This morning while walking my daughter to kindergarten, I thought I was going to turn into an ice cube.
It was so cold!
The official temperature in Wellesley, MA, is 15 degrees but with the wind chill, I felt like I was in Antarctica.
Despite the frigid cold in the northeast, there is one thing that I love about this time of year.
The light.
Every day, sunrise is a little earlier and sunset is a little later.
As the days lengthen, I notice my mood improving. Spring is coming!
And better yet, there are a lot of reasons to be optimistic with stocks.
Vaccines are being rolled out, and the economic recovery will be strong in 2021.
Stocks that will benefit from the economic recover should have strong tailwinds.
While our entire portfolio should benefit from an improving economy, two stand out to me.
The first is Dorchester Minerals (DMLP) which is an energy royalty company. As the global economy picks up steam, demand for energy will increase, driving prices higher. We’ve already seen this as crude oil is above $60/bbl. Dorchester is a direct beneficiary of higher prices and pays out its income as dividends.
Greystone Logistics (GLGI) will be another beneficiary of an improving economy. As the economy recovers as vaccines are rolled out, companies’ demand for pallets will increase, driving higher sales and earnings for Greystone. The stock very cheap trading at 7.7x earnings.
In terms of the market outlook, nothing has really changed. The market looks expensive but the trend is higher. Don’t fight the tape!
This week, we had a couple of our recommendations report earnings. All reported good results. We are bumping up our buy limit for Donnelley Financial (DFIN) given excellent execution yet a cheap valuation.
The next issue of Cabot Micro-Cap Insider will be published on Wednesday, March 10, 2021. As always, if you have any questions, don’t hesitate to email me at rich@cabotwealth.com.
Changes This Week
Increasing limit on DFIN to Buy under 25.00
Updates
BBX Capital (BBXIA) had another quiet week. In February, Angelo Gordon filed a 13D to disclose that it owns 6.4% of shares outstanding. I view this as bullish given: 1) Angelo Gordon is a sophisticated investor who sees significant value and 2) management was open to taking on outside investment (the company will allow Angelo Gordon to own up to 9.9% of shares outstanding). I recently spent considerable time reviewing my investment thesis for BBX Capital. All in all, the investment case remains on track. Despite strong performance, the company trades at just 39% of book value. It should generate significant earnings and free cash flow in 2021. In October 2020, the company announced that it had authorized a $10 million share repurchase, representing 8% of its market cap. The company also recently announced that it has purchased Colonial Elegance, a supplier and distributor of building products, including barn doors, closet doors, and stair parts for 5.6x EBITDA, an attractive price. Despite poor historical corporate governance, we are aligned with management as the Levin family (controlling shareholders) own 42% of shares outstanding. I see 20%+ upside. Original Write-up. Buy under 5.00.
Donnelley Financial Solutions (DFIN) reported excellent earnings last week and the stock responded as you would expect. In the quarter, revenue increased 10.5%, beating consensus expectations considerably. The revenue upside was driven by strong capital markets activity (IPOs and SPAC issuance) as well as continued growth of software and tech enabled solutions. Software solutions revenue increased 8% y/y to $54.2MM and now represent 25.8% of total sales. The company also announced the launch of a new software solution for SEC filing and announced a $50MM share repurchase authorization that will replace its current $25MM authorization. All in all, an excellent quarter. And better yet, the stock is still cheap, trading at 7.7x free cash flow and 7.0x forward earnings. Given the stock is up 30% since reporting earnings, I wouldn’t be surprised if it took a breather. Nonetheless, I’m raising my buy limit to 25 given its excellent performance and strong outlook. Original Write-up. Buy under 25.00.
Dorchester Minerals LP (DMLP) looks attractive. While the stock is up ~42% (including dividends) since we recommended it, it still appears undervalued given that oil prices are back above $60/barrel. In 2020, the company generated $39.4MM of free cash flow. Given the pandemic, we can view this free cash flow generation as a trough. As such, DMLP is trading at 12.7x trough free cash flow. This an extraordinarily cheap multiple for such a high-quality royalty business. Original Write-up. Buy under 15.00.
FlexShopper (FPAY) has pulled back in the past couple of weeks despite no news. I view this pullback as healthy given the stock has appreciate quite substantially. I continue to like FlexShopper. It is a rapidly growing company in the virtual lease-to-own market. Despite rapid growth and margin expansion, it is only trading at 9.5x 2021 earnings. Importantly, the Chairman of FlexShopper owns over 20% of the company and has recently been buying in the open market. Given new loan originations accelerated in the last quarter, I expect strong revenue and earnings growth in 2021. My 12-month price target for FlexShopper is 4.70. Original Write-up. Buy under 3.00.
Greystone Logistics (GLGI) reported earnings in January. The stock has been a little volatile, but I still have long-term conviction in it. Revenue declined by 20% in the quarter. The biggest challenge that Greystone currently has is meeting demand from its customer base. As a result, one of the company’s customers (a major beer company) gave notice that it will be diversifying purchases of case pallets between Greystone and another vender. Greystone will continue to be the sole provider for the keg pallets. Greystone believes that it will not have a material impact on its financials. On the one hand, a 20% decline in revenue is worse than I had anticipated. But on the positive side, net income increased by 187%. How is that possible? The big driver was a strong improvement in the company’s gross margin. It increased from 11.0% last year to 19.9% in the most recent. Greystone has been investing in improving its manufacturing efficiency and clearly that has paid off. The gross margin expansion is even more impressive given that revenue declined. Usually, gross margins shrink as revenue shrinks given diseconomies of scale. The key question in my mind is “Will revenue ever start growing again?” I have high conviction that it will. From 2016 to 2020, revenue grew at a compound annual growth rate of 30.4%. Once vaccines are broadly distributed and Greystone has its workforce back up to full capacity, the company should start growing quickly again. In the most recent quarter, the company generated $0.03 of EPS or $0.12 on an annualized basis. Thus, the stock is trading at a P/E of 7.6x. This represents a good value for a company with such a strong long-term growth outlook. Original Write-up. Buy under 1.10.
HopTo Inc (HPTO) had no news this week, but the stock has generally been weak since reporting earnings in November. In the quarter, sales declined by 6%. However, just as we didn’t get too excited last quarter when sales jumped 49%, we aren’t going to get too down this quarter. On a quarterly basis, sales are lumpy. Year to date, revenue is up 3% and operating profit is up 5%. The stock has pulled back and looks attractive. I believe HPTO is worth ~0.86 per share. HopTo is currently trading at an EV/EBIT multiple of 5.3x. This is too cheap. To put it in perspective, the software and internet industry trades at an average EV/EBIT multiple of over 50x. Original Write-up. Buy under 0.55.
IDT Corporation (IDT) is my newest recommendation. IDT Corporation is a mini-conglomerate run by Howard Jonas, one of the best value creators in the world. The stock is trading at a big discount to its sum-of-the-parts valuation, but the imminent spin-off of one or more of its high growth technology subsidiaries will unlock that value. Insiders own 25% of shares outstanding ensuring we are well aligned with management. My price target implies over 50% upside. Original Write-up. Buy under 23.50.
Liberated Syndication (LSYN) announced that it has acquired Auxbus, a podcast creation software company. Terms of the transaction weren’t disclosed, but I imagine the purchase price was quite low seeing as the company has been for sale for over a year. The acquisition will marry Auxbus’s podcast creation platform with Libsyn’s hosting platform, a move that allows it to keep up with a growing shift toward offering a full-service experience to producers. The addition of Auxbus will help Libsyn compete against companies such as Anchor. The Spotify-owned company allows podcast newcomers to create a show, host it on its platform, and then distribute it with a few clicks on Spotify. Libsyn continues to be an attractive company benefitting from several secular tailwinds. I look forward to the company’s Q4 earnings release and the outlook for 2021. Libsyn is in the process of rolling out a new user interface and advertising network and it could accelerate growth in 2021. Original Write-up. Buy under 4.25.
MamaMancini’s Holdings (MMMB) recently announced that it has submitted its application to list on the NASDAQ in order to increase the number of investors that can invest in the stock. This is a significant positive for the company. MamaMancini’s reported earnings in early December. Revenue grew 6.8% while EPS grew 100% to $0.02 as the company continues to leverage its fixed cost base. Sales growth decelerated slightly due to COVID headwinds, but I’m confident sales will reaccelerate in 2021 and beyond. Additionally, the company is currently running a strategic review which could result in the company being sold. Whether or not the company is sold, I believe returns should be strong going forward given the company will continue to grow and generate strong earnings growth. It has historically grown revenue at a 24% CAGR yet only trades at 11.3x forward earnings. Management owns over 50% of the stock, ensuring that incentives are aligned. Further, the company has a clean balance sheet. Original Write-up. Buy under 2.00.
Medexus Pharma (MEDXF) announced earnings earlier this week. The results were excellent. Revenue increased 70% y/y to $31.5MM in the quarter. Sales benefitted from ~$3MM of sales that slipped from last quarter to this quarter. Adjusted EBITDA increased to $5.1MM from $0.7MM a year ago. The bigger news with Medexus is the licensing deal that it announced last month. In February, Medexus announced that it has entered into a licensing agreement with medac, a German company. Medexus agreed to pay $5MM upfront, up to $55MM in regulatory milestone payments, and up to $40MM in sales-based milestone payments. Medexus just announced that it closed its equity offering to fund the deal. For those payments, Medexus will have the right to sell a drug called Treosulfan which is given to patients with acute myeloid leukemia (“AML”) and myelodysplastic syndrome (“MDS”) prior to stem cell transplantation. Patients who received Treosulfan lived longer and had fewer side effects than patients treated with the generic alternative. Medexus believes the drug will ultimately generate more than $126MM in sales. Medexus’s current drug portfolio (including Treosulfan) has peak sales potential of $275MM to $325MM CAD. Assuming the company can trade at 3x this revenue estimate (the company will execute additional licensing deals so I expect revenue to ultimately grow even higher), in line with slower growing peers, MEDXF would trade at ~30 per share implying significant upside from here. Original Write-up. Buy under 7.50
NamSys Inc. (NMYSF) recently reported positive full-year results. In the fiscal year, revenue increased 15% to $4.7MM. Free cash flow increased 34% to $1.9MM. Namsys is attractive, trading at 15.3x free cash flow. The biggest news remains that the company recently announced that it has terminated its long-term incentive plan. The plan was originally put in place in the mid 2010’s to incentivize the team to help transition Namsys’s software from on-premise to a cloud-based offering. However, the long-term incentive plan had no limit as participants in the bonus plan are entitled to 15% of the value of the company, no matter how high it’s valued. The payout for the termination of the bonus plan will be made in cash and stock. This is a major positive as it will increase the company’s earnings growth rate going forward. Further, it’s possible that this announcement could be a prelude to a sale of the company. Despite historically growing revenue and earnings at a compound annual growth rate of 20%+, the stock only trades at 15.3x free cash flow. It has a pristine balance sheet with significant cash and no debt, and insiders own over 40% of the company, ensuring strong alignment. Original Write-up. Buy under 0.80.
P10 Holdings (PIOE) has been quiet since it closed its acquisition of Enhanced Capital Group, a premier impact investment platform, in December. Since its inception, Enhanced has deployed over $2BN of capital into impact credit and impact equity investments. Areas of focus include small business lending in impact areas and to women and minority-owned businesses, renewable energy, and historic building rehabilitation. My estimate is that this transaction will increase run rate EBITDA to ~$75MM. As such, P10 is trading at an EV/EBITDA multiple of 14.6x. As I have said before, the stock is no longer dirt cheap. Nonetheless, it still trades at a sharp discount to its closest peer, Hamilton Lane (HLNE), which trades at an EV/forward EBITDA multiple of 30.6x. Catalysts for P10 Holdings going forward include: 1) additional deals and 2) a potential up-listing to a major exchange. Given the stock is not dirt cheap anymore, I recommend holding a half position. I want to keep exposure to the name but think it’s prudent to book some profits. Original Write-up. Hold Half.
U.S. Neurological Holdings (USNU) has been quiet since last reporting earnings in November. Revenue grew 0.6% y/y and 11% q/q as procedures and price per procedure both rebounded. Year to date, the company has generated EPS of $0.05 or $0.067 on an annualized basis. As such the company is trading at just 4.5x earnings. In addition, the company has $1.5 million ($0.19 per share) of cash and no debt on its balance sheet. It also has $1.1MM (due from related parties) and has generated over $500,000 in free cash flow year to date. U.S. Neurological Holdings operates as a holding company in the United States. It is engaged in providing medical treatment and diagnostic services that include stereotactic radiosurgery centers, utilizing gamma knife technology, and it holds interests in radiological treatment facilities. Original Write-up. Buy under 0.25.
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 BBXIA, GLGI, HPTO, LSYN, MMMB, MEDXF, PIOE, FPAY, and IDT. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members and will follow his rating guidelines.