The S&P 500 is off to an excellent start in 2023 and according to Ryan Detrick of Carson, that bodes well for the rest of the year.
I’m continuing to see many opportunities in the micro-cap world. The two areas that seem the most interesting to me right now are the biotech and energy sectors.
The biotech market is interesting because there are many tiny biotechs that are trading below cash. Many of them are in the process of liquidating and paying out proceeds to investors.
The opportunity exists because the biotech sector has been in a bear market for a long time and investors have thrown in the towel.
In the energy space, there is a different opportunity. While oil and gas prices are elevated, upstream energy companies are not drilling new wells because 1) they’ve learned their lessons in prior boom years about over-drilling 2) energy financing is tight so energy companies must finance their own operations from internally generated cash flow 3) investors are clamoring for cash to be returned through share buybacks and dividends.
The lack of new drilling will result in energy prices staying higher for longer.
Despite strong performance from energy companies over the past couple of years, valuations remain depressed.
A perfect example is recent recommendation, Unit Corp (UNTC). It’s currently yielding 18% on an annual basis ($2.50 quarterly dividend).
Usually, when a company is yielding over 10%, it’s a red flag because that company is likely to cut its dividend in the future. In this case, the dividend is well covered by free cash flow that is being generated.
In terms of our micro-cap portfolio, there were three updates that I wanted to highlight this week (full updates below):
1) Currency Exchange (CURN) announced quarterly results. Revenue and EPS grew over 100% as the travel market continues to boom. The investment case remains on track.
2) Kistos (GB: KIST) reported an operational update. The company generated ~€100MM (my estimate) of free cash flow. As such, it’s trading at 1.6x FCF. The investment case remains on track.
3) Unit Corp (UNTC) will pay out a $10 special dividend on January 31, but the stock price has already adjusted down (ex-date has passed). On an ongoing basis, Unit Corp is yielding 18%.
The next issue of Cabot Micro-Cap Insider will be published on Wednesday, February 8. As always, if you have any questions, please email me at firstname.lastname@example.org.
Changes This Week
Aptevo (APVO) had no news this week. The company announced positive data for APVO436 in a Phase 1b trial in early December. In the trial, 100% of patients showed clinical benefit and 50% of patients showed a complete response. As a result, the stock skyrocketed higher but then fell even further than where it started. Aptevo continues to be a high-risk/high-reward stock. It’s trading at a negative enterprise value but will likely have to raise cash within the next 12-18 months, which could dilute shareholders. On the other hand, it could be acquired or strike a lucrative partnership with a large pharma company which could be worth multiples of the current stock price. Original Write-up. Buy under 7.50
Atento S.A. (ATTO) had no news this week. It reported earnings on November 15. Revenue was flat but EBITDA margin increased 3.3 percentage points to 11.1% in the quarter, driven by cost efficiencies. The company generated operating cash flow of $8MM in the quarter. It has a cash balance of $66MM with no near-term debt maturities. Investors were relieved with the quarter as the stock has almost doubled. Subsequent to the quarter, MCI Capital announced a tender offer to buy Atento shares for 5.00 per share. Through this tender offer, MCI Capital was able to purchase a 3% stake in the business. While Atento is in a turnaround, the stock is incredibly cheap and is not at risk of defaulting on its debt (no maturities until 2025). Thus, it makes sense to stick with the stock. Original Write-up. Buy under 10.00
Cogstate Ltd (COGZF) had no news this week. The company got a boost when Esai and Biogen announced positive results for its Phase 3 Alzheimer’s trial on September 27. This is massively positive news as it will drive more Alzheimer’s trials (and revenue for Cogstate). Ultimately, Cogstate’s revenue potential in 2023 and beyond will be determined by FDA approval of the blockbuster Alzheimer’s drugs that are in development. Lecanemab from Eisai (Phase 3 data) already came in with positive results. Gantenerumab from Roche (Phase 3 data expected) announced negative results. Donanemab from Eli Lilly (Phase 3 data) will announce results in mid-2023. The Cogstate thesis remains on track. Original Write-up. Buy under 1.80
Copper Property Trust (CPPTL) paid out $0.30 per trust certificate on January 10, 2023. The distribution consists of $0.20 of net sales proceeds. The balance is from net income generated from rental proceeds. 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. 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 $170MM. 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) had no news this week. It reported earnings on October 25. EPS increased 21% to $0.94. Return on assets and equity were 2.48% and 20.60%, respectively. Credit metrics remain strong with nonperforming loans of 0.67% and a reserve for loan losses of 1.24%. I continue to believe Esquire dominates an attractive niche and is set to grow nicely for the foreseeable future. Despite 21% EPS growth and strong credit metrics, Esquire trades at just 11x forward earnings. Original Write-up. Buy under 42.00
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 operation 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). Nonetheless, 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) has had no news recently. Libsyn’s plan was to “go public” again in September. Obviously, that didn’t happen. It isn’t too surprising given the market volatility. I’ve reached out to Libsyn’s CEO and hope to catch up with him soon. Libsyn has posted several press releases in the past couple of months. I remain optimistic about Libsyn’s prospects. Once financials are re-filed, I’m looking forward to seeing: 1) How Libsyn’s core hosting business is doing. Podcasting conferences were a key way that Libsyn marketed. When COVID shut down in-person events, it negatively impacted Libsyn’s new customer acquisition. Now that COVID is behind us, I expect the core business to accelerate. 2) Revenue growth for AdvertiseCast. This is an exciting business opportunity. Revenue grew 50% in 2021 for AdvertiseCast, and I expect continued strong growth going forward. 3) The growth of Glow. Libsyn acquired Glow in 2021. Glow enables podcast creators to offer premium shows (think substack but for podcasts). I think this is a big market opportunity. While Libsyn has been a frustrating stock, I think (and hope!) our patience will be rewarded. Original Write-up. Hold
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 126% 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
M&F Bancorp (MFBP) had no news this week. M&F is taking advantage of an interesting opportunity (Emergency Capital Investment Program) available to many small banks. As a result, I expect EPS to grow from $1.36 in 2021 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 almost 150% upside. Original Write-up. Buy under 21.00
Medexus Pharma (MEDXF) announced on January 12 that it expects another record quarter, but that Treosulfan is going to be delayed by at least another 1.5 years. Interestingly, the stock traded up despite this mixed news. I continue to believe Medexus is very cheap without Treosulfan. The next big catalyst will be management addressing the convertible debenture that is due this fall in a non-dilutive manner. Medexus continues to look cheap at 1.1x revenue and 7.6x adjusted EBITDA. The investment case remains on track. Original Write-up. Buy under 3.50
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
P10 Holdings (PX) 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) 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.
On November 2, the company announced that it had acquired ProShred Philadelphia for $7.3MM to $8.3MM (depending on earn-outs). I estimate the acquisition took place at a 6x EV/EBITDA multiple. This is a good deal. 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 Q3 earnings on October 20. They were very good. Net income in the quarter of $1.49 grew 11% y/y. Net revenue also grew ~11%. Credit metrics remain excellent with $0 in non-performing loans. On an annualized basis, Truxton is generating $5.96 in EPS. It is trading at 10.4x annualized earnings. Historically it has traded at 13.5x. 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 will pay a special dividend of $10 per share on January 31 to shareholders of record on January 20. The ex-date has passed so Unit’s stock price adjusted down by $10 but fear not, you will receive a $10 dividend 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 an 18% yield. Not bad! 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. Further, it has 66% of its market cap in cash. Original Write-up. Buy under 6.00
Aptevo Therapeutics (APVO)
Buy under 7.50
Atento SA (ATTO)
Buy under 10.00
Cogstate Ltd (COGZF)
Buy under 1.80
Copper Property Trust (CPPTL)
Buy under 14.00
Currency Exchange (CURN)
Buy under 16.00
Epsilon Energy (EPSN)
Buy under 8.00
Esquire Financial Holdings (ESQ)
Buy under 42.00
IDT Corporation (IDT)
Buy under 45.00
Kistos PLC (KIST)
Buy under 7.50
Liberated Syndication (LSYN)
M&F Bancorp (MFBP)
Buy under 21.00
Medexus Pharma (MEDXF)
Buy under 3.50
Merrimack Pharma (MACK)
Buy under 12.50
NexPoint Diversified Real Estate Trust (NXDT)
Buy under 17.00
P10 Holdings (PX)**
Buy under 15.00
Buy under 3.50
Transcontinental Realty Investors (TCI)
Buy under 45.00
Truxton Corp (TRUX)*
Buy under 75.00
Unit Corp (UNTC)
Buy under 65.00
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.