November 2, 2022

The biggest news over the past couple of weeks has been the disappointing results from big tech.

Even though I’m a micro-cap investor, it’s hard to ignore some of these massive moves.

Amazon (AMZN) traded down 7%.

Alphabet (GOOG) traded down 10%.

Meta Platforms (META) traded down 25%.

It was amazing and shocking to see billions of dollars of value disappear so quickly.

I believe all three mega-cap tech stocks have phenomenal business models and bright prospects. But I also would have said that six months ago.

It’s one of the reasons that I try to stick to micro-cap stocks.

In the micro-cap world, it’s much easier to gain an edge as far fewer investors are looking at each stock. It’s just a less competitive environment.

This week, we had one company, Zedge (ZDGE), report earnings.

Over the next couple of weeks, results will continue to trickle out:

• November 10^th: Epsilon Energy (EPSN) and P10 Holdings (PX)
• November 15^th: Atento S.A. (ATTO)

I’m also looking forward to recommending a new idea next week. I have many names to choose from as valuations look attractive.

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

1. Zedge (ZDGE) preannounce results that looked ok. We will have to wait until the 10-K is published to dive deeper. Nonetheless, the stock is too cheap.
2. NexPoint (NXDT) announced its quarterly dividend (no increase). While the lack of increase to the dividend is disappointing, many catalysts remain.

The next issue of Cabot Micro-Cap Insider will be published on Wednesday, November 9. As always, if you have any questions, please email me at rich@cabotwealth.com.

CHANGES THIS WEEK

None

UPDATES

Aptevo (APVO) had no news this week. On September 19, 2022, the company announced that the FDA has approved the company and its partner, Alligator Bioscience, to proceed with a new investigational drug ALG.APV-527 to treat multiple solid tumors. This isn’t major news but shows that the company has several promising shots on goal. Aptevo reported quarterly results on August 11. The company continues to report positive results from its key drug, APVO436. Further, it has additional drugs that are progressing well. Aptevo renegotiated its royalty agreement with Pfizer which allows Aptevo to recognize a gain and regain compliance with Nasdaq’s shareholder equity listing requirement. This is a positive. Currently, Aptevo has $25MM of net cash on its balance sheet and projects that it has enough liquidity to continue to operate for 12 more months without raising capital. This biotech bear market is no fun, but Aptevo continues to be an asymmetric bet. Original Write-up. Buy under 7.50

Atento S.A. (ATTO) had no news this week. It will report earnings on November 15^th. On September 7^th, Atento announced that it extended its lockup agreement with its largest shareholders (who represent 71% of shares outstanding) for 12 months. This is meaningful as it shows the largest shareholders of the company have conviction in the stock and believe it’s undervalued. On August 3, Atento reported another weak quarter. Management lowered revenue guidance to flat versus consensus of +4% growth and previous guidance of “mid-single-digit” growth. EBITDA margin guidance has been reduced to 12% (at the midpoint) from 13.5%. While this quarter and guidance cut were disappointing, 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

Cipher Pharma (CPHRF) had no news this week. On September 22^nd, the company announced that it has approved a share repurchase authorization to buy back 1.4MM shares (10% of float, 6% of shares outstanding). This is a positive. The company reported strong results on August 11. Revenue declined 8% driven primarily by lower Absorica sales (as expected); however, adjusted EBITDA grew sequentially to $3.6MM. The company’s cash balance stands at $24.2MM, ~50% of its market cap. This limits downside risk. Further, the company continues to generate significant free cash flow and buy back shares. Finally, the company had positive pipeline developments with two compounds (MOB-015 for nail fungus and Piclidenoson for psoriasis). Both drugs are progressing in phase III trials. Original Write-up. Buy under 2.50

Cogstate Ltd (COGZF) had no news this week. However, 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 this year and beyond will be determined by key Alzheimer’s drug read-outs which are expected this year and next year: 1) Lecanemab from Eisai (phase 3 data: already announced and positive), 2) Gantenerumab from Roche (Phase 3 data expected in Q4 2022), and 3) Donanemab from Eli Lilly (phase 3 data in mid-2023). The Cogstate thesis remains on track. Original Write-up. Buy under 1.80

Copper Property Trust (CPPTL) had no news this week. It recently announced that it paid out $0.76 per trust certificate on October 11th. On September 12th, the trust announced that it sold 7 of its properties for $65MM. The blended cap rate of the transactions was 7.3%. The trust on an aggregate basis is trading at a ~10% cap rate (the higher the cheaper). Proceeds will be paid out next month as well as net rental income. The trust remains attractive. The current yield is 10%. And the trust has no debt, so our downside is protected. Original Write-up. Buy under 14.00

Crossroads Impact Corp. (CRSS) had no news this week. The company reported earnings on September 13th. The quarter was relatively uneventful as the business is in transition from processing PPP loans to focusing on growing its loan portfolio. To that end, the business recently announced a $180MM equity infusion in July and has since added a $150MM credit line. The company is well-capitalized and will be growing strongly going forward. Further, delinquencies remain very low. Original Write-up. Buy under 15.00

Currency Exchange International (CURN) had no news this week. It reported earnings on September 13th. They looked great! Revenue increased 139% to $21MM, beating consensus expectations by $5MM. This was truly a massive beat. Revenue in the fiscal third quarter was 67% higher than 2019 FQ3 (pre-pandemic). The company’s Payments business grew revenue 65% to $3.6MM. Year to date, Currency Exchange has generated EPS of $1.15 or $1.53 on an annualized basis. As such, the stock is trading at just 9x earnings. The investment case remains on track. Original Write-up. Buy under 16.00

Epsilon Energy (EPSN) had no news this week. The company announced strong results on August 11. Epsilon continues to benefit from high natural gas prices. Revenue increased 46% sequentially, driven by 68% higher natural gas prices. Revenue should continue to soar as long as natural gas prices remain elevated and Epsilon is mostly unhedged. During the quarter, the company generated $5.9MM of free cash flow, or $23.4MM on an annualized basis. The stock looks attractive given its $31MM of net cash and strong earnings power. Original Write-up. Buy under 8.00

Esquire Financial Holdings (ESQ) reported earnings on October 25^th. 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) had no news this week. It reported fiscal Q4 earnings on October 6^th. Similar to last quarter, revenue declined y/y (down 16%), mainly due to tough comps from last year. However, the two most important segments, NRS and net2phone, continued to generate excellent results. NRS revenue grew 157% to $17.7MM, with full-year 2022 recurring revenue increasing 129% to $45.3 million. net2phone subscription revenue increased 37% to $15.1MM. Overall, it was a solid quarter. 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) had no news this week. The company reported first-half 2022 results on September 7th. They looked great. The company reported revenue growth of 745% and EBITDA growth of 768%. It generated free cash flow of £93MM or $186MM annualized. Kistos has pulled back due to falling natural gas prices in Europe. As such, Kistos is currently trading at 0.7x annualized EBITDA and 1.8x annualized free cash flow. This is too cheap. Another risk is that the EU is considering instituting a windfall profit tax on energy companies. While this would be a negative, I think it’s reflected in Kistos’ valuation. Further, Kistos generated $89MM of EBITDA in 2021. Thus, it’s trading at just 3.5x “normalized” EBITDA, not a demanding valuation. I continue to see at least 100% upside ahead. 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

Medexus Pharma (MEDXF) had no news this week. It announced preliminary revenue results for FQ2 2023 on October 6^th. Revenue is expected to exceed $27.0 million, which will be the strongest quarter in history. Primary drivers stemming from organic increases in net sales across Medexus’ portfolio, a highlight being recognition of 100% of revenue from Gleolan sales in the U.S. starting September 2022. Assuming a 20% EBITDA margin (backing out Treo expenses), the business is trading at an EV/EBITDA multiple of 3x, very cheap for a profitable and growing business. Original Write-up. Buy under 3.50

NexPoint (NXDT) had no news this week. It recently declared its quarterly dividend of $0.15. Unfortunately, this isn’t an increase from its previous $0.05 monthly dividend. Nonetheless, the company has many important upcoming potential catalysts: 1) Q3 results 2) potential share buyback 3) potential spin-offs. The thesis remains on track, and I see ~50% upside in the next 12 months. Original Write-Up. Buy under 17.00

P10 Holdings (PX) announced on October 13^th that it closed its acquisition of Western Technology Investment, a market leader in venture debt. The acquisition will add $12.5MM of additional EBITDA to P10. It appears that P10 is paying ~12x EBITDA for the acquisition, a cheap but not dirt-cheap price. This acquisition will add to P10’s growth potential. P10 is currently trading at 15x 2022 adjusted EBITDA which is a very reasonable valuation for such a stable business with strong organic growth potential. The investment case remains on track. Original Write-up. Buy under 15.00

RediShred (RDCPF) had no news this week. It last reported earnings on August 26^th. Results were excellent! Revenue grew 68% to $14.6MM CAD while EBITDA grew 73% to $4.5MM CAD. While acquisitions are helping, organic growth is very strong (+40% y/y). 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

Richardson Electronics (RELL) had no news this week. It reported earnings on October 6^th. Revenue grew 26% to $68MM, beating consensus expectations by $5MM. EPS of $0.45 beat consensus expectations by $0.21. The stock reacted well. The company is a rapidly growing micro-cap that is benefiting from many “green” initiatives (electric trains, wind turbines, etc.). Despite strong growth expectations and a pristine balance sheet ($40MM of net cash), the stock trades at just 12x next year’s earnings. Insider ownership is high, and I see ~50% upside over the next couple of years. Original Write-up. Buy under 17.00

Transcontinental Realty Investors (TCI) had no news this week. It is a real estate company that just completed a massive asset sale. As a result of the sale, the company now has ~87% of its market cap in cash. Once the transaction is reflected in Q3 2022 financials, Transcontinental should see a big boost as investors recognize value that has been crystalized. Finally, 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^th. 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

Zedge, Inc. (ZDGE) preannounced results on November 1^st. Fiscal 4^th quarter revenue came in at $7.4MM, growing 37% y/y. The growth was primarily driven by the acquisition of GuruShots which contributed $1.7MM of revenue in the quarter. Zedge didn’t share full results as its 10-K is not ready yet. The reason? Its accounting firm was acquired by another firm and that has resulted in delays in the finalization of the 10-K. Total users of Zedge’s flagship app declined 7% y/y. While this is a concerning trend, the company is still profitable and has ample opportunity to drive revenue synergies with its GuruShots acquisition. Further, the Zedge has $12MM of cash on its balance sheet (my estimate, 1/3 of market cap) and trades at 2.0x EBITDA. Further, the company is buying back stock. 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. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members.