June 7, 2023

This week, I wanted to share a few charts before getting into my weekly update.

The first chart shows the amazing valuation discrepancy between small stocks and large-cap stocks.

Mega-cap stocks are trading at a PE ratio of 29.4x while small-cap stocks are trading at a 12.8x.

This is a good time to remember that small-cap stocks have historically outperformed large-cap stocks over the long term.

Historical Returns by Market Cap

Large-Cap Stocks: 9.21%
Mid-Cap Stocks: 11.53%
Small-Cap Stocks: 12.43%
Micro-Cap Stocks: 17.45%
Source: CRSP database (1927-2016)

For my second chart, I want to share a recent tweet from Carson strategist, Ryan Detrick.

You can read it for yourself, but in short: the S&P 500 is very close to starting a new bull market (up 20% off bear market lows).

If the S&P 500 can get there, it bodes very well for the next year.

I have a few updates that I want to highlight (more details below):

1) IDT Corp (IDT) reported another solid quarter.
2) Copper Property Trust (CPPTL) announced another $0.10 monthly distribution.
3) Kistos PLC (GB: KIST) filed its annual report last week which shined a light on how cheap the company is.
4) Unit Corp (UNTC) declared its Q2 dividend of $2.50 per share.
5) NexPoint Diversified (NXDT) was removed from my recommendation list last week. See this special bulletin in case you missed it.

The next issue of Cabot Micro-Cap Insider will be published on Wednesday, June 14. As always, if you have any questions, please email me at rich@cabotwealth.com.

Changes This Week
None.

Updates

Cogstate Ltd (COGZF) had no news but continues to buy back stock in the open market (we know this because Australian companies must disclose when they buy back stock). On May 3, Eli Lilly (LLY) announced positive results for its Alzheimer’s drug, donanemab. Patients treated with the drug saw their Alzheimer’s progression slow by 27% versus placebo. Eli Lilly plans to proceed with regulatory submissions to get approval as quickly as possible. I expect FDA approval in late 2023 or early 2024. Cogstate worked with Eli Lilly for its phase III trial of donanemab. If the drug is approved, it will mean significantly more revenue for Cogstate as the additional studies are greenlit. Cogstate reported fiscal Q3 results on April 26. Revenue declined 15% y/y to $11MM. The revenue shortfall is due to slow patient enrollment in Alzheimer’s clinical trials. This isn’t lost revenue but revenue that has just been pushed out a year or so. Management also mentioned that smaller biotechs are a little more cautious spending money given the macro environment. In the near term, Cogstate has two significant catalysts: 1) Eisai’s LEQEMBI (Alzheimer’s) PDUFA date (FDA decision date) is July 6, 2023. 2) Potential approval for Eli Lilly’s donanemab (Alzheimer’s) in late 2023/early 2024. Positive news for either or both drugs would mean significantly more revenue for Cogstate due to the need for additional clinical trials to expand the drugs’ labels and to monitor the effectiveness of the drugs in real patients. Finally, Cogstate announced that it is actively buying back its own stock. It currently has a $13MM authorization (5% of market cap). While Cogstate’s performance has been disappointing, I remain confident in the long-term outlook. Original Write-up. Buy under 1.80

Copper Property Trust (CPPTL) announced on June 5 that it will pay out $0.107713 per trust certificate on June 12, 2023. The distribution is from cash flow that was generated from operations (minimal asset sales proceeds were included). As such, the run rate yield on the Trust is 11%. Very attractive in my opinion! The Trust has pulled back, but this is largely due to rising interest rates which have impacted all real estate companies. Copper Property Trust continues to look attractive. I’m very happy to recommend a security that has no debt, is paying an 11% dividend yield, and is liquidating properties over time. Original Write-up. Buy under 14.00

Currency Exchange International (CURN) had no news this week. It reported another excellent quarter on March 15. Revenue grew 32% to $16.5MM, beating consensus expectations by ~$1MM. While we have grown accustomed to 100%+ revenue growth, typical seasonality is returning to the business (Q1 is typically the weakest quarter while Q3 is typically the strongest). Banknote revenue grew 26% while Payments revenue increased 60%. Currency Exchange’s valuation looks attractive at 9x forward earnings and 7x forward free cash flow. Original Write-up. Buy under 16.00

Epsilon Energy (EPSN) had no news this week. It reported Q1 earnings on May 10, 2023. The company generated $3.6MM of free cash flow (excluding positive movements in working capital) in the quarter or $14.4MM annualized. EBITDA was $5.6MM in the quarter or $22.4MM annualized. Epsilon bought back 237k shares (1% of shares outstanding) at an average price of 5.72. It paid out $1.4MM in dividends. Despite both, net cash rose to $49.8MM. While depressed natural gas prices are negatively impacting Epsilon’s results, the company looks attractively valued even using draconian assumptions. In 2020, when natural gas prices were at similar levels, Epsilon generated $15.7MM of adjusted EBITDA. Thus, the stock is trading at just 3.6x 2020 (which I view as trough) EBITDA. This valuation appears compelling. Meanwhile, the company is paying a nice dividend and buying back stock. Downside is further limited given that cash represents 43% of Epsilon’s market cap. Original Write-up. Buy under 8.00

Esquire Financial Holdings (ESQ) had no news this week. The company reported a good quarter on April 25. Capital remains strong. Common equity tier 1 ratio stands at 14.89% and would be 12.97% including all after-tax unrealized losses. Tangible common equity to tangible assets stands at 11.77% and would be 11.38% including all after-tax unrealized losses. Credit losses remain low with no non-performing loans and a 1.34% allowance for credit losses. Total deposits increased $100MM to $1.3BN from December 31, 2022, to March 31. Uninsured deposits are just 33% of total deposits, and importantly, more than 90% of uninsured deposits represent clients with full relationship banking (loans, payment processing, and other service-oriented relationships). EPS came in at $1.47 or $5.88 on an annualized basis. As such, the stock is trading at just 6x earnings. Esquire looks compelling. Original Write-up. Buy under 45.00

IDT Corporation (IDT) reported earnings on June 5. It looked like a solid quarter. Highlights were as follows: 1) Strong NRS growth continues. While growth slowed down from 100%+ in prior quarters to 65% growth in the current quarter, the performance was still impressive. NRS is profitable and has a huge runway for future growth. The division was negatively impacted by a pullback in advertising. This will eventually come back. 2) net2phone continued to grow nicely as well. Revenue decelerated from 30%+ to 20% but was still impressive. The division is approaching cash flow break even. 3) The company generated $20.5MM of EBITDA. Thus it’s generating $82MM of EBITDA on an annualized basis. As such, it’s trading at 7.8x annualized EBITDA. 4) The company bought back ~77,000 shares of its own stock. Given challenging market conditions for high-growth companies, IDT’s subsidiaries won’t be spun off soon, but we know that, ultimately, they will be monetized either through a sale or a spin-off. The investment case remains on track. Original Write-up. Buy under 45.00

Kistos PLC (KIST: GB) filed its annual report on May 30. Some takeaways: 1) The company generated €190MM of free cash flow in 2022. The market cap of the entire company today is €200MM. This company is insanely cheap. 2) Kistos is focused on diversifying away from the U.K. and Netherlands given the regressive tax policy of “windfall” taxes. 3) The company is positioned exceptionally well given its recently announced acquisition of Mime Petroleum, a Norwegian company. Given high insider ownership and excellent operating excellence from the management team, I remain an enthusiastic shareholder of Kistos. Original Write-up. Buy under 7.50

Liberated Syndication (LSYN) is working to gain liquidity for shareholders. I spoke to the CEO on February 17 and got an update. He is pursuing any and all liquidity options for investors including: 1) partnering with a SPAC, 2) merging with another public NOL shell, 3) raising money through an IPO, and 4) taking on private equity. I don’t have a sense of timing in terms of when LSYN shareholders can expect liquidity, but I know it is a big focus for the company. From a financial perspective, Libsyn continues to grow strongly. Revenue grew from $42MM in 2021 to $57MM in 2022. On a pro forma basis (full-year contribution from the acquisition of Julep), revenues are over $60MM. Profitability is down as the company is focused on expanding into the podcasting advertising market which has lower profitability than the hosting business. Still, I’m optimistic that Libsyn has a bright future. Original Write-up. Hold

M&F Bancorp (MFBP) reported excellent earnings on May 5. EPS increased 82% to $0.89. ROE reached 32% vs. 12% a year ago. This windfall is due to M&F’s deployment of new capital from the Emergency Capital Investment Program. The bank’s CEO stated, “We are pleased with our results for the first quarter of 2023, which exceeded our expectations. We achieved significantly increased earnings available to stockholders of $1.8 million and achieved a 1.55% return on assets, which is outstanding.” The bank remains overcapitalized with stockholder’s equity representing 26.95% of total assets. Non-performing loans represent 0.19% of total assets. M&F is trading at just 6.5x annualized earnings. I expect EPS to grow to $4.74 in 2025 (this might happen by 2024). 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

Magenta Therapeutics (MGTA) had no news this week. It announced on May 3 that it plans to merge with Dianthus Therapeutics. The stock closed down ~20% but has recovered half the drop since then. The announcement is disappointing as I was hoping Magenta would pay out excess cash and then perhaps merge its public listing with another company that hoped to go public. Pre-merger Magenta shareholders are expected to own 21.3% of the new company. The new company is going to raise $70MM in capital from Fidelity, Venrock Healthcare, and several other institutional investors in conjunction with the merger. The new company will have $180MM of cash and several drugs in development focused on treating autoimmune diseases. I’m going to dig into Dianthus to try to determine how promising it is. At a bare-bones level, pre-merger Magenta shareholders will own 21.3% of $180MM of cash that the new company will have once the merger closes. That represents $39MM of value. Magenta’s current market cap is $43MM. Thus, the market is not giving Magenta much credit for Dianthus’s pipeline. I think it’s unlikely that the current merger gets approved by shareholders – I bet an improved deal will be reached. Therefore, I’m comfortable switching my rating from Hold to Buy under 0.75. Original Write-up. Buy under 0.75

Medexus Pharma (MEDXF) had no news. On April 11, the company announced that it expects record fiscal year results. This is encouraging. On March 22, the company announced that it has secured a new licensing agreement to sell a topical treatment called Terbinafine. The product could be approved in Canada this year. Management hasn’t provided sales potential, but it will be a positive contributor. On March 8, Medexus announced that it has secured new credit facilities amounting to $58.5MM. The interest rate for the facilities is only 8.58%, an attractive rate. The new facilities include a $35 million loan, of which $30MM will be used to repay long-term debt, and an additional $5MM that can be used to pay off debentures. Additionally, there is a possibility of accessing an extra $20MM of uncommitted capital. Medexus plans to use this capital to repay convertible debentures in cash, which could potentially halve the dilution. Overall, this is a big positive. All in all, my conviction level remains high. The stock’s valuation looks cheap. 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

P10 Holdings (PX) had no news this week. The company filed a Form 4 statement on March 16 that seemed to indicate that an insider is selling. But it appears that the company repurchased those shares at an 8% discount to the market (privately negotiated transaction). What appears like a negative is actually a positive. P10 announced an excellent quarter on March 6. Fee-paying assets under management increased 23% y/y. Revenue increased 32% and adjusted EBITDA grew 29%. P10 continues to benefit from secular tailwinds in the private equity industry. Despite strong growth, P10 trades at just 12.9x EBITDA and just 13x cash earnings. This is too cheap a valuation. The investment case is on track. Original Write-up. Buy under 15.00

RediShred (RDCPF) had no news this week. It reported another excellent quarter on April 21. Revenue grew 57% to $57MM CAD while EBITDA grew 67% to $15.3MM. The strength was driven both by acquisitions and organic growth. Organic growth is being driven by increased demand for shredding by businesses. Higher fuel costs and driver costs hurt margins, but these are starting to moderate. The stock continues to look cheap at 5.8x forward EBITDA. 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. The company announced on April 19 that its CEO had resigned. I’m not sure what this means. It could be a prelude to a sale but perhaps I’m just being optimistic. The company filed Q4 and 2022 results on March 24. The results look great. As of December 2022, Transcontinental has $471MM of cash and notes receivable on its balance sheet. Its current market cap is $362MM. The company does have some debt for which it has no recourse as it’s tied to additional real estate that Transcontinental owns. Long story short, this stock is very, very cheap. Unfortunately, there is no hard catalyst now, and we don’t know what management is going to do with the stock, but we know that the stock is extremely cheap. Insiders are incentivized to buy out minority shareholders at a premium to the current stock price but at a discount to book value. Currently, the stock trades at a price to book value multiple of just 0.4x. Original Write-up. Buy under 45.00

Trinity Place Holdings (TPHS) is my newest recommendation. It is a high-risk, high-reward stock. I see a legitimate case for the stock to go up 7x. At the same time, the stock could decline by 100%. The company’s real estate is well-located and based in New York City. The stock represents an asymmetric opportunity with a 7:1 upside-to-downside ratio. Insiders own a significant portion of shares. Original Write-up. Buy under 0.45

Truxton (TRUX) reported earnings on April 20. The quarter was solid. EPS came in at $1.47. Asset quality remains high with $0 non-performing loans as of March 31, 2023. The bank’s capital position remains strong with Tier 1 leverage at 10.3%. The one negative in the quarter was that deposits decreased, albeit slightly (by 4%) from December 31, 2022, to March 31, 2023. I’m going to watch this trend closely to see if it continues. Truxton continues to look attractive at ~10x 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) declared its Q2 dividend of $2.50. It did not indicate whether a Q3 dividend will be paid. My sense is it will, but the company/board of directors is still finalizing the plan. Based on conversations with Unit’s CFO, I believe Unit’s dividend policy will include a standard “normal quarterly dividend” that is sustainable (perhaps $1 per quarter) and then periodic special dividends to return excess cash. This clarity will be a major positive. On May 11, Unit Corp filed its 10-Q, and the fundamentals look terrific. The company generated over $50MM of free cash flow in Q1. My estimate for the entire year was $94MM so I’m obviously too low. Areas of upside: 1) Upstream operation expenses are tracking $25MM lower than I had modeled (this is obviously a source of material upside). 2) BOSS day rates were $30.8MM in the quarter, but 8/14 of the BOSS rigs will reprice higher in Q2. 3) Drilling operating expenses are tracking slightly lower than I expected. As a result of the strong free cash flow generation, Unit currently has $171MM of cash on its balance sheet, or 41% of its market cap. All in all, it was a very strong quarter, and the investment case remains on track. Original Write-up. Buy under 65.00

William Penn (WMPN) reported strong quarterly results on April 19. Despite the turmoil in the banking market, William Penn grew deposits in the quarter. The bank remains well capitalized with a tangible common equity ratio of 19.7%. The company continues to aggressively repurchase shares. During the quarter, the Board of Directors authorized a fourth repurchase program to buy back up to 698,312 shares. The company is being quite aggressive. In the first half of April, it repurchased nearly 400,000 shares in the open market. Tangible book value is $12.54 so the stock is currently trading at 75% of book value. This looks like a compelling valuation. Downside is low given the stock is trading below liquidation value. Original Write-up. Buy under 12.50

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.