Before we get to our weekly update, I want to spend some time talking about the broader market.
Most people (including me) have been surprised by the strength S&P 500’s rally off its March lows.
While the S&P 500 is up slightly on the year, it’s important to remember that its return is skewed by the strong performance of Facebook, Amazon, Alphabet, Microsoft, and Apple, which together make up ~23% of the S&P 500.
The equal weighted S&P 500 index is down 8% on the year.
Will the market rally continue?
On the positive side of this argument, it appears the market “wants” to go higher.
Legendary trader Jesse Livermore famously said, “don’t fight the tape.” And usually it pays to follow his advice.
Stocks that are going up, tend to continue to go up. Just check out the chart below which shows the positive returns that are association with “momentum” stocks.
On the bearish side of the argument, the S&P 500’s P/E ratio at 23x is at the high end of the historical spectrum.
I’m noticing signs of speculative excess such as a record number of new investors entering the market, there appears to be a bubble in Special Purpose Acquisition Vehicles focused on electric vehicle companies, and bankrupt companies are seeing soaring stock prices.
Meanwhile insider selling is up 140% from the same week a year ago.
In the current environment, I continue to be cautious. However, I’m still very bullish on my micro-cap picks.
In particular, Medexus Pharma (PDDPF), P10 Holdings (PIOE), and Greystone Logistics (GLGI) look appealing because they have momentum (don’t fight the tape!), strong revenue growth, and cheap valuations.
This week, we have one change that I want to highlight.
We are increasing our buy limit on P10 Holdings (PIOE) to 2.80. The new rating is Buy under 2.80. P10 Holdings is executing very well with strong revenue growth and profitability. Yet, the stock only trades at 9.7x free cash flow. As such, it makes sense to increase our buy limit for the stock.
Last week, we published our latest issue and highlighted Greystone Logistics (GLGI) as our latest recommendation. You can read that write up here. We also 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, August 12, 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
Upgrading PIOE to Buy below 2.80
Updates
Greystone Logistics (GLGI) is my most recent recommendation. There was no news this week, but I expect GLGI to report quarterly earnings soon. You can review my investment thesis here. GLGI is up slightly since I profiled it but remains attractive. The company is a micro-cap manufacturer of plastic pallets. It has historically grown revenue at a 34% compound annual growth rate and is on pace to grow EPS 140% this fiscal year. Despite such strong growth, the stock trades at a P/E of 7.4x. Management and directors own 44.1% of the stock and are well aligned with shareholders. My price target is 1.58.
Hopto Inc (HPTO) traded up this week with no news. HPTO will likely file its second quarter 10-Q within the week. I will be looking at sales trends as well as an update on the backstop agreement. As a reminder, HPTO had a rights offering in March and as part of the offering, 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. We haven’t received an update on whether the backstop agreement has closed. If it fails to close, it will be a negative signal for the stock. Buy below 0.45.
Liberated Syndication (LSYN) was flat on the week. LSYN finally filed its Q1 10-Q. This is a major positive as the delayed 10-Q has been an overhang on the stock. Revenue in Q1 was down 0.5% which was somewhat surprising. However, the decline was driven in large part by a difficult comp for Pair (website hosting business) which reported an incredibly strong Q1 in 2019. A bigger concern for me was that LSYN’s podcast hosting business only grew at 14%. I will be looking for growth acceleration in Q2 (April was LSYN’s second best month ever for new podcast sign ups). On the positive side, LSYN continues to spew cash. It generated $1.7MM of free cash flow in the quarter. Also, there continues to be significant strategic interest in the podcasting space. SiriusXM recently announced that it is acquiring Simplecast, a podcast host for an undisclosed price. It also announced that it is acquiring E.W. Scripps’ unprofitable podcast business (Stitcher app and Midroll podcast network) for $325 million or a 4.5x revenue multiple. Libsyn is very profitable and currently trades at an EV/revenue multiple of 3.2x. LSYN could announce the results of its strategic review at any time, but I expect the announcement after the company has filed its second quarter 10-Q. Buy under 3.35.
Medexus Pharma (PDDPF) continues to perform well. The company reported excellent fiscal 4th quarter results in June. As a result of the transformative IXINITY acquisition, Medexus generated adjusted EBITDA of $4.2 million in the quarter or $16.8 million on an annualized basis. Better yet, revenue grew organically 27%. So clearly there is significant growth ahead. One other positive is that Medexus bought back 919,000 shares (~9% of shares outstanding) in the past fiscal year including 139,400 in the most recent quarter. Based on Medexus’ run rate EBITDA of $16.8 million, the stock is currently trading at an EV/EBITDA multiple of 6.4x and an EV/Revenue multiple of 1.1x. It’s even cheaper on forward estimates. Specialty pharma companies trade at an average EV/EBITDA multiple of 16.5x and an EV/Revenue multiple of 3.4x. Given the excellent quarter and dirt-cheap valuation, I recently raised my buy limit to 3.00. Buy under 3.00.
P10 Holdings (PIOE) was flat on the week with no news. I expect P10 to report second quarter earnings by the end of July. In the first quarter, revenue grew 8% y/y due to additional fund raising 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 9.5x 2020 free cash flow. Given attractive fundamentals and a cheap valuation, we are increasing our buy limit for PIOE to 2.80. Buy under 2.80.
Riviera Resources (RVRA) was flat 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 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 up slightly on the week with no news. 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. USNU stays at Hold this week, but if it were to drop below 0.20, I would upgrade it to BUY under 0.20. HOLD
P.S. Registration is now open for the next Cabot Micro-Cap Insider call on Thursday, August 13 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 GLGI, HPTO, LSYN, PDDPF, PIOE, 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.