I got back from vacation in Manchester-by-the-sea, Massachusetts, on Saturday.
It was a great week. Great food (and drink!), lots of time at the beach, and quality time with my extended family.
And many of our micro-cap stocks reported excellent quarters. I should go away more often!
HopTo Inc (HPTO) reported a great quarter, with 49% revenue growth. More importantly, the long-awaited backstop agreement for the rights offering closed (more details below), which is a very bullish sign.
Liberated Syndication (LSYN) returned to strong growth in the quarter and had an encouraging conference call.
Medexus Pharma (PDDPF) reported another excellent quarter, with revenue growth of 71% and adjusted EBITDA of $5.0 million. While the stock has appreciated sharply since we bought it, it still looks very cheap relative to its growth.
U.S. Neurological Holdings (USNU) reported down revenue but positive earnings and cash continues to build, and the company now has $2.0 million ($0.26 per share) of cash and no debt on its balance sheet yet still only trades at $0.20.
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, September 9.
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 Buy under 0.20 to Buy under 0.25
PDDPF moves from Buy under 3.00 to Buy under 3.50
Updates
Greystone Logistics (GLGI) was down slightly on the week. Recently, the company filed a Form 4 disclosing that 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 Greystone to report quarterly earnings by the end of August. As a reminder, Greystone Logistics 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 8.6x. Management and directors own 44.1% of the stock and are well aligned with shareholders. Given that GLGI has increased significantly since my original recommendation, I recently moved my rating to hold. Let’s see how GLGI’s next quarter progresses and then perhaps we can increase our buy limit. Hold
HopTo Inc (HPTO) reported an excellent quarter with revenue up 49%. Quarterly revenue growth is very lumpy so I’m not going to get too excited, but it’s good to see that year-to-date revenue is up 7%. More importantly, hopTo disclosed that its “backstop agreement” closed in early August. 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 hopTo stock. The transaction was expected to close in April but was delayed indefinitely. The closing of this agreement bodes very well for the outlook of the stock as it is effectively a massive insider buy (granted at a discounted price). Buy under 0.45.
Liberated Syndication (LSYN) reported an excellent quarter and hosted a helpful and transparent conference call. In the second quarter, revenue grew by 11.4%. Podcast hosting grew 11.1% while website hosting grew 14.3%. I was a little surprised that podcast revenue didn’t grow more strongly, but management commented that podcast listening has been down due to less commuting time. Nonetheless, I expect podcast listening and Libsyn podcast revenue to reaccelerate over time. One major positive in the quarter was that the profitability of the business improved drastically. This is a direct result of a focus on profitability. In the second quarter, Libsyn generated an EBITDA margin of 38.4%, its highest level ever. I expect this trend to continue. Libsyn is going to be rolling out Libsyn 5, a new and improved user interface for podcast hosts. Management expects this new interface to improve the user experience and revenue growth. LSYN has appreciated since posting its quarterly result, but it still only trades at 8.8x Q2 2020 annualized EBIDTA and 3.5x 2019 revenue. Buy under 3.35.
MamaMancini’s Holdings (MMMB) performed well this week. It is my latest recommendation and you can read my full investment case here, but the short story is MamaMancini’s is a defensive consumer staples company that is benefitting from COVID-19. It has historically grown revenue at a 24% CAGR yet only trades at a P/E of 15.0. Management owns over 50% of the stock, ensuring that incentives are aligned, and the company has a clean balance sheet. My price target of 2.50 implies significant upside. Buy under 2.00.
Medexus Pharma (PDDPF) reported an excellent quarter with revenue growth of 71%. The company generated $4.1 million of free cash flow in the quarter or $16.4 million annualized. As such, PDDPF is currently trading at a price to free cash flow multiple of 3.4x. On an EV/Revenue basis, PDDPF trades at 1.1x while slower growing peers trade at 3.6x. This is a good stock to average up as the company continues to execute yet remains undervalued by the market. I’m raising my buy limit to 3.50. Buy under 3.50.
P10 Holdings (PIOE) reported solid earnings last week. Revenue increased 55% in the quarter while cash earnings increased 33%. RCP Advisors closed on $394 million of capital commitments for Fund XIV (a fund of fund) and has already launched Fund XV and closed on $145 million of capital commitments. Excluding one-time costs, P10 will generate $0.27 in cash earnings in 2020. As such, PIOE is trading at 9.6x 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. Recently, Riviera reported Q2 earnings and also disclosed that it has reached an agreement to sell certain properties located in the Anadarko basin for a contract price of $15.8MM. I thought the sales price of the Anadarko assets was a little low. Riviera expects to sell any remaining upstream oil and gas assets on EnergyNet by year end. At that point, Riviera’s only asset will be Blue Mountain. 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. Buy under 2.25.
U.S. Neurological Holdings (USNU) reported a solid quarter. While revenue declined by 28% due to hospital procedures being delayed, the company continued to generate strong cash flow, and expects operations to return to normal soon. Currently, the company has $2.0 million ($0.26 per share) of cash and no debt on its balance sheet yet still only trades at $0.20. As such, I’m increasing my buy limit to 0.25. U.S. Neurological Holdings 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. Buy under 0.25.
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.