March 1, 2023

As expected, the second half of February was pretty weak from a stock market return perspective.

But February is over and March and April tend to be seasonally strong, according to Ryan Detrick of Carson Investment Research.

I’m continuing to find many attractive opportunities.

One area of the market that is fascinating to me is the biotech market.

It’s been in a bear market for almost two years and a record number of biotech companies are trading below net cash.

Further, many of these companies are evaluating strategic alternatives and deciding to liquidate and return cash to shareholders. I have several liquidating biotechs on my watch list and may recommend one next week.

In case you missed it, Warren Buffett published his Berkshire Hathaway annual letter.

As usual, it is excellent.

One key point that he made was the following:

“The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders.”

He mentions Coca-Cola (KO) and American Express (AXP) as two great investments that have continued to blossom (and pay dividends!).

I need to continually remind myself to cut my losers and ride my winners.

This week, there were two highlights that I wanted to mention (full updates below):

1) Opera (OPRA) reported a strong quarter, beating top- and bottom-line expectations. The investment case remains on track.

2) Cogstate (COGZF) reported a disappointing quarter, but I still believe the long-term growth outlook remains intact.

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
No changes

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) reported disappointing fiscal 1H 2023 results. Revenue declined 15% y/y due to timing of clinical trials which can be quite lumpy and difficult to project. For the full fiscal year, management expects revenue to be down 6% to 9%. While this is disappointing, the long-term outlook for the company is very strong given development in the Alzheimer’s market and future demand for Cogstate’s cognitive test. One other interesting tidbit is Cogstate was approached as an acquisition candidate and while the deal fell through, it does signal that the company has strong strategic value. 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 that 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) is working to gain liquidity for shareholders. I spoke to the CEO on February 17. To review, Liberated Syndication stopped trading publicly in late 2021 because it was so behind on its historical financials that FINRA/SEC revoked its ability to trade. So since late 2021, the stock has been private. Libsyn had been working to restate its financials. The previous management team did a poor job accruing tax liabilities and the new management team has had to spend a ton of time righting the ship. The good news is that all financials from 2019 through 2021 have been successfully re-stated and audited. Further, the CEO tells me that the 2022 audit will be completed by the end of March 2023, right on time. Once this audit is complete, the company can “turn on” public trading. The CEO and many on the board of directors would prefer to raise capital in a partial IPO or go public in another way that avoids the stock “leaking” back onto the OTC market without any real sponsorship. To that end, the board of directors is pursuing all options, including 1) partnering with a SPAC, 2) merging with another public NOL shell, 3) raising money through an IPO. Nevertheless, there is no guarantee that any of these options are imminent. However, I’m encouraged that the board of directors is pursuing all these options. While I do want Libsyn to go public sooner rather than later, I’m more concerned about potential dilution. Let me explain. In 2021, Libsyn raised $25MM through a PIPE to fund the acquisition of AdvertiseCast. The terms of that capital raise were that the investors that participated in the PIPE would receive 400,000 shares for every quarter that Libsyn remained a private company without a publicly traded stock. This amounts to roughly 5% dilution per year.

This is an obvious conflict of interest as the investors who participated in the PIPE have an incentive to keep the company private for longer to accrue more shares. I expressed forcefully to the CEO that this perverse incentive is an obvious conflict of interest and violates the board of directors’ fiduciary obligation to all shareholders (most of the PIPE investors are on the board of directors). I further argued that the company should pursue all avenues possible to go public in an optimal manner. But once the 2022 financials are audited, if no “optimal” solution has been reached, the company should just “turn on” trading to provide liquidity to current investors. If the stock price sinks, so be it. It may be an opportunity to buy more shares. In the coming weeks and months, I’m going to continue to pressure management and the board of directors to “go public” again as the current shareholders did not sign up to own shares indefinitely in a private 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. Stay tuned as there will be more to come. 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 a $20MM asset-backed loan maturing on July 17, 2023. $50MM U.S. 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 (private equity 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) reported an excellent quarter on February 27. Revenue grew 33%, beating consensus expectations by 7%. EPS of $0.27 beat consensus expectations by $0.70. The company is expecting revenue growth of 15% and EBITDA growth of 12%. This seems very conservative which is the company’s typical approach to guidance. The investment case remains on track. 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.