October 26, 2022

This week was another relatively slow one. However, we did have two companies report earnings.

Esquire Financial (ESQ) and Truxton Corporation (TRUX) both reported earnings and reported continued strong results.

I’ve touched on this in the past, but one reason that I like financials is that 1) they should benefit from rising rates and 2) delinquencies remain depressed.

Both Esquire and Truxton reported solid earnings growth and low levels of non-performing loans.

Nonetheless, I will continue to be watchful as comments from Bank of America’s CFO suggest industry losses may be creeping up.

“…our consumer delinquencies remain well below pre-pandemic levels. And as Brian noted earlier, we’re watching closely the early-stage card delinquencies as they begin to increase modestly.”

I continue to believe that financials are a good place to be in the current economic environment.

The next couple of weeks should be quite busy as we get updates from the majority of CMCI companies.

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

1. Truxton Corporation (TRUX) reported solid earnings. The stock looks too cheap.
2. Esquire Financial (ESQ) reported an excellent quarter with 20%+ EPS growth. The investment case remains on track.

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
Increase buy limit on Esquire (ESQ) to Buy under 42.00.

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 announced on September 7 that it has reached an extension on 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 the 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 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 11. On September 12, 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 13. 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 13. 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 7. 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. As such, Kistos is currently trading at 1x current EBITDA and 2.5x current free cash flow. The only downside is that the EU is considering instituting a windfall profit tax on energy companies. While this would be a negative, I think it’s partially reflected in Kistos’ valuation. Further, Kistos generated $89MM of EBITDA in 2021. Thus, it’s trading at just 5.1x “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. I had a chance to speak to the CEO in June. He said the team is working through re-filing its financials, and he expected to “go public” again by the end of September (this proved optimistic). Instead of just “turning on” trading, he would like to raise a little capital and also pick up coverage from some sell-side analysts. He noted the advertising business is growing very well and that the podcast hosting business is growing again. It had experienced limited growth last year given free hosting competition, but business has picked back up. While Libsyn has been a frustrating stock, I think (and hope!) our patience will be rewarded. Unfortunately, the market volatility may have delayed Libsyn’s IPO further, but ultimately, I’m highly confident the business will go public again. Since you can’t actually buy the stock until then, I rate it a Hold for those who already own it. 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 stem from organic increases in net sales across Medexus’ portfolio, a highlight being the 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 reported consistent insider buying last week by CEO, James Dondero. While rising interest rates will impact REIT valuations, I remain confident that NXDT is trading well below fair value. The company had its shareholder update call on August 10, during which they provided significant detail into the assets that make up NAV. Management spent a lot of time discussing how they are confident that they can close the gap to NAV. Unfortunately, no comments were made on an increase to the dividend or whether the company will start buying back stock. Both of these would be significant catalysts for NXDT shares. 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 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. 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 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 the value that has been crystallized. 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) had no news this week. It announced on August 16 that it has authorized a 1.5MM share repurchase (10% of shares outstanding). This is a positive as it conveys management’s conviction in Zedge’s fundamentals and cheap valuation. The stock remains very cheap, trading at 3.4x 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. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members.