Hope you had a fantastic Memorial Day weekend.
It rained a little on Saturday in Boston, but the weather was absolutely perfect on Sunday and Monday.
80 degrees and sunny with zero humidity. It was glorious.
We spent the weekend hanging out with friends, eating a lot of hot dogs and hamburgers.
Another highlight of the week was the Celtics beating the Heat in game 7 to advance to the NBA finals on Sunday evening.
If you watched the game, you know it wasn’t pretty. The Heat came within one missed 3-pointer of beating the Celtics. But a win is a win!
I’m the first to admit I’m a fair-weather fan. I will not watch any regular season games, but once the playoffs are on, I try to watch every game.
The only problem is the games are so late!
I like to be reading in bed by 9:30 (my kids wake up early), but the Celtics-Heat games started at 8:45 and didn’t finish until 11pm. And it’s going to get worse in the Finals as the games won’t start until 9:15pm.
Oh well. I will happily deal with being a little tired for the next few weeks.
This week, there wasn’t a whole lot of news.
Last week, I closed out my BBX Capital (BBX) recommendation for a profit of +172%. You can find my full alert here.
The primary reasons were:
- The fundamentals of the business have worsened.
- Business isn’t terrible right now for BBX, but it’s not great.
- Share repurchases have stopped.
- This is more concerning as the stock looks incredibly cheap. And without the buybacks (i.e., visible signs of shareholder-friendly behavior), investor concern could pop up regarding corporate governance.
Bottom line, I lost conviction and was happy to move on to higher-conviction ideas.
This week, we had a few items of note that I wanted to highlight (full updates below).
- Medexus (MEDXF) announced that the FDA has requested additional data and analysis related to its New Drug Application for Treosulfan. I continue to like the stock.
- Zedge (ZDGE) continues to see insider buying (I’m starting to sound like a broken record).
The next issue of Cabot Micro-Cap Insider will be published on Wednesday, June 9. As always, if you have any questions, please email me at rich@cabotwealth.com.
Changes This Week
None
Updates
Aptevo (APVO) reported earnings in early May. The company disclosed that it earned $10MM in milestone payments related to 2021 sales of RUXIENCE. It is optimistic that it will receive an additional $22.5MM in capital over the next two years. As of March 31, 2022, Aptevo has $30MM of net cash and, as detailed above, 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) reported earnings and has gotten absolutely crushed. This market is punishing stocks that miss expectations. Revenue came in at $1.45BN, up 5.7%, but missed consensus expectations slightly. The bigger issue is EBITDA decreased 10% to $35MM. The EBITDA shortfall was driven by lingering issues related to the cyber hack, higher inflation and the Omicron surge. Despite the weak quarter, management maintained its guidance for mid-single-digit constant currency revenue growth and 13.5% EBITDA margins. This may be optimistic, but the share price drop is an overreaction. At the end of the day, the stock is trading at just 3x EBITDA while peers trade at closer to 12x EBITDA. Original Write-up. Buy under 20.00
Cipher Pharma (CPHRF) reported earnings this week. 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. 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) had no news this week. It 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 25x current earnings. Looking out a few years, this stock could easily double or more. Original Write-up. Buy under 1.80
Crossroads Systems (CRSS) reported earnings results in April. PPP has ended, but Crossroads continues to process the forgiveness of loans. In addition, the company continues to focus on funding impact loans across the country. Book value currently sits at $11.68, slightly below the current stock price. The management team and board of directors have a track record of creating shareholder value (the company paid a special dividend of $40/per share in 2021 due to windfalls from the PPP program). As such, the current valuation looks attractive. Original Write-up. Buy under 15.00
Currency Exchange International (CURN) is my newest recommendation. The company is benefitting from the post-pandemic travel boom yet only trades at 6x EBITDA. It is growing revenue by 100% and is expanding margins rapidly. Insider ownership is high, and the company has a rock-solid balance sheet. Finally, Currency Exchange has a hidden asset (payments business) which is highly valuable. I see 100% upside. Original Write-up. Buy under 15.00
Dorchester Minerals LP (DMLP) continues to look good as energy prices stay elevated. Dorchester recently announced its Q2 distribution of $0.75, which annualizes to a 9.7% yield. The company is benefiting from high commodity prices. 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) continues to perform well given rocketing natural gas prices. Last year, the company produced tremendous free cash flow and will likely do so again this year. The company currently has $27.1MM of cash (18% 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 3.3% dividend yield. In addition, the company approved a share repurchase authorization to buy 1.1MM shares. Original Write-up. Buy under 8.00
Esquire Financial Holdings (ESQ) initiated a 9-cent quarterly dividend recently. This works out to a 1% yield. The company reported earnings in late March. 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 recently that it is delaying its net2phone spin-off. While this is disappointing, it makes sense given the market environment for high-growth stocks. Eventually the spin-off will happen. In March, IDT reported Q2 earnings. The headline number didn’t look great, but the investment case remains on track. Revenue was down slightly year over year, but IDT’s two key segments, NRS and net2phone, generated excellent results. NRS revenue grew 104% to $10.6MM while net2phone subscription revenue increased 32.5% to $12.5MM. 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
Liberated Syndication (LSYN) stopped trading on April 15 (the 14th was the last day of trading) because the SEC revoked the company registration. This sounds like horrible news, but I think it’s actually the opposite. Let me explain. Libsyn has been working with the SEC for ~2 years to restate its financials. Long story short, the prior CEO and CFO did a bad job managing the business and didn’t properly account for state sales tax. As a result, the company had to go back through its financials and restate them all. This process has taken longer than anyone anticipated. However, it appears that we are close to the end of the process. I recently spoke to the CEO of Libsyn, and he told me that the SEC had advised that it would be a more efficient path forward to de-register the stock and then refile financials rather than restate all previous financials. This makes intuitive sense to me. As such, this de-registration is step one. I don’t have a sense for when the financials will be refiled, but I believe it could happen within a few weeks. Once the financials are filed, I believe we will see a fast-growing, profitable company trading at less than 3x revenue. While Libsyn has been a frustrating stock, I think (and hope!) our patience will be rewarded in short order. Original Write-up. Buy under 5.00
Medexus Pharma (MEDXF) announced that the FDA has requested additional data and analysis related to its New Drug Application for Treosulfan. Medac (Medexus’ partner) believes it will be able to provide all the data and analysis by July 2022 (the original 12-month deadline). However, in the case that Medac can’t make the deadline, it can request an extension. In response to the news, the stock has gotten wacked, but I think it is a good buying opportunity. I think the stock is undervalued even if Treosulfan isn’t ultimately approved. I continue to believe that the risk/reward for Medexus looks attractive heading into the second half of the year. Original Write-up. Buy under 3.50
NexPoint Diversified REIT (NXDT) had no news this week. In its proxy statement in late March, the company disclosed that “the Conversion process is nearly complete.” This is a major positive as it will enable many new shareholders to invest in the stock (most professional investors don’t invest in closed end funds). The company also recently announced that it made a major realization on its MGM investment. The company disclosed that it received $45MM in cash due to Amazon’s acquisition of MGM. However, what is more interesting is the company disclosed that it expects to receive an additional $81MM from indirect investments in MGM. I spoke to the company and the indirect investments are attributed to the company’s CLO (collateralized loan obligation) holdings. I believe the CLOs are heavily discounted due to liquidity. As such, once they are realized, NAV (net asset value) should increase. Given the positive news, I’m increasing my buy limit to 16.00. Original Write-Up. Buy under 16.00
P10 Holdings (PX) reported another great quarter recently. 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
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) continues to see more insider buying. In total, three different insiders have purchased shares on the open market over the past 3 weeks. Zedge announced a transformative acquisition in April. It has acquired GuruShots, a company that combines photography with mobile gaming for $18MM up front and an additional potential earnout of $16.8MM in cash or stock. GuruShots is an Israel-based company whose app allows amateur photographers to compete in a wide variety of contests, showcasing their photos. The app generates an impressive ARPMAU of $3.50 (compared to Zedge at $0.06). The app generated $8MM of revenue but is growing rapidly. I had a chance to talk to Zedge investor relations and am optimistic about the opportunity for the Zedge team to scale up GuruShots and cross-sell to its existing Zedge app users. Pro-forma for the acquisition, Zedge is trading at 3.0x EBITDA and looks very attractive. Original Write-up. Buy under 6.00
| Stock | Price Bought | Date Bought | Price on 5/31/22 | Profit | Rating |
| Aptevo Therapeutics (APVO) | 32.01 | 3/10/21 | 4.68 | -85% | Buy under 7.50 |
| Atento SA (ATTO) | 21.57 | 8/24/21 | 10.68 | -50% | Buy under 20.00 |
| BBX Capital (BBXIA) | - | - | - | - | Sold |
| Cipher Pharma (CPHRF) | 1.80 | 9/8/21 | 1.36 | -24% | Buy under 2.00 |
| Cogstate Ltd (COGZF) | 1.70 | 4/13/22 | 1.21 | -29% | Buy under 1.80 |
| Crossroad Systems (CRSS) | 14.10 | 2/9/22 | 13.70 | -3% | Buy under 15.00 |
| Currency Exchange (CURN) | 14.10 | 05/12/22 | 15.25 | 8% | Buy under 15.00 |
| Dorchester Minerals LP (DMLP)* | 10.49 | 10/14/20 | 30.89 | 194% | Buy under 25.00 |
| Epsilon Energy (EPSN) | 5.00 | 8/11/21 | 6.98 | 40% | Buy under 8.00 |
| Esquire Financial Holdings (ESQ) | 34.11 | 11/10/21 | 38.18 | 12% | Buy under 35.00 |
| IDT Corporation (IDT) | 19.37 | 2/10/21 | 27.56 | 42% | Buy under 45.00 |
| Liberated Syndication (LSYN) | 3.06 | 6/10/20 | 3.75 | 23% | Buy under 5.00 |
| Medexus Pharma (MEDXF) | 1.78 | 5/13/20 | 1.67 | -6% | Buy under 3.50 |
| NexPoint Diversified Real Estate Trust (NXDT) | 13.67 | 1/12/22 | 15.45 | 13% | Buy under 16.00 |
| P10 Holdings (PX)** | 2.98 | 4/28/20 | 11.50 | 286% | Buy under 15.00 |
| Truxton Corp (TRUX)* | 72.25 | 12/8/21 | 69.75 | -2% | Buy under 75.00 |
| Zedge (ZDGE) | 5.73 | 3/9/22 | 5.32 | -7% | Buy under 6.00 |
Disclosure: Rich Howe owns shares in BBXIA, LSYN, MEDXF, PIOE, 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.