This week, I wanted to highlight two quick things before getting into our regular update.
First, I’ve talked a lot about the biotech bear market and how it’s lasted longer than most previous biotech bear markets.
I just stumbled upon the below chart on Twitter which shows the length of the current biotech bear market versus the previous three.
As you can see, the bear market is getting a little long in the tooth.
When will it end?
Of course, we don’t know, but we do know that eventually it will end and that biotechs will go on to perform well.
My preferred way to play the theme is by investing in biotechs that are trading at negative enterprise values.
I’ve written about it several times (as you probably know) but here’s a recent article.
My most recent Cabot Micro-Cap Insider recommendation, Magenta Therapeutics, also fits the bill.
The second thing I wanted to highlight was a great quote from a recent Peter Lynch (famed former manager of Fidelity Magellan Fund) interview:
“We’ve had 13 recessions since World War 2 and we’ve had 13 recoveries. Maybe we’re gonna have one. If this is a recession, it’s probably the most predicted one ever. You know, I never know when we’re gonna go. I’d love to know the future. I think it would help. I’d be a better investor. I’d pay five extra dollars for next year’s Wall Street Journal. It would really help. Right? I cannot predict the future, but this recession is so expected, so predicted. Maybe it’s coming.”
Another important thing to remember is that the market tends to perform better the year of the recession than during the year before the recession.
There were a few items that I wanted to highlight this week (full updates below):
1) Opera (OPRA) reported a great quarter.
2) William Penn (WMPN) reported an excellent quarter and looks dirt cheap.
The next issue of Cabot Micro-Cap Insider will be published on Wednesday, May 10. As always, if you have any questions, please email me at firstname.lastname@example.org.
Changes This Week
Cogstate Ltd (COGZF) 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) Phase 3 data from Eli Lilly’s donanemab (Alzheimer’s) is expected to read out in June 2023. 2) Eisai’s LEQEMBI (Alzheimer’s) PDUFA date (FDA decision date) is July 6, 2023. 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) had no news this week. It paid out $0.204134 on April 10. ~50% of the distribution came from rental income and ~50% came from sales proceeds. 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. 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 will report Q1 results on May 10. It reported solid year-end results on March 23. 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 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) had no news this week. It 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 a spin-off. The investment case remains on track. Original Write-up. Buy under 45.00
Kistos PLC (KIST: GB) announced a deal to acquire Mime Petroleum, a Norwegian company, on April 19. I love the structure of the deal. Kistos will pay US$1 plus issue up to 6 million warrants exercisable into new Kistos ordinary shares at a price of 385p each, which represents a premium of 31.4% to the last Kistos trading price. Kistos will assume ~$300MM of debt associated with Mime Petroleum, but after factoring cash both at Kistos and on the Mime balance sheet, net cash is expected to be €5MM. Kistos decided to diversify away from the U.K. and Dutch sectors as punitive windfall tax potential made it difficult for the company to commit capital in those geographies. I will need additional data to complete an updated valuation analysis, but I like the deal and continue to be excited by the prospects for 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) had no news this week. It 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
Magenta Therapeutics (MGTA) had no news this week. It is a failed biotech that has fired 84% of its workforce, including its CEO. It is evaluating strategic alternatives. It currently trades at a negative-$44MM enterprise value. Thus, the company is worth more dead than alive. Once the strategic review has concluded, the company will likely be sold to another company, merged with another company or liquidated. In those scenarios, I believe the stock will trade at a premium to where it currently stands. I see limited downside and 31% to 92% upside over the next 12 months. Original Write-up. Buy under 0.83
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
NexPoint (NXDT) filed its 10-K on March 31. A couple takeaways: 1) NexPoint’s current NAV (net asset value) is $25.14. As such, the stock is still trading at a massive discount. 2) NexPoint is trying to refinance its debt ($145MM) for its Cityplace Tower in Dallas. The debt was originally due in September, but the maturity has continually been pushed out to May 8 and it could be pushed out further, to September 8. Management remains confident that it can complete the refinancing, but I’m watching this closely as Cityplace represents ~10% of NXDT’s NAV. 3) The company authorized a share repurchase agreement in October of $20MM over a two-year period. So far, the company has not bought back any stock. I believe this is because the company is retaining liquidity to support the Cityplace refinancing. NexPoint remains a high-conviction idea. Original Write-Up. Buy under 17.00
Opera (OPRA) reported an excellent first quarter on April 27. Revenue increased 22% and EBITDA margin hit 25%. During the first quarter, Opera repurchased 370,162 ADSs in the open market at an average price of $6.66 per ADS, for a total spend of $2.5 million, leaving $30.2 million or 60% of our existing buyback authorization remaining. For the full year of 2023, Opera is raising the low end of its previously issued guidance of revenue to be $373 million to $390 million. Opera expects adjusted EBITDA to now be between $77 million and $83 million, or a 21% margin at the midpoints. The stock has had a great run but remains reasonably valued at 12x EBITDA and 14x FCF. The investment case remains on track. Original Write-Up. Buy under 8.00
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) 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 but also 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) 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 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 a price to book value multiple of just 0.4x. Original Write-up. Buy under 45.00
Truxton (TRUX) had no news this week. The stock has generally sold off in 2023 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) had no news this week. I’ve done a lot of work on Unit over the past couple of weeks and believe the company will generate $92MM in free cash flow in 2023, even with depressed natural gas prices. As such, the stock looks compelling at a price to free cash flow multiple of 4.6x and an enterprise value to free cash flow multiple of 3.3x. My conversation with the Unit Corp. CFO in April confirmed that all my assumptions are reasonable/conservative. Here are the key takeaways: 1) Q2 dividend ($2.50) hasn’t been approved by the board yet, but they intend to pay it. They also intend to give a little bit of guidance as to what the quarterly dividend will be going forward. I mentioned that I was a little disappointed that the company wasn’t currently buying back stock at 4x FCF and 3x on an EV/FCF basis and the CFO responded with: “We are subject to earnings blackouts when we can’t buy back stock (current period)” and “The implied dividend yield if you annualize the Q2 dividend is very high.” This comment suggests to me that the Q2 dividend might in fact be a good proxy for the run-rate quarterly dividend. 2) While the strategic process to sell the upstream division is over, “everything is for sale at the right price.” 3) Day rate for BOSS rigs is low-to-mid-$30k range. Expect 100% utilization for 2023. SCR Rig utilization might be lower given the natural gas price pullback. All in all, it was a good update, and I bought more stock recently. 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 repurchase 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
|Price on |
|Cogstate Ltd (COGZF)||1.7||4/13/22||0.99||-42%||Buy under 1.80|
|Copper Property Trust (CPPTL)||12.93||8/11/22||11.1||2%||Buy under 14.00|
|Currency Exchange (CURN)||14.1||5/11/22||18.3||30%||Buy under 16.00|
|Epsilon Energy (EPSN)||5||8/11/21||5.03||1%||Buy under 8.00|
|Esquire Financial Holdings (ESQ)||34.11||10/10/21||37.32||9%||Buy under 45.00|
|IDT Corporation (IDT)||19.37||2/10/21||32.83||69%||Buy under 45.00|
|Kistos PLC (KIST)||4.79||7/13/22||2.99||-38%||Buy under 7.50|
|Liberated Syndication (LSYN)||3.06||6/10/20||3.75||23%||Hold|
|M&F Bancorp (MFBP)||19.26||11/9/22||23.23||21%||Buy under 21.00|
|Magenta (MGTA)||0.79||4/12/23||0.77||-3%||Buy under 0.83|
|Medexus Pharma (MEDXF)||1.78||5/13/20||0.97||-46%||Buy under 3.50|
|Merrimack Pharma (MACK)||11.99||1/11/23||12.78||7%||Buy under 12.50|
|NexPoint Diversified Real Estate Trust (NXDT)||14.15||1/12/22||10.03||-25%||Buy under 17.00|
|Opera Ltd. (OPRA)||7.04||2/8/23||11.15||58%||Buy under 8.00|
|P10 Holdings (PX)**||2.98||4/28/20||10.15||241%||Buy under 15.00|
|RediShred (RDCPF)||3.3||6/8/22||2.95||-11%||Buy under 3.50|
|Transcontinental Realty Investors (TCI)||40.22||10/13/22||36.66||-9%||Buy under 45.00|
|Truxton Corp (TRUX)*||72.25||12/8/21||59||-15%||Buy under 75.00|
|Unit Corp (UNTC)||57.44||12/14/22||42.52||-7%||Buy under 65.00|
|William Penn Bancorp (WMPN)||11.91||3/8/23||9.2||-14%||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.