Pullbacks in the market are never fun.
It’s way more fun when we are all making money together and stocks are going up.
But it’s important to keep the recent market action in perspective.
LPL Strategist Ryan Detrick recently shared a couple charts that helped put the recent volatility in perspective.
Since 1950, there have been three pullbacks of 5% or more in the S&P 500 per year on average.
So the current volatility in the market is to be expected.
In fact, the S&P 500 is only down 2.5% from its all-time high. So it wouldn’t be surprising if the pullback continued.
But longer term, the economy should continue to grow and the market should continue to grind higher.
Typically, the average expansion cycle after a recession is ~5 years and the last four expansions have lasted ~8 years.
If you’ve been a subscriber for a while, you know I don’t get overly concerned with what the market is doing.
In the micro-cap world, there is always a hidden gem that looks attractive, no matter the market environment.
But it’s comforting to know that the recent market volatility is completely normal from a historic perspective.
Before we get into this week’s update, I want to remind you that our annual conference is fast approaching.
9th Annual Smarter Investing, Greater Profits Online Conference
It will take place from August 17-19 and you will hear from the whole Cabot team on a wide range of topics.
I will be highlighting three opportunities that I’m seeing in the energy market.
The next issue of Cabot Micro-Cap Insider will be published on Wednesday, August 11, 2021. As always, if you have any questions, please email me at rich@cabotwealth.com.
Changes This Week
Increasing limit on PIOE to Buy under 8.00
Updates
Aptevo (APVO) has been relatively strong versus the market of late. The company has not issued any press releases since Proposal 4 (Company Sale) passed at its annual meeting. Recall, the company made a special point in a footnote that the majority of non-Tang shareholders voted against the immediate sale. As such, it’s possible that management might believe it can proceed without an immediate sale process. It’s tough to say how it will all play out, but I still like the risk/reward setup. Aptevo had an enterprise value of $48MM. 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). Thus, Aptevo’s pipeline is being valued by the market at -$4MM. 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 40.00.
Atento S.A. (ATTO) had no news this week but pulled back with the market. 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) although it has started to lose a little steam vs. the USD. 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) recently announced final results from its tender offer. In total, it bought back 1,420,481 shares, or 7.5% of shares outstanding. As a result of the transaction, I estimate that book value per share increased from 16.40 to 17.09. The stock still looks very attractive trading at 0.45x book value. I think 60% of book value is reasonable, which implies a price of 10.25. Original Write-up. Buy under 8.00.
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 too, and the stock performed well. The stock pulled back after an analyst downgraded it to Hold, but DFIN has rebounded sharply. Donnelley is executing well and is still too cheap trading at 8.6x free cash flow and 6.2x forward EBITDA. Original Write-up. Buy under 25.00.
Dorchester Minerals LP (DMLP) will pay its next quarterly dividend in July. It’s yet to be declared, but I expect it to be at least $0.30, which was paid last quarter, given energy prices are materially higher. 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 13.8x 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) recently announced that professional golfer Rory Mcllroy’s investment partnership has committed to invest $10MM+ in exchange for a 10% ownership stake in three yet-to-be-opened Puttery locations. This is the first time the terms of the investment have been disclosed. McIIroy’s involvement and investment will help Puttery venues build momentum. 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. My price target is 6.00. 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. I recently downgraded the stock as I’m rebalancing my portfolio, but I will likely eventually upgrade it to buy as I like the long-term outlook. Original Write-up. Sell Three Quarters.
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 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 conversations 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 7.5x current fiscal year EPS estimate of $0.15 (fiscal year ends in May) which is too cheap given the strong growth. I expect strong EPS growth in 2021 (fiscal 2022). I recently downgraded the stock as I’m rebalancing my portfolio, but I will likely eventually upgrade it to buy as I like the long-term outlook. Greystone Original Write-up. Sell Three Quarters.
HopTo Inc (HPTO) has been relatively weak on no news. 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 case 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. I recently downgraded the stock as I’m rebalancing my portfolio, but I will likely eventually upgrade it back to buy as I like the long-term outlook. Original Write-up. Sell Three Quarters.
IDT Corporation (IDT) received a boost recently when Connor Haley, one of my favorite Twitter follows, disclosed a new, high-conviction idea: IDT Corporation (IDT). That’s the reason IDT has performed so well recently. Here’s a link to the IDT presentation. His base case price target is 88, double our 44 price target. After reviewing his detailed work, especially his analysis of IDT’s point of sale segment, NRS, I believe our price target is far too conservative. NRS has the ability to increase penetration considerably while also increasing average revenue per user. This should result in continued explosive revenue growth over time. As such, we are increasing our buy limit for IDT to 45. Original Write-up. Buy under 45.00.
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.
Medexus Pharma (MEDXF) remains our highest conviction idea. Last week, the company announced that it hired a new CFO. I view this news as a positive as it appears the company is upgrading its CFO in anticipation of significant revenue growth. 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.
Performant Financial (PFMT) is my latest recommendation. It has a fast-growing healthcare business which is being obscured by its declining legacy student loan recovery business. The healthcare business is poised to grow 30%+ for the foreseeable future. Despite its fast growth, the company is trading at a big discount to a competitor which was recently acquired. My price target implies ~70% upside, but longer term, this could be a multi-bagger. Original Write-up. Buy under 5.00.
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 higher 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. Given the stock is valued so reasonably and has great room for growth, I’m upgrading it to Buy under 8.00. Original Write-up. Buy under 8.00.
Stabilis Solutions (SLNG) has performed well on no news. 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.