter results in June. As a result of the transformative IXINITY acquisition, Medexus generated adjusted EBITDA of $4.2 million in the quarter, or $16.8 million on an annualized basis. Better yet, revenue grew organically 27%. So clearly there is significant growth ahead. One other positive is that Medexus bought back 919,000 shares (~9% of shares outstanding) in the past fiscal year, including 139,400 in the most recent quarter. Based on Medexus’ run rate of EBITDA of $16.8 million, the stock is currently trading at an EV/EBITDA multiple of 6.3x and an EV/Revenue multiple of 1.0x. It’s even cheaper on forward estimates. Specialty pharma companies trade at an average EV/EBITDA multiple of 16.5x and an EV/Revenue multiple of 3.4x. Buy under 3.00.

P10 Holdings (PIOE) was flat this week with no news. I expect P10 to report second quarter earnings within the next week or two. In the first quarter, revenue grew 8% y/y due to additional fund raising by RCP Advisors. Cash earnings stayed flat y/y at $0.04 although that was due to costs related to acquiring Five Points and almost acquiring another private equity manager. RCP Advisors noted it has already raised $165 million of additional capital commitments for its private equity funds. It will launch two more funds this year and Five Points will also begin a new fundraise. Excluding one-time costs, P10 will generate $0.27 in cash earnings in 2020. As such, PIOE is trading at 9.4x 2020 free cash flow. Given attractive fundamentals and a cheap valuation, we recently increased our buy limit for PIOE to 2.80. Buy under 2.80.

Riviera Resources (RVRA) was up slightly on the week. Last week, Riviera reported Q2 earnings and also disclosed that it has reached an agreement to sell certain properties located in the Anadarko basin for a contract price of $15.8MM. I thought the sale price of the Anadarko assets was a little low, but I need to speak to the company to fully understand the transaction. Riviera expects to sell any remaining upstream oil and gas assets on EnergyNet by year end. At that point, Riviera’s only asset will be Blue Mountain. The current market cap implies a valuation of Blue Mountain of $64 million. In Q1 2020, Blue Mountain generated $7MM of EBITDA. Applying a 5.6x multiple (in line with peers) to an annualized run rate EBITDA of $28MM yields a fair value for the asset (today) of $157MM. If this valuation is accurate, RVRA is worth ~3.50. Buy under 2.25.

U.S. Neurological Holdings (USNU) was down slightly on the week with no news. USNU operates as a holding company in the United States. It is engaged in providing medical treatment and diagnostic services that include stereotactic radiosurgery centers, utilizing gamma knife technology, and holds interests in radiological treatment facilities. USNU reported Q1 2020 earnings on May 15. The company generated $0.02 of earnings and $399,000 of free cash flow in the first quarter, and as a result net cash on the company’s balance sheet increased to $1.7 million or $0.22 per share. USNU did note that revenue declined 12% in the quarter driven by fewer procedures being performed due to the outbreak of COVID-19. I expect USNU to report Q2 earnings within the next two weeks. Buy under 0.20.

Watch List
This month, DMLP and SOFO remain on my watch list. However, I’m adding another name: NamSys Inc (CTZ.V).

NamSys Inc is a small Canadian based software company that provides solutions to the cash management industry for financial institutions, retailers, casino operators, transit services, and many government entities. The company has historically grown revenue and earnings at 20%+ per year yet only trades at 18x free cash flow. I need to dig a little deeper, but this one looks interesting.

Dorchester Minerals (DMLP) is an oil and gas royalty company that pays out all its of its earnings to its shareholders. It has no debt and so has no risk of bankruptcy. The lowest quarterly distribution that DMLP has made over the past 10 years was $0.15 in 2016 (the last time energy prices were depressed). At DMLP’s current price, it’s trading at a trough yield of 5.0%. I will continue to research this name and may recommend it in a future issue.

Sonic Foundry (SOFO) is a video software company that specializes in solutions that cater to the education market. The company has struggled over the past three years but appears to be very well positioned to increase sales in the COVID-19 world as many schools will be embracing remote classes. Further, the chairman of the company recently tried to take the company private at $5.00 per share but relented when minority shareholders complained that this price was too low.

Recommendation RATINGS

*Includes 0.75 distribution

Glossary
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 HPTO, PIOE, PDDPF, LSYN, GLGI, and RVRA. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members and will follow his rating guidelines.

The next Cabot Micro-Cap Insider issue will be published on September 9, 2020.

Cabot Wealth Network
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