May 4, 2022

While I’m grateful that the pandemic has faded and everyone is getting back to normal, there is one downside. During the pandemic, my family had a stretch of two years of amazing health. No Covid (luckily!), no flu, and no colds,

That has all changed.

Last week, my 3-year-old boy got hand, foot, and mouth disease (sounds worse than it is!) and my wife and 6-year-old daughter got the flu. Somehow, I avoided the flu last week, but now I have a horrible cold.

Oh well. At least the weather is getting better!

As I think about the market, I’m struck by how negative sentiment is. The U.S. Sentiment Bull-Bear spread is at -43%. Typically, when it is this negative, forward returns look quite attractive.

What could jolt the market back to life?

It’s tough to predict these things, but what if inflation is peaking or has already peaked?

In that case, rates wouldn’t need to rise as quickly and equity valuations could expand.

There are some signs that inflation is, in fact, peaking.

Alright, enough macro prognosticating.

What’s going on with micro-cap stocks?

This week was relatively quiet, but I did have a few things that I wanted to flag (full updates below).

• Esquire Bank (ESQ) initiated a quarterly dividend of $0.09. Obviously, a 9-cent dividend isn’t monstrous (it works out to a 1% annual yield), but it’s a positive signal.
• Truxton (TRUX) reported a solid quarter. The investment case remains on track.

The next issue of Cabot Micro-Cap Insider will be published on Wednesday, May 11. As always, if you have any questions, please email me at rich@cabotwealth.com.

Changes This Week
No changes

Updates
Aptevo (APVO) continues to perform poorly. It recently filed an 8-K disclosing that it is at risk of being delisted from the Nasdaq exchange because its stockholders’ equity balance of $1.2MM is below the minimum threshold of $2.5MM. The company could easily meet this threshold by raising equity although it would be dilutive. The stock continues to look incredibly cheap, but the entire biotech space is in a bear market. What could get the stock going again? It’s tough to say with certainty, but Aptevo will report additional data from its ongoing trials this year, and any positive news will move the stock upwards. Aptevo has cash on its balance sheet of $46MM which is enough for the next 12 months. Original Write-up. Buy under 7.50

Atento S.A. (ATTO) reported earnings in late March. Revenue increased 5% but EBITDA declined by 7%. Results missed consensus expectations, but the miss was due to a cyber hack which had been previously disclosed and resolved. Nonetheless, the investment thesis is intact. To summarize, the company is trading at a massive discount to peers and will likely be sold in the near term (the company has hired Goldman Sachs to review strategic alternatives, according to Bloomberg). Another positive is the Brazilian Real has appreciated recently and that will be a tailwind for the company. Original Write-up. Buy under 35.00

BBX Capital (BBXIA) reported earnings in March. They were excellent. Book value per share now stands at $20.79, up over a dollar since last quarter. The aggressive buybacks are really paying off. Since the spin-off, shares outstanding have declined by 16%. The company has a market cap of $162MM. Meanwhile, it has net cash + notes receivable of $113MM ($6.96 per share). In 2021 it generated $29MM in free cash flow and that is set to continue given the real estate market is booming in Florida. My new price target is 12.50 (60% of book value). Original Write-up. Buy under 11.00

Cipher Pharma (CPHRF) reported earnings in March. The results were great. On the year, revenue was up 1% to $21.9MM. SG&A decreased 18.3% to $5.1MM and this drove a dramatic increase in EBITDA, which increased 46% to $11.8MM. The company bought back ~5% of shares during the year. The company has no debt and $20.5MM ($0.79 per share) of cash on its balance sheet. Meanwhile, Cipher continues to move its pipeline forward and evaluate accretive acquisition opportunities. Original Write-up. Buy under 2.00

Cogstate Ltd (COGZF) is my newest recommendation. 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 33x current earnings. Looking out a few years, this stock could easily be a double or more. Original Write-up. Buy under 1.80

Crossroads Systems (CRSS) reported results recently. 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

Dorchester Minerals LP (DMLP) continues to hold up. Dorchester recently announced its Q2 distribution of $0.75, which annualizes to an 11.5% 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) has soared over the past week due to rocketing natural gas prices. Last year, the company produced tremendous free cash flow and will likely do so again this year. Epsilon currently has $27.1MM of cash (18% of its market cap) and no debt. It 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 at an average price of no more than $6.76 per share. Original Write-up. Buy under 6.00

Esquire Financial Holdings (ESQ) initiated a 9-cent quarterly dividend this week. 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%. The company remains well capitalized with excellent credit metrics. Esquire has a long runway for grow 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) reported earnings in early March. 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. IDT announced its goal is to spin net2phone off before the end of its fiscal year (July 31 year-end). 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 14^th 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 re-state 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 new CEO, 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 re-file financials rather than re-state all previous financials. This makes intuitive sense to me. As such, this de-registration is step 1. I don’t have a sense for when the financials will be re-filed, 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 below 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) recently announced that it has completed its resubmission of Treosulfan to the FDA. The company expects a decision within six months. In March, Medexus announced that it has acquired exclusive rights to sell Gleolan in the United States. Medexus estimates that this is a $14MM USD opportunity. Medexus currently sells Gleolan in Canada and is familiar with the product. This is a big positive as it increases the company’s revenue run rate by ~16%. In February, Medexus posted their Q3 earnings results, and reported sales of $21.3MM, beating consensus of $18.8MM. They also posted positive EBITDA of $1.9MM, which was expected to be negative-$1.6MM. Revenue was $17.9MM last quarter. So sequential improvement of 18% is excellent from my perspective. Looks like IXINITY is getting back on track (Medexus noted IXINITY drove the sequential improvement). Key things to note from the earnings call: The company received a $2MM order for IXINITY late in the quarter so it was a little higher than expected. Next quarter might be a little lower revenue but should be breakeven EBITDA. But remember, the company is carrying costs for Treo so excluding that spend, the company would be profitable. 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) filed its proxy statement in late March and 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 with people at NexPoint and the indirect investments are attributed to the company’s CLO holdings. I believe the CLOs are heavily discounted due to liquidity. As such, once they are realized, NAV 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 excellent year-end results in early March. Revenue increased 123% y/y. Adjusted EBITDA increased 162% y/y to $83MM. P10 Holdings has equity stakes in six private equity-focused strategies: 1) RCP Advisors, 2) TrueBridge Capital Partners, 3) Enhanced Capital, 4) Five Points Capital, 5) Hark Capital, and 6) Bonaccord Capital Partners. These managers have strong track records which will enable them to continue to raise additional assets under management. Higher assets under management will drive continued revenue and earnings growth. 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) had another great quarter in April – the company’s best quarterly earnings ever, in fact. 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 non-performing loans and $0 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) 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 earn out 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 average revenue per monthly average user of $3.50 (compared to just $0.06 for Zedge). The app generated $8MM of revenue but is growing rapidly. I had a chance to talk to Zedge’s 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. Original Write-up. 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.