One of my favorite follows on Twitter is Ryan Detrick, the Chief Market Strategist at LPL Financial.
He is always tweeting out extremely timely technical market information. I highly recommend you follow him!
Anyway, he recently posted the following chart showing that November has historically been the best month for the S&P 500 during a presidential election year, and December has been the third best month.
While volatility has picked up recently, history suggests the market will end the year with a strong run.
This week, we have no changes to our recommendations.
Over the next couple quarters, I look forward to reviewing quarterly results for Liberated Syndication, Dorchester Minerals, Medexus Pharmaceuticals, and U.S. Neurological Holdings.
The next issue of Cabot Micro-Cap Insider will be published on Wednesday, November 11. If you have any questions that you want me to address, feel free to send me an email at email@example.com.
Changes This Week
BBX Capital (BBXIA) recently announced that it has authorized a $10MM share repurchase representing 14% of its market cap. This is a significant positive. The company also announced that it is has purchased Colonial Elegance, a supplier and distributor of building products, including barn doors, closet doors, and stair parts. This purchase compliments the company’s subsidiary, Renin Holdings, which manufactures and distributes sliding doors, door systems and hardware, and home décor products. BBX paid $39MM for the acquisition but that price includes $5.1MM of excess working capital. As a result, the purchase price goes down to $33.99MM. EBITDA in the past year was $8.1MM CAD, or $6.1MM USD. As such, BBX paid 5.6x EBITDA, which seems like a rather cheap purchase price. It is hard to know for sure based on the limited information disclosed in the press release. We will have to wait until we get the financials. I want to speak to the company to get additional insight, but I continue to like the stock. Factoring in a note receivable due within five years, it is trading at ~53% of its cash and notes receivable. Further, the company has valuable operating assets that generate positive free cash flow. Despite poor historical corporate governance, BBXIA shares trade far too cheaply. I see 100%+ upside. Buy under 5.00.
Dorchester Minerals LP (DMLP) recently announced that it will pay its third quarter distribution of $0.325 to unitholders of record on November 2 on November 12. This works out to an annualized yield of 13.0%. The third quarter distribution represents a 43% increase over the second quarter, reflecting significantly higher average energy prices. Dorchester is the rare energy company with high margins and no capital expenditures. It generates tons of free cash flow and pays a dividend. Insiders have been gobbling up shares, and I believe the stock is a great long-term holding, which will be trading significantly higher in three years. While waiting for the stock to appreciate, investors get to collect a ~13% dividend yield. Buy under 11.00.
Greystone Logistics (GLGI) recently reported first-quarter fiscal 2021 earnings by filing its 10-Q. The filing was not accompanied by a press release. In the quarter, sales declined by 6%. There was a ~16% increase in volume, but pricing structure and product mix drove the sales decline. Importantly, gross margin increased from 12.6% to 16.8%. This drastic gross margin expansion drove a 25% increase in gross profit despite the sales decline. The strong gross profit growth coupled with lower interest expense and preferred dividends drove 94.5% EPS growth. I’m conservatively estimating forward earnings of $0.13 (fiscal 2021). As such, the stock is trading at 7.0x forward earnings. This is too cheap for a company that has historically grown revenue at a 4-year CAGR of 30.4%. Further, after the 10-Q was filed we saw significant insider buying from CEO and President Warren Kruger and a company director. 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. Buy under 1.10.
HopTo Inc (HPTO) was flat on the week with no news. We did see an individual named Jon C. Baker disclose that he owns 892,383 shares, or 4.8% of shares outstanding. I have no insight into Mr. Baker’s intentions. 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 2020, 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 7.7x. This is too cheap. To put it in perspective, the software and internet industry trades at an average EV/EBIT multiple of 50.9x. Buy under 0.55.
Liberated Syndication (LSYN) was flat on the week. Recently, we saw some insider selling, but it was by two directors who will be replaced shortly (they were appointed by the former CEO, Chris Spencer, who had issues with self-dealing). Ironically, I view their selling as a positive as it signals to me that they will be leaving 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 was higher, 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. I look forward to Libsyn’s Q3 earnings, which should be reported within two weeks. Buy under 3.75.
MamaMancini’s Holdings (MMMB) was flat on the week. 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 starting 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 16.6x. 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 up slightly 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 3.6x. This is a good stock to average up in as the company continues to execute yet remains undervalued by the market. I look forward to the company’s Q3 earnings report within a few weeks. Buy under 3.50.
NamSys Inc. (NMYSF) recently reported fiscal Q3 earnings (quarter ended July 31). Revenue grew 11.8%, which is 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. The most important factor for NamSys is continued revenue growth. Despite historically growing revenue and earnings at a compound annual growth rate of 20%+, the stock only trades at 18.5x 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. Recently, the company closed the acquisition of 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 paid $159MM for the acquisition. To fund the deal, P10 issued 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 13.6x 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. Hold.
Riviera Resources (RVRA) made a distribution of $1.35 on October 28. Riviera estimates that any subsequent distributions will range from $0 to $40MM, or $0.00 to $0.69 per share. I recently spoke with Riviera management and learned that the soonest another distribution can be made is September 2021. I’m assuming Riviera’s second distribution is the midpoint of the guidance range, $0.34. As such, I believe it makes sense to buy the stock below $0.28. Buying the stock at $0.27 implies an attractive IRR of 27.0% if $0.34 is paid out by the middle of September 2021. Riviera’s estimated wind down costs are $32MM, which seem high although there could be significant severance costs. Buy under 0.28.
U.S. Neurological Holdings (USNU) was flat on the week. The company’s last quarterly report was solid. 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 it holds interests in radiological treatment facilities. I expect the company to file its next quarterly report in mid-November and it will be interesting to see if revenue growth reaccelerates. Buy under 0.25.
P.S. Registration is now open for the next Cabot Micro-Cap Insider call on Thursday, November 12 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 BBXIA, 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