August 4, 2021
According to Detrick, “The S&P 500 is up 17.02% YTD at the end of July. Since WWII, this has happened only 12 other times and the rest of the year was higher 11 times. The only time it didn’t work was ’87, but it was up 32% YTD right now (stretched rubber band).” In other words, stocks in motion tend to stay in motion. While I don’t make investment decisions based on these data points, I do find them to be helpful to give me context for what the broader market is likely to do.
Before we get into this week’s update, I wanted to share two data points from my favorite strategist, Ryan Detrick.
Let’s start with the bearish data point.
Typically, stocks take a breather in August and September.
So don’t be surprised if the market pulls back.
Now for the bullish data point.
According to Detrick, “The S&P 500 is up 17.02% YTD at the end of July. Since WWII, this has happened only 12 other times and the rest of the year was higher 11 times. The only time it didn’t work was ’87, but it was up 32% YTD right now (stretched rubber band).”
In other words, stocks in motion tend to stay in motion.
While I don’t make investment decisions based on these data points, I do find them to be helpful to give me context for what the broader market is likely to do.
The big news this week was that Medexus received a complete response letter from the FDA for its drug, Treosulfan. I published a special bulletin yesterday which you can access here.
In short, the FDA needs more data and analysis related to Treosulfan and its approval has been indefinitely delayed.
I think the stock looks attractive with or without Treosulfan.
Nonetheless, the stock has dropped sharply due to a hit to management’s credibility.
I personally like CEO, Ken d’Entremont (have spoken to him several times) and loved the deal that he structured for IXINITY.
But the lack of NASDAQ uplisting and the lack of FDA approval for Treosulfan after he publicly expressed high confidence in both undermine investor confidence in his judgement.
I personally am not going to sell a share of Medexus given:
- The stock looks really cheap on current and future revenue/EBITDA (excluding any contribution from Treosulfan).
- The financial hit from the Treosulfan delay is immaterial ($5MM upfront payment).
- The stock was trading 63% higher on the day prior to announcement of the Treosulfan deal.
- Medexus will be able to consummate more licensing deals (similar to the IXINITY deal).
- The FDA’s issues with Treosulfan could be resolved.
Given the hit to management’s credibility, I am reducing my medium-term price target for Medexus to $6.80 which corresponds to a 1.5x target EV/revenue multiple and 4.9x target EV/EBITDA multiple. Longer term, I still believe the stock can and ultimately will trade up into the mid-teens.
Original Write-up. Buy under 5.00
Before we get into the update for our other stocks, I want to remind you that our annual conference is only two weeks away.
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 (next week!). As always, if you have any questions, please email me at firstname.lastname@example.org.
Changes This Week
Reducing buy limit for MEDXF to Buy under 5.00
Aptevo (APVO) continues to be weak. 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 -$14MM. 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 this week (August 5th). I expect another strong quarter. Atento is too cheap trading at 3.9x free cash flow and 3.8x 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 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 6.6x 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 to shareholders of record on 8/2/2021. DMLP’s current dividend annualizes to a yield of 11.8%. I continue to like this low-risk stock (no debt) which will continue to benefit from higher oil prices. Original Write-up. Buy under 17.50.
Drive Shack (DS) has pulled back due to additional concern about spiking COVID cases. Nonetheless, I think the company is positioned well and the stock should rebound once sentiment charges 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 7.1x 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. It’s trading at 8.3x current year earnings which is too cheap given strong growth potential. When I published my original investment case, my price target was $1.58. It’s likely that I update that price target once the company reports quarterly results. I arrived at my initial $1.58 price target by multiplying its historical P/E multiple (10.5x) by my estimate for fiscal 2021 EPS ($0.15). I want to wait to see fiscal Q4 results before I adjust my price target. My rough estimate is that GLGI could earn $0.27 in fiscal 2022. If that’s the case, and we assume it trades at its 5-year median multiple of 9.3x (the historical multiple came down slightly), my price target could increase to ~$2.50. 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. Original Write-up. Sell 3/4.
IDT Corporation (IDT) continues to perform very well as its core business (legacy telecom) and high-growth subsidiaries (BOSS Money Transfer, National Retail Solutions, and Net2phone) continue to perform well. I expect Net2phone to be spun off in early 2022 and National Retail Solutions to be spun off in late 2022 or early 2023. I recently increased my price target to 64, but longer term, I could see this stock trading up to 100 or higher. 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 be able to 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) was covered above. Original Write-up. Buy under 5.00.
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 today (August 4th). 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
Registration is now open for the next Cabot Micro-Cap Insider call on Thursday, August 12 at 2:00 PM ET. Click Here to Register
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.