Over the past couple of weeks, the market has been flat despite a lot of news flow.
There are rumors that the Biden administration may try to push through a tax hike on high earners and separately propose a massive infrastructure bill.
Meanwhile, another round of stimulus checks are being mailed out and perhaps that will provide support for stocks.
What impact will all this news have on our stocks? It’s hard to say.
It’s natural to feel the need to react to the news and adjust our portfolios in real time. But sometimes it’s best to just sit back and be patient.
MamaMancini’s Holding (MMMB) is a perfect example.
We originally recommended the stock last summer and for a long time, it didn’t really do anything. The stock moved slightly up but didn’t make any large moves.
It wasn’t as exciting as some of our other fast moving micro-cap recommendations.
But we stuck with the stock because it had solid fundamentals (good revenue and earnings growth), a strong balance sheet, and reasonable valuation.
And our patience is starting to pay off.
After treading water for a while, the stock looks like it’s breaking out.
Not a ton has changed from a fundamental perspective. Recently, the company announced that it appointed Managing Partner from Alta Fox Capital, Connor Haley, as a member of the board. This is a major positive as it suggests that Alta Fox Capital (the firm has excellent performance) will remain a shareholder for the long term.
MamaMancini’s is in the process of uplisting to the NASDAQ, but that isn’t really new news. The company did recently announce that it is looking to make bolt-on acquisitions of companies with $12MM to $20MM of sales and positive EBITDA. Any acquisition will be complementary to the company’s current portfolio of products and will be immediately accretive.
Given strong performance and a cheap valuation, I recently increased my buy limit to 2.50. My 12-month price target is 3.80, which is driven by an estimated price to earnings multiple of 20x on expected fiscal 2021 earnings of $0.19.
With MamaMancini’s, patience is paying off. I believe it will pay off with some of our other “boring” holdings as well such as HopTo (HPTO) and Greystone Logistics (GLGI).
The next issue of Cabot Micro-Cap Insider will be published on Wednesday, April 14, 2021. As always, if you have any questions, don’t hesitate to email me at rich@cabotwealth.com.
Changes This Week
No changes.
Updates
Aptevo Therapeutics (APVO) has been weak this week although there has been no news. I believe it’s partially driven by fact that Odonate Therapeutics (ODT) has plunged by over 80%. What does Odate have to do with Aptevo? Well, Odonate is a large holding of Tang Capital and so perhaps Tang Capital will have less capital to fund its 50 buyout offer for Aptevo. While this is certainly the case, I continue to like the Aptevo set up. We have significant downside protection given Aptevo’s strong balance sheet and royalty income streams (in the process of being monetized) yet substantial upside potential given the blockbuster potential of its pipeline. I still believe Aptevo looks like a great asymmetric bet and believe Tang will follow through with his proxy fight to get Aptevo sold to the highest bidder. Original Write-up. Buy under 40.00.
BBX Capital (BBXIA) reported its fourth quarter results last week. The story remains on track. The most important positive relates to the company’s real estate business. Management wrote in its press release: “Although BBX Capital Real Estate (“BBXRE”) was initially adversely impacted by the COVID-19 pandemic during 2020, it has largely recovered and has to some extent benefited from the recent migration of residents into Florida. We believe that there has been an increase in the demand for single-family and multifamily apartment housing in many of the markets in which BBXRE operates.” This news is a major positive as the company has over $100MM of fair value invested in real estate primarily in Florida. The company’s Renin subsidiary (subsidiary and distributor of building products, including barn doors, closet doors, and stair parts) appears to be performing well and should benefit from a strong economic recovery in 2021. The one negative in the quarter was that the company didn’t buy back any shares despite its $10MM share repurchase authorization. A share buyback would make perfect sense given the stock is trading well below and reasonable estimate of fair value. The investment thesis remains on track and the stock is too cheap trading at 39% of book value. Original Write-up. Buy under 5.00.
Donnelley Financial Solutions (DFIN) recently reported excellent earnings, and the stock has 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 8.0x free cash flow and 7.4x forward EBITDA. Given the stock is up 30% since reporting earnings, I wouldn’t be surprised if it took a breather. Nonetheless, I recently increased my buy limit to 25 given its excellent performance and strong outlook. Original Write-up. Buy under 25.00.
Dorchester Minerals LP (DMLP) continues to look attractive. While oil has pulled back recently, it’s still above $55/bbl and the company will generate substantial dividends at this price level. 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 12.1x trough free cash flow. This is 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 but reported an excellent quarter this week. In the quarter, revenue increased by 25.3%, beating consensus by 4%. Adjusted EBITDA increased by 136% to $2.6MM. And better yet, new originations increased 26.5%, which implies that revenue and earnings growth for 2021 should be very strong. 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 8.9x 2021 earnings. Importantly, the Chairman of FlexShopper owns over 20% of the company and has recently been buying in the open market. My 12-month price target for FlexShopper is 4.70. Original Write-up. Buy under 3.00.
Greystone Logistics (GLGI) had another quiet week. The stock has been pretty weak since the company reported earnings in January. Nevertheless, 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 vendor. 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 7.8x. 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 another quiet week with no news, 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. The stock is currently trading at an EV/EBIT multiple of 6.8x. This is way 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) had pulled back sharply prior to reporting earnings. Following excellent results, the stock has rallied just as sharply. Consolidated revenue increased by 5%. National Retail Solutions (NRS), BOSS Revolution Money Transfer, and net2phone-UCaaS subscription revenues increased by 151%, 73% and 36%, respectively. In particular, NRS’s growth of 151% was incredibly impressive. NRS deployed 1,300 billable POS terminals during the quarter, increasing its network to 13,700 terminals, and had 3,800 active payment processing merchant accounts as of January 31, 2021. IDT believes that the market for NRS’s point of sale terminals is 100,000. On a sum-of-the-parts basis (which I think is the right way to view this name given IDT’s propensity to sell and spin off its assets), the stock is worth 34. Original Write-up. Buy under 23.50.
Liberated Syndication (LSYN) announced that previous financial statements from 2020 should not be relied upon as the company did not properly withhold for state sales taxes and EU VAT taxes. While this is not encouraging news, I think it relates to the former CFO and his incompetence. Last year, Libsyn reported a similar issue but it was resolved with minimal changes to the financials. The company is extremely well positioned in a secular basis at 13.6x normalized free cash flow and 4.1x revenue. There are many catalysts on the horizon including: 1) a reacceleration of the business due to an improved user interface, 2) progress on monetization of advertising, 3) a Nasdaq uplisting and 4) the resolution of a lawsuit by Libsyn against some of its largest shareholders, which could reduce shares outstanding by 27%. Original Write-up. Buy under 4.25.
MamaMancini’s Holdings (MMMB) was covered above. Original Write-up. Buy under 2.50.
Medexus Pharma (MEDXF) recently disclosed that two insiders (including the CEO) bought shares in the open market. This is obviously very bullish for the company. I expect Medexus to announce that it will be uplisted to the NASDAQ very soon and this could be a nice catalyst to see the stock continue its upward march. Medexus remains my highest conviction idea and largest person holding. Management believes its current drug portfolio (including recently licensed Treosulfan) has peak sales potential of $350MM to $400MM 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 ~24 per share, implying significant upside from here. Original Write-up. Buy under 8.00.
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 attractively valued, 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-2010s to incentivize the team to help transition NamSys’ 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 15.2x free cash flow. It has a pristine balance sheet with significant cash and no debt, and insiders own more than 40% of the company, ensuring strong alignment. Original Write-up. Buy under 0.80.
P10 Holdings (PIOE) recently published a nice new investor slide deck. But otherwise, the stock has been relatively 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. Yet, 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) had another quiet week. It last reported 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, IDT, and APVO. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members and will follow his rating guidelines.