April 28, 2021

The big news this week is taxes.

President Biden proposed to raise the capital gains income tax on long-term capital gains from 20% to 39.6% for millionaires.

Who knows if this law will actually get passed. I have my doubts. For years, Republican and Democratic politicians have tried unsuccessfully to close the carried interest loophole which allows private equity and hedge fund managers to treat profit windfalls as long-term capital gains not ordinary income.

If bipartisan support couldn’t close the carried interest loophole in the past, I don’t think it will this year (this new law would effectively shut the loophole).

Nonetheless, even if the tax hike does go through, it’s not necessarily bad for the stock market.

A rise in capital gains tax rate has no impact on stock market returns during the year before the tax hike or during the year of the tax hike according to Schwab’s strategist Liz Ann Sonders.

As you know, I love investing in micro-caps.

One of the reasons why is access to management.

If you have a question on Tesla (TSLA), good luck trying to get Elon Musk on the phone. But if you have a question on a micro-cap, the CEO is usually happy to speak with you.

I had a chance to speak to the CEO of Greystone Logistics (GLGI) recently and learned a bunch of new stuff.

Why did I want to speak to the CEO?

Greystone had recently reported a quarter that looked awful at first blush.

Revenue declined in the quarter by 26% while EPS declined by 65% to $0.02. However, the 10-Q revealed that the decline in revenue was primarily due to a timing issue. In March (one month after quarter end), Greystone received an order for $7.8MM. If that order had been received in February, revenue would have grown by 13% and earnings would have grown significantly as well.

I wanted to get clarity on what was going on.

I called the company and within 30 minutes, I was on the phone with CEO Warren Kruger.

For the next 20 minutes, I asked Kruger a ton of questions about the industry and his business (he owns over 40% of shares outstanding).

He was very candid and direct. I think it was the most informative 20-minute conversation that I’ve ever had!

I had two big takeaways from the call:

1. The customer that previously decided to diversify away from Greystone for its pallet orders reversed its decision. This is a major positive.
2. The long-term outlook for the company remains bright and Kruger remains highly engaged.

The stock is trading at 8x current fiscal year EPS estimate of $0.15 (fiscal year ends in May) which is too cheap given strong growth.

I expect strong EPS growth in 2021 (fiscal 2022). As such, I’m increasing my buy limit to 1.30. Greystone Original Write-up. Buy under 1.30.

Last week, I recorded a webinar titled, 3 Micro-Cap Stocks that Could Triple in the Next Year.

If you missed the webinar, you can watch a replay here.

The next issue of Cabot Micro-Cap Insider will be published on Wednesday, May 12. As always, if you have any questions, don’t hesitate to email me at rich@cabotwealth.com.

Changes This Week

Updates

Aptevo (APVO) appears to have stabilized. Aptevo reported Q4 2020 quarterly results and announced that it has agreed to sell Ruxience Royalty stream for $35MM up front and milestone payments of up to an additional $32.5MM in 2021, 2022, and 2023. Aptevo did not announce any details on the sale of its IXINITY royalty stream, however, I estimate it is worth $19MM. Aptevo’s enterprise value is $92MM. Counting $67.5MM in payments for Ruxience and $19MM for IXINITY, Aptevo’s pipeline is being valued by the market at $10MM which seems low considering APVO436 has generated 1 complete response and another partial response in difficult to treat AML patients. With regards to Tang’s unsolicited offer, management noted that it couldn’t agree to a non-disclosure agreement and so talks broke down (this is the main reason why the stock sold off, I believe). I still believe Aptevo looks like a great asymmetric bet and believe Tang will follow through with his proxy fight to get Aptevo sold to the highest bidder. Original Write-up. Buy under 40.

Atento S.A. (ATTO), was up slightly on the week despite no news. The company is a Latin American customer relationship management (CRM) business that is growing, expanding margins, and an acquisition candidate. It’s majority owned by sophisticated private equity investors who are restricted from selling the company until May 2022. At that time, I expect a sale of the company for more than 100% above Atento’s current price. Original Write-up. Buy under 25.00.

BBX Capital (BBXIA) had no news this week. It reported its fourth quarter results recently. The story remains on track. The most important positive relates to the company’s real estate business. Management wrote in its press release: “Although BBX Capital Real Estate (“BBXRE”) was initially adversely impacted by the COVID-19 pandemic during 2020, it has largely recovered and has to some extent benefited from the recent migration of residents into Florida. We believe that there has been an increase in the demand for single-family and multifamily apartment housing in many of the markets in which BBXRE operates.” This news is a major positive as the company has over $100MM of fair value invested in real estate primarily in Florida. The company’s Renin subsidiary (subsidiary and distributor of building products, including barn doors, closet doors, and stair parts) appears to be performing well and should benefit from a strong economic recovery in 2021. The one negative in the quarter was that the company didn’t buy back any shares despite its $10MM share repurchase authorization. I’m changing my rating on the stock to Sell Half. This is driven by the fact that I’m personally going to be selling half my position. I still think there is more upside in the name, but the position has appreciated to be quite large in my portfolio and so I’m going to trim it. The investment thesis remains on track and the stock is too cheap trading at 39.0% of book value. Original Write-up. Buy under 5.00.

Donnelley Financial Solutions (DFIN) continues to perform well. In February, Donnelley reported a solid quarter. Revenue increased 10.5%, beating consensus expectations considerably. The revenue upside was driven by strong capital markets activity (IPOs and SPAC issuance) as well as continued growth of software and tech enabled solutions. Software solutions revenue increased 8% y/y to $54.2MM and now represent 25.8% of total sales. The company also announced the launch of a new software solution for SEC filing and announced a $50MM share repurchase authorization that will replace its current $25MM authorization. All in all, an excellent quarter. Currently, the stock trades at 8.4x free cash flow and 7.4x forward EBITDA. Original Write-up. Buy under 25.00.

Dorchester Minerals LP (DMLP) announced that its next dividend of $0.30 will be paid on 5/13/2021 to shareholders of record on 5/3/2021. At an annualized rate, the annual dividend yield is 8.4%. Not too bad! In 2020, the company generated $39.4MM of free cash flow. Given the pandemic, we can view this free cash flow generation as a trough. As such, DMLP is trading at 13.3x trough free cash flow. This is an extraordinarily cheap multiple for such a high-quality royalty business. Original Write-up. Buy under 15.00.

FlexShopper (FPAY) recently reported an excellent quarter but has pulled back. In the quarter, revenue increased by 25.3%, beating consensus by 4%. Adjusted EBITDA increased by 136% to $2.6MM. And better yet, new originations increased 26.5%, which implies that revenue and earnings growth for 2021 should be very strong. I continue to like FlexShopper. It is a rapidly growing company in the virtual lease-to-own market. Despite rapid growth and margin expansion, it is only trading at 6.2x 2021 earnings. Importantly, the Chairman of FlexShopper owns over 20% of the company and has recently been buying in the open market. My 12-month price target for FlexShopper is 4.70. Original Write-up. Buy under 3.00.

Greystone Logistics (GLGI) was covered above.

HopTo Inc (HPTO) recently filed its 10-k to disclose Q4 earnings. Revenue increased 6% y/y to $0.8MM. For the full year, revenue grew 3%. While not a blow-out quarter, it is a positive nonetheless. Insiders own a significant stake in the company and have an incentive to grow revenue and earnings to increase value. I believe HTPO is worth ~0.80 per share. The stock is currently trading at an EV/EBIT multiple of 6.5x. This is way too cheap. To put it in perspective, the software and Internet industry trades at an average EV/EBIT multiple of over 50x. Original Write-up. Buy under 0.55.

IDT Corporation (IDT) has performed well since reporting strong earnings in March. Consolidated revenue increased by 5%. National Retail Solutions (NRS), BOSS Revolution Money Transfer, and net2phone-UCaaS subscription revenues increased by 151%, 73% and 36%, respectively. In particular, NRS’ growth of 151% was incredibly impressive. NRS deployed 1,300 billable POS terminals during the quarter, increasing its network to 13,700 terminals, and had 3,800 active payment processing merchant accounts at January 31, 2021. IDT believes that the market for NRS’ point of sale terminals is 100,000. On a sum-of-the-parts basis (which I think is the right way to view this name given IDT’s propensity to sell and spinoff its assets), the stock is worth 34. Original Write-up. Buy under 23.50.

Liberated Syndication (LSYN) announced last week that it will be making another acquisition. This time, it will buy Glow, a podcast monetization platform. Financial terms of the transaction were not disclosed. The more interesting acquisition was announced a few weeks ago when Libsyn announced that it will acquire AdvertiseCast, an independent, podcast advertising company. The combination of Libsyn’s 75,000 podcasts with AdvertiseCast’s advertising capabilities should result in accelerating revenue growth going forward. Last year, AdvertiseCast grew revenue 45% to $12MM and has scaled profitably since launched in 2016 with no outside investment. Under the terms of the transaction, Libsyn will pay $30MM ($18MM in cash, $10MM in newly issued Libsyn shares, and $2MM in earnouts). Libsyn will issue $25MM of stock to pay for the deal in a PIPE transaction which will be led by Camac Partners. The transaction is expected to close in Q2 2020. The acquisition looks like a steal. Libsyn is paying 2.5x revenue for a podcast advertising business that is growing 45% per year and profitable. With the acquisition, podcast revenue growth will increase from 11.1% to 26.2%. Total company growth increases from 5.0% to 17.5%. Original Write-up. Buy under 5.00.

MamaMancini’s Holding (MMMB) recently reported earnings and the stock popped. While revenue in the quarter only increased by 1.4%, net income increased 500% to $0.05 as the company continues to leverage its fixed cost base. For the full year, MamaMancini’s generated EPS of $0.12 (+200% y/y) on revenue growth of 20.8%. Growth in 2021 (fiscal 2022) should continue driven by continued penetration of the company’s products in grocery stores nation-wide as well as by bolt on acquisitions. My 12-month price target is 3.80, which is driven by an estimated price to earnings multiple of 20x on expected fiscal 2021 earnings of $0.19. Original Write-up. Buy under 2.50.

Medexus Pharma (MEDXF) has been a little weak, but it remains our highest conviction idea. I expect Medexus to announce that it will be uplisted to the NASDAQ very soon and this could be a nice catalyst to see the stock continue its upward march. Medexus remains my highest conviction idea and largest person holding. Management believes its current drug portfolio (including recently licensed Treosulfan) has peak sales potential of $350MM to $400MM CAD. Assuming the company can trade at 3x this revenue estimate (the company will execute additional licensing deals so I expect revenue to ultimately grow even higher) in line with slower-growing peers, MEDXF would trade at ~24 per share, implying significant upside from here. Original Write-up. Buy under 8.00.

NamSys Inc. (NMYSF) recently reported positive full-year results. In the fiscal year, revenue increased 15% to $4.7MM. Free cash flow increased 34% to $1.9MM. Namsys is attractively valued, trading at 15.3x free cash flow. The biggest news remains that the company recently announced that it has terminated its long-term incentive plan. The plan was originally put in place in the mid-2010s to incentivize the team to help transition NamSys’ software from on-premise to a cloud-based offering. However, the long-term incentive plan had no limit as participants in the bonus plan are entitled to 15% of the value of the company, no matter how high it’s valued. The payout for the termination of the bonus plan will be made in cash and stock. This is a major positive as it will increase the company’s earnings growth rate going forward. Further, it’s possible that this announcement could be a prelude to a sale of the company. Despite historically growing revenue and earnings at a compound annual growth rate of 20%+, the stock only trades at 15.3x free cash flow. It has a pristine balance sheet with significant cash and no debt, and insiders own more than 40% of the company, ensuring strong alignment. Original Write-up. Buy under 0.80.

P10 Holdings (PIOE) recently filed its 10K and issued its annual letter to shareholders. It is always a great read and quick (only three pages). In the letter, Co-CEOs Robert Alpert and Clark Webb lay out high level guidance for P10 Holdings financial outlook. The business currently has $12.7 billion in assets under management and charges ~1.00% on average for its management fee. The business should generate 55% to 60% EBITDA margins. Taxes and interest payments currently amount to $18.4MM per year. After doing the basic algebra (assuming a 55% EBITDA margin), I determined that the business is currently on track to generate ~$70MM of EBITDA and $51MM of free cash flow. As such, it’s trading at 15.8x EBITDA and 12.4x free cash flow. This isn’t dirt cheap, but it is very reasonable for such a well-positioned company with organic growth and additional acquisition opportunities. It’s closest (albeit larger) peer is Hamilton Lane (HLNE) which trades at 31.9x EBITDA and 21.3x free cash flow. My official rating is Hold Half, but I may eventually switch my rating back to Buy given how well the business is positioned. Original Write-up. Hold Half.

U.S. Neurological Holdings (USNU) filed its 10-k to report Q4 earnings. In the quarter, revenue grew 55% due to a strong snap back of demand. For the full year, revenue grew 3% which is impressive given the pandemic. In 2020, the company generated EPS of $0.07. As such, it is trading at a P/E of 5.8x. It also has $2.0MM ($0.26 per share) of cash on its balance sheet and no debt. 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. Original Write-up. 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, MMMB, MEDXF, PIOE, FPAY, IDT, and APVO. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members.