During his 30+ year career, my dad was a professional investor in Boston, Massachusetts.
He worked for several firms, but always specialized in managing value portfolios worth hundreds of millions of dollars for institutional clients.
I am lucky that he’s a great teacher and enjoyed passing along his investing wisdom over the years.
These days, we have more of a peer relationship. In other words, I teach him as much as he teaches me. We talk daily about the market and which stocks look attractive.
This morning, he emailed me to share that GMO, a highly regarded, Boston based investment firm had published its 7-year asset class forecast.
The expected return for U.S. large cap stocks? -7.9% per year.
The expected return for U.S. small cap stocks? -8.5% per year.
While I respect GMO’s thoughts and analysis, they are permabears. They are always bearish.
In 2014, GMO issued its 7-year asset class forecast.
At the time, the firm expected the S&P 500 to return -1.7% per year.
Since then, the S&P 500 is up 143% including dividends.
I don’t point this out to ridicule GMO. Like I said earlier, I have a lot of respect for the firm and Jeremy Grantham, one of the Firm’s founders.
I just don’t put much stock in their (or anyone else’s!) asset class forecasts.
I try to focus on the game that I can win which is picking individual stocks.
While the market looks expensive, there are many individual stocks that are cheap on a normalized basis and will benefit from a booming economy in 2021 and 2022.
The most obvious example is Dorchester Minerals (DMLP) which trades at 13x free cash flow, pays an 8% dividend and will benefit from a recovery in oil/gas markets.
But many other names on our recommendation list including Greystone Logistics (GLGI), BBX Capital (BBXIA), and Drive Shack (DS), trade at cheap valuations yet will benefit from the cyclical recovery.
I did want to mention (in case you missed it) that I recommended selling U.S. Neurological Holdings (USNU) yesterday in a special bulletin due to the company losing a contract with their only large customer.
The next issue of Cabot Micro-Cap Insider will be published on Wednesday, June 9, 2021. As always, if you have any questions, don’t hesitate to email me at rich@cabotwealth.com.
Changes This Week
Increase limit for DMLP to Buy under 17.50.
Updates
Aptevo (APVO) continues to be weak, in-line with the biotech market. The company recently reported earnings and announced that it closed its Ruxience transaction and received $35MM in upfront proceeds. I continue to like the stock. After backing out the value of Aptevo’s royalties, the market is valuing the company’s pipeline at $9MM. This seems overly pessimistic given that Aptevo’s lead compound, APVO436, has generated 1 complete response and another partial response in difficult to treat AML patients. Further, Tang Capital owns over 40% of the stock and will ultimately be successful in getting a board seat. Ultimately (within a year), I believe a process will be run and Aptevo will be sold to the highest bidder. In the earnings release, Aptevo noted that it will publish data on its lead compound APVO436 later this year. This could serve as a key catalyst. Original Write-up. Buy under 40.
Atento S.A. (ATTO), reported a solid quarter recently. EBITDA margins were slightly disappointing at 10.5%, but it was due to the seasonal impact of Brazilian wage increases. Management maintained full-year guidance of 12.5% to 13.5% for EBITDA margins. Constant currency revenue growth came in at 8%, ahead of mid-single-digit guidance. On the call, management indicated that the quarter was ahead of their expectations. All in all, the investment case remains on track. I see over 100% upside in the stock over the next couple of years. Original Write-up. Buy under 25.00.
BBX Capital (BBXIA) reported earnings this week and results look good. The company is benefitting from a strong demand for single and multi-family housing in Florida. During the quarter, the Company sold 128 developed lots to homebuilders at its Beacon Lake Community development in St. Johns County, Florida, and it has now entered into agreements with homebuilders to sell substantially all of the remaining lots in the community. Further, leasing and rent collections at the multi-family apartment communities have returned to, and in some cases have exceeded, pre-pandemic levels. The biggest positive in my mind was the company was active in repurchasing its own shares. During the quarter, the company spent $2.1MM of its $10MM authorization buying back 338,897 shares at an average cost of $6.30. Original Write-up. Hold Half.
Donnelley Financial Solutions (DFIN) recently reported a great quarter with 11% revenue growth, significantly ahead of consensus expectations. Non-GAAP EPS of $1.15 beat consensus as well and the stock performed well. The stock pulled back after an analyst downgraded it to hold, but it has since stabilized. Donnelley is executing well and is still too cheap, trading at 7.2x free cash flow and 6.0x forward EBITDA. Original Write-up. Buy under 25.00.
Dorchester Minerals LP (DMLP) recently paid a $0.30 quarterly dividend. At an annualized rate, the annual dividend yield is 8.0%. 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 13.2x trough free cash flow. This is an extraordinarily cheap multiple for such a high-quality royalty business. Given oil prices are back to pre-pandemic levels but the stock remains depressed, I’m increasing my buy limit to 17.50. Original Write-up. Buy under 17.50.
Drive Shack (DS) is my newest recommendation. Its traditional and entertainment golf businesses are set to boom in 2021. Given substantial recent cost cuts, operating leverage should drive earnings growth in 2021 and beyond. Longer term, growth will be driven by new Puttery Venues which have high potential. At its current valuation, Drive Shack’s share price gives minimal value to the strong upside potential from new Puttery Venues. Finally, alignment is high as management and directors own 16.3% of shares outstanding and have recently bought in the open market. My price target implies over 100% upside. Original Write-up. Buy under 3.00.
FlexShopper (FPAY) disclosed that its Chairman and a director both bought the stock in the open market. This is very encouraging. Recently, the company reported another excellent quarter. Revenue increased by 32.0%, beating consensus slightly. Adjusted EBITDA increased by 20% to $2.4MM. New originations increased 21.7%, 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. My 12-month price target for FlexShopper is 4.70. Original Write-up. Buy under 3.00.
Greystone Logistics (GLGI) is primed to continue to perform well. I recently had a chance to speak to the CEO 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 quarter 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 reverse 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 8.4x 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 recently increased my buy limit to 1.30. Greystone Original Write-up. Buy under 1.30.
HopTo Inc (HPTO) recently filed its 10-Q to disclose Q1 earnings. Disclosure was limited but revenue grew slightly in the first quarter. The company also disclosed that it sold some patents for $269.8K. The company didn’t disclose how many patents were sold, but it’s good to see that the company was able to monetize at least a portion of its patent portfolio. All in all, the investment remains on track. Insiders own a significant stake in the company and have an incentive to grow revenue and earnings to increase value. I believe HPTO is worth ~0.80 per share. The stock is currently trading at an EV/EBIT multiple of 5.7x. 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) has been relatively quiet recently. The latest news is that the company is in the process of making several acquisitions: Glow, a podcast monetization platform, and AdvertiseCast, an independent, podcast advertising company. I’m most excited about the AdvertiseCast acquisition. 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 nationwide 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 personal 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 Q1 ’21 results. Revenue grew 9% which was solid, but a slight deceleration from last year’s growth. The Canadian dollar was strong relative to the USD and, as a result, was a headwind for the company in the first quarter. Otherwise, macro trends remain supportive of continued strong growth in 2021 and beyond. The stock continues to look attractive, trading at only 15.0x 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 released its Q1 ’21 letter and everything looks good. A couple highlights. Assets under management are expected to increase by 30% this year. This will drive revenue, earnings and cash flow high in 2021. The company has a full pipeline of M&A opportunities. Insiders own 73% of shares outstanding. If we assume the company can achieve $16.0BN in assets under management by the end of the year (its goal), it is trading at 10.0x free cash flow and 13x EBITDA. Very reasonable considering its 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.
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, APVO, and DS. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members.