This was a busy week, with many of our companies reporting earnings.
On top of earnings, COVID-19 cases are spiking around the country, and I’m desperately hoping that it doesn’t force my daughter’s kindergarten class to go fully remote.
I can say with some confidence (she started the year fully remote) that remote schooling does not work for little ones!
Before we get into our regular update, I just wanted to share a few thoughts on the current market environment.
In our most recent monthly issue, I shared the below chart.
This chart shows the Nasdaq 100. The yellow dots on the chart show the days when the equal weighted S&P 500 index outperformed the Nasdaq 100 by greater than 5% or more. In 2000, these yellow dots signaled that value stocks were about to go on an epic run of outperformance.
Earlier this month (on Monday, November 9, to be exact), we had the first yellow dot in ~18 years, suggesting value stocks are poised to outperform.
I wanted to share one more chart showing just how dramatically value stocks have underperformed.
If value stocks do snap back, they will have significant ground to make up and our recommendations should continue to perform very well.
This week, hopTo, Liberated Syndication, Medexus, P10 Holdings, and U.S Neurological Holdings reported earnings.
In summary, the reports were largely in line with expectations. Good but not great. Nothing that was thesis-changing.
I do have one change this week. I’m increasing my buy limit from 3.50 to 4.50 for Medexus Pharma. The company continues to execute yet remains dramatically undervalued based on its earnings power. Better yet, the company is actively looking to acquire and/or license additional drugs, which will only increase its growth potential.
The next issue of Cabot Micro-Cap Insider will be published on Wednesday, December 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
Medexus buy limit moved to Buy under 4.50
Updates
BBX Capital (BBXIA) recently reported Q3 2020 earnings. Given the recent spin-off, there were many moving pieces. But the key takeaway is BBX Capital continues to look attractive. The company recently announced that it has authorized a $10MM share repurchase representing 14% of its market cap. This is a significant positive. The company also recently announced that it has purchased Colonial Elegance, a supplier and distributor of building products, including barn doors, closet doors, and stair parts. This purchase complements 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. Factoring in a note receivable due within five years, it is trading at ~66% 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.
Donnelly Financial Solutions (DFIN) is a 2016 spin-off that has successfully executed a turnaround, transitioning from a mainly print focused business to a software/tech-enabled services business. Despite strong cash flow generation and debt paydown, the stock still trades at a draconian valuation. Simcoe Capital, an activist investor, owns 10% of the stock, ensuring we are well aligned with insiders. With modest earnings growth and multiple expansion, coupled with significant debt paydown, the stock should hit 40 by 2024, implying almost 200% upside. Buy under 15.00.
Dorchester Minerals LP (DMLP) recently released Q3 earnings. There were no surprises. Through September, the company has generated $32MM of free cash flow or $43MM on an annualized basis. As such, it is trading at 8.7x annualized free cash flow. This is an incredibly cheap valuation for a debt free royalty business that pays out all its income in dividends and will skyrocket if (when) energy markets recover. The last distribution of $0.33 was paid on November 12. This yield on an annualized basis works out to a yield of 12%. 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 7.3x forward earnings. This is too cheap for a company that has historically grown revenue at a four-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 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) reported earnings this week. Sales declined by 6%. However, just as we didn’t get too excited last quarter when sales jumped 49%, we aren’t going to get too down this quarter. On a quarterly basis, sales are lumpy. Year to date, revenue is up 3% and operating profit is up 5%. The stock has pulled back and looks attractive. I believe HTPO is worth ~0.86 per share. HopTo is currently trading at an EV/EBIT multiple of 5.6x. This is too cheap. To put it in perspective, the software and internet industry trades at an average EV/EBIT multiple of 59.0x. Buy under 0.55.
Liberated Syndication (LSYN) reported earnings this week. As expected, the quarter was a little messy due to compensation expenses related to the former CEO, Chris Spencer leaving. Total revenue grew 4.7% to $6.5MM. Podcast hosting revenue growth accelerated from 11% to 15%, but website hosting revenue declined by 8%. Over the long term I would expect website hosting revenue to grow slightly and podcast hosting revenue to re-accelerated to a 20% annual growth rate. Positives: 1) Libsyn has bought back 9% of shares outstanding in 2020, 2) Libsyn will launch a new user interface (Libsyn 5) and advertising technology in 2021. Negatives: 1) Gross margins declined as Libsyn’s bandwidth usage increased due to increased podcast consumption; 2) Libsyn is spending more on technology, customer support, and selling. This is both a negative and a positive. In the near term, it will depress Libsyn’s EBITDA margin, but it should accelerate revenue growth longer term. In summary, the quarter doesn’t change our Libsyn investment thesis. Buy under 3.75.
MamaMancini’s Holdings (MMMB) was flat on the week with no news. 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’s 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 17.3x. 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) reported earnings this week. Medexus generated revenue of $23.6MM which was up 44%, but down 14% sequentially. The reason for the decline was ~$3MM of IXINITY (hemophilia drug) sales slipped from September to October. As such, I expect next quarter to be unusually strong. Year to date, Medexus has generated $4.0MM of free cash flow or $8.0MM annualized. As such, the stock is trading at a 8.8x free cash flow, an incredibly cheap valuation for a rapidly growing company. On an EV/Revenue basis, MEDXF trades at 1.0x while slower growing peers trade at 3.6x. Given continued strong execution, I’m increasing my buy limit to 4.50. Buy under 4.50.
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 19.2x 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) reported earnings this week. The company continues to execute well as it raised over $400MM in additional capital for its private equity strategies. This capital is locked up for 10+ years and will generate predictable and high margin revenue for the foreseeable future. The company also disclosed that it hired a new CFO with significant public market experience and that it plans to uplist to a national exchange in the future. 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. 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 14.2x EBITDA. This isn’t a dirt-cheap valuation, but it remains reasonable. P10’s most comparable company is Hamilton Lane, which trades at 29x forward EBITDA. Hold.
U.S. Neurological Holdings (USNU) reported earnings this week. Revenue grew 0.6% y/y and 11% y/y as procedures and price per procedure both rebounded. Year to date, the company has generated EPS of $0.05 or $0.067 on an annualized basis. As such, the company is trading at just 4x earnings. In addition, the company has $1.5 million ($0.19 per share) of cash and no debt on its balance sheet. It also has $1.1MM (due from related parties) and has generated over $500,000 in free cash flow year to date. 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. Buy under 0.25.
P.S. Registration is now open for the next Cabot Micro-Cap Insider call on Thursday, December 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 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