Over the past decade, it has paid to invest in the most expensive and least profitable companies. According to Verdad Research, $100 invested in the most expensive and least profitable companies has turned into $321 while $100 invested in the cheapest and most profitable companies has turned into $167.
However, over longer periods, the cheapest and most profitable companies have outperformed.
For example, the cheapest and most profitable stocks have generated an annual return of 13.4% per year from 1963 to 2020 while the most expensive and least profitable stocks have generated an annual return of 4.1%.
It’s always difficult to call a change in the market, but it appears that “value” stocks are due to outperform.
Of course, at Cabot Micro-Cap Insider, we aren’t looking for “value” or “growth” stocks. We are looking for stocks that are cheap, profitable, and growing. These types of companies will do well in any market.
Thus, even if there is a rotation from “growth” to “value” stocks, the CMCI portfolio is positioned to flourish.
This week, we have no changes, but I did want to highlight one update.
I recently had the chance to speak to the CEO of Riviera Resources (RVRA). I came away from the conversation incrementally more negative. My upside case is unlikely for the foreseeable future as natural gas prices and volumes should remain depressed. As such, I’m decreasing my price target to $3.50. Nonetheless, this price target still implies significant upside.
A replay of last month’s webinar can be found here. As a reminder, the next issue of Cabot Micro-cap Insider will be published on Wednesday, August 12, 2020, and the August webinar will take place on August 13, 2020 at 2pm ET. Click here to register.
If you have any questions that you want me to address, feel free to send me an email at rich@cabotwealth.com.
Changes This Week
No changes
Updates
Greystone Logistics (GLGI) was up slightly on the week on no news. I expect GLGI to report quarterly earnings soon. You can review my investment thesis here. The company is a micro-cap manufacturer of plastic pallets. It has historically grown revenue at a 34% compound annual growth rate and is on pace to grow EPS 140% this fiscal year. Despite such strong growth, the stock trades at a P/E of 7.8x. Management and directors own 44.1% of the stock and are well aligned with shareholders. My price target is 1.58.
Hopto Inc (HPTO) was flat on the week with no news. HPTO will likely file its second quarter 10-Q in August. I will be looking at sales trends as well as an update on the backstop agreement. As a reminder, HPTO had a rights offering in March and as part of the offering, there was a backstop agreement whereby management and a consortium of accredited investors agreed to purchase at $0.30 per share up to $2.4 million of Hopto stock. Essentially, the backstop agreement is a massive insider buy and bodes very well for the outlook of the stock. That transaction was expected to close in April but the 10-Q indicated that it was not expected to close until May. We haven’t received an update on whether the backstop agreement has closed. If it fails to close, it will be a negative signal for the stock. Buy below 0.45.
Liberated Syndication (LSYN) was flat on the week. LSYN recently filed its Q1 10-Q. This is a major positive as the delayed 10-Q has been an overhang on the stock. Revenue in Q1 was down 0.5% which was somewhat surprising. However, the decline was driven in large part by a difficult comp for Pair (website hosting business) which reported an incredibly strong Q1 in 2019. A bigger concern for me was that LSYN’s podcast hosting business only grew at 14%. I will be looking for growth acceleration in Q2 (April was LSYN’s second best month ever for new podcast sign ups). On the positive side, LSYN continues to spew cash. It generated $1.7MM of free cash flow in the quarter. Also, there continues to be significant strategic interest in the podcasting space. SiriusXM recently announced that it is acquiring Simplecast, a podcast host for an undisclosed price. It also announced that it is acquiring E.W. Scripps’ unprofitable podcast business (Stitcher app and Midroll podcast network) for $325 million or a 4.5x revenue multiple. Libsyn is very profitable and currently trades at an EV/revenue multiple of 3.2x. LSYN could announce the results of its strategic review at any time, but I expect the announcement after the company has filed its second quarter 10-Q (expected in August). Buy under 3.35.
Medexus Pharma (PDDPF) continues to perform well. The company reported excellent fiscal 4th quarter results in June. As a result of the transformative IXINITY acquisition, Medexus generated adjusted EBITDA of $4.2 million in the quarter or $16.8 million on an annualized basis. Better yet, revenue grew organically 27%. So clearly there is significant growth ahead. One other positive is that Medexus bought back 919,000 shares (~9% of shares outstanding) in the past fiscal year including 139,400 in the most recent quarter. Based on Medexus’ run rate EBITDA of $16.8 million, the stock is currently trading at an EV/EBITDA multiple of 6.4x and an EV/Revenue multiple of 1.1x. It’s even cheaper on forward estimates. Specialty pharma companies trade at an average EV/EBITDA multiple of 16.5x and an EV/Revenue multiple of 3.4x. Given the excellent quarter and dirt-cheap valuation, I recently raised my buy limit to 3.00. Buy under 3.00.
P10 Holdings (PIOE) was down slightly this week with no news. I expect P10 to report second quarter earnings by the end of July. In the first quarter, revenue grew 8% y/y due to additional fundraising by RCP Advisors. Cash earnings stayed flat y/y at $0.04 although that was due to costs related to acquiring Five Points and almost acquiring another private equity manager. RCP Advisors noted it has already raised $165 million of additional capital commitments for its private equity funds. It will launch two more funds this year and Five Points will also begin a new fundraise. Excluding one-time costs, PIOE will generate $0.27 in cash earnings in 2020. As such, PIOE is trading at 9.2x 2020 free cash flow. Given attractive fundamentals and a cheap valuation, we are increasing our buy limit for PIOE to 2.80. Buy under 2.80.
Riviera Resources (RVRA) was flat on the week with no news. Last week, I had the chance to talk with Riviera’s CEO and CFO. I came away from the conversation incrementally more negative. My upside case is unlikely for the foreseeable future as prices and volumes for Blue Mountain. M&A interest is very low in the energy industry due primarily to limited access to capital. I got the sense that the most likely transaction would be a merger in order to increase scale of the company. Currently, the upstream business is basically operating at a breakeven level while Blue Mountain will generate positive cash flow in the second half of the year (almost all capex is behind Blue Mountain). In Q1 2020, Blue Mountain generated $7MM of EBITDA. Applying a 5.6x multiple (in line with peers) to annualized run rate EBITDA of $28MM yields a fair value for the asset (today) of $157MM. Adjusting for other energy assets and $13MM of net debt, I estimate Riviera’s fair value is $204MM or $3.52 per share. Buy below 2.25.
U.S. Neurological Holdings (USNU) was flat on the week with no news. USNU operates as a holding company in the United States. It is engaged in providing medical treatment and diagnostic services that include stereotactic radiosurgery centers, utilizing gamma knife technology, and holds interests in radiological treatment facilities. USNU reported Q1 2020 earnings on May 15, 2020. The company generated $0.02 of earnings and $399,000 of free cash flow in the first quarter, and as a result net cash on the company’s balance sheet increased to $1.7 million or $0.22 per share. USNU did note that revenue declined 12% in the quarter driven by fewer procedures being performed due to the outbreak of COVID-19. Eventually, I would expect deferred procedures to resume. USNU stays at Hold this week, but if it were to drop below 0.20, I would upgrade it to BUY under 0.20. I expect USNI to report Q2 earnings in mid August. HOLD
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 GLGI, HPTO, LSYN, PDDPF, PIOE, and RVRA. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members and will follow his rating guidelines.