My favorite market strategist, Ryan Detrick, is always good for some interesting factoids.
According to Ryan, when the S&P 500 is up >10% through the first 100 days of the year, it increases 8.6% on average during the remaining portion of the year.
While the market is pricy, the advice “don’t fight the tape” usually pays off.
That said, we aren’t recommending a single name in the S&P 500 due to our focus on micro-caps.
When evaluating micro-caps, it’s important to focus on the fundamentals. It’s been a while since I reviewed the criteria that I look for when evaluating a micro-cap, so let’s spend a little time on it.
1) Momentum
This includes business momentum (earnings and revenue growth) as well as stock price momentum.
2) Low valuations
The beautiful thing about micro-caps is it’s possible to find growth names trading at value multiples.
3) Illiquidity
We don’t necessarily look for illiquidity, but if a micro-cap is illiquid, it doesn’t scare us away.
Why? Because historically some of the best performing micro-caps have been extremely illiquid.
Other factors that we look for include:
- High insider ownership,
- A low share count,
- A reasonable balance sheet.
Alright, now let’s get into this week’s review of open recommendations.
We have one change this week as I’m increasing my buy limit on Drive Shack (DS) to 3.50. I had a great conversation with Drive Shack’s treasurer last week and it increased my conviction in the idea.
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 buy limit on DS to Buy under 3.50.
Updates
Aptevo (APVO) released positive data for their lead compound APVO436, and have announced the drug has entered an expansion phase. My two key takeaways are that one, safety of the drug looks good. There were no neurological toxicities in their initial trials, which was a concern. And two, efficacy looks good—four out of the seven patients treated in cohort 6 saw stabilization of their leukemia. In the expansionary phase, 90 more AML patients will be enrolled into five cohorts, designed to evaluate tolerability and clinical impact of APVO436. Further, interim data from this phase in the trial is expected to come later this year. The stock reacted positively to the news, before fading and selling off over the last two days. I continue to like the risk/reward setup as the company’s pipeline is being valued as an almost free call option. 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) announced last week that it will commence a tender offer to buy back 4,000,000 class A shares at $6.75 ($27MM in total spend). This represents a buyback of 21% of shares outstanding! The transaction makes all the sense in the world as the company is buying back its stock at a massive discount to book value. Today, book value per share is $16.00. The stock is trading at a price to book value ratio of 0.42x. If successful with its tender offer, the company will spend $27MM to retire 4MM shares. Book value per share will increase from $16.00 to $18.41. If the stock trades at $6.75 after the tender offer is complete, it will trade at a price to book value ratio of 0.37x. Since the transaction was announced, the stock has traded up above the tender offer of $6.75. It will be interesting to see if the company increases the price of its tender offer or keeps it at $6.75. Original Write-up Buy with a limit of 6.75.
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 too, and the stock performed well. DFIN pulled back after an analyst downgraded it to Hold, but the stock has rebounded sharply. Donnelley is executing well and is still too cheap trading at 8.5x free cash flow and 6.9x 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 7.7%. 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. Given that oil prices are back to pre-pandemic levels but the stock remains depressed, I think DMLP looks compelling. 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 have recently bought in the open market. I recently spoke to investor relations at the company and the conversation increased my conviction levels. As such, I’m increasing my buy limit to 3.50. Original Write-up. Buy under 3.50.
FlexShopper (FPAY) recently disclosed that its chairman and a director both bought the stock in the open market. This gives me great confidence that strong results should continue. Recently, the company reported another excellent quarter. Revenue increased by 32%, 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 7.0x 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 information. 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 reversed their 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 8.0x 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). 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 track remains on track. Insiders own a significant stake in the company and have an incentive to growth 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 3.6x. 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 spin off its assets), the stock is worth 34. Original Write-up. Buy under 23.50.
Liberated Syndication (LSYN) recently filed an 8-K disclosing the extent of the restatement of their financials. In it they also disclosed that the CFO, Richard Heyse, resigned. The restatement is a little messier than I had initially expected, but I don’t think it’s material. The CFO resigning was the big negative to me. While it is said that Heyse had no disagreements with LSYN’s Management, directors, or outside auditors, it’s certainly not something you want to see, especially because he was buying stock in the open market recently. The CFO has also agreed to act as a consultant for the company to assist in the preparation of the 2018 and 2019 restated financial statements. Perhaps it’s optimistic, but maybe he just realized that it’s going to be a lot of work and would rather move on, or rather didn’t want to commit himself to the process. I continue to have conviction in the stock. 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, MamaManchini’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. 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 15.9x 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 great. 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. That’s 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.