View as an RSS Feed
View John Leonard, CFA's Articles BY TICKER:
ABTL, ACY, AETI, AHP, ALJ, AMNL, AMS, AOI, ARCI, ASUR, ATNM, AVNW, BGI, BIOC, BLT, BSQR, BZC, CAW, CBEY, CBNJ, CBRX, CCF, CGR, CIX, CLQMF, CNSI, COVR, CRTN, CRV, CSUWF, CSVI, CTIB, CUTR, CZWI, DAEG, DAIO, DLLR, EBTC, EEI, EFOI, EGL, ENVE, ESMC, EVOL, EVRY, EXFO, EXMRF, FES, FORD, FORR, FPP, FRF, FSNN, GBL, GCA, GILT, GPRK, GSB, GTIM, HARR, HCOM, HDY, HMTV, HNNA, HNRG, HSII, ICFI, IFON, IIN, INPH, INS, INTL, INTZ, ISIG, ISSC, ITI, JOUT, JRN, KAI, KBALB, KEQU, KND, KVHI, LDL, LMOS, LTM, LTRE, LUCRF, LYRI, MFCSF, MGAM, MICT, MLNK, MOC, MTEX, MYRG, NAII, NAUH, NCIT, NEWP, NGL, NNBR, NOR, NSATF, NTK, NUTR, NX, OBCI, OFLX, ORBT, OTEL, OTTR, PATK, PATR, PCMI, PDII, PIKE, PMFG, PNRG, PTSI, PULS, PWX, QNST, RAND, REIS, SAFM, SCX, SENEB, SGGH, SHLO, SINO, SKY, SLGD, SLI, SPDC, SPRO, SRCRF, SRDX, SRI, SRMC, STRN, STRS, SWS, SXC, SXCL, TAX, TAYD, TIGR, TIK, TNAV, TORM, TREE, TSEM, UFCS, UNTK, USCR, USLM, VIDE, VKSC, VPG, VSCP, VSEC, WGA, WTT, WVVI, XPLR, XRSC, ZBB
Citizens Community Bancorp Should Trade More In Line With Its Higher Valued Peers Given The Improving Fundamentals
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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.