December 23, 2020
I started my career as an equity research associate at Eaton Vance, a $100BN+ asset manager. It was a great place to start out because the equity research department was small relative to its assets under management. As a result, even as an entry level research associate, I had the opportunity to interview senior management teams.
I started my career as an equity research associate at Eaton Vance, a $100BN+ asset manager.
It was a great place to start out because the equity research department was small relative to its assets under management. As a result, even as an entry level research associate, I had the opportunity to interview senior management teams.
Shortly after I started my career, the senior pharma analyst under whom I worked left for another job, and I was the only “pharma expert” left.
Before they hired another senior analyst, I was tasked with interviewing the management teams that visited our offices when conducting the Boston portion of their periodic roadshows.
I still distinctly remember interviewing Johnson & Johnson (JNJ), Chairman and CEO, Bill Weldon, who must have been quite surprised to be sitting across from a 22-year-old recent college graduate.
That is the benefit of working at a large asset management firm. You get unfettered access to management.
Unfortunately, as an individual investor, this is no longer the case. Elon Musk is not standing by to answer my questions!
But as a micro-cap investor, I do have good access to management.
That is one of my favorite parts of being a micro-cap investor.
Just last week I was able to have an hour-long conversation with the CEO and CFO of FlexShopper (FPAY), my most recent recommendation.
The conversation enabled me to better understand the business and industry as well as understand FlexShopper’s growth strategy. All in all, the conversation has increased my conviction in the stock.
This week, we have a couple updates. Given continued strong execution from Medexus (MEDXF) and several catalysts in the year ahead, I’m increasing my recommendation to Buy under 5.50. We saw more insider buying at Liberated Syndication (LSYN) and P10 Holdings (PIOE) closed its most recent acquisition.
The next issue of Cabot Micro-Cap Insider will be published on Wednesday, January 13, 2021. 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
Increase limit on MEDXF to Buy under 5.50.
BBX Capital (BBXIA) had no news this week. The company recently reported Q3 2020 earnings. On the heels of the recent spin-off from Bluegreen Vacations Holding Corp. (BVH), 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 $10 million share repurchase, representing 12% 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. The stock is trading at 27% of book value which is too cheap given book value is comprised of cash, a note receivable and real estate. Further, the real estate is located in Florida which is attractive and should continue to appreciate (Florida is an attractive state due to low taxes). 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, but the stock has performed well. Donnelley 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 over 100% upside. Buy under 17.00.
Dorchester Minerals LP (DMLP) recently reported 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 9.2x 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 11.6%. Given strong free cash flow generation and a reasonable valuation, we recently increased our buy limit from 11 to 12. Buy under 12.00.
FlexShopper (FPAY) is a rapidly growing company in the virtual lease-to-own market. Despite rapid growth and margin expansion, it is only trading at 5.0x forward earnings. Importantly, the Chairman of FlexShopper owns over 20% of the company and has been buying more stock as fast as he can in the open market. Recently, H.C. Wainwright published an initiation report on the company with a $4.00 target. Also, I recently had a chance to talk to management (both the CEO and CFO), and it increased my conviction in the idea. I see 100%+ upside over the next year. Buy under 2.50.
Greystone Logistics (GLGI) had another quiet week. The company reported first-quarter fiscal 2021 earnings in October. 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 7.7x 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) had no news this week, but the stock has generally been weak 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 6.6x. This is too cheap. To put it in perspective, the software and internet industry trades at an average EV/EBIT multiple of 60.0x. Buy under 0.55.
Liberated Syndication (LSYN) reported additional insider buying this week as the CFO and a director bought shares in the 5.15 range. Previously, the activist investor, Eric Shahinian of Camac Partners, bought in the open market at prices ranging from 3.58 to 3.80. Camac Partners currently owns 7.9% of shares outstanding ensuring strong alignment. Libsyn recently reported earnings. As expected, the quarter was a little messy due to compensation expenses related to the former CEO, Chris Spencer, leaving. Nonetheless, the long-term outlook looks great. Another interest thing to monitor is that Libsyn recently filed an 8-k disclosing that it is suing several of its largest shareholders to force them to forfeit their shares. The backstory is a little complicated but here is a good article that summarizes it. The key takeaway is it would be a huge positive for us if Libsyn won its lawsuit as shares outstanding would decline from 26.6MM to 19.4MM, a 27% decline. Buy under 4.25.
MamaMancini’s Holdings (MMMB) reported earnings last week. Revenue grew 6.8% while EPS grew 100% to $0.02 as the company continues to leverage its fixed cost base. Sales growth decelerated slightly due to COVID headwinds, but I’m confident sales will reaccelerate in 2021 and beyond. Additionally, the company is currently running a strategic review which could result in the company being sold. Whether or not the company is sold, I believe returns should be strong going forward given that the company will continue to grow and generate strong earnings growth. It has historically grown revenue at a 24% CAGR yet only trades at 10x forward earnings. 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 10.0x 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. Medexus recently gave a great presentation which is available on YouTube. Given continued strong execution, I am increasing my buy limit to 5.50. Buy under 5.50.
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 18.7x 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) announced this week that it has closed its acquisition of 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. My estimate is that this transaction will increase run rate EBITDA to ~$75MM. As such, P10 is trading at an EV/EBITDA multiple of 14.4x. As I have said before, 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 27.3x. 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 recommend holding a half position. I want to keep exposure to the name but think it’s prudent to book some profits. Hold Half.
U.S. Neurological Holdings (USNU) reported earnings recently. 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 5x 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.
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 FPAY. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members and will follow his rating guidelines.