Investing in micro-caps is fun because you can invest in growth companies at value prices.
When investing in pure “value” stocks, your goal is to buy a dollar for 50 cents. The problem is that the dollar of value can shrink over time to 80 cents or 60 cents, especially if the business is facing secular headwinds.
The benefit of investing in “growth” companies is the value of your investment can grow over time.
You may be paying 90 cents for a dollar of value, but hopefully over time, the dollar of value will grow to 2 dollars or better yet 10 or 100 dollars (think Amazon or Tesla).
With “growth” stocks, it’s not as important to pay a bargain-basement price.
But the best scenario is when you can pay 50 cents for a dollar of value that is going to grow to 2 dollars of value or more.
IDT Corporation (IDT) is a beautiful example of this.
When I originally recommended IDT in February of 2021, it was trading at 19.37, and I estimated fair value at 33 per share.
But over the past 5 months, IDT’s fair value has increased.
What has driven the increase?
Growth.
IDT’s traditional telecom business is its cash cow. It offers international phone plans primarily to immigrant communities. The business is in secular decline as its customers switch, over time, to free apps such as Whatsapp.
IDT’s strategy is to harvest cash flow from its legacy business to fund new innovative businesses and then ultimately, to spin those businesses off.
But the traditional business has been exceeding expectations and growing instead of shrinking.
Further, the high-growth businesses that IDT’s legacy cash flow is funding are growing like crazy too.
- BOSS Money Transfer, IDT’s money remittance app, is performing well with 35% growth in money transfer transactions.
- National Retail Solutions, IDT’s point-of-sale terminal business for convenient stores, is growing over 100% y/y.
- Net2Phone, IDT’s unified communications as a service app, is growing well with 39% growth y/y in subscription revenue.
All this growth is creating additional value.
IDT has appreciated from 19.37 (recommendation price) to ~48.00 but my estimate of fair value has increased from 33 to 64.
Better yet, fair value should continue to grow as long as growth continues. Looking out a couple years, I could see IDT hitting 100 per share.
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
Upgrading GLGI to Buy under 1.30
Updates
Aptevo (APVO) has faded again as momentum from last week appears to be losing steam. There has been no news this week, but the stock still looks very cheap as its pipeline is being valued by the market (after backing out cash and royalty payments) at -$13MM. This is draconian 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 will report earnings next Thursday (August 5th). I expect another strong quarter. Atento is too cheap trading at 4.0x free cash flow and 3.9x EBITDA. Peers trade anywhere from 8x to 20x EBITDA. Ultimately, I think Atento is sold to a strategic competitor. 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 concluded its tender offer to repurchase its own shares. 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 has pulled back slightly since the conclusion of the tender offer, but still looks very attractive trading at 0.45x book value. I think 60% of book value is reasonable which implies a price target of 10.25. Original Write-up. Buy under 8.00.
Donnelley Financial Solutions (DFIN) will report earnings next week on Wednesday (August 4th). I expect a good quarter given continued strong capital market activity. Despite the stock’s strong run, the stock is still very cheap trading at 8.8x free cash flow and 6.5x forward EBITDA. Original Write-up. Buy under 25.00.
Dorchester Minerals LP (DMLP) announced that it will pay its next distribution of $0.48 on 8/12/2021. As expected, the dividend increased considerably from last quarter. As a result, the stock has appreciated. Nonetheless, it still looks cheap. On an annualized basis, the stock is trading at a dividend yield of 11%. Not too shabby! I continue to think the stock looks compelling. Original Write-up. Buy under 17.50.
Drive Shack (DS) has pulled back due to additional concerns about spiking COVID cases. Nonetheless, I think the company is positioned well and the stock should rebound once sentiment changes regarding cyclical stocks. 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. 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. Despite rapid growth and margin expansion, it is only trading at 6.7x 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 3/4.
Greystone Logistics (GLGI) is primed to continue to perform well. Last quarter looked weak on the surface, but it was all driven by the timing of one order. As a result, next quarter (expect it to be released within a few weeks) should be very strong. I downgraded the stock to sell ¾ as I was rebalancing my portfolio. Now that I have rebalanced my GLGI position, I’m upgrading the stock back to buy under 1.30. It’s trading at 8.3x current year earnings which is too cheap given strong growth potential. Greystone Original Write-up. Buy under 1.30.
HopTo Inc (HPTO) has been relatively weak on no news. I expect the company to report earnings soon and it will be good to see an update with regards to revenue growth. I hope to see some acceleration. Longer term, I believe the stock is worth ~0.80. Nonetheless, 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 3/4.
IDT Corporation (IDT) was covered above. Original Write-up. Buy under 45.00.
Liberated Syndication (LSYN) has been languishing recently. Its CFO resigned recently and it’s late in filing its financials. Nonetheless, I have full confidence that the financials will ultimately be filed and that a replacement CFO will be hired. Once this takes place (I hope by year end), the focus will switch back to the company’s growth and excellent position in the podcast hosting market. 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) continues to look attractive. It is currently 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 recently upgrading it to Buy under 8.00. Original Write-up. Buy under 8.00.
Stabilis Solutions (SLNG) will report earnings next week. Since we recommended the idea, the stock has traded up modestly. Stabilis Solutions 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, MEDXF, PIOE, FPAY, IDT, APVO, DS, SLNG, DMLP, and PFMT. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members.