As we get towards the end of January, the biggest thing on my mind is the pullback in growth stock.
It has been remarkable. According to J.P. Morgan and Bloomberg, the software index is down ~22% from its peak.
But there are many examples of stock that have pulled back 50% plus. Roku, Teladoc Health and Zillow are a few examples.
If you believe the growth stock meltdown is going to mirror what happened after the Tech bubble, you want to stay on the sidelines. But if you believe this pullback is going to be similar other growth stock pullbacks, it’s probably time to step in and start buying.
Especially because valuations are starting to look more reasonable compared to long-term historical averages.
What am I going to do?
Sit back with my popcorn and watch it all unfold. If I see a compelling opportunity, I may try to jump in, but I will probably just stick to my specialties: 1) micro-cap stocks and 2) special situations.
Through micro-caps and special situations, it’s possible to buy growth stocks at value prices. Two examples are Leatt Corp (LEAT) and IDT Corp (IDT). Leatt is trading at ~10x earnings yet is growing revenue at 94%. IDT Corp looks like a boring conglomerate trading at 12x EBITDA, but it has two rapidly growing subsidiaries that will likely be spun off within 12 months.
The next issue of Cabot Micro-Cap Insider will be published on Wed., 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) is all the way back to where it traded prior to the positive news that a patient treated with APVO436 experienced a complete remission. 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) has started to perk up. I think it’s mainly due to the 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 published a new shareholder presentation which highlights the value of its real estate. 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 10.00
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) has rebounded with energy prices but still looks attractive from a valuation and fundamentals perspective. The current annualized dividend yield is ~9.0%. Further, we saw an insider (COO) buy more stock on the open market recently. 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) 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) has pulled back slightly with the market despite no company news. 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 (~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 insider 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) had no news this week and has pulled back into the high 30 range. Results from its recent quarter were solid with consolidated revenue up 8%. Most importantly, NRS revenue increased by 104% and net2phone revenue increased by 37.5%. The company announced that it is making progress towards spinning off net2phone. I expect the transaction to take place in Q1 2022. All in all, the investment case is on track. Original Write-up. Buy under 45.00
Leatt Corporation (LEAT) continues to look very attractive. In November, the company reported an incredibly strong quarter despite supply-chain bottlenecks. The stock initially shot up but has given back much of its gains. It looks compelling trading at under 10x annualized EPS. I think ~20x is a more appropriate multiple. Original Write-up. Buy under 40.00
Liberated Syndication (LSYN) filed an 8K last week 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) looks 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 REIT is complete, it will be eligible for many more investors to own including funds and ETFs. This will likely drive indiscriminate buying pressure. The CEO of the company 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) recently 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
Truxton (TRUX) is a rapidly growing bank and wealth management business based in Nashville, Tennessee. Since its initial public offering nine years ago, revenue is up 325% while the stock has generated a 587% total return, beating the S&P 500 by more than 200%. Despite this impressive performance, the stock trades at just 13x earnings given its low liquidity. 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 1/18/22 | Profit | Rating |
| Aptevo Therapeutics (APVO) | 32.01 | 3/10/21 | 6.61 | -79% | Buy under 15.00 |
| Atento SA (ATTO) | 21.57 | 8/24/21 | 25.98 | 30% | Buy under 30.00 |
| BBX Capital (BBXIA) | 3.17 | 10/5/20 | 10.30 | 225% | Buy under 10.00 |
| Cipher Pharma (CPHRF) | 1.80 | 9/8/21 | 1.50 | -17% | Buy under 2.00 |
| Dorchester Minerals LP (DMLP)* | 10.45 | 10/14/20 | 22.63 | 134% | Buy under 19.00 |
| Epsilon Energy (EPSN) | 5.00 | 8/11/21 | 5.77 | 15% | Buy under 5.50 |
| Esquire Financial Holdings (ESQ) | 34.10 | 11/10/21 | 34.23 | 0% | Buy under 35.00 |
| FlexShopper (FPAY) | 2.13 | 12/9/20 | 2.13 | 0% | Buy under 2.50 |
| IDT Corporation (IDT) | 19.37 | 2/10/21 | 36.12 | 86% | Buy under 45.00 |
| Leatt Corporation (LEAT) | 24.00 | 10/13/21 | 30.60 | 28% | Buy under 40.00 |
| Liberated Syndication (LSYN) | 3.06 | 6/10/20 | 3.70 | 21% | Buy under 5.00 |
| Medexus Pharma (MEDXF) | 1.78 | 5/13/20 | 2.20 | 24% | Buy under 3.50 |
| NexPoint Diversified Real Estate Trust (NXDT) | 14.15 | 1/12/22 | 13.81 | -2% | Buy under 15.00 |
| P10 Holdings (PX)** | 1.98 | 4/28/20 | 12.80 | 546% | Buy under 15.00 |
| Truxton Corp (TRUX) | 69.50 | 12/8/21 | 70.01 | 1% | 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.