Do you consider yourself a growth stock investor or a value stock investor?
I think growth or value framework is a false dichotomy.
Warren Buffett summed it up well when he said:
“Most analysts feel they must choose between two approaches customarily thought to be in opposition: ‘value’ and ‘growth.’... In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value.”
Recognizing that growth and value are joined at the hip, I do believe that “value” stocks or “cyclical” stocks are poised to continue to perform well as the economic recovery gathers steam around the world.
Over the past 10 years, growth stocks have crushed value stocks.
Over the past 6 months, value stocks appear to have taken the performance baton.
But more recently, growth stocks have had the edge.
If I had to bet, my best guess is value stocks will continue to outperform for the next couple of years. That’s what typically happens following recessions. Especially because interest rates will start to grind higher.
But the beauty of investing in micro-caps is you don’t have to choose between growth and value. You can invest in growth stocks at value prices. In other words, you can have your cake and eat it too.
Before we get into this week’s update, I wanted to highlight (in case you missed it) that we hosted our monthly member call last month. 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
No Changes.
Updates
Aptevo (APVO) sold off sharply to start the week after Tang Capital disclosed that it has formally withdrawn its $50 acquisition offer. It did note that it would be willing to consider another offer if management removed its standstill provision. The standstill provision basically prevented Tang from buying more shares in the open market and attempting a hostile takeover. It’s hard to know Tang’s motivation, but the timing is interesting. He formally withdrew his offer the week of the annual meeting where shareholders will vote on whether to run a process to sell the company. My best guess is his strategy is to force the stock price down so management feels more pressure to sell the company. Either way, we will know more by the end of the week (the annual meeting is on Friday). I value Aptevo’s royalty payments at $18.50, thus, the market is assigning very little value to Aptevo’s 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 as well 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 7.2x 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 7.2%. 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. Original Write-up. Buy under 4.00.
FlexShopper (FPAY) disclosed recently 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 7.7x 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. In April, I 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 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 9.0x 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 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 misaccounted 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 Holding (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) remains our highest conviction idea. The company recently reported a slightly disappointing quarter as revenue declined sequentially and announced that it would not uplist to the NASDAQ in the immediate future. It did announce that it has uplisted to the Toronto Stock Exchange which is a positive. The big news for Medexus is its biggest pipeline drug, Treosulfan, will likely be approved by the FDA in August. This will drive the next leg of growth for the company. Longer term, I think revenue and the stock can triple as the company continues to execute. Original Write-up. Buy under 8.00.
NamSys Inc. (NMYSF) recently filed 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 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 likely to 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.