Hope your summer is off to a great start!
Next week, we will be celebrating the holiday with my in-laws who live near the beach north of Boston.
It will be great to spend some time together and enjoy the Fourth of July with (hopefully) some good weather and beach time.
We have a lot to cover this week, so I’m going to use my intro to cover one company: BBX Capital (BBXIA).
Last week, BBX announced that it increased its tender offer to buy back shares up to 8.00 per share, up from 6.75.
Currently, the stock is trading at 7.96 and it makes sense to buy shares up to 8.00 as you can immediately sell the shares back to the company at a profit.
My sense is this offer won’t get raised again.
Because BBX is buying back shares at a higher price, it won’t be able to purchase as many shares (3.5MM instead of 4MM). Nonetheless, this is a huge positive as it will increase book value per share significantly.
By my math, book value per share will increase from $16.40 to $18.32. The bear case on BBX Capital is that corporate governance will be bad, but this massive share repurchase directly refutes the bear case.
I will not be tendering any of my shares at 8.00.
Ultimately, I believe BBX Capital is probably worth 60% of pro forma (after the buyback) book value per share (18.32). This equates to a new price target of 11.00. Original Write-up. Buy under 8.00.
Before I get into the other updates, I wanted to give a quick plug for our upcoming annual conference.
9th Annual Smarter Investing, Greater Profits Online Conference
It will take place from August 17-19 and you will hear from all our experts (including me!) about opportunities in the market.
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
Increasing limit on BBXIA to Buy under 8.00
Updates
Aptevo (APVO) filed an 8-K disclosing that Proposal 4 (Company Sale) passed.
However, as you can see in the screenshot below, the company made a special point in the footnote that the majority of non-Tang shareholders voted against the immediate sale.
As such, it looks like management might believe it can proceed without an immediate sale process. I’m not a fiduciary expert, but I would think the Board of Directors would open themselves up to all sorts of lawsuits if they ignore this shareholder vote (even though it’s non-binding) unless they are extremely confident that they can ultimately sell at a higher price later.
Where does it leave us?
As of this writing, Aptevo has a market cap of $107MM and an EV of $64MM (see math below). It will receive another $32.5MM in milestone payments from its RUXIENCE sale. Further, I believe its IXINITY royalty payments could be sold for ~$20MM (assuming 10% discount rate).
As shown above, at Aptevo’s closing price on 6/28/2021, its pipeline is being valued by the market at $12MM. This seems too low given the promising results that APVO436 has shown in difficult to treat AML patients. Besides APVO436, Aptevo has a pipeline of other interesting assets.
I don’t know how it will play out, but I continue to believe APVO represents a good risk/reward opportunity with potential asymmetric upside. Original Write-up. Buy under 40
Atento S.A. (ATTO) had no news this week. The company reported a solid quarter in May. It sold off after earnings but has started to perk up lately. One thing that should benefit Atento this year is the strength of the Brazilian real (Brazil represents 40% of revenue). I expect a strong end to 2021 and believe the investment case is 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) was covered above.
Donnelley Financial Solutions (DFIN) had no news this week. It 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 has rebounded sharply. Donnelley is executing well and is still too cheap, trading at 9.1x free cash flow and 7.4x 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 7.5%. 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 14.2x 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 DMLP 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 who 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. 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 (the 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%, beating consensus estimates 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 of 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 had 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) has sold off this week on no news and closed earlier this week at 0.27. At that valuation, it is trading at an EV/EBIT multiple of 1x! Kind of crazy. The company reported earnings recently. 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 story 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. 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 being in secular decline. The big increase was driven by Mobile Top-Up sales growth of 56%.. 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, disclose 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 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 acquisition 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. This week we had two positive pieces of news. First, we saw insider buying by the management team. Second, it received approval to start selling Treosulfan in Canada (this bodes well for ultimate approval in the U.S.) Also, it recently 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) had performed well on no news. It 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.