After a sharp pullback in January, the market has started to snap back this week. Nonetheless, I wouldn’t be surprised in the market tests new lows in February. Usually when the market is down in January, February weakness follows.
Still, I continue to feel good about the stocks in the Cabot Micro-Cap Insider portfolio. Last week, I discussed IDT Corp (IDT) and Leatt Corp (LEAT) and how both stocks are rapid growers yet trade at value prices.
I keep an active list of micro-cap pipeline ideas and during the first week of each new month, I finetune my analysis to finalize what new idea I will be recommending (our new recommendation comes out on the second Wednesday each month).
I’m seeing plenty of attractive names to recommend next week. Here are two that I’m considering:
- A fast-growing (50%+) app company that is trading at a single-digit P/E ratio.
- An illiquid micro-cap with terrific fundamentals, a cheap valuation, and a recent transformative acquisition.
This week, there was some company-specific news that I wanted to highlight (more details below):
- Esquire Financial (ESQ) reported a great quarter, beating expectations on the top and bottom lines.
- Truxton (TRUX) also reported a great quarter and announced a special dividend of $1 per share and a $5MM share repurchase authorization.
- The chairman of Aptevo (APVO) This is a non-event.
The next issue of Cabot Micro-Cap Insider will be published next Wednesday, February 9, 2022. As always, if you have any questions, please email me at rich@cabotwealth.com.
Changes This Week
No Changes
Updates
Aptevo (APVO) announced that its chairman of the board announced he is retiring. He was the founder of the company Emergent BioSolutions (parent company of Aptevo). I don’t think his retirement announcement signals anything about Aptevo’s valuation and fundamentals. Aptevo is suffering along with the rest of biotech as we are in a biotech bear market. Nonetheless, I continue to believe the stock looks compelling given positive recent APVO436 data. Where do we go from here? I don’t know, but I know there are many positive catalysts on the horizon. Aptevo will report additional data from its ongoing trials and any positive news will move the stock upwards. Original Write-up. Buy under 15.00
Atento S.A. (ATTO) had no news but has started to perk up over the past month. I think it’s mainly due to previous news that an activist investor, Kyma Capital, now owns 5% of the company, and is engaging with the management team to unlock value. This is a strong positive, given healthy fundamentals and an incredibly cheap valuation. 2022 could be the year that Atento gets sold. Original Write-up. Buy under 30.00
BBX Capital (BBXIA) recently announced yet another share repurchase authorization, this time for an additional $15MM. I’m looking forward to BBX reporting its annual results so that I can add up all the shares that have been repurchased since the initial spin-off. Well over 20% of shares outstanding have been retired. While BBX has performed very well since our initial recommendation, it remains a high-conviction idea, given 1) positive fundamentals (real estate in Florida is hot) and 2) a very cheap valuation (the stock is still trading at a 50% discount to book value). Original Write-up. Buy under 11.00
Cipher Pharma (CPHRF) has stabilized after selling off in November and December. The stock is currently dirt cheap, has no debt, and significant optionality. Finally, insiders own a significant portfolio of shares outstanding and are incentivized to maximize value. The company is buying back shares aggressively. Original Write-up. Buy under 2.00
Dorchester Minerals LP (DMLP) announced that it will pay out a distribution of $0.639 per unit on February 10, 2022. On an annualized basis, Dorchester is yielding 11.6%. The stock continues to look attractive. I’m optimistic that the current COVID wave caused by the Omicron variant will be the last and we will see strong economic activity in 2022 that drives energy prices higher. Original Write-up. Buy under 19.00
Epsilon Energy (EPSN) had no news but is benefitting from surging natural gas prices. The company reported a strong quarter in November, generating $3.3MM of free cash flow. Given no debt and a large and growing cash balance, I expect the management team to announce a large special dividend or accelerated share repurchase within the next few quarters. Original Write-up. Buy under 5.50
Esquire Financial Holdings (ESQ) reported a great quarter this week. For the year, the company generated $2.26 of EPS, up 37% from last year. Asset quality remains high as the company’s allowance for bad loans is just 1.7% of total loans. Esquire dominates its niche, the liquidation industry. Due to its specialty and expertise, it has been able to grow very well, and I expect that growth to continue. Importantly, the company’s investment in digital marketing and sales is paying off as digital accounted for half of commercial loan originations in 2021. This expertise will enable Esquire to grow beyond its current New York and New Jersey focus. Despite strong historical growth (~20% per year), the stock trades at ~10x forward earnings. Looking out a couple of years, Esquire should be trading significantly higher. Original Write-up. Buy under 35.00
FlexShopper (FPAY) continues to tread water as insiders gobble up shares. I expect a strong 2022 for the stock and for the stock to appreciate sharply. Given less government stimulus, more consumers will need to use FlexShopper’s solutions which will increase revenue and earnings. My 12-month price target for FlexShopper is 4.70. Original Write-up. Buy under 2.50
IDT Corporation (IDT) is up ~86% from our initial recommendation, but it has sold off viciously in 2022. What has driven the sell-off? It’s hard to say with certainty, but I think it’s been a combination of three factors: 1) the sell-off in high-growth companies that are valuation comps to NRS and net2phone, 2) a sell-off in the small- and micro-cap market, and 3) investors thinking that a spin-off may be delayed given the rocky environment for growth stocks. Nonetheless, I’m maintaining my position in the stock. I updated my sum-of-the-parts with lower multiples (to reflect lower multiples for growth stocks) and got an updated fair value of $55/per share. Original Write-up. Buy under 45.00
Leatt Corporation (LEAT) has also sold off sharply. Why the sell-off? There is really nothing that I can think of. The stock has done incredibly well over the past couple of years, but it’s been driven by strong fundamentals. For example, the stock grew revenue 94% in the most recent quarter despite headwinds from supply chain bottlenecks. Yes – Covid has benefitted Leatt and other providers of motocross gear, but even before Covid, Leatt revenue was growing at a high-teens clip. At its current price, the stock is trading at price-to-annualized-earnings multiple of 7.9. This is just too cheap. Original Write-up. Buy under 40.00
Liberated Syndication (LSYN) had no news this week. It filed an 8-K in early January announcing that it had canceled 7.5MM shares (22% of shares outstanding!) that had been fraudulently issued to Zhang Parties prior to LSYN’s spin-off. This is a major positive. Zhang Parties have 90 days to challenge the cancellation. Given Zhang Parties didn’t respond to the initial lawsuit that resulted in the cancellation of shares, it’s possible that there will be no challenge. While I do have some questions regarding LSYN’s business trajectory, I think it remains quite attractive at its current valuation. I estimate that it’s trading at 3.0x (EV/revenue) with high-teens revenue growth. Original Write-up. Buy under 5.00
Medexus Pharma (MEDXF) continues to look completely washed out. Given a recent positive meeting with the FDA, it looks like Treo will be up for approval in the second half of this year. If approval is gained (I estimate 50% probability), I believe the stock is worth $10+. As such, I think the risk/reward looks very favorable at current levels. Original Write-up. Buy under 3.50
NexPoint Diversified REIT (NXDT) is my newest recommendation. It is a closed end fund that is transitioning into a real estate investment trust (REIT). It trades at a 40% discount to NAV and is significantly below where it traded pre-pandemic. Once the transition to a REIT is complete, it will be eligible for many more investors to own including funds and ETFs. This will likely drive indiscriminate buying pressure. NexPoint’s CEO owns 14% of the company and has been buying the stock in the open market relentlessly. A near-term re-rate to NAV could drive 50%+ upside, but longer term, a bigger opportunity could materialize as the REIT is repositioned to capture value. Original Write-Up. Buy under 15.00
P10 Holdings (PX) had no news this week. It reported a great quarter in November. 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
Truxton (TRUX) reported a great quarter this week and announced a $1 per share special dividend and $5MM share repurchase authorization. For the full year, EPS increased 29% to $5.02. Meanwhile, the stock trades at just 14.3x earnings. Loan quality remains excellent as the company wrote off just $2k in loan losses. Allowance for loan losses remains very low at 0.9% of all loans. I expect strong performance to continue in the future and anticipate significant upside in the years ahead. Original Write-up. Buy under 75
| Stock | Price Bought | Date Bought | Price 2/1/22 | Profit | Rating |
| Aptevo Therapeutics (APVO) | 32.01 | 3/10/21 | 6.00 | -81% | Buy under 15.00 |
| Atento SA (ATTO) | 21.57 | 8/24/21 | 24.61 | 30% | Buy under 30.00 |
| BBX Capital (BBXIA) | 3.17 | 10/5/20 | 11.19 | 253% | Buy under 11.00 |
| Cipher Pharma (CPHRF) | 1.80 | 9/8/21 | 1.47 | -18% | Buy under 2.00 |
| Dorchester Minerals LP (DMLP)* | 10.45 | 10/14/20 | 23.00 | 138% | Buy under 19.00 |
| Epsilon Energy (EPSN) | 5.00 | 8/11/21 | 5.80 | 16% | Buy under 5.50 |
| Esquire Financial Holdings (ESQ) | 34.10 | 11/10/21 | 34.05 | 0% | Buy under 35.00 |
| FlexShopper (FPAY) | 2.13 | 12/9/20 | 1.76 | -17% | Buy under 2.50 |
| IDT Corporation (IDT) | 19.37 | 2/10/21 | 38.65 | 100% | Buy under 45.00 |
| Leatt Corporation (LEAT) | 24.00 | 10/13/21 | 25.80 | 8% | Buy under 40.00 |
| Liberated Syndication (LSYN) | 3.06 | 6/10/20 | 3.45 | 13% | Buy under 5.00 |
| Medexus Pharma (MEDXF) | 1.78 | 5/13/20 | 2.33 | 31% | Buy under 3.50 |
| NexPoint Diversified Real Estate Trust (NXDT) | 14.15 | 1/12/22 | 14.22 | 0% | Buy under 15.00 |
| P10 Holdings (PX)** | 1.98 | 4/28/20 | 12.57 | 535% | Buy under 15.00 |
| Truxton Corp (TRUX) | 69.50 | 12/8/21 | 75.05 | 8% | Buy under 75.00 |
* Return calculation includes dividends
**Original Price adjusted for reverse split.
Disclosure: Rich Howe owns shares in BBXIA, LSYN, MEDXF, PIOE, FPAY, IDT, APVO, DMLP, LEAT, and NXDT. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members
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.