Earnings season is coming!
We didn’t have much news this week, but our companies will start reporting in late July and August.
Most of the companies that have reported so far have provided commentary that current economic data doesn’t suggest that a recession is coming.
“Little of the data I see tells me the U.S. is on the cusp of a recession. Consumer spending remains well above pre-COVID levels with household savings providing a cushion for future stress. And as any employer will tell you, the job market remains very tight. Similarly, our corporate clients see robust demand and healthy balance sheets with revenue softness attributed to supply chain constraints so far. So, while a recession could indeed take place over the next two years in the U.S., it’s highly unlikely to be a sharper downturn as others in recent memory.” – Citigroup (C) CEO Jane Fraser
“Leading indicators such as payment rates, deposit levels, utilization, and revolving debt trends do not yet indicate signs of stress – Credit performance remained strong. Our allowance reflected an increase due to loan growth – Overall, our consumer deposit customers’ health indicators, including cash flow, payroll, and overdraft trends are not showing elevated risk concerns.” - Wells Fargo (WFC) CEO Charlie Scharf
Once our companies start reporting in the next couple of weeks, it will be a good chance to peak under the hood.
I talked about this on July’s update webinar, but I wanted to flag it again so all subscribers are on the same page.
I currently have 18 open recommendations. My goal is to get to 20 recommendations so that a new subscriber can join and build a diversified micro-cap portfolio with my recommendations.
Once I’ve reached 20 recommendations, I will continue to recommend new ideas, but it will force me to “kick out” a low-conviction idea.
There were a few items that I want to highlight (full updates below):
- We saw some more insider buying by the CEO of NexPoint Diversified (NXDT).
- We saw some insider buying from a Zedge (ZDGE)
The next issue of Cabot Micro-Cap Insider will be published on Wednesday, August 10. As always, if you have any questions, please email me at rich@cabotwealth.com.
Changes This Week
None
Updates
Aptevo (APVO) announced positive data during the week of June 9 from its phase 1b trial in MDS patients treated with APVO436. Thirty-six percent of patients achieved a remission. As of March 31, 2022, Aptevo has $30MM of net cash and expects to receive an additional $22.5MM over the next few years. Aptevo’s cash burn over the past year was $22MM. As such, it can probably make it another two years without raising cash. However, the company probably does want to raise capital at some point. From a fundamental perspective, Aptevo continues to report good data for its lead compound APVO436 in patients with acute myeloid leukemia (AML). This biotech bear market is no fun, but Aptevo continues to be an asymmetric bet. Original Write-up. Buy under 7.50
Atento S.A. (ATTO) had no news this week. The company reached a settlement with an activist investor, Kyma Capital, in early June. Kyma owns 8.5% of the company. Under the terms of the agreement, Kyma will get a board seat and will work with the Board of Directors to evaluate all options to increase shareholder value. Kyma also has permission to increase its position to 19.9%. While the most recent quarter was weak, the stock looks very cheap. And the agreement is a positive. Atento is trading at just 3x EBITDA while peers trade at closer to 12x EBITDA. Original Write-up. Buy under 20.00
Cipher Pharma (CPHRF) had no news this week. The company reported earnings in May. They were great. Revenue was flat year over year, but EPS increased from $0.05 last year to $0.08 this year. The EPS increase was driven by cost cutting (operating expenses decreased 25%). Meanwhile, ~2% of shares were repurchased during the quarter. Cipher currently has $22MM of net cash on its balance sheet, representing 48% of the company’s market cap. Cash flow should be stable for at least the next 4-5 years which will provide time for the pipeline to emerge. The company continues to move its pipeline forward and evaluate accretive acquisition opportunities. Original Write-up. Buy under 2.00
Cogstate Ltd (COGZF) has had no recent news, but we will get a financial update on July 28, 2022. Cogstate is a profitable, rapidly growing Australian company that is the market leader in computerized cognition testing. The biggest use case is Alzheimer’s Disease, which is a massive and growing market. Cogstate is benefiting from a boom in Alzheimer’s R&D spending which is driving 20%+ revenue growth. Longer term, Cogstate’s direct-to-consumer Alzheimer’s test could accelerate growth even further. Despite a terrific outlook, Cogstate trades at just 23x current earnings. Looking out a few years, this stock could easily double or more. Original Write-up. Buy under 1.80
Crossroads Impact Corp. (CRSS) announced on July 11, 2022 that P10 Holdings (PX), another CMCI recommendation, is investing $180MM of equity capital at $10.76 with the ability to commit an additional $310MM of equity capital at the same price. This will enable Crossroads to really ramp up its ESG lending ability and grow earnings. It will also enable Crossroads to scale up and eventually explore an uplisting to a major exchange. Original Write-up. Buy under 15.00
Currency Exchange International (CURN) reported earnings on June 14. Results were strong, but not strong enough as the stock has sold off since. Revenue increased 109% y/y to $13.3MM. Net operating income increased to $2.9MM up from a loss of $0.6MM last year. Both Banknotes (+103%) and Payments (+127%) grew very strongly. Importantly, management noted that it expects a strong summer travel season which should drive (my opinion) record results. The stock continues to look very cheap. Original Write-up. Buy under 16.00
Dorchester Minerals LP (DMLP) has stabilized as the price of oil has stabilized. It continues to print free cash flow. Dorchester’s latest distribution was $0.75, which annualizes to an 11.5% yield. While commodity prices will continue to be volatile, I expect them to remain elevated for the foreseeable future. Dorchester will pay out all windfall profits to shareholders. Original Write-up. Buy under 25.00
Epsilon Energy (EPSN) announced in June that its CEO and CFO have retired. I’ve gotten more color on this announcement and understand that it was part of a planned transition and that the CEO and CFO will both stay on as consultants for some time. Natural gas prices have stabilized after pulling back and remain quite elevated. Last year, the company produced tremendous free cash flow and will likely do so again this year. The company currently has $30MM of cash (20% of its market cap) and no debt. Epsilon recently committed to paying a quarterly dividend of $0.0625 per share starting on March 31. This works out to a 4.0% dividend yield. In addition, the company is actively buying back shares (1.1MM share repurchase authorization). Original Write-up. Buy under 8.00
Esquire Financial Holdings (ESQ) had no news this week. It initiated a nine-cent quarterly dividend in April. This works out to a 1% yield. The company reported earnings in late March (the next quarterly results are due out later this month). Results were excellent, and the investment case remains on track. The company reported Q2 EPS of $0.66, a penny ahead of consensus. Return on equity increased y/y from 13.3% to 15.0%. Esquire remains well capitalized with excellent credit metrics. The company has a long runway for growth, as articulated by CEO Andrew Sagliocca: “There is tremendous potential in both the litigation and payment markets primarily due to the limited number of players and fragmented and inefficient approach to coupling financing, payment processing, and technology. We believe Esquire will be a leader in all three categories in both industries.” Despite its strong outlook, the stock trades at just 12x earnings. Original Write-up. Buy under 35.00
IDT Corporation (IDT) announced quarterly results in early June, and the stock sold off. At a high level, the quarter didn’t look great. Revenue decreased 12% y/y which was driven by a 17% decline in traditional communications revenue. This segment benefitted from the boom in paid calling during the pandemic, but that surge is normalizing. Most importantly, IDT’s high-growth segments continue to grow well. National Retail Solutions (NRS), IDT’s payment terminal business, grew 102% y/y. Net2phone, IDT’s other highly valuable subsidiary, grew recurring revenue by 42%. Further, IDT expects subsidiary growth to contribute to consolidated profitability in the second half of this year. While the spin-off of net2phone has been temporarily delayed, we know that it and NRS will ultimately be monetized. The investment case remains on track and my price target is 55 based on an updated sum-of-the-parts analysis. Original Write-up. Buy under 45.00
Kistos PLC (KIST: GB) had no news this week. It is a U.K. natural gas provider is run by an experienced oil and gas operator that created a 40x return on his last public energy company. Kistos is taking advantage of a booming natural gas market in Europe yet only trades at 1x current free cash flow. It has very little debt. The management team is excellent, and they own ~20% of the company, ensuring that we are well aligned. I see at least 100% upside ahead. Original Write-up Buy under 5.50
Liberated Syndication (LSYN) has had no news recently. However, I had a chance to speak to the CEO on June 20. He said the team is working through re-filing its financials, and he expects to “go public” again by the end of September. Instead of just “turning on” trading, he would like to raise a little capital and also pick up coverage from some sell-side analysts. He noted the advertising business is growing very well and that the podcast hosting business is growing again. It had experienced limited growth last year given free hosting competition, but business has picked back up. While Libsyn has been a frustrating stock, I think (and hope!) our patience will be rewarded by the end of September. Since you can’t actually buy the stock until then, I rate it a Hold for those who already own it. Original Write-up. Hold
Medexus Pharma (MEDXF) reported a strong quarter on June 22. Revenue increased 15% y/y to $20.4MM and EBITDA in the quarter was $1.1MM, up from -$1.6MM last year. IXINITY has returned to normal sales patterns which closely align with underlying patient demand. The company also benefited from its launch of Gleolan in the United States. If/when treosulfan is approved, Medexus will have to pay Medac milestone payments of $15MM to $45MM depending on the label. Medexus is evaluating financing options to pay the milestone payments with a number of interested parties. Medexus continues to be optimistic that Medac will provide the FDA with all the data that it needs by July 2022 and that treosulfan will ultimately be approved. Liquidity remains strong as the company has $10MM of cash on hand and the business is growing again. I continue to think the risk/reward profile of Medexus is asymmetric to the upside. Original Write-up. Buy under 3.50
NexPoint’s (NXDT) disclosed some more insider buying this week from its CEO. On July 12, the company announced that its long-awaited transition to a REIT is complete. NexPoint will hold an update call on August 3, 2022. This is exciting news, and I’m eager to hear more about the strategy going forward. The thesis remains on track, and I see ~50% upside in the next 12 months. Original Write-Up. Buy under 17.00
P10 Holdings (PX) reported another great quarter in May. Revenue increased 32% to $43.3MM while adjusted EBITDA increased 31% to $22.5MM. Assets under management increased 34% to $17.6BN. Higher assets under management will drive continued revenue and earnings growth. The company also announced a $20MM share repurchase. P10 is currently trading at 15x 2022 adjusted EBITDA which is a very reasonable valuation for such a stable business with strong organic growth potential. Original Write-up. Buy under 15.00
RediShred (RDCPF) had no news this week. It’s a Canada-based, leading document destruction services company. Insiders own more than 30% of the company. It has grown revenue at a 31% CAGR and EBITDA at an 80% CAGR over the past 10 years through organic and inorganic growth. Future growth is poised to continue, yet the stock trades at just 5x forward EBITDA. I see 100% upside over the next 12 months and significantly more upside looking out a few years. Original Write-up. Buy under 0.70
Truxton (TRUX) reported another great quarter in April, with the company reporting its best quarterly earnings ever. The private banking team continues to grow assets in the Nashville area and rising rates are benefiting the portfolio’s net interest margin. Asset quality remains sound with $0 in non-performing loans and $0 in net charge-offs (that’s pretty good!). The Truxton investment case remains on track. The bank will continue to grow loans and earnings prudently while returning excess cash to shareholders through dividends and share buybacks. The stock is trading at just 12.3x annualized earnings. This isn’t the most exciting stock, but it’s a slow and steady winner. Original Write-up. Buy under 75.00
Zedge, Inc. (ZDGE) reported some insider buying this week – a welcome sign after investors seemed underwhelmed following the company’s June 18 earnings report. The stock fell as revenue grew by 18% but declined sequentially. Monthly active users (MAUs) in both developing and developed countries also fell sequentially. However, management noted that MAUs are growing again and that they are cautiously optimistic that these trends will continue. Further, the recent quarter included no contribution from the recent acquisition of GuruShots. Given strong recent insider buying, I’m expecting positive news when we hear more details about the integration of GuruShots. The stock remains very cheap trading at 3.4x EBITDA. Original Write-up. Buy under 6.00
| Stock | Price Bought | Date Bought | Price on 7/20/22 | Profit | Rating |
| Aptevo Therapeutics (APVO) | 32.01 | 3/10/21 | 4.32 | -87% | Buy under 7.50 |
| Atento SA (ATTO) | 21.57 | 4/14/21 | 9.00 | -58% | Buy under 20.00 |
| Cipher Pharma (CPHRF) | 1.80 | 10/11/21 | 1.68 | -7% | Buy under 2.00 |
| Cogstate Ltd (COGZF) | 1.70 | 4/13/22 | 1.17 | -31% | Buy under 1.80 |
| Crossroad Systems (CRSS) | 14.10 | 2/9/22 | 13.10 | -7% | Buy under 15.00 |
| Currency Exchange (CURN) | 14.10 | 05/11/22 | 13.05 | -7% | Buy under 16.00 |
| Dorchester Minerals LP (DMLP)* | 10.45 | 10/14/20 | 26.75 | 156% | Buy under 25.00 |
| Epsilon Energy (EPSN) | 5.00 | 8/11/21 | 6.01 | 20% | Buy under 8.00 |
| Esquire Financial Holdings (ESQ) | 34.11 | 10/10/21 | 34.53 | 1% | Buy under 35.00 |
| IDT Corporation (IDT) | 19.37 | 2/10/21 | 26.66 | 38% | Buy under 45.00 |
| Kistos PLC (KIST) | 4.63 | NEW | 524.80 | 11235% | Buy under 5.00 |
| Liberated Syndication (LSYN) | 3.06 | 6/10/20 | 3.75 | 23% | Buy under 5.00 |
| Medexus Pharma (MEDXF) | 1.78 | 5/13/20 | 1.48 | -17% | Buy under 3.50 |
| NexPoint Diversified Real Estate Trust (NXDT) | 14.15 | 1/12/22 | 15.70 | 11% | Buy under 17.00 |
| P10 Holdings (PX)** | 2.98 | 4/28/20 | 11.96 | 301% | Buy under 15.00 |
| RediShred (RDCPF) | 0.66 | 6/8/22 | 0.55 | 135% | Buy under .70 |
| Truxton Corp (TRUX)* | 72.25 | 12/8/21 | 69.25 | -3% | Buy under 75.00 |
| Zedge (ZDGE) | 5.73 | 3/9/22 | 2.83 | -51% | Buy under 6.00 |
Disclosure: Rich Howe owns shares in KIST:GB, LSYN, MEDXF, PX, IDT, APVO, DMLP, and NXDT. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members.
Buy means accumulate shares at or around the current price.*Includes dividends received
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.