As we head into summer, weather has been a little erratic in the Boston area where I live.
For three days in a row, we had 90-degree heat and now we are experiencing a couple rainy days in the 60s.
I’m hopeful that the weather will improve, especially because my wife and I are heading away this weekend (Stowe, VT) for the first time without the kids since the pandemic started.
Fingers crossed!
The market continues to be strong with the S&P 500 near all-time highs. And micro-caps continue to chug along.
In aggregate, our micro-cap recommendations continue to do quite well, and I continue to find many excellent opportunities, especially in “cyclical” areas of the market.
Before we get into this week’s update, I wanted to spend some time sharing my perspective on stop-losses as I get questions on them quite often.
In general, stop-losses are not a viable option for micro-cap stocks.
I think they are great risk management tools for large, mid-cap, and maybe even small-cap stocks. But they don’t work for micro-cap stocks.
The reason is as follows:
Many micro-caps have very limited volume, and at certain times of the day there can be no volume in a certain stock.
As a result, very small orders can really move the market. I always advocate using limits when buying or selling micro-caps but not all investors do that. As a result, a small “market” order can force a micro-cap stock to gap up or down.
If a novice investor decides to sell 100 shares of a micro-cap using a “market” order, the price might drop by 20% on that order only to pop back up when more experienced traders realize what has happened.
However, if you had entered a 20% stop-loss on that micro-cap, you would get sold out of the stock at the worst possible time.
Instead, I recommend using a “mental stop-loss” to manage risk. If a recommendation is down 20% from your entry price, it’s worth taking a hard look at the position and deciding if you want to cut bait. If you do decide to get out, you can do so with limits to ensure the sale process is orderly.
In case you missed it, we hosted our monthly member call last week. You can watch the replay here.
The next issue of Cabot Micro-Cap Insider will be published on Wednesday, July 14, 2021. As always, if you have any questions, please email me at rich@cabotwealth.com.
Changes This Week
Increase DS buy limit to Buy under 4.00
Updates
Aptevo (APVO) has started to trend up heading into its annual meeting. The meeting will take place on June 25, 2021, and the most interesting question on the ballot is “vote upon a non-binding stockholder proposal regarding the commencement of a sale process to sell Aptevo if presented at the 2021 Annual Meeting.” I submitted my vote and voted FOR the sales process. Considering Tang Capital controls ~40% of shares outstanding, I think it’s likely that this question gets approved. Given strong asset value (through royalty value), Aptevo’s current market valuation reflects minimal value for its pipeline. 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. 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), had no news this week. The company reported a solid quarter in May, but the stock has been relatively weak. 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. A very strong point was that 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) had no news this week regarding its BBX Capital’s tender offer to repurchase up to 21% of its shares in the open market. The share price has risen above the previously announced buyback price ($6.75). I could see a couple different scenarios playing out:
- BBX Capital raises its buyback price
- BBX Capital keeps its buyback price at 6.75 and few shares get tendered
- BBX Capital keeps their buyback price at 6.75 and the stock falls and a decent amount of shares get tendered
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, the book value per share is $16.00, and 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, increasing the book value per share from $16.00 to $18.41. Original Write-up Buy with a limit of 6.75.
Donnelley Financial Solutions (DFIN) recently reported a great quarter in May with 11% revenue growth, significantly ahead of consensus expectations. Non-GAAP EPS of $1.15 beat consensus and the stock performed well. The stock 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 8.8x free cash flow and 7.3x 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 7.0%. 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 15.2x 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 think the stock looks compelling. Original Write-up. Buy under 17.50.
Drive Shack (DS) has performed well on really no news. However, I believe Drive Shack’s 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. I recently spoke to investor relations at the company and the conversation increased my conviction levels. While the stock has rallied sharply, I still see good upside. My price target is 6, but I think the stock could hit 9 looking out a few years. As such, I’m increasing my buy limit to 4.00. Original Write-up. Buy under 4.00.
FlexShopper (FPAY) disclosed last week that more insiders (Chairman and a director) bought in the open market. This gives me strong confidence that strong results should continue. 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 7.6x 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 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 9.2x current fiscal-year EPS estimates 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 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) reported another strong quarter, and the stock has skyrocketed. Consolidated revenue increased 16% to $374MM. National Retail Solutions (NRS) and net2phone-UCaaS subscription revenues increased by 123% and 39%, respectively. BOSS Revolution Money Transfer (IDT’s other fintech asset) experienced a revenue decline of 13% but increased by 63% when excluding the impact of FX market conditions that positively impacted revenue. The biggest surprise in the quarter was the traditional communications business which grew by 16%. This is a business that I had viewed as in secular decline. The big increase was driven by Mobile Top-Up sales growth of 56%. I’m going to talk to the company to understand if this sales growth is sustainable. Given the strong growth, I revisited my sum-of-the-parts valuation analysis and believe fair value is 43. As such, I’m increasing my buy limit to 33. Original Write-up. Buy under 33.00.
Liberated Syndication (LSYN) recently announced that it closed its AdvertiseCast acquisition. This is a major positive, and I look forward to when the company can disclose more about it. Currently, disclosure is limited given Libsyn is in the process of restating its financials as it previously mis-accounted for state sales taxes (I view this restatement to be immaterial). I continue to have conviction in the stock. Original Write-up. Buy under 5.00.
MamaMancini’s Holdings (MMMB) recently reported another good quarter. Revenue declined by 5%, but this was due to a difficult comparison versus the quarter from Q2 2020 when consumers were stockpiling frozen foods in preparation for the pandemic (sales in the quarter are up 45% over a two-year period). Revenue growth will reaccelerate in the second half of 2021 driven by increased distribution into Walmart and Sam’s Club. The company is also exploring a NASDAQ uplisting and 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 started to perk up after languishing for a couple months. 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 9.6x free cash flow and 12.9x 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.
Stabilis Solutions (SLNG) is my latest recommendation. It specializes in delivering liquid natural gas (LNG) and hydrogen to its customers who are away from pipelines and off the energy grid. Customers use Stabilis Solutions as it provides them with cheap, reliable energy that is cleaner than other fossil fuels. The company has grown revenue at a 27% CAGR and has a bright outlook. Insiders own over 50% of the company but have been relentlessly buying more stock in the open market. The stock has performed well since the pandemic but looks like a double over the next 12 months. Original Write-up. Buy under 9.00
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, DS, and SLNG. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members.