U.S large-cap markets are more expensive than international developed and emerging markets. Capital Group put together the below chart, which tells the story nicely.
Of course, U.S. micro caps remains incredibly inexpensive, especially relative to their growth.
But looking at international stocks is prudent even in the micro-cap world.
One of our favorite recommendations, Medexus Pharma (PDDPF), a Canadian company, has performed well, but remains incredibly undervalued and off the radar of most investors.
This week, I stumbled upon another Canadian micro-cap company that has historically grown revenue at 20%+ yet only trades at a P/E of 18. It’s a software company, so revenue is recurring and high margin. I’m still doing additional research and may recommend it next week in my August issue of Cabot Micro-Cap Insider. Stay tuned.
As you manage your portfolio, it pays to remember that U.S. stock market performance has historically varied significantly by month.
It so happens that August is generally not a good month for the stock market, as shown below.
This isn’t a reason to move your entire portfolio to cash, but it may be smart to opportunistically sell into strength.
This week, I’m upgrading U.S. Neurological Holdings (USNU) to Buy under 0.20 from Hold. Over the past couple of months, the stock has generally stayed above 0.20, but if it drops below that level, it would be a buying opportunity.
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 next Wednesday, August 12, and the August webinar will take place on Thursday, August 13, at 2 p.m. 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
USNU moves from Hold to Buy under 0.20
Updates
Greystone Logistics (GLGI) was up slightly on the week. This week, the company filed a Form 4 disclosing that its director, Larry Lebarre, sold stock in the open market. He sold 77,000 shares at an average price of $0.90. While it’s never encouraging to see insiders sell, he still owns over 320,000 shares. In terms of a signal, insider buys are generally more predictive than insider sells. Nonetheless, if we see a flurry of additional insider sells, my level of concern will increase. 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 7.9. 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. HopTo 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, hopTo 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 HPTO 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) traded up on the week on the news that LSYN has hired a full-time CFO. This is positive news, and adds to Liberated Syndication’s momentum. Libsyn. 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 Liberated Syndication’s podcast hosting business only grew at 14%. I will be looking for growth acceleration in Q2 (April was the company’s second best month ever for new podcast sign-ups). On the positive side, Libsyn. 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 (the Stitcher app and the 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 3.3x. The company 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 fourth-quarter results in June. As a result of the transformative XINITY 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 of $16.8 million EBITDA, the stock is currently trading at an EV/EBITDA multiple of 6.5x 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. Buy under 3.00.
P10 Holdings (PIOE) was up slightly this week on no news. I expect P10 to report second-quarter earnings within the next week or two. 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, P10 will generate $0.27 in cash earnings in 2020. As such, PIOE stock is trading at 9.4x 2020 free cash flow. Given attractive fundamentals and a cheap valuation, we recently increased our buy limit for PIOE to 2.80. Buy under 2.80.
Riviera Resources (RVRA) was down slightly on the week. Last week, Riviera announced that it had sold its oil and gas properties in Louisiana for $26.5 million. Pro forma for the transaction, Riviera will have $12MM of net cash on its balance sheet. Besides Blue Mountain, Riviera has ~29 MM cfe/d of mainly natural gas production in the Anadarko basin. It also has ~105,000 net leasehold acres in the Anadarko basin, and ~74,000 net acres in Blaine, Major, and Garland counties. I estimate that these oil and gas assets are worth $45MM. The current market cap implies a valuation of Blue Mountain of $64 million. In Q1 2020, Blue Mountain generated $7MM of EBITDA. Applying a 5.6x multiple (in line with peers) to an annualized run rate EBITDA of $28MM yields a fair value for the asset (today) of $157MM. If this valuation is accurate, RVRA is worth ~$3.50. While my recent conversation with Riviera’s management team left me less bullish on the stock, it still appears compelling, and a low-risk investment. Buy below 2.25.
U.S. Neurological Holdings (USNU) was down slightly on the week with no news. U.S. Neurological 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. The company reported Q1 2020 earnings on May 15, generating $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. U.S. Neurological 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. Given that USNU is flirting with my 0.20 buy limit, I’m upgrading the stock from Hold to Buy under 0.20. I expect the company to report Q2 earnings in mid-August. Buy under 0.20.
P.S. Registration is now open for the next Cabot Micro-Cap Insider call on Thursday, August 13 at 2:00 PM ET. Click Here to Register
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.