Before getting into the updates from this week, I want to spend a little time providing context for my most recent recommendation, New BBX Capital (BBXIA), because it’s a little different from my typical recommendation.
In my Cabot Micro-Cap Insider Guide (which you can download on our members page), I describe the three buckets of my recommendations:
1) Rockets
2) Quick Trades
3) Slow and Steady
To date, the vast majority of my recommendations have been “Rockets.” These are companies with cheap valuations, strong fundamentals, and solid balance sheets. The expected holding time of “Rockets” is many years as long as the story remains intact.
In the Guide, I described my “Quick Trades” as follows:
“While it doesn’t happen every day, corporate restructurings or spinoffs can create opportunities in which a newly created public company is undervalued for a variety of reasons. Sometimes cash on hand per share alone is worth more than the price of the stock. These opportunities tend to come and go rather fast as the market will figure out the valuation problem quickly, causing prices to snap back up to a higher valuation.”
My most recent recommendation, New BBX Capital, is my first “Quick Trade” idea. You can read my full write-up here, but the gist of the thesis is that New BBX is an obscure micro-cap spinoff that is trading at a big discount to its fair value.
Oftentimes stock spinoffs, especially tiny ones, are mispriced in initial trading. BBXIA has already appreciated significantly since I published my recommendation, and I expect it to continue to be volatile.
Unlike my other recommendations, this recommendation is more of a quick trade idea. While my official price target is 7.52, I think it would probably make sense to sell if the stock gets over 6. After all, corporate governance is an issue for the company and as such, we don’t have to wait around to capture 100% of the upside. I’m happy to leave a little money on the table.
While it’s impossible to predict where the stock will trade in the near term, I expect high volatility. As such, if it trades close to 6.00, I may recommend taking profits. And feel free to do that without hearing from me. If it dips back below 4. I will likely recommend buying it back. In short, this idea is more of a trade as opposed to a long-term hold (like most of my recommendations).
Alright, now let’s get into this week’s updates on open recommendations.
This week, the only change is I’m increasing my buy limit for Riviera Resources to 1.98 as the company announced a sale of its oil and gas assets at a price higher than I was expecting.
The next issue of Cabot Micro-Cap Insider will be published on Wednesday, October 14. 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
Increase buy limit for RVRA to Buy under 1.98.
Updates
Greystone Logistics (GLGI) was flat on the week. In September, CEO and President Warren Kruger disclosed that he purchased an additional 1,000 shares of GLGI in the open market at a price of $1.02. In total, Kruger owns over 30% of the company. As such, we are well aligned as we both will benefit from continued strong operational performance and stock price increases. Greystone reported earnings recently 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 7.8x earnings. This is too cheap for a company that has historically grown revenue at a 20%+ CAGR and just grew EPS 140%. Buy under 1.10.
HopTo Inc (HPTO) was flat on the week. In the company’s most recent quarter, revenue grew 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%. Here’s my current thinking on hopTo’s valuation. In the first six months of 2019, hopTo generated $389.9k of earnings before interest and taxes (EBIT), or $779.8k annualized. I think a 12x multiple is fair, which works out to a $9.4MM enterprise value for these cash flows. This arguably is a cheap multiple for a software company, but the company is tiny and I’m not convinced it really has a sustainable competitive advantage. Next, we can add the value of hopTo’s 39 patents, which I value at $2.8MM based on where hopTo has sold other patents. Finally, we can add hopTo’s cash balance of $4.5MM (pro forma for the rights offering). Add it all up and you get a fair market cap of $16.65MM, or $0.89 per share. HopTo is currently trading at an EV/EBIT multiple of 8.3x. This is too cheap. To put it in perspective, the software and internet industry trades at an average EV/EBIT multiple of 55.8x. Buy under 0.55.
Liberated Syndication (LSYN) was flat on the week. Last week, LSYN announced that it has partnered with Player FM to distribute its podcasts on the Player FM podcast app. This is just another example of Libsyn partnering with all podcast distributors to ensure that podcast hosted episodes are available everywhere. Recently, there have been several insider purchases. New CFO Richard Heyse has purchased 40,000 shares through several different transactions, while Eric Shahinian (the activist investor) bought an additional ~15,000 shares. In total, Shahinian owns almost 7% of the company. Libsyn 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. Buy under 3.75.
MamaMancini’s Holdings (MMMB) was flat on the week but has generally pulled back since reporting earnings on September 14. I think the share price weakness is a buying opportunity. In the most recent quarter, revenue growth of 28% was very impressive. Even more impressive, EPS grew 104% to $0.02 as the company continues to leverage its fixed costs. One area of weakness was in gross margins, which were lower than expected due to higher beef prices, but management commentary in the press release suggests that this pressure is started to dissipate. MamaMancini’s continues to execute well and the investment case remains on track. It has historically grown revenue at a 24% CAGR yet only trades at a P/E of 15.8x. Management owns over 50% of the stock, ensuring that incentives are aligned. Further, the company has a clean balance sheet. Buy under 2.00.
Medexus Pharma (MEDXF) was flat on the week and continues to look attractive. In its most recent quarter, Medexus reported 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 3.4x. On an EV/Revenue basis, MEDXF trades at 0.8x while slower growing peers trade at 3.7x. This is a good stock to average up in as the company continues to execute yet remains undervalued by the market. Buy under 3.50.
NamSys Inc. (NMYSF) recently reported fiscal Q3 earnings (quarter ending July 31). Revenue grew 11.8% which is pretty impressive given pandemic related headwinds. Gross margins were under pressure due to an accrual of management bonuses as well as increased staffing related costs. I’m not concerned with the management bonus as it is based on continued strong execution. The increased staffing costs relate to the high demand and required salary for software engineers/programmers. I will monitor this going forward, but I’m not overly concerned. The most important factor for NamSys is continued revenue grow. Despite historically growing revenue and earnings at a compound annual growth rate of 20%+, the stock only trades at 19.7x 2019 earnings. It has a pristine balance sheet with significant cash and no debt, and insiders own over 40% of the company, ensuring strong alignment. Buy under 0.80.
P10 Holdings (PIOE) was flat on the week. In August, the company announced a transformative acquisition, and the stock has rallied sharply. It will be acquiring TrueBridge Capital Partners, a venture capital firm with $3.3BN in assets under management. TrueBridge’s strategy is to invest in micro and venture funds. P10 holdings is paying $159MM for the acquisition. To pay for the deal, P10 is issuing convertible preferred debt that will yield 1% and has the right to convert into P10 stock at a conversion price of 3.30 (PIOE’s share price was 2.58 before the deal was announced). Pro forma for this deal, P10 expects to generate $55MM in EBITDA on a run rate basis by the end of 2020. As such, the stock is trading at 13.0x EBITDA. This isn’t a dirt-cheap valuation, but it remains reasonable. P10’s most comparable company is Hamilton Lane, which trades at 30x forward EBITDA. Nonetheless, given the stock’s sharp increase, I recently moved my rating to Hold. Hold.
Riviera Resources (RVRA) was flat on the week. This week, Riviera filed an 8k to disclose that it has sold its last remaining oil and gas property for proceeds of $13.4MM (more than I had expected). The company is currently liquidating assets. After all sales close, Riviera should have ~$143.8 million, or ~2.48 per share, to distribute to shareholders. I expect almost all net proceeds to be distributed by year end. Given the higher than expected sales price announced this week, I’ve increased my estimated liquidation value from 2.31 to 2.48. I believe it makes sense to buy the stock below 1.98 as it would imply a 25% return to liquidation. Buy below 1.98.
U.S. Neurological Holdings (USNU) was flat on the week. The company 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, October 15 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.