August 25, 2021

I’m fairly active on Twitter; it’s probably my favorite site.

It’s entertaining and a great way to stay on top of news.

And it’s an incredible resource for finding new stock ideas. I can say with confidence that Twitter has made be tens of thousands of dollars.

The one problem with Twitter is there is a lot of noise.

Whatever the latest topic du jour, people you follow are going to have opinions about it.

Whether it’s the Delta Covid spike, President Biden’s decision to withdraw from Afghanistan, or whether Cam Newton or Mac Jones should be the Patriots starter in week one (I live in Massachusetts), everyone is going to have an opinion, and it’s easy to get sucked into the debate and spend time trying to form an opinion.

The topic du jour in my Twitter feed is China’s crackdown on big tech.

On the one hand Tencent looks incredibly compelling.

It grew revenue 35% in the last quarter and is trading at a P/E ratio of 20x. Its 10-year median P/E is 39x.

But on the other hand, it just gave 50BN RMB ($15BN) to the China Communist Party “in good faith.”

It’s tempting to try to form an opinion and decide whether it’s worth investing.

But I must remember Warren Buffett’s reminder that “there are no called strikes” in investing.

In other words, wait for the perfect pitch.

In my world, a perfect pitch is an illiquid micro-cap, with strong growth and high insider ownership, trading at a discounted valuation.

In the past month, I’ve added three names to my watch list that fit my criteria, and I’m excited to share my top idea next month when I publish the next issue of Cabot Micro-Cap Insider.

Your focus area doesn’t have to be micro-caps, but it’s always good advice to wait for your perfect pitch, however you define it.

Because otherwise, it’s too easy to get sucked into the topic du jour.

Alright, now I will get off my soap box and get into this week’s update!

The next issue of Cabot Micro-Cap Insider will be published on Wednesday, September 8, 2021. As always, if you have any questions, please email me at rich@cabotwealth.com.

Changes This Week
Reducing buy limit on Aptevo (APVO) to Buy under 25
Upgrading Medexus (MEDXF) to Hold

Updates
Aptevo (APVO) has been stable this past week. The story with the stock is the same as it’s been for the past couple of months. The market is undervaluing Aptevo’s pipeline. One positive bit of news occurred that may improve sentiment: Pfizer (PFE) announced that it is acquiring Trillium Therapeutics (TRIL) for $2.3BN. The purchase price represents a 200% premium to Trillium’s stock price. Not that I’m predicting it, but something like this could happen to Aptevo given promising data for Aptevo’s main pipeline drug APVO436. Aptevo continues to be a high risk/reward trade because the upside could be substantial, but downside could also be substantial if it continues to burn cash with little to show for it. Given Tang Capital’s acquisition offer was rebuffed, I’m reducing my buy limit price to 25. Original Write-up. Buy under 25.00.

Atento S.A. (ATTO) recently reported a great quarter, and after shooting up, the stock has retreated. I think there’s more upside ahead. In the quarter, revenue increased 22% to $382MM, beating consensus by 4%. EBITDA increased 123% y/y to $50.7MM. EBITDA margin increased to 13.3%, up from 7.1% a year ago. Despite the strong performance, ATTO is still only trading at 3.7x my estimate for 2022 EBITDA. Peers such as Concentrix (CNXC) trade at 10x or higher. With the strong performance, I recently increased my buy limit to 30. Original Write-up. Buy under 30.00

BBX Capital (BBXIA) recently reported an excellent quarter with revenue increasing 132% y/y. The company is on pace to generate $22MM of free cash flow this year. The company benefited from strong consumer demand, especially in single-family and multifamily housing in many of the markets in Florida where BBX Capital’s real estate segment operates. My new price target is 12. Here’s how I’m thinking about my new valuation. The company has $7.44 per share of net cash/notes receivable on its balance sheet and I’m giving it 100% credit for that (given recent shareholder-friendly actions). I’m assuming the remaining business is worth 5x this year’s free cash flow. Note that a $12 target is still at a significant discount to book value per share ($17.53). Original Write-up. Buy under 9.00.

Dorchester Minerals LP (DMLP) recently reported Q2 2021 earnings of $0.46, or $1.84 on an annualized basis. As such, the stock is trading at 8.6x annualized earnings, too cheap a multiple for such a high-quality, high-margin, and no-debt business. At its current quarterly dividend, the stock is trading at a dividend yield of 12%. I continue to like this low-risk stock which will continue to benefit from higher oil prices. Original Write-up. Buy under 17.50.

Drive Shack (DS) recently reported an excellent quarter recently with revenue growth of 130%, beating consensus expectations by 9%. The company reported EBITDA of $7.7MM versus consensus expectations of $1.2MM. The investment case is on track for Drive Shack. 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.

Epsilon Energy (EPSN) is my latest recommendation. It reported solid earnings recently with 12% revenue growth y/y. YTD the company has generated FCF of $6.3MM or $12.6MM on an annualized basis. As such, it’s trading at a 9.1x. YTD, the company has bought back about 1% of shares outstanding. Insiders already own 25% of shares outstanding but are buying stock in the open market. The company has downside protection with a net cash balance sheet and a valuable midstream business. I see significant upside over the next 12 months as the company benefits from high natural gas prices. Original Write-up. Buy under 5.50

FlexShopper (FPAY) saw more insider buying from Howard Dvorkin, Chairman of the Board of Directors. This is obviously bullish for the company’s prospects. This insider buy follows a strong quarter from the company. Revenue grew 25% y/y to $30.7MM. Looking out to the rest of the year, strong growth should continue as the company is expanding its pilot program with an undisclosed national retailer and has added a second national retailer to its pilot program. My 12-month price target for FlexShopper is 4.70. Original Write-up. Buy under 2.50.

IDT Corporation (IDT) has pulled back sharply on no news. I view this as a buying opportunity. IDT’s 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 of late, and I recently wrote an article that addresses why that might be the case. In short, it might become very difficult to buy companies that are not current on their financials or don’t report their financials to the SEC or OTCmarkets.com due to an SEC rule change (15c2-11). I believe this is pressuring Libsyn’s stock lower. But I also believe it represents an opportunity as when the company reports its restated financials it will show a company growing revenue at ~17%. At its current valuation of 2.5x 2021 revenue, it looks very attractive. Original Write-up. Buy under 5.00.

Medexus Pharma (MEDXF) fell on its poor quarterly report but has started to bounce back. I think the risk/reward looks attractive at the current valuation. Nonetheless, I’m not going to be buying until I start to see some good news/good execution from the management team. Sales should stay roughly flat sequentially over the next couple of quarters, but I think sales will perk up in the fourth quarter and into 2022. I believe IXINITY has strong potential longer term, and the company has several interesting pipeline opportunities which should drive growth into 2022. Assuming execution improves, there is a lot of upside. I still believe this could be a mid-teens stock within a couple of years. But I’m personally going to be waiting for improved results before adding to my position. If I have to pay a slightly higher price, so be it. It will be a small price to pay to gain increased conviction. Original Write-up. Hold.

Performant Financial (PFMT) took a hit last week because it announced a secondary offering to raise up to $40MM of capital at a price of 3.80. While I’m disappointed in the dilution, it will improve the company’s balance sheet substantially and allow it to accelerate growth. All in all, the investment case is still on track. My price target decreases a little bit in the medium term to 6.60 (due to the dilution), but longer term, I think this stock could trade over 10. Original Write-up. Buy under 5.00.

P10 Holdings (PIOE) continues to look attractive. It is currently trading at 10x free cash flow and 13.0x EBITDA. Very reasonable considering its closest (albeit larger) peer is Hamilton Lane (HLNE) which trades at 28.2x EBITDA and 21.5x free cash flow. Given the stock is valued so reasonably and has great room for growth, I recently upgraded it to Buy under 8.00. Original Write-up. Buy under 8.00.

Stabilis Solutions (SLNG) reported record earnings last week with revenue of $16.1MM, up 221% y/y. It was 45% above Q2 2019 revenue (pre-pandemic) of $11.0MM. The investment case remains on track. As a reminder, 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 more than 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, 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.