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John Leonard, CFA

 
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  • Citizens Community Bancorp Should Trade More In Line With Its Higher Valued Peers Given The Improving Fundamentals
     • Yesterday, 2:00 PM CZWI Comment!

    Summary

    • The stock trades at only 0.8x book compared to 1.3x for the industry; this is likely due to the small size and lack of analyst coverage.
    • A higher ROE (up >3x in the mrq to 4%) should be driven by continued loan growth, a shift towards low-cost core deposits and growing non-interest income.
    • The new commercial banking platform, expanded commercial/industrial lending and introduction of agricultural lending offsets the impact of lower refinancing activity as well as provides additional non-interest income and core deposits.
    • Management is working to bring down the high efficiency ratio through branch closures, asset sales and workforce reductions.
    • Improving credit quality and a stronger capital position enabled the first dividend to be paid since 2009 last year, which was doubled less than a year later.
  • Lull Ahead Of Major Investment Cycle Provides Low-Risk Opportunity For EXFO
     • Thu, Sep. 11 EXFO Comment!

    Summary

    • EBITDA is likely at trough levels due to the impact of lower network operator spending over the past two years.
    • However the intermediate-term outlook remains bullish; there are already signs of a recovery as evident by the improving book-to-bill ratio.
    • EXFO is highly levered to this recovery with its high market share, increasing exposure to the strong wireless market and new products that benefit from the trend towards network virtualization.
    • The 15% EBITDA margin target to be reached over the intermediate term is less aggressive in light of the considerable progress already made (11.5% margin in the mrq).
    • The downside is limited by the high insider ownership, improving cash flow and strong balance sheet (no debt and cash that equals 20% of the market cap).
  • Ecology & Environment: Attractive Valuation, Strengthening Balance Sheet, High FCF, Return To Core Markets And A Proactive Board
     • Mon, Sep. 8 EEI Comment!

    Summary

    • The stock trades near the bottom of its peer group due to a steady downtrend in revenue and EBITDA as a result of a costly international expansion and lower backlog.
    • The much needed management changes provide reassurance that the dual class structure has not affected the ability of the board or management to focus on maximizing shareholder value.
    • The withdrawal from the Middle Eastern and Chinese markets in order to focus on the core U.S. and South American markets should reduce earnings volatility.
    • The collection of unpaid receivables boosted FCF (which funds the high dividend) and strengthened the balance sheet through delevering.
    • Revenue should rebound with new contract awards, which along with reduced use of contracted services and lower SG&A expenses should enable EBITDA to return to positive territory.
  • Birks Group: The Other Famous Jeweler Known For Its Blue Boxes And Poised For A Turnaround
     • Sat, Sep. 6 BGI 2 Comments

    Summary

    • The stock is down 34% over the past year due to concerns over the increasing leverage and lower top line.
    • The new letter of credit and increased borrowing capacity act as a bridge until a permanent recapitalization plan is complete; an extended credit facility eliminated the near term maturity cliff.
    • Temporary and one-off factors have masked the underlying strength of the core business, which continues to improve due to new brands and the closing of underperforming stores.
    • The 16% increase in same store sales in 1Q15 is proof that the retail turnaround is on track.
    • Even placing a multiple several turns lower than its two closest peers on an expected doubling of EBITDA over the next 2-3 years results in a significant gain.
  • Oncology Diagnostics Company Biocept Is A Beaten Down IPO With Near Term Catalysts
     • Wed, Sep. 3 BIOC 2 Comments

    Summary

    • The stock is down 60% since the February IPO due to the increasing cash burn rate and fears of another equity raise.
    • However, the expected commercialization of multiple tests targeting additional tumor types within the next year should reduce any potential dilution due to a higher expected valuation.
    • There is significant upside potential as its liquid biopsy tests begin to supplement or even replace tissue biopsies in the $1 billion+ molecular oncology testing market.
    • The company is already at the commercialization stage with a clear path to revenue growth.
    • The conversion of the preferred shares and convertible notes simplified the capital structure; patents covering key aspects of its tests provide downside protection.
  • Asure Software: Cloud-Based Growth Without The Nosebleed Valuation
     • Tue, Sep. 2 ASUR Comment!

    Summary

    • The bullish long-term outlook driven by the growing use of SaaS workspace management solutions remains intact despite lower guidance for 2H14.
    • The high recurring revenue and increasing contribution of higher margin SaaS revenue provides increased visibility and deserves a higher multiple more in line with peers.
    • New products that leverage the unique integrated hardware/software approach and shift towards larger customers should accelerate growth.
    • A refinancing earlier this year should help the company remain profitable and utilize the significant NOLs.
    • The growth at a reasonable price thesis is supported by the investment in one of its closest peers at a 5x higher multiple.
  • TOR Minerals: Recovery Of Titanium Dioxide Business And Shift Towards Higher-Margin Products Are Two Overlooked Catalysts
     • Thu, Aug. 28 TORM 2 Comments

    Summary

    • The depressed titanium dioxide market that drove the stock to a multi-year low is finally showing signs of a recovery.
    • Lower staffing and production costs mitigated the overall bottom line impact and should drive significant earnings growth once the cycle turns.
    • The increasing contribution of the higher-margin specialty aluminas business is being overshadowed by the titanium dioxide business.
    • Continued inventory reductions and lower OpEx should boost cash flow that can be used to delever.
    • Investors should remember that the risk is lowest when the valuation is the highest for such a cyclical company with depressed earnings.
  • Norsat International Is Overlooked And Undervalued With An "Outsider" Management And History Of Successful Capital Allocation
     • Tue, Aug. 26 NSATF 5 Comments

    Summary

    • The distressed valuation more than prices in the risk of the challenging macro environment, which is beginning to improve.
    • The continued diversification should further reduce dependence on military spending as well as overall revenue volatility.
    • Recently launched products have the potential to become significant revenue contributors and help beat low growth expectations.
    • There has been steady EBITDA growth despite top line pressure due to aggressive yet targeted spending cuts that preserved critical R&D spending.
    • The strong balance sheet and low interest rates provide the ability to make another accretive acquisition that would provide additional growth and diversification.
  • Time For Investors To See The Light: Energy Focus Is Undervalued Relative To Its Peer Group, Patent Portfolio And Growth Prospects
     • Sat, Aug. 23 EFOI 1 Comment

    Summary

    • Investors have been slow to recognize the successful transition and significant revenue growth, gross margin expansion and narrower operating losses.
    • The reverse split last month (being mistaken as a sign of weakness as evident by the 20% stock price decrease) resulted in an uplisting to NASDAQ.
    • The stock trades at a meaningful discount to its peer group despite a more attractive growth outlook.
    • The (overlooked) IP portfolio is worth ~2x the EV of the company.
    • The sale of the non-core pool products business last year (with proceeds used to repay the line of credit) and conversion of convertible debt in 1Q14 strengthened the balance sheet.
  • ZBB Energy: Attractive Relative Valuation, Strong Demand Tailwind And Multiple Near-Term Catalysts
     • Thu, Aug. 21 ZBB 13 Comments

    Summary

    • Stocks in the energy storage industry rose exponentially earlier this year as investors got over their skis in terms of pricing in growth.
    • However, expectations have come down too far, which provides underpriced optionality given the near term catalysts and longer term constructive growth outlook.
    • Strategic partnerships provide entry into large international markets and much needed cash flow as well as eliminate significant capex requirements.
    • The strong balance sheet and lower cash burn rate reduces the chance of another secondary offering in the near term.
    • There is strong federal support for the industry as evident by the recent $4 billion in loan guarantees provided by the Department of Energy for renewable energy projects.
  • Cloud Marketer Lyris Could Double And Still Be Undervalued
       • Mon, Aug. 4 LYRI 6 Comments

    Summary

    • The stock is down ~50% since April due to concerns regarding a slowdown in growth and transition away from lower margin legacy products to SaaS subscriptions.
    • However, this is more than reflected in the 4x EBITDA multiple and 0.5x revenue multiple, a significant discount to its peers, many of which generate no EBITDA.
    • Results should begin to improve over the next year due to continued strong demand for cloud-based digital marketing solutions, a recent enhancement to its core product and higher market share.
    • In addition to the high demand created by the ongoing shift to a “Moneyball” approach to marketing, the 90%+ recurring revenue and 60%+ gross margin support a higher multiple.
    • The recent swing to profitability even on a GAAP basis after years of losses should enable utilization of the $161 million of NOLs.
  • Sierra Monitor Is Undervalued With A Bullish Growth Outlook, Increasing FCF And A Strong Balance Sheet
       • Thu, Jul. 31 SRMC 5 Comments

    Summary

    • The stock trades at a significant discount to the peer group median and sum-of-the-parts valuation.
    • The building automation business is an overlooked play on two secular demand drivers - the "Internet of Things" and energy management.
    • Demand for higher-margin gas detection devices should be driven by continued market diversification and increasing orders from international energy companies.
    • The leadership transition earlier this year has gone better than expected, considering the long tenure of the founder and splitting of CEO/CFO roles.
    • The downside is limited by the 11% FCF yield, $3.6 million of net cash (23% of the market cap) and extremely high insider ownership.
  • Balloon Manufacturer CTI Industries Should Rise As Elevated OpEx Deflates
       • Tue, Jul. 29 CTIB Comment!

    Summary

    • The stock is down almost 25% YTD due to growing frustration that the steady revenue growth has not translated into a higher bottom line due to elevated OpEx/interest expenses.
    • However, these expenses should be viewed as a “necessary evil” that financed the expansion into the faster growing and higher margin vacuum sealing business.
    • Management is working to bring OpEx down to 16% of revenue, which along with continued top line growth should drive a significant EBITDA increase using even conservative assumptions.
    • Continued decreases in latex and natural gas prices should provide a meaningful (and underappreciated) gross margin tailwind.
    • The fragmented marketplace and low international presence provides plenty of white space for CTI with its high market share, patented technology, entry into club stores and new product roll out.
  • Hennessy Advisors Would Be A Perfect Addition To One Of Its Own Funds
       • Wed, Jul. 23 HNNA 10 Comments

    Summary

    • The stock trades at a discount to its peer group as historical AUM growth has been driven by acquisitions rather than organic inflows.
    • However, the strong FCF provides more than sufficient coverage for the acquisition-related debt, which only has a 4% interest rate.
    • The highly accretive acquisition of a fund family from FBR in 2012 provided the critical mass necessary to fully benefit from the scalable business model.
    • The recent turnaround in fund flows provides reassurance of the organic growth potential.
    • The skin in the game trifecta for the CEO (large equity ownership, highly incentivized compensation structure, name on the door) results in a perfect alignment of interests with shareholders.
  • InfoSonics Is Attractive After The Extreme Negative Swing In Sentiment
       • Sat, Jul. 19 IFON 4 Comments

    Summary

    • The successful transition from distribution to branded products almost tripled the gross margin.
    • This margin expansion, along with a doubling of unit shipments and two restructurings enabled the company to return to profitability for the first time since 2009.
    • The continued expansion beyond the core Latin American market and refreshed phone line up should drive the next growth phase.
    • A new bank line of credit and access to vendor credit should remove previous capital constraints that prevented growth from reaching its full potential.
    • The CEO owns 30% of the company, which explains the multiple shareholder value-maximizing actions taken over the past two years.
  • Recent Disruptive Product Launch Is Underappreciated Growth Catalyst For Interphase
       • Wed, Jul. 16 INPH 1 Comment

    Summary

    • The 42% drop in the stock over the last two months is an extreme overreaction to the slow roll out of the Penveu product line.
    • This line could potentially double revenue by 2016 as the revolutionary technology and competitive advantages disrupt the $1.8 billion interactive whiteboard market.
    • Revenue in the electronics manufacturing services business has increased >6x since 1Q12 and is expected to double in 2014.
    • The ongoing weakness in the higher margin communications networking business should reverse in the near term after one of the largest customers resumes purchases.
    • This increased revenue, significantly lower OpEx, net cash position (minimal interest expense) and $48 million of NOLs should help Interphase reach profitability sooner than expected.
  • Fusion Telecommunications Is Not Given Enough Credit For Its Transition
       • Fri, Jul. 11 FSNN 6 Comments

    Summary

    • The ongoing transition towards cloud services has been unfairly discounted as it has been largely driven by acquisitions.
    • However, this is more than reflected in the low normalized EBITDA multiple, which is a fraction of the peer group and recent industry deal comps.
    • In business services, the large customer base generates a growing stream of high margin (>60% GM is ~5.3x higher than carrier services) and recurring revenue (>90%; multi-year contracts).
    • Fusion should be able to capture a meaningful portion of the increasing cloud spending (and accelerate organic growth) through higher quality customer acquisition, cross/up selling opportunities and verticalization.
    • The turnaround in carrier services should be driven by continued gross margin expansion, operational synergies with business services, greater volume capacity and new customer acquisition.
  • Low Multiple For L.S. Starrett Reflects Family Control And Ignores Improving Fundamentals
       • Tue, Jul. 8 SCX 1 Comment

    Summary

    • L.S. Starrett trades at a ~5x lower EBITDA multiple than its peer group, as shareholder-unfriendly measures effectively prevent a sale of the company or the non-core saw blades business.
    • However, this ignores the high market share and expected ramp-up in growth driven by emerging markets, new products/applications and a greater contribution from a bolt-on acquisition.
    • Modest top line growth, increasing sales of higher margin capital equipment, greater operating efficiencies and lower SG&A should drive meaningful EBITDA growth.
    • The strong FCF should support continued dividend increases and further deleveraging, while the pension liability should decrease significantly as corporate yields rise.
    • The float is reduced by half (and shareholder stability enhanced) by three core value funds that own 32% and insiders who own 18%.
  • Scott's Liquid Gold Trades At <4x EBITDA As Battle With Activist Masks Impressive Turnaround
       • Mon, Jul. 7 SLGD 5 Comments

    Summary

    • The distressed multiple fails to reflect the steady top line growth, significant margin expansion, improving cash flow and fortress-like balance sheet.
    • The turnaround in the (until recently) struggling household products segment means it should no longer be a performance drag on the consistently strong skin/hair care products segment.
    • The sale of its Colorado property last year enabled SLGD to repay all debt (and eliminate restrictive covenants preventing value-maximizing actions), focus on the core business and lower OpEx.
    • Despite an activist investor recently “giving up” on SLGD, the constructive movement in several key areas (including the property sale) is proof of the board’s desire to increase shareholder value.
    • A novel takeover approach and vulnerable poison pill should encourage financial and/or strategic investor involvement.
  • Command Security Is Attractive With The Multiple Still In 'Shock' Despite 2 Major Threats Being Neutralized
       • Fri, Jun. 27 MOC 1 Comment

    Summary

    • Command Security is down ~30% from the peak last fall due to the loss of a key contract and slight gross margin compression due to increasing competitive pressures.
    • However, the lost contract (which had been extended 4x) has already been replaced through new business wins and contract renewals.
    • There is scope for incremental operating margin expansion over the next two years through providing higher value-added services and as one-off G&A expenses drop off.
    • A minority investment in a U.K.-based security provider with complimentary services and recent ability to bid on new federal government contracts further extends the growth runaway.
    • The strong free cash flow enables continued deleveraging and share repurchases.
  • CCA Industries Is A Classic Value With A Catalyst Special Situation
       • Tue, Jun. 24 CAW 28 Comments

    Summary

    • CCA Industries trades at a ~63% discount to its peer group after the tragic death of the CEO resulted in top line pressure and a spike in returns/allowances.
    • However, the extremely poor performance in 4Q13 likely marked the trough given the subsequent sharp rebound, appointment of a new CEO and recent outsourcing agreements.
    • These agreements should provide significant OpEx savings, lower working capital requirements and expanded distribution capabilities while freeing up funds for much needed investment in core brands.
    • The expected return to profitability in FY14 should enable utilization of the $9.4 million of NOLs and lack of debt means operating income is substantially the same as net income.
    • As a result, there is scope for significant appreciation even using extremely conservative revenue growth and valuation assumptions.
  • VirtualScopics: Undervalued, Unconventional And Misunderstood Oncology Play With Significant Medium-Term Growth Potential
       • Tue, Jun. 17 VSCP 2 Comments

    Summary

    • The attractive relative valuation is due to a persistent lack of revenue growth/profitability and inherent lumpy results due to revenue recognition policies and project life cycle timing.
    • Growth should ramp up due to the recent significant increase in bookings and awards, which should turn the previous accounting revenue headwind into a tailwind.
    • The unique and quantitative approach to medical imaging should result in meaningful market share gains as the current qualitative and subjective approach is disrupted.
    • The ongoing shift from Phase I to Phase II/III studies and greater penetration of the oncology market should result in larger awards, higher gross margins and a longer growth runway.
    • The return to the core clinical trials business and lower SG&A run rate should reduce cash burn and preserve the high cash balance (48% of market cap; no debt).
  • Xplore Technologies: The Other Tablet Manufacturer On The Verge Of Exponential Growth
       • Sat, May. 31 XPLR 56 Comments

    Summary

    • Xplore Technologies is an overlooked pure play on enterprise tablet computing at the beginning of its growth trajectory.
    • The low valuation is primarily due to the implied disbelief that XPLR will be unable to capture market share from iPad or other rugged tablets.
    • However, customers continue to switch to XPLR as its tablets are more durable and provide superior functionality/performance.
    • The recent introduction of a cheaper and lighter weight tablet expands the potential target market by >10x and should drive a >3x increase in revenue over the next several years.
    • The lack of debt and $86 million of NOLs mean operating income drops straight to net income while outsourced manufacturing results in minimal inventory and no production related investment.
  • Sutron Is Attractive Due To A Fundamental Misunderstanding Of Its New Business Model
       • Wed, May. 28 STRN Comment!

    Summary

    • Sutron is down 22% over the past three months as the market wrongly assumes that the recent poor performance will continue indefinitely.
    • Margins and EBITDA are likely at trough levels and should rebound due to increased bookings, the realization of delayed orders and increasing end-market demand.
    • Sutron has received no credit for expanding beyond a niche market with limited growth prospects to a growing number of markets with their own secular demand drivers.
    • The focus on providing turn key projects consisting of bundled products and services should drive further margin expansion and provide greater revenue visibility due to longer-term contracts.
    • The downside is limited by the strong balance sheet (no debt, cash is 35% of market cap) and cash flow (18% FCF yield).
  • Blount International Is Attractive As Pullback Overdiscounts Fading Negative Catalysts
       • Sat, May. 10 BLT 1 Comment

    Summary

    • Blount International is down almost 25% YTD due to the lowered 2013 guidance and the discovery of an accounting problem.
    • However, the discount to the peer group remains even after management provided a bullish outlook for 2014 while the accounting problem is in the process of being remediated.
    • As a result, the stock trades at an attractive valuation that implies little to no value for its dominant market position, strong recurring cash flow or multiple growth opportunities.
    • The significant increase in free cash flow driven by improved working capital management and operating efficiencies should provide funding for continued deleveraging and the initiation of a dividend/buyback.
  • Scorpio Gold Is An Undervalued 'Variant Perception' Play
       • Wed, Apr. 30 SRCRF 2 Comments

    Summary

    • Scorpio Gold is a perfect example of variant perception as the depressed valuation implies a rapid production decrease despite recent evidence to the contrary.
    • As a result, there is the potential for significant price appreciation even under the worst case scenario.
    • Although the primary mining project only has a three year projected mine life, this estimate should continue to be extended as a result of successful drilling programs.
    • Multiple properties advancing through the exploration phase should drive additional resource and production growth.
    • There is the potential for cash flow to meaningfully exceed low market expectations after production and costs all came in better than expected last year.
  • Intrusion, Inc. - Rapid Growth With A Value Kicker
       • Sat, Apr. 26 INTZ 1 Comment

    Summary

    • Intrusion should be a prime yet overlooked beneficiary (due to a lack of analyst coverage) of higher projected network security spending following several high profile data breaches..
    • The low relative valuation becomes even more attractive when considering revenue is only beginning to ramp up from its newer network security solution Savant..
    • The legacy TraceCop business with a strong moat and high-margin cash flow largely supports the overall valuation, which gives investors the optionality associated with Savant for free..
    • Recent M&A activity (including the purchase of competitor Mandiant for ~2x the multiple of INTZ) highlights the growing strategic interest in the space..
  • Lumos Networks Is Attractive Due To Low Valuation And Even Lower Expectations
       • Wed, Apr. 23 LMOS 15 Comments

    Summary

    • The continued deterioration in the legacy voice/access segments and recent earnings miss drove Lumos Networks down ~50% over the past six months.
    • As a result, the stock trades at a distressed multiple that implies little chance of shifting towards the strategic data segment.
    • Lumos should gradually be repriced as the market recognizes it as a faster growing, high margin and emerging pure fiber play rather than a slow growth telecom.
    • The continued industry consolidation at high single digit/low double digit multiples makes Lumos an attractive acquisition target.
  • The Rapid Growth Story At Iteris Is Only Just Beginning
       • Wed, Apr. 2 ITI 14 Comments

    Summary

    • The secular demand for intelligent transportation solutions should result in a period of accelerated growth, especially after the threat of multiple headwinds has receded.
    • Despite its size, Iteris should be able to capture a meaningful share in fast-growing core and tangential markets due to its diverse/superior product offerings and long-term track record.
    • The small but growing iPerform segment (funded with cash flow from more mature segments) with its predictive weather/traffic analytics is a hidden asset with a low implied value.
  • The Market Has Quickly Forgotten The Recent Positive News For Pulse Electronics
       • Mon, Mar. 31 PULS 2 Comments

    Summary

    • Pulse Electronics is attractive following a recent pullback due to the removal of two large overhangs - the threat of dilution and near term debt maturity.
    • The significant EBITDA growth (on a dollar and margin basis) due to lower OpEx should be more than sufficient for debt service and continue R&D.
    • The implied odds of selling the weaker wireless segment (although it is turning around) or even the entire company (after it rejected a previous offer) are too low.
  • Speed Commerce: Transition From Distribution To E-Commerce Is An Overlooked Catalyst
       • Sat, Mar. 29 SPDC 22 Comments

    Summary

    • The ~25% YTD decline for Speed Commerce creates an asymmetric opportunity due to unwarranted concern over the secular decline in part of the distribution segment.
    • E-commerce growth (with a 10x higher EBITDA margin) is ramping up while higher consumer electronics sales in the distribution segment are mostly offsetting lower software/video game sales.
    • The upcoming decision by management regarding the future of the distribution segment (e.g. much smaller and more focused) is a significant and underpriced near term catalyst.
  • Escalon Medical Is An Overlooked Ophthalmology Pure Play On The Verge Of Profitability
       • Wed, Mar. 26 ESMC 6 Comments

    Summary

    • Escalon Medical trades at a significant discount to its peer group as the lack of investor (and analyst) following results in the successful “shrink to grow” strategy being ignored.
    • The company is now a pure play with no debt, cash that represents ~20% of the market cap, overlooked tax assets and a significantly lower cash burn rate.
    • Growth should accelerate due to upcoming new product introductions with superior functionality including a tablet-based imaging system.