Investor sentiment is high these days.
Just look at the Citi Panic/Euphoria Index
Historically, when the index is at Euphoria, the market is due to take a breather.
Similarly, the Investors Intelligence Bullish Percentage chart is also suggesting the market may be overheated.
So what should we do?
I will do what I always do. Focus on bottom up analysis to identify companies that look attractive no matter the market environment.
I’m actually finding a lot of micro-caps that look quite compelling. In fact, I’m having a hard time deciding which stock to recommend next week when I publish my latest edition of Cabot Micro-Cap Insider.
Here are a few candidates:
1). Well-capitalized healthcare company about to consummate a merger that will create a fast-growing men’s health company trading at 1.1x revenue. Strong insider buying.
2). Fast growing rent-to-own company trading at 4x forward earnings with strong insider buying.
We do have one change this week. I’m recommending selling half of our position in P10 Holdings (PIOE). The stock doesn’t look too expensive but doesn’t look that cheap either. I want to keep it as a recommendation, but I think it makes sense to take some profits.
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
PIOE to Sell Half
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 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. 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) had a quiet week with no news. Donnelley Financial Solutions 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 report 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 8.9x 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) had a quiet week. The company 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 7.5x 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 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) has generally been week since reporting earnings recently. In the quarter, 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 6.1x. 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) filed an 8-k recently which disclosed that it filed a lawsuit against Hongcheng Zhang. This individual used to run a business that Fab Universal acquired (predecessor company to Liberated Syndication). The business turned out to be a fraud and Zhang was subsequently arrested in China. Zhang still owns 9% of Libsyn shares, but it appears that Libsyn is trying to claw back those shares. If the company is successful, it would be a massive positive. Libsyn recently reported earnings. 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) has pulled back and looks attractive. 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 15.6x. 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) reported earnings recently. 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 8.0x free cash flow, an incredibly cheap valuation for a rapidly growing company. On an EV/Revenue basis, MEDXF trades at 1.1x while slower growing peers trade at 3.6x. Given continued strong execution, I recently increased 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 20.2x 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) recently announced another transformative acquisition last week. In this transaction, P10 will be acquiring Enhanced Capital Group, a premier impact investment platform. Since its inception, Enhanced has deployed over $2BN of capital into impact credit and impact equity investments. Areas of focus include small business lending in impact areas and to women and minority-owned businesses, renewable energy, and historic building rehabilitation. As is typical for its transactions, P10 is paying for the deal with cash and convertible preferred equity. Full terms of the transaction have not been disclosed, but my estimate is that this transaction will increase run rate EBITDA to ~$75MM. As such, P10 is trading at an EV/EBITDA multiple of 13.8x pro forma for this deal. As I said above, the stock is no longer dirt cheap. Nonetheless, it still trades at a sharp discount to its closest peer, Hamilton Lane (HLNE), which trades at an EV/forward EBITDA multiple of 27.0x. Catalysts for P10 Holdings going forward include: 1) additional deals and 2) a potential up-listing to a major exchange. Given the stock is not dirt cheap anymore, I am recommending selling a half position. I want to keep exposure to the name but think it’s prudent to book some profits. Sell Half
U.S. Neurological Holdings (USNU) reported earnings last week. Revenue grew 0.6% y/y and 11% q/q 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 $0.5MM 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.
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, and PIOE. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members and will follow his rating guidelines.