Last week, we talked about the pullback in growth stocks. This week, the pullback has expanded to all stocks.
The S&P 500 has pulled back ~9% and is on the verge of a correction (defined as a 10% pullback from its recent high).
While this doesn’t feel good, it’s helpful to remember that pullbacks are completely normal and not a reason for panic.
According to LPL Financial, the S&P 500 pulls back by 14% on average every year since 1980. During midterm years (like 2022) the S&P 500 pulls back by 17% on average.
We are getting into earnings season, and it will be good to get an update from all our companies and get the outlook for 2022. While things can change quickly, I feel very comfortable with all my current recommendations.
Both IDT Corp (IDT) and Leatt Corporation (LEAT) have pulled back sharply. Before we get to our standard updates on all names, I want to discuss both names.
We are up ~86% on IDT from our initial recommendation, but it has sold off viciously in 2022.
What has driven the selloff? It’s hard to say with certainty, but I think it’s been a combination of three factors:
1) the selloff in high-grow companies that are valuation comps to NRS and net2phone
2) a selloff in the small and micro-cap market
3) and investors thinking that a spin-off may be delayed given the rocky environment for growth stocks.
Nonetheless, I’m maintaining my position in the stock. I updated my sum-of-the-parts with lower multiples (to reflect lower multiples for growth stocks) and got an updated fair value of $55/per share.
Leatt Corporation (LEAT) has also sold off viciously.
Why the selloff?
There is really nothing that I can think of. The stock has done incredibly well over the past couple of years, but it’s been driven by strong fundamentals. For example, the stock grew revenue 94% in the most recent quarter despite headwinds from supply chain bottlenecks.
Yes, Covid has benefitted Leatt and other providers of motocross gear, but even before Covid, Leatt revenue was growing at a high-teens clip.
At its current price, the stock is trading at price to annualized earnings multiple of 7.9. This is just too cheap.
The next issue of Cabot Micro-Cap Insider will be published on Wed., February 9, 2022. As always, if you have any questions, please email me at rich@cabotwealth.com.
Changes This Week
Increasing limit on BBX Capital (BBXIA) to Buy under 11.00
Updates
Aptevo (APVO) is all the way back to where it traded prior to the positive news that a patient treated with APVO436 experienced a complete remission. Where do we go from here? I don’t know, but I know there are many positive catalysts on the horizon. Aptevo will report additional data from its ongoing trials and any positive news will move the stock upwards. Original Write-up. Buy under 15.00
Atento S.A. (ATTO) has started to perk up. I think it’s mainly due to the news that an activist investor, Kyma Capital, now owns 5% of the company, and is engaging with the management team to unlock value. This is a strong positive, given healthy fundamentals and an incredibly cheap valuation. 2022 could be the year that Atento gets sold. Original Write-up. Buy under 30.00
BBX Capital (BBXIA) recently announced yet another share repurchase authorization, this time for an additional $15MM. I’m looking forward to BBX reporting its annual results so that I can add up all the shares that have been repurchased since the initial spin-off. Well over 20% of shares outstanding have been retired. While BBX has performed very well since our initial recommendation, it remains a high-conviction idea, given 1) positive fundamentals (real estate in Florida is hot) and 2) a very cheap valuation (the stock is still trading at a 50% discount to book value). Original Write-up. Buy under 11.00
Cipher Pharma (CPHRF) has stabilized after selling off in November and December. The stock is currently dirt cheap, has no debt, and significant optionality. Finally, insiders own a significant portfolio of shares outstanding and are incentivized to maximize value. The company is buying back shares aggressively. Original Write-up. Buy under 2.00
Dorchester Minerals LP (DMLP) announced that it will pay out a distribution of $0.639 per unit on February 10, 2022. On an annualized basis, Dorchester is yielding 11.6%. The stock continues to look attractive. I’m optimistic that the current Covid wave caused by the Omicron variant will be the last and we will see strong economic activity in 2022 that drives energy prices higher. Original Write-up. Buy under 19.00
Epsilon Energy (EPSN) reported a strong quarter in November, generating $3.3MM of free cash flow. Given no debt and a large and growing cash balance, I expect the management team to announce a large special dividend or accelerated share repurchase within the next few quarters. Original Write-up. Buy under 5.50
Esquire Financial Holdings (ESQ) has pulled back slightly with the market despite no company news. It is a niche bank focused on lawyers and the litigation industry. Due to its specialty and expertise, it has been able to grow very well. Lawyers are low credit risk, and consequently losses have been low. Despite strong growth (~20% per year), the stock trades at ~10x forward earnings. Looking out a couple of years, Esquire should be trading significantly higher. Original Write-up. Buy under 35.00
FlexShopper (FPAY) continues to tread water as insiders gobble up shares. I expect a strong 2022 for the stock and for the stock to appreciate sharply. Given less government stimulus, more consumers will need to use FlexShopper’s solutions which will increase revenue and earnings. My 12-month price target for FlexShopper is 4.70. Original Write-up. Buy under 2.50
IDT Corporation (IDT) was covered above. Original Write-up. Buy under 45.00
Leatt Corporation (LEAT) was covered above. Original Write-up. Buy under 40.00
Liberated Syndication (LSYN) filed an 8k in early January announcing that it had canceled 7.5MM shares (22% of shares outstanding!) that had been fraudulently issued to Zhang Parties prior to LSYN’s spin-off. This is a major positive. Zhang Parties have 90 days to challenge the cancellation. Given Zhang Parties didn’t respond to the initial lawsuit that resulted in the cancellation of shares, it’s possible that there will be no challenge. While I do have some questions regarding LSYN’s business trajectory, I think it remains quite attractive at its current valuation. I estimate that it’s trading at 3.0x (EV/revenue) with high-teens revenue growth. Original Write-up. Buy under 5.00
Medexus Pharma (MEDXF) looks completely washed out. Given a recent positive meeting with the FDA, it looks like Treo will be up for approval in the second half of this year. If approval is gained (I estimate 50% probability), I believe the stock is worth $10+. As such, I think the risk/reward looks very favorable at current levels. Original Write-up. Buy under 3.50
NexPoint Diversified REIT (NXDT) is my newest recommendation. It is a closed end fund that is transitioning into a real estate investment trust (REIT). It trades at a 40% discount to NAV and is significantly below where it traded pre-pandemic. Once the transition to REIT is complete, it will be eligible for many more investors to own including funds and ETFs. This will likely drive indiscriminate buying pressure. The CEO of the company owns 14% of the company and has been buying the stock in the open market relentlessly. A near-term re-rate to NAV could drive 50%+ upside, but longer term, a bigger opportunity could materialize as the REIT is repositioned to capture value. Original Write-Up. Buy under 15.00
P10 Holdings (PX) recently reported a great quarter. Adjusted EBITDA increased 147% to $21.8MM. Adjusted EPS increased 66% to $0.15. Meanwhile, three brokers (JPMorgan, KBW, and UBS) all initiated coverage with Buy ratings. The investment case remains on track as fundamentals are strong, yet the stock remains cheap on a relative and absolute basis. Original Write-up. Buy under 15.00
Truxton (TRUX) is a rapidly growing bank and wealth management business based in Nashville, Tennessee. Since its initial public offering nine years ago, revenue is up 325% while the stock has generated a 587% total return, beating the S&P 500 by more than 200%. Despite this impressive performance, the stock trades at just 13x earnings given its low liquidity. I expect strong performance to continue in the future and anticipate significant upside in the years ahead. Original Write-up. Buy under 75
| Stock | Price Bought | Date Bought | Price 1/25/22 | Profit | Rating |
| Aptevo Therapeutics (APVO) | 32.01 | 3/10/21 | 5.79 | -82% | Buy under 15.00 |
| Atento SA (ATTO) | 21.57 | 8/24/21 | 24.20 | 30% | Buy under 30.00 |
| BBX Capital (BBXIA) | 3.17 | 10/5/20 | 10.70 | 238% | Buy under 11.00 |
| Cipher Pharma (CPHRF) | 1.80 | 9/8/21 | 1.45 | -19% | Buy under 2.00 |
| Dorchester Minerals LP (DMLP)* | 10.45 | 10/14/20 | 22.94 | 137% | Buy under 19.00 |
| Epsilon Energy (EPSN) | 5.00 | 8/11/21 | 5.54 | 11% | Buy under 5.50 |
| Esquire Financial Holdings (ESQ) | 34.10 | 11/10/21 | 32.71 | -4% | Buy under 35.00 |
| FlexShopper (FPAY) | 2.13 | 12/9/20 | 1.91 | -10% | Buy under 2.50 |
| IDT Corporation (IDT) | 19.37 | 2/10/21 | 35.90 | 85% | Buy under 45.00 |
| Leatt Corporation (LEAT) | 24.00 | 10/13/21 | 23.35 | -3% | Buy under 40.00 |
| Liberated Syndication (LSYN) | 3.06 | 6/10/20 | 3.60 | 18% | Buy under 5.00 |
| Medexus Pharma (MEDXF) | 1.78 | 5/13/20 | 2.10 | 18% | Buy under 3.50 |
| NexPoint Diversified Real Estate Trust (NXDT) | 14.15 | 1/12/22 | 13.39 | -5% | Buy under 15.00 |
| P10 Holdings (PX)** | 1.98 | 4/28/20 | 12.02 | 507% | Buy under 15.00 |
| Truxton Corp (TRUX) | 69.50 | 12/8/21 | 70.03 | 1% | Buy under 75.00 |
* Return calculation includes dividends
**Original Price adjusted for reverse split.
Disclosure: Rich Howe owns shares in BBXIA, LSYN, MEDXF, PIOE, FPAY, IDT, APVO, DMLP, LEAT, and NXDT. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members
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.