March 29, 2023

I’ve never liked gambling.

I went to Las Vegas once with friends and had a blast.

But that was because the weather was beautiful, and we sat by the pool during the days and then had some good nights out.

Some of my friends loved to play blackjack. I enjoyed it for entertainment value, but I was only interested in playing at tables with low minimums.

Why?

Because I know that the house always wins! (Unless you are Edward Thorp, the famous card counter.)

I’m only interested in playing games where I have an edge (like micro-caps!).

But recently, I started betting on sports games for the first time in my life.

You see, sports betting just became legal in Massachusetts where I live and sports books are offering “Risk Free Bets” to lure new customers.

By “Bet Matching,” you can turn the “Risk Free Bet” into cold hard cash that you can withdraw.

Bet Matching is taking the opposite side of the same bet on two different sports books. It’s basically like arbitrage.

I will walk you through one example to share how it works, with an example from Barstool Sports.

Barstool Sportsbook is offering a $1,000 risk-free bet.

Here’s how it works…

I deposited $1,000 into the Barstool Sportsbook.

I deposited $2,675 into Wynn Sportsbook (to hedge).

I bet $1,000 at Barstool on Pedro Cachin to beat Martin Fucsovics in a tennis match. The odds were +344 so if Cachin won, I would make $3,400.

I then placed a $2,675 bet on Wynn Sportsbook for Fuscovics to beat Cachin. The odds were -370 so I would make $723 if Fuscovics won.

Fuscovics won so I make $723 on Wynn and lost $1,000 on Barstool.

But then Barstool refunded my $1,000 bet (Risk Free Bet).

Now, I couldn’t just withdraw my $1,000 refund (sports books make you bet one more time).

So for step 2, I bet $1,000 at Barstool on the over in the Warriors/Mavericks NBA game at -115 odds ($870 potential profit).

For my hedge bet, I wagered $1,000 on Wynn on the under in the Warriors/Mavericks game at +110 odds ($990 potential profit).

My Barstool bet won, so I made $870.

Add it all up (+$723 with Wynn on first bet, +$870 with second Barstool bet, and -$1,000 with second Wynn bet) and I had made $593.

Not bad (and kind of fun)!

The best part is there are at least eight different sports books with similar offers (some much better than Barstool’s offer).

This article walks you through all the offers.

If you are not in Massachusetts, fear not.

Sports betting is slowly but surely being legalized state by state. And when it becomes legal to bet on sports in your state, the sportsbooks will have similarly lucrative offers that you can exploit.

Alright now, back to our regularly programed content: micro-caps.

In terms of updates this week, there are several that I wanted to highlight (full updates below):

1) Epsilon Energy (EPSN) reported a good quarter. Despite weak energy prices, the stock continues to look attractive based on its depressed valuation and strong balance sheet.

2) Transcontinental Realty (TCI) filed its 10-K and looks very cheap.

3) Unit Corp (UNTC) filed its 10-K and a new investor presentation. The stock remains a high conviction idea.

The next issue of Cabot Micro-Cap Insider will be published on Wednesday, April 12. As always, if you have any questions, please email me at rich@cabotwealth.com.

Changes This Week:
No changes

Updates

Cogstate Ltd (COGZF) reported disappointing fiscal 1H 2023 results on February 27. 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. Finally, the company announced a share buyback program for $13MM, which represents ~5% of shares outstanding. This is a nice positive given where the shares are trading. Original Write-up. Buy under 1.80

Copper Property Trust (CPPTL) paid out $0.106699 per trust certificate on March 9. This distribution doesn’t include any proceeds from asset sales and implies a 12% 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 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) reported solid year-end results. In 2022, revenue increased 64% to $70MM. Adjusted EBITDA increased 120% to $53MM. During the year the company bought back 4% of shares outstanding and the Board of Directors authorized another one-year share repurchase authorization to buy back up to 10% of shares outstanding. The company has hedged ~20% of production at a natural gas price of $3.96. The balance sheet remains strong with $45.8M of net cash, representing 38% of its market cap. While lower natural gas prices will hurt results in 2023, it will still be profitable. In 2020, when natural gas prices were at similar levels, Epsilon generated $15.7MM of adjusted EBITDA. Thus, the stock is trading at just 4.2x 2020 (which I view as trough) EBITDA. This valuation appears compelling. Meanwhile, the company is paying a nice dividend and buying back stock. Original Write-up. Buy under 8.00

Esquire Financial Holdings (ESQ) reported on March 15 that its CFO bought 1,500 shares in the open market. This is reassuring given the current banking crisis. The company 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. Original Write-up. Buy under 45.00

IDT Corporation (IDT) reported another solid quarter on March 8. Consolidated revenue decreased 7% due to continued tough comps, but NRS continues to grow like crazy (+103%) and net2phone does as well (+30%). The company generated $23.2MM of consolidated EBITDA. Thus, it’s trading at 6.2x consolidated annualized EBITDA. So the stock now looks cheap on both a consolidated and SOTP basis. 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 through a spin-off. The investment case remains on track. Original Write-up. Buy under 45.00

Kistos PLC (KIST: GB) had no news this week but I expect for the company to report full 2022 results in early April. Kistos 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 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

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

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) announced on March 8 that it has secured new credit facilities amounting to $58.5MM. The interest rate for the facilities is only 8.58%, which is slightly surprising considering WBD recently issued debt at 6.4%. 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

NexPoint (NXDT) had no news this week, but I expect the company to file its 10-K by the end of March. It filed its 10-Q to report earnings on November 14. The results looked good. Operating cash flow is healthy. Net asset value (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) 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 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) filed Q4 and 2022 results this week. The results look great. As of December 2022, Transcontinental has $471MM of cash and note receivables 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 price to book value multiple of just 0.4x. Original Write-up. Buy under 45.00

Truxton (TRUX) sold off this week in sympathy with the fallout from Silicon Valley Bank. However, Truxton should experience no impact from the SVB disaster. It 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) released both its 10-K and an investor presentation for FY22 last week. The company generated $130MM FCF in 2022, in-line with what I had expected. With a market cap of $390MM, UNTC is trading at 3.1x FCF. With net cash of $118MM, its EV is just $277MM (EV/FCF 2.2x). The company sold its 50% interest in the midstream joint venture with SP Investor for $20MM, $12MM of which they will get at close, the other $8MM deferred over 12 months. UNTC reiterated its plan to monetize non-core drilling locations and continue to sell minor interests in outlying areas. Within its core fields, Unit expects to drill in 1 to 2 net wells per year, with development capex of ~$10-$20MM per year. UNTC has been weak recently. While oil and gas have sold off, UNTC is just too cheap (I think 100% undervalued). Further, downside is limited with a net cash balance sheet. Original Write-up. Buy under 65.00

William Penn (WMPN) reported that its CEO bought 50,000 shares on the open market at a price of 10.68. This is encouraging given the current banking crisis. William Penn is a micro-cap “thrift” bank that is extremely cheap. Most “thrifts” sell themselves three years after their thrift conversation (acquisitions are prohibited before then). This anniversary will be in 12 months (March 2024). At that point, I expect the company to sell itself for a 50% premium to its current price (based on typical thrift acquisition premiums). Finally, insiders are buying shares on the open market and the company is buying back its own shares aggressively. Downside is low given the stock is trading below liquidation value. Original Write-up . Buy under 12.50

Zedge, Inc. (ZDGE) reported a disappointing quarter on March 15. Revenue grew 1% to $7MM while adjusted EBITDA declined 63% to $1.4MM. Fears of a recession and a pullback in advertising are negatively impacting Zedge’s business. As a result, the management team has put in place a plan to cut $2.5MM to $3.0MM in expenses which will enable Zedge to operate at a breakeven level. Fortunately, Zedge has $13MM of net cash on its balance sheet representing 50% of its market cap. As such, the company is well capitalized to ride out the downturn. Importantly, the company is using the current downturn to buy back stock. From November 1, 2022 to January 31, 2023, the company bought back 318,000 shares at a price of 2.15 per share. Zedge’s valuation looks attractive at 2.4x EBITDA. 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.