September 21, 2022

Given the volatility of September, I want to revisit my “bear market” analysis.

Typically, bear markets last about 14 months and average a peak to trough drop of 35.7%.

The current bear market has lasted for 9 months with a drawdown of 19.0%.

So unfortunately, it looks like we could see some further downside in the current bear market.

But there is good news!

In March 2020, Verdad published some great research about crisis investing.

Their conclusions were quite encouraging. In short, if you invest three months after the S&P 500 drops 20%, the 12-month and 24-month returns look terrific for all stocks.

It really doesn’t matter what (growth/value or small/large) you bought; the returns look very good.

We are now in September (three months after the bear market began). If the historical pattern holds, returns could be quite strong over the next 12 and 24 months.

This week, we had one update that I wanted to highlight:

Medexus (MEDXF) announced that the FDA has delivered to Medac (Medexus’ partner on Treosulfan) a second notice of incomplete response, thus delaying the potential for Treosulfan to be approved. Nonetheless, I continue to like Medexus, and think the sell-off is overdone.

The next issue of Cabot Micro-Cap Insider will be published on Wednesday, October 12. As always, if you have any questions, please email me at rich@cabotwealth.com.

Changes This Week
None

Updates

Aptevo (APVO) had no news this week. The company reported quarterly results on August 11. The company continues to report positive results from its key drug, APVO436. Further, it has additional drugs that are progressing well. Aptevo renegotiated its royalty agreement with Pfizer which allows Aptevo to recognize a gain and regain compliance with Nasdaq’s shareholder equity listing requirement. This is a positive. Currently Aptevo has $25MM of net cash on its balance sheet and projects that it has enough liquidity to continue to operate for 12 more months without raising capital. 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. It announced on September 7 that it has reached an extension on its lockup agreement with its largest shareholders (who represent 71% of shares outstanding) for 12 months. This is meaningful as it shows the largest shareholders of the company have conviction in the stock and believe it’s undervalued. On August 3, Atento reported another weak quarter. Management lowered revenue guidance to flat versus consensus of +4% growth and previous guidance of “mid-single-digit” growth. EBITDA margin guidance has been reduced to 12% (at the midpoint) from 13.5%. While this quarter and guidance cut were disappointing, the stock is incredibly cheap and is not at risk of defaulting on its debt (no maturities until 2025). Thus, it makes sense to stick with the stock. Original Write-up. Buy under 10.00

Cipher Pharma (CPHRF) had no news this week. It reported strong results on August 11. Revenue declined 8% driven primarily by lower Absorica sales (as expected); however, adjusted EBITDA grew sequentially to $3.6MM. The company’s cash balance stands at $24.2MM, ~50% of its market cap. This limits downside risk. Further, the company continues to generate significant free cash flow and buy back shares. Finally, the company had positive pipeline developments with two compounds (MOB-015 for nail fungus and Piclidenoson for psoriasis). Both drugs are progressing in phase III trials. Original Write-up. Buy under 2.00

Cogstate Ltd (COGZF) had no news this week. The company provided guidance for its fiscal year on August 29. It expects 1H23 revenue to be in line with 2H22 revenue ($19.5MM). At this point, the company decided against providing revenue guidance for the second half of fiscal year 2023. Ultimately, Cogstate’s revenue potential this year and beyond will be determined by key Alzheimer’s drug read-outs which are expected this year and next year: 1) Lecanemab from Eisai (phase 3 data expected in September 2022), 2) Gantenerumab from Roche (Phase 3 data expected in Q4 2022), and 3) Donanemab from Eli Lilly (phase 3 data in mid-2023). All things considered, the thesis remains on track. Original Write-up. Buy under 1.80

Copper Property Trust (CPPTL) announced on September 12 that it has sold seven of its properties for $65MM. The blended cap rate of the transactions was 7.3%. The trust on an aggregate basis is trading at a ~10% cap rate (the higher the cheaper). Proceeds will be paid out next month, as will net rental income. The trust remains attractive. The current yield is 10%. And the trust has no debt so our downside is protected. Original Write-up. Buy under 14.00

Crossroads Impact Corp. (CRSS) had no news this week. On July 11, the company announced that P10 Holdings (PX), another CMCI recommendation, is investing $180MM of equity capital (through one of its investment funds) at $10.76 a share 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 September 13. They looked great! Revenue increased 139% to $21MM, beating consensus expectations by $5MM. This was truly a massive beat. Revenue in the fiscal third quarter was 67% higher than 2019 FQ3 (pre-pandemic). The company’s Payments business grew revenue 65% to $3.6MM. Year to date, Currency Exchange has generated EPS of $1.15 or $1.53 on an annualized basis. As such, the stock is trading at just 9x earnings. The investment case remains on track. Original Write-up. Buy under 16.00

Epsilon Energy (EPSN) had no news this week. The company announced strong results on August 11. Epsilon continues to benefit from high natural gas prices. Revenue increased 46% sequentially driven by 68% higher natural gas prices. Revenue should continue to soar as long as natural gas prices remain elevated and Epsilon is mostly unhedged. During the quarter, the company generated $5.9MM of free cash flow, or $23.4MM on an annualized basis. The stock looks attractive given its $31MM of net cash and strong earnings power. Original Write-up. Buy under 8.00

Esquire Financial Holdings (ESQ) had no news this week. The company reported earnings in July. Results were excellent. Revenue grew 23% y/y while EPS grew 37%. Credit metrics look very strong as the company has an allowance-to-loans ratio of 1.2%. The company has a long runway for growth, as articulated by CEO Andrew Sagliocca: “There is tremendous growth potential in both our national platforms due to the limited number of participants and the fragmented approach to finance and technology in both markets.” Despite its strong outlook, the stock trades at just 14x earnings. Original Write-up. Buy under 35.00

IDT Corporation (IDT) had no news this week. The company last reported quarterly results on June 2. 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) reported first-half 2022 results. They looked great. The company reported revenue growth of 745% and EBITDA growth of 768%. It generated free cash flow of £93MM, or $186MM annualized. As such, Kistos is currently trading at 1x current EBITDA and 2.5x current free cash flow. The only downside is that the EU is considering instituting a windfall profit tax on energy companies. While this would be a negative, I think it’s partially reflected in Kistos’ valuation. Further, Kistos generated $89MM of EBITDA in 2021. Thus, it’s trading at just 5.1x “normalized” EBITDA, not a demanding valuation. I continue to see at least 100% upside ahead. Original Write-up Buy under 7.50

Liberated Syndication (LSYN) has had no news recently. I had a chance to speak to the CEO in June. He said the team is working through re-filing its financials, and he expects to “go public” again by the end of September (this might be optimistic given the volatility in the market). 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) announced that the FDA has delivered to Medac (Medexus’ partner on Treosulfan) a second notice of incomplete response, thus delaying the potential for Treosulfan to be approved. While the continued delay of approval for Treosulfan continues to be frustrating, I believe the base business looks very undervalued on a standalone basis. Results were excellent in the most recent quarter. Revenue increased 33% y/y to $23MM. Sales drivers were IXINITY and Gleolan sales in the U.S. Adjusted EBITDA was $1.9MM. Currently, the stock is trading at 0.7x annualized revenue and an EV/EBITDA multiple of 7.7x. This is too cheap. Original Write-up. Buy under 3.50

NexPoint (NXDT) finally had its shareholder update call on August 10, during which they provided significant detail into the assets that make up NAV. Management spent a lot of time discussing how they are confident that they can close the gap to NAV. Unfortunately, no comments were made on an increase to the dividend or whether the company will start buying back stock. Both of these would be significant catalysts for NXDT shares. Last month, we saw more insider buying by CEO James Dondero. 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) announced a meaningful acquisition in August. The company is acquiring Western Technology Investment, a market leader in venture debt. The acquisition will add $12.5MM of additional EBITDA to P10. It appears that P10 is paying ~12x EBITDA for the acquisition, a cheap but not dirt-cheap price. This acquisition will add to P10’s growth potential. 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. The investment case remains on track. Original Write-up. Buy under 15.00

RediShred (RDCPD) completed a reverse stock split on August 18. For every 5 shares that you previously owned, you now own 1 share. The stock price adjusted up to account for the reverse split. The reverse split has no economic impact on RediShred. You still own the same percentage of the company. Other than the reverse split, RediShred has had no recent news. 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 3.50

Richardson Electronics (RELL) was my September recommendation. The company is a rapidly growing micro-cap that is benefiting from many “green” initiatives (electric trains, wind turbines, etc.). Despite strong growth expectations and a pristine balance sheet ($40MM of net cash), the stock trades at just 10x next year’s earnings. Insider ownership is high, and I see ~75% upside over the next couple of years. Original Write-up. Buy under 17.00

Truxton (TRUX) reported a great quarter in July. Despite a volatile market, pre-provision net revenue grew 9% sequentially and 30% y/y. EPS grew 16% y/y. Credit metrics remain strong. The bank has $0 in non-performing loans and $0 in net charge-offs. During the quarter, the company repurchased 22,000 shares for an average price of $70.05. 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 14x 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 on August 16 that it has authorized a 1.5MM share repurchase (10% of shares outstanding). This is a positive as it conveys management’s conviction in Zedge’s fundamental and cheap valuation. The stock remains very cheap, trading at 3.4x EBITDA. Original Write-up. Buy under 6.00

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.

Disclosure: Rich Howe owns shares in KIST:GB, LSYN, MEDXF, PX, IDT, APVO, NXDT, COGZF, and RDCPD. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members.