November 17, 2021

It’s earnings season.

That 3-to-4-week period where most public companies report their results.

I find earnings season to be a great time to check in on your holdings.

Many think that the market is too short-term oriented and that quarterly earnings don’t really matter—what matters is annual progress.

While I agree that annual progress is what really matters, I find it helpful to check in every quarter to see if my recommendations are executing like I thought they would.

The good news is that most of our recommendations are showing great results (more details below) and we’ve moved on from the one company that did not, Performance Financial (PFMT).

I wanted to share a couple good charts from Ryan Detrick of LPL Financial.

Historically speaking, stocks tend to go sideways this time of year, and then finish strong at year end.

What about next year?

There are many signs of froth in the market. I will give just one example. Rivian (RIVN) is an electric car manufacturer that hasn’t produced a single car yet sports a market cap of $139 billion! It’s even too expensive for Cathie Wood of Ark Invest!

With that as context, usually years of strong stock returns are followed by another positive year as is shown in the following chart.

In other words, “bubbly” market conditions could get “bubblier.”

This week, we have a decent number of updates on our recommendations, and so I’m going to highlight them here before providing more details below.

Highlights:

• We had earnings updates from many of our recommendations. The highlight of the bunch was Leatt (LEAT) which reported blowout earnings.
• Aptevo (APVO) extended its poison pill by a year, so Tang Capital won’t have the ability to add to its position. The stock continues to tank and looks oversold.
• P10 Holdings (PIOE) reported great earnings and a number of brokers initiated coverage on the stock, all with Buy ratings.

The next issue of Cabot Micro-Cap Insider will be published on December 9, 2021. As always, if you have any questions, please email me at rich@cabotwealth.com.

Changes This Week
Increasing buy limit for Leatt (LEAT) to Buy under 40.00
Lowering buy limit for Aptevo (APVO) to Buy under 15.00

Updates
Aptevo (APVO) reported earnings, or lack thereof (it’s a biotech after all!), on November 12, 2021. The key takeaway for me is that the company will report more data for its lead drug candidate, APVO436, from its Phase IB trial. This could be a key catalyst. In terms of liquidity, Aptevo has plenty. It has $33.3MM of net cash on its balance sheet. In addition, it will receive additional payments of $32.5MM from Ruxience and has the potential to monetize its IXINITY royalty stream, which I believe is worth $20MM. Aptevo’s market cap is currently $48MM. Thus, its pipeline is negative $41MM. Recently, the company extended its poison pill for another year, which will prevent Tang Capital from buying any more shares. Original Write-up. Buy under 15.00

Atento S.A. (ATTO) reported earnings on November 15^th. Revenue grew by 4.5% but missed consensus expectations. The revenue miss was driven by the non-renewal of lower-margin contracts in Brazil. On the positive side, EBITDA margins expanded to 13.9%. Full-year sales guidance was maintained (mid-single-digit revenue growth and ~13% EBITDA margin). All in all, the investment case is on track. Original Write-up. Buy under 30.00

BBX Capital (BBXIA) reported another great quarter. The company reported revenue up over 100% as BBX Sweet Holdings came out of bankruptcy and rebounded strongly while the real estate business continues to perform well. BBX is extremely well positioned given its single- and multi-family real estate portfolio located in Florida. Book valued increased from $17.53 to $19.72. The investment case remains on track. Original Write-up. Buy under 9.50

Cipher Pharma (CPHRF) reported a weak quarter as revenue declined sequentially. Nonetheless, revenue is still up YTD, and the stock remains extraordinarily cheap and its buying back stock in the open market. I’m going to speak to management to better understand the quarter. Downside protection remains strong given no debt, strong free cash flow generation, and $0.65 of cash per share on the balance sheet. Original Write-up. Buy under 2.00

Dorchester Minerals LP (DMLP) has moved down slightly this week as it passed its ex-date for its next distribution. The distribution of $0.50 was paid out on Thursday, November 11. If we annualize the distribution, the stock is trading at a 10.3% dividend yield. I think the dividend will be increasing next quarter as energy prices continue to rise. Given higher energy prices, I recently increased my price target on DMLP to 25.00. Original Write-up. Buy under 17.50

Drive Shack (DS) recently reported strong revenue of $76.4MM, slightly above its pre-announced revenue of $75MM. Revenue is at the highest level in three years. The company has had strong progress with its Puttery (indoor minigolf) concept and plans to continue to open additional venues. Despite another good quarter, the stock’s valuation remains depressed. At its current valuation, Drive Shack’s share price gives minimal value to the strong upside potential from new Puttery venues. Alignment is high as management and directors own 16.3% of shares outstanding. My price target is 6.00. Original Write-up. Buy under 4.00

Esquire Financial Holdings (ESQ) is my latest recommendation. 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, the stock trades at a very cheap valuation. Looking out a couple of years, Esquire should be trading significantly higher. Original Write-up. Buy under 35.00

Epsilon Energy (EPSN) reported a strong quarter this week. It generated $3.3MM of free cash flow in the quarter. Going forward, free cash flow generation should increase given less of its gas sales are hedged. Year to date, the company has repurchased 2.2% of shares outstanding. Cash continues to build, and the company currently has $20.6MM of cash on its balance sheet. Management wrote the following in its press release, “Once our 2022 development capital needs are defined, we will evaluate the appropriate amount of capital to retain in the business.” This seems to hint that management is likely to announce a special dividend or large accelerated share repurchase authorization. I see significant upside over the next 12 months as the company benefits from high natural gas prices. Original Write-up. Buy under 5.50

FlexShopper (FPAY) reported earnings recently. Despite what I thought was a strong report, the stock sold off. It will be interesting to see if we see more insider buying (we saw some after the company reported earnings last quarter). In the quarter, revenue grew 26% y/y to $30.9MM. Gross lease origination was down 30% which implies lower revenue in the future. However, given that government stimulus appears to be fading, I believe more consumers will need FlexShopper’s solutions, which will enable originations to ramp up. All in all, I still believe in the FlexShopper story. My 12-month price target for FlexShopper is 4.70. Original Write-up. Buy under 2.50

IDT Corporation (IDT) recently reported a great quarter with strong growth across the board. Mobile Top-up revenue increased 41% y/y; this is the sixth consecutive quarter of 20%+ revenue growth. National Retail Solutions (NRS) revenue increased 76% y/y, with performance being driven by an increase in average revenue per user (ARPU) and terminal growth. Management expects continued upside in ARPU, driven by merchant services, advertising, and data. Net2phone subscription revenue increased 46% y/y, with 80%+ gross margin. Lastly, Traditional communications reported its third consecutive quarter of revenue growth and generated $29mm of EBITDA. Original Write-up. Buy under 45.00

Leatt Corporation (LEAT) reported a ridiculously good quarter last week. Revenue was up 94% to $22.1MM. EPS increased 163% to $0.79. It’s incredibly impressive that this growth was achieved despite supply-chain bottlenecks. The stock has shot up but still looks reasonable. The stock is only trading at 10.6x annualized EPS. Perhaps 20x is a more appropriate multiple? As such, I’m increasing my limit to buy under 40. Original Write-up. Buy under 40.00

Liberated Syndication (LSYN) recently announced that it hired a new full-time CEO to add to its recently hired CFO. This is a positive as the company had been operating without a CFO or CEO. However, I do have strong confidence in President Laurie Sims, who has been leading the business. I’m hopeful that financials will be restated by the end of the year or, at worst case, in January. At that point, I think the financials will reveal a fast-growing podcast company trading at a cheap valuation. Original Write-up. Buy under 5.00

Medexus Pharma (MEDXF) reported quarterly results recently. While the stock has traded down, I think it was positive update. The company’s liquidity remains strong (there will be no need to raise equity) and revenue grew sequentially. It continues to work through the IXINITY inventory issue and should return to growth in the next quarter or so. Further, the company is a quarter or two away from hitting operational breakeven. Meanwhile, the company will meet with the FDA to discuss its plan to refile Treosulfan and we will hear how that meeting goes by the end of the year. This could be a major de-risking event. The way that I’m thinking about it is Medexus should be a $10+ stock if Treosulfan is approved. I think there is at least a 50% chance it is approved next year. In the case that it is not approved, I don’t think there is much downside to the stock as the base business (as long as IXINITY reverts to growth) easily supports the current valuation. Original Write-up. Buy under 3.50

P10 Holdings (PX) 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

Disclosure: Rich Howe owns shares in BBXIA, LSYN, MEDXF, PIOE, FPAY, IDT, APVO, DS, SLNG, DMLP, and PFMT. 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.
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.