What a crazy market.
Since declaring bankruptcy on April 1, Whiting Petroleum (WLL) is up 413% despite the bankruptcy restructuring plan stipulating that that equity shareholders will be diluted by 97%.
Hertz Global Holdings (HTZ) is up 254% since declaring bankruptcy. Further, Hertz plans to sell $500 million of common stock and included this disclosure in its SEC filing,
“Although we cannot predict how our common stock will be treated under a plan, we expect that common stock holders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), are paid in full, which would require a significant and rapid and currently unanticipated improvement in business conditions to pre-COVID-19 or close to pre-COVID-19 levels.”
The S&P 500 pulled back 7% recently, but appears to be off to the races again on the backs of the Federal Reserve’s announcement that it would buy individual corporate bonds. Previously, it has only invested in ETFs that buy corporate bonds.
I continue to scour the investment landscape looking for profitable, growing, micro-caps trading well below fair value.
My recent recommendation, Liberated Syndication (LSYN), is a perfect example. The company has $10 million of net cash on its balance sheet and is a cash flow producing machine.
In 2019, it generated over $7 million of free cash flow. It’s growing revenue at 10%+ per year and will grow earnings for the foreseeable future at 20%+ per year. Its business model (website and podcast hosting) is sticky as customers pay every month. Further, its in an industry with secular growth (especially podcast hosting).
Despite its strong outlook, the stock only trades at 12x free cash flow!
Better yet, institutional investor, Camac Partners, which recently won an activist proxy fight, will announce the results of its strategic review shortly. This could be a meaningful catalyst for Liberated Syndication.
This week, we have a couple of changes that I want to highlight. First, we are moving Recro Pharma (REPH) to Sell above 5.00. The stock has rebounded from its post earnings selloff but will be in “purgatory” for the next couple of quarters until its business regains positive momentum.
Second, I am downgrading P10 Holding (PIOE) to HOLD as the stock has appreciated above my buy range. I may raise my buy limit in the future, but I’m comfortable with a hold rating for now.
We recently hosted our monthly webinar, and you can watch a replay here. As a reminder, the next issue of Cabot Micro-cap Insider will be published on Wednesday, July 8, 2020.
If you have any questions that you want me to address, feel free to send me an email at rich@cabotwealth.com.
Changes This Week
Moving REPH to Sell above 5.00
Move PIOE to Hold
Updates
Hopto Inc (HPTO) continues to bounce back and forth between 0.45 and 0.52. There was no news or SEC filings this week. As a reminder, Hopto reported first quarter results on May 20, 2020. Sales declined 21% which appears very bad at first glance. However, sales for Hopto are typically lumpy on a quarter by quarter basis. The 10-Q discloses that the decline was due to timing of revenue recognition and a larger order in Q1 2019 that did not renew. Most importantly, management noted that it expects “sales in 2020 to be similar to sales” in 2019. In other words, management doesn’t expect a decline in sales in 2020 despite the Q1 drop. This is the same language that Hopto used in 2019 (sales grew 13% in 2019). As such, I’m not concerned with the headline drop in sales in Q1.
One issue that I will continue to watch relates to the rights offering that Hopto closed in March. As part of the agreement, there was a backstop agreement whereby management and a consortium of accredited investors agreed to purchase at $0.30 per share up to $2.4 million of Hopto stock. Essentially, the backstop agreement is a massive insider buy and bodes very well for the outlook of the stock. That transaction was expected to close in April but the 10-Q indicated that it was not expected to close until May. If the backstop agreement doesn’t close, it will be a negative signal for the stock. Since I issued my BUY under 0.45 rating, the stock has appreciated above my 0.45 limit. As such, my current rating is HOLD. If the stock drops back to 0.44 or lower, my recommendation will change back to BUY. HOLD
Liberated Syndication (LSYN), my most recent recommendation, was down slightly on the week with no news. LSYN is a profitable podcast and website hosting company with $10MM of net cash on its balance sheet growing at a double-digit clip. As the business does not require much capex, it generates significant free cash flow. Despite its high business quality, sticky revenue and secular growth trajectory, LSYN trades at just 8.9x 2019 EBITDA. An activist recently won a proxy fight with management and has undertaken a strategic review for the company. The conclusion is expected to be announced soon. My 6.00 target implies significant upside. Buy under 3.35
Medexus Pharma (PDDPF) was up this week but continues to fly under the radar. On May 22, 2020, Medexus issued a press release stating: “We continue to generate steady growth across our key product lines and, despite the disruption from the COVID-19 pandemic, our sales teams have continued to be remarkably productive by finding new ways to connect creatively and productively with clinicians and patients.”
Medexus will release full quarterly results in June, and I expect investors to be impressed with progress to date. Pro forma for the recent acquisition of XINITY(hemophilia drug), it is trading at an EV/revenue multiple of 0.9x while peers trade at 3.0x. My rating for PDDPF is Buy under 2.32
P10 Holdings (PIOE) appreciated by ~10% this week on no news. PIOE reported earnings on Thursday, April 30th. Revenue grew 8% y/y due to additional fundraising by RCP Advisors. Cash earnings stayed flat y/y at $0.04 although that was due to costs related to acquiring Five Points and almost acquiring another private equity manager. RCP Advisors noted it has already raised $165 million of additional capital commitments for its private equity funds. It will launch two more funds this year and Five Points will also begin a new fundraise. Excluding one-time costs, PIOE will generate $0.27 in cash earnings in 2020. As such, PIOE is trading at 9.0x 2020 free cash flow. While PIOE still looks fundamentally attractive, it has appreciated significantly since my initial recommendation. As such, I’m moving the stock to Hold. I may raise my Buy limit in the future, but I’m comfortable with a hold rating for now. Hold
Recro Pharma (REPH) has bounced back from a disappointing quarterly report. As a reminder, management decreased annual revenue guidance due to 1) Increased competition from Mylan, a competitor to Recro customer Teva. 2) Slower than expected new business growth, which REPH believes is primarily attributable to COVID-19. 3) Notifications by two customers of discontinuations for two commercial product lines, which resulted in a decrease of approximately $4 million on previous 2020 revenue guidance and is estimated to have an annual impact to 2021 revenue of approximately $7 million to $8 million. Given the disappointing quarter and outlook, I believe REPH will be in “purgatory” for at least the next couple of quarters. As such, I think it is prudent to move REPH to Sell above 5.00. I’m happy to revisit once we see signs of improving business momentum. Sell above 5.00
Riviera Resources (RVRA) was down slightly on the week with no news. The next catalyst for the stock would be the announcement of a sale of one of RVRA’s assets. This would likely result in another distribution for investors. RVRA continues to be an attractive long term holding. It has minimal debt and is generating positive free cash flow. Further, it has a very valuable asset in its Blue Mountain midstream business. Once the energy market turns (and it always eventually does), Riviera will be well positioned to benefit. BUY Under 2.25
U.S. Neurological Holdings (USNU) was flat on the week. USNU operates as a holding company in the United States. It is engaged in providing medical treatment and diagnostic services that include stereotactic radiosurgery centers, utilizing gamma knife technology, and holds interests in radiological treatment facilities. USNU reported Q1 2020 earnings on May 15, 2020. The company generated $0.02 of earnings and $399,000 of free cash flow in the first quarter, and as a result net cash on the company’s balance sheet increased to $1.7 million or $0.22 per share. USNU did note that revenue declined 12% in the quarter driven by fewer procedures being performed due to the outbreak of COVID-19. Eventually, I would expect deferred procedures to resume. Since I issued by BUY under 0.20 rating, the stock has appreciated above my 0.20 limit. As such, my current rating is HOLD. If the stock drops back to 0.19 or lower, my recommendation will change back to BUY under 0.20. HOLD
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 HPTO, LSYN, PDDPF, REPH, and RVRA. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members and will follow his rating guidelines.