Last week, I participated in my first ever Cabot Wealth Summit. What a great experience.
It was fun to talk about the opportunity in micro caps and to share some of my highest conviction ideas.
But I also learned a ton from the other participants.
At heart, I’m a value investor and am not as well versed in growth and momentum.
So hearing Tim Lutts’ thoughts on Tesla (TSLA) and on other electric vehicle stocks was eye opening.
Tim has been dead right on the stock for a long time and remains bullish.
It was also fun to listen to Mike Cintolo’s presentation on the outlook for the market.
I want to share a couple charts from his presentation.
According to a recent Gallup poll, investor sentiment doesn’t appear excessive…
Typically, an overbought market is…..surprise, surprise…bullish for the market.
Much of Mike’s presentation ran against my “value investor” intuition.
So that too was eye opening, and really helpful.
While I truly enjoyed the Summit, I’m grateful to have a little quieter schedule this week so that I can dive back into micro caps and try to find my next great idea.
This week, the main updates are that Greystone Logistics (GLGI) reported earnings and Riviera Resources (RVRA) announced that it has sold its midstream business and will liquidate the company.
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
Riviera Resources (RVRA) Buy limit decreased from 2.25 to 1.85.
Updates
Greystone Logistics (GLGI) reported earnings yesterday for its fiscal year ended May 31. Quarterly revenue was $18.3 million, down 13% from a year ago. In its press release, the company noted that demand from customers continues to grow. Its biggest challenge is maintaining an adequate workforce as many employees have opted to stay at home for protection from COVID-19. The company reported $0.06 of GAAP EPS that was helped by an unusual tax benefit. On a normalized basis, the company generated $0.03 in EPS, consistent with my expectations. Thus, in the last fiscal year, the company generated $0.12 of EPS and is trading at 9x earnings. This is too cheap for a company that has historically grown revenue at a 20%+ CAGR and just grew EPS 140%. While my official rating is Hold, I would recommend buying if the stock dips below 1.00. Hold.
HopTo Inc (HPTO) recently 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) recently 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 9.2x Q2 2020 annualized EBIDTA and 3.7x 2019 revenue. Buy under 3.35.
MamaMancini’s Holdings (MMMB) came back down to earth 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 16. 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 (MEDXF) recently 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, MEDXF is currently trading at a price to free cash flow multiple of 3.7x. On an EV/Revenue basis, MEDXF trades at 1.0x 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 recently raised 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 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, the stock continues to look attractive. Buy under 2.80.
Riviera Resources (RVRA) announced on Monday that it has reached an agreement to sell Blue Mountain, its midstream business, to Citizen Energy for a price of $111 million. The sale price is a premium to what was implied by RVRA’s share price ahead of the sale, but is nonetheless disappointing. Over the past three years, Riviera has spent over $300 million building out the midstream asset and so the sale price is at a large discount to replacement value. The company noted in its press release that it intends to liquidate the company. After all sales close, Riviera should have ~$134 million, or ~$2.31 per share, to distribute to shareholders. I expect almost all net proceeds to be distributed by year end. Given my estimate of liquidation value, I believe it makes sense to buy the stock below 1.85 as it would imply a 25% return to liquidation. Buy below 1.85.
U.S. Neurological Holdings (USNU) recently 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. 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.
P.S. Registration is now open for the next Cabot Micro-Cap Insider call on Thursday, September 10 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, MEDXF, 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.