April 6, 2022

This week, everyone is talking about the yield curve inversion.

What’s a yield curve inversion?

Its when the yields on long-term government bonds are lower than the yields on short-term government bonds.

A typical yield curve slopes up as maturities increase. An inverted yield curve does the opposite.

Everyone is talking about the yield curve this week because the 1- year Treasury rate dipped (and remains) below the 2-year Treasury rate.

This is important because typically recessions follow an inverted yield curve.

The good news is that usually the market continues to perform well for a sustained period before the recession occurs.

According to LPL Financial, the last four times the 2-Year/10-Year Yield Curve inverted, the S&P 500 continued up ~29% on average.

The spread between the 10-year Treasury and the 2-year is most often cited in the financial press. However, it turns out that the spread between the 10-year Treasury and the 3-month is the one to watch. This spread is the best predictor of a recession, according to recent research by the San Francisco Fed.

When the spread between the 10-year Treasury and the 3-month turns negative, a recession typically follows within six months (median).

Luckily, this yield curve is very healthy.

Alright, enough with the macro prognosticating!

This week, there wasn’t a ton of news, but I did want to highlight one item:

Atento (ATTO) reported earnings and the results were a little light/disappointing due to a previously disclosed cyber hack. Nonetheless, the investment thesis (a company sale) is on track given the Bloomberg report that Goldman Sachs has been hired to sell the company.

The next issue of Cabot Micro-Cap Insider will be published on Wednesday, April 13. As always, if you have any questions, please email me at rich@cabotwealth.com.

Changes This Week
No changes

Updates
Aptevo (APVO) reported 2021 results recently. The biggest takeaways were: 1) 11 of 40 patients that were treated with APVO436 showed promising clinical activity and two had complete remissions; and 2) Aptevo has cash on its balance sheet of $46MM which is enough for the next 12 months. The stock continues to look incredibly cheap, but the entire biotech market is in a bear market. What could get the stock going again? It’s tough to say with certainty, but Aptevo will report additional data from its ongoing trials this year, and any positive news will move the stock upwards. Original Write-up. Buy under 15.00

Atento S.A. (ATTO) reported earnings this week. Revenue increased 5% but EBITDA declined by 7%. Results missed consensus expectations, but the miss was due to a cyber hack which had been previously disclosed and resolved. Nonetheless, the investment thesis is intact. To summarize, the company is trading at a massive discount to peers and will likely be sold in the near term (the company has hired Goldman Sachs to review strategic alternatives, according to Bloomberg). Another positive is the Brazilian Real has appreciated recently and that will be a tailwind for the company. Original Write-up. Buy under 35.00

BBX Capital (BBXIA) reported earnings in March. They were excellent. Book value per share now stands at $20.79, up more than a dollar since last quarter. The aggressive buybacks are really paying off. Since the spin-off, shares outstanding have declined by 16%. The company has a market cap of $162MM. Meanwhile, it has net cash + notes receivable of $113MM ($6.96 per share). In 2021 it generated $29MM in free cash flow and that is set to continue given the real estate market is booming in Florida. My new price target is 12.50 (60% of book value). Original Write-up. Buy under 11.00

Cipher Pharma (CPHRF) reported earnings in March. The results were great. On the year, revenue was up 1% to $21.9MM. SG&A decreased 18.3% to $5.1MM and this drove a dramatic increase in EBITDA. EBITDA increased 46% to $11.8MM. The company bought back ~5% of shares during the year. The company has no debt and $20.5MM ($0.79 per share) of cash on its balance sheet. Meanwhile, the company continues to move its pipeline forward and evaluate accretive acquisition opportunities. Original Write-up. Buy under 2.00

Crossroads Systems (CRSS) reported results recently. Not much info was shared and I’m trying to schedule a call with the company to learn more. My biggest question is why adjusted book value declined from $12.70 to $11.68. I continue to think it looks attractive. The stock is trading slightly above book value ($11.68) yet has significant optionality. The management team and board of directors have a track record of creating shareholder value (the company paid a special dividend of $40/per share in 2021 due to windfalls from the PPP program). Original Write-up. Buy under 15.00

Dorchester Minerals LP (DMLP) continues to look very attractive. The company is benefitting from soaring commodity prices due to the geopolitical conflict in Ukraine. Dorchester will pay out all windfall profits to shareholders. The company paid out its latest dividend of $0.639 per unit on February 10. On an annualized basis, Dorchester is yielding 9.4%. The stock continues to look attractive. Original Write-up. Buy under 25.00

Epsilon Energy (EPSN) recently reported full-year results. Epsilon had an incredible year. Revenue grew 73% due to soaring natural gas prices. Adjusted EBITDA grew 53%. The company produced tremendous free cash flow and currently has $27.1MM of cash (18% of its market cap) and no debt. The company recently committed to paying a quarterly dividend of $0.0625 per share, starting on March 31. This works out to a 4.0% dividend yield. In addition, the company approved a share repurchase authorization to buy 1.1MM shares at an average price of no more than $6.76 per share. Original Write-up. Buy under 6.00

Esquire Financial Holdings (ESQ) had no news this week. The company reported a great quarter in January. For the year, Esquire generated $2.26 of EPS, up 37% from last year. Asset quality remains high as the company’s allowance for bad loans is just 1.7% of total loans. Esquire dominates its niche, the liquidation industry. Due to its specialty and expertise, it has been able to grow very well, and I expect that growth to continue. Importantly, the company’s investment in digital marketing and sales is paying off as digital accounted for half of commercial loan originations in 2021. This expertise will enable Esquire to grow beyond its current New York and New Jersey focus. Despite strong historical growth (~20% per year), the stock trades at ~10x forward earnings. Looking out a couple of years, Esquire should be trading significantly higher. Original Write-up. Buy under 35.00

IDT Corporation (IDT) reported earnings in early March. The headline number didn’t look great, but the investment case remains on track. Revenue was down slightly year over year, but IDT’s two key segments, NRS and net2phone, generated excellent results. NRS revenue grew 104% to $10.6MM while net2phone subscription revenue increased 32.5% to $12.5MM. IDT announced its goal is to spin net2phone off before the end of its fiscal year (July 31 year-end). 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

Liberated Syndication (LSYN) announced that it sold 1.1MM shares to insiders including Camac Partners at a price of $3.75. The proceeds are being used to pay for a milestone payment due to AdvertiseCast. I was initially a little annoyed that capital was raised given that Libsyn has a strong net cash balance sheet. However, I was able to speak to the company’s CEO last week and got some additional perspective on the equity raise. Essentially, it’s important for Libsyn to have a very strong balance sheet so that advertising partners have confidence in working with the company. The CEO also implied that they are very close to re-stating their financials, which will be a major positive for the stock. I’m bullish on the stock and expect 2022 to be a good year. Original Write-up. Buy under 5.00

Medexus Pharma (MEDXF) recently announced that it has acquired exclusive rights to sell Gleolan in the United States. Medexus estimates that this is a $14MM USD opportunity. Medexus currently sells Gleolan in Canada and is very familiar with the product. This is a big positive as it increases the company’s revenue run rate by ~16%. In February, Medexus posted their Q3 earnings results, and reported sales of $21.3MM, beating consensus of $18.8MM. They also posted positive EBITDA of $1.9MM, which was expected to be negative-$1.6MM. Revenue was $17.9MM last quarter. So sequential improvement of 18% is excellent from my perspective. Looks like IXINITY is getting back on track (Medexus noted IXINITY drove the sequential improvement). Key things to note from the earnings call: The company received a $2MM order for IXINITY late in the quarter so it was a little higher than expected. Next quarter might be a little lower revenue but should be breakeven EBITDA. But remember, the company is carrying costs for Treo so excluding that spend, the company would be profitable. I continue to believe that the risk/reward for Medexus looks attractive heading into the second half of the year. Original Write-up. Buy under 3.50

NexPoint Diversified REIT (NXDT) filed its proxy statement this week and disclosed that “the Conversion process is nearly complete.” This is a major positive as it will enable many new shareholders to invest in the stock (most professional investors don’t invest in closed end funds). The company also recently announced that it made a major realization on its MGM investment. The company disclosed that it received $45MM in cash due to Amazon’s acquisition of MGM. However, what is more interesting is the company disclosed that it expects to receive an additional $81MM from indirect investments in MGM. I spoke to the company and the indirect investments are attributed to the company’s CLO holdings. I believe the CLOs are heavily discounted due to liquidity. As such, once they are realized, NAV should increase. Given the positive news, I’m increasing my buy limit to 16.00. Original Write-Up. Buy under 16.00

P10 Holdings (PX) reported excellent year-end results in early March. Revenue increased 123% y/y. Adjusted EBITDA increased 162% y/y to $83MM. P10 Holdings has equity stakes in six private equity-focused strategies: 1) RCP Advisors, 2) TrueBridge Capital Partners, 3) Enhanced Capital, 4) Five Points Capital, 5) Hark Capital, and 6) Bonaccord Capital Partners. All of these managers have strong track records which will enable them to continue to raise additional assets under management. This drives continued revenue and earnings growth. P10 is currently trading at 19x 2021 adjusted EBITDA which is a very reasonable valuation for such a stable business with strong organic growth potential. Original Write-up. Buy under 15.00

Truxton (TRUX) reported a great quarter in January and announced a $1 per share special dividend (which was paid on March 31) and $5MM share repurchase authorization. For the full year, EPS increased 29% to $5.02. Meanwhile, the stock trades at just 14.3x earnings. Loan quality remains excellent as the company wrote off just $2k in loan losses. Allowance for loan losses remains very low at 0.9% of all loans. I expect strong performance to continue in the future and anticipate significant upside in the years ahead. Original Write-up. Buy under 75.00

Zedge Inc (ZDGE) reported a great quarter last week with 32% revenue growth. Revenue came in at $6.9MM, beating consensus of $6.0MM. EBITDA of $3.4MM grew 16% and beat consensus expectations of $3.1MM. EPS of $0.16 beat consensus expectations of $0.12. The only downside is that management didn’t increase revenue growth guidance which was maintained at 25% to 30%. The management team is very conservative, and guidance looks conservative given revenue grew 60% in Q1 and 32% in Q2. The investment case remains on track. Original Write-up. Buy under 6.00

Buy means accumulate shares at or around the current price.*Includes dividends received
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 BBXIA, LSYN, MEDXF, PIOE, IDT, APVO, DMLP, and NXDT. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members.