Quarterly Performance Review Ending September 2017

by: Jan Svenda


I believe in transparency when doing equity research. Therefore, I regularly publish performance of every ticker that I wrote an article on alongside the initial thesis.

Through this, I want to build a strong habit of looking back at my own reasoning. The review will be heavily skewed to stocks where my thesis is not working.

The past two months were largely positive as both LGL and PICO appreciated. OTC performance also remains strong. AEY, though, disappointed a bit.

Due to my OTC newsletter, I am going to switch to quarterly reporting.

Dear Followers/Readers

First of all, I would like to thank you for your continued interest in my work, and I hope you are getting value of out my research!

Before delving into the review, I wanted to provide an update. As you might know, I started my own OTC newsletter which should alleviate one of the main issues for investors, and that is idea sourcing. You can learn more about the newsletter in this SA blog post. Due to this, I will provide updates for my SA coverage on a quarterly basis from now on. I will also differentiate between OTC performance and Listed performance.

In August last year, I introduced a monthly review of all of the tickers that I am actively covering alongside my initial thoughts about the stocks. I think this can be beneficial for the following reasons:

  • Learning exercise – I will primarily focus on stocks where my initial thesis was wrong. I will try to understand why, how to prevent this from happening in the future, and what should one do about this fact.
  • Increased frequency of thesis updates – This will be beneficial for people that are following specific tickers and might be interested in the latest developments that are not necessarily asking for a full-blown update.
  • Creating a database – It is always fun to look back and either laugh about failures or cheer about winners.

I am doing so through the following simple tables.

Note: This is not a comprehensive list of all OTC tickers. Only members of the newsletter can see a list of all the tickers. Notes: The price at the origin is the opening price on the date of the first publication, and the current price is the closing price on last trading day of the month. The original thesis that is labeled Neutral (Long) is a thesis where I have a positive view on the stock, but for whatever reason, I do not believe it the right time to buy. The same goes for Neutral (Short). I do not judge neutral ratings unless the share price movement is significant, and I missed an opportunity to be on the right side of the trade. This is slightly subjective. Feel free to address any neutral rating that you believe I got wrong.

I also add two indices that can be used to ‘benchmark’ the performance of the covered stocks. I chose Russell 2000 due to its small-cap bias and Russell 3000 in order to track the overall market.

During the reviews, I will not be talking about every stock, but rather ones that I started to cover in the past month, the ones I am wrong about, or that are undergoing significant developments.

ADDvantage Technologies (AEY)

One of the biggest disappointments so far is AEY, as the share price kept on declining throughout 2017. From a fundamental perspective, the company had its fair share of good and bad news, but I believe that the thesis was not really impacted.

The Nave segment did start to lose a material amount of money and thus sunk the value of the profits coming from the Cable segment. However, Cable actually had a great start to the year as the profitability slightly increased despite the gloomy long-term outlook, which could mean that they could sustain current revenue stream for a longer period of time.

Nave also diminished the profitability of the ‘newly’ acquired Triton, but Triton's profitability is also likely to be sustainable as the subsidiary might be a better for fit for AEY (due to business model similarities).

What Nave’s losses did not affect much though is the cash flow of the business. AEY registered $2.28 million of cash from operations in the past nine months while CapEx was minimal and thus a free cash flow estimate (ignoring the acquisition of Triton and payouts) was roughly $2.11 million.

This cash flow stream then does not fit the valuation of the company as the current market cap is only $15 million. While there are still questions regarding the sustainability of the Cable segment or uncertainty regarding valuation of the inventory, I believe these are not offsetting the potential value of the company.

Finally, I would recommend reading this valuation of AEY in a run-off scenario. While the forecast is long term, it does show that there is plenty of potential which might not be that hard to realize.

That being said, the catalyst for short-term share appreciation will likely rely on earnings results. Once Nave is stabilized or the other two segments ‘outprofit’ the subsidiary, the shares should climb back to $1.8 or so, but without such visible improvement, the shares might continue to trade around the current range. This does not mean though that AEY is unable to create shareholder value in the long run.

P&F Industries (PFIN)

PFIN also did not yet appreciate and actually lost some value since I wrote my initial article, but I cautioned investors that the investment thesis is long term (2-3 years) because the value is being squeezed by the management. The margin of safety though is present as the valuation discounts the relatively stable cash flow streams (despite the Sears (NASDAQ:SHLD) situation), which the company is eager to add to as per the recent acquisition of a smaller aerospace unit.

That being said, the stock could get a near-term bump if the company decides to go through with its buyback program which was announced in the last earnings results. These were also quite positive as PFIN stabilized its cash flow. Given the acquisition of Jiffy Air Tools (completed in April of this year), the next results could showcase similar improving picture.

Trupanion (TRUP) and World Acceptance (WRLD)

Before I started to work on my OTC newsletter, I covered several stocks that I believed could be interesting to short. This was a great learning experience as I looked more in depth on how to build a successful short investment thesis and what to avoid.

The learning experience from TRUP is quite clear. Shorting a growth story is tricky, and unless there is an identifiable short-term catalyst, it is better to remain on sidelines. This applies even to this insurance company which amazingly trades at 17 times the book value. One might say that using book value is inappropriate because, in reality, this company is based on a ‘subscription model’. Even if one uses this Silicon Valley language and looks at cash flow, the overvaluation does not seem much better. In the past six months, the company registered $3.2 million from cash from operations (I am not even looking at FCF). This does not compare well with the current market cap of almost $850 million.

While the valuation currently defies reality, I believe that this company has one thing going for it and that is the industry dynamics. As more pet owners will insure their pets, the cost of pet treatment will increase, and thus pet owners who are not yet insured might be forced to do so in order to avoid costly treatment thus perpetuating the cycle.

Therefore, if companies like TRUP are able to increase their market share enough, they might benefit from this. This might be a valid argument, but if one wants to use this string of logic, he/she needs to also answer why TRUP will be the company that will be able to grab a disproportionate amount of market share as I do not think that TRUP runs a special business model.

WRLD’s case is a bit more straightforward. The short thesis was built around slightly binary catalyst. Either CFBP is going to act or not. Either WRLD is going to survive or it will have to face a near-bankruptcy situation. I believed that CFPB action might occur, but that now seems to be a distant scenario, given the current administration. That being said, the regulatory risk is still present, and even if the company can stabilize its business, the shares could continue to be volatile.

At least one of the short calls is performing well and that is VUZI. The issues with the company are clear, and given the continuously unimpressive financials, the share price is likely to stay low.

PICO Holdings (PICO)

Turning to the positive performance, PICO has been doing well recently likely due to the fact that it has successfully offloaded the remaining stake in CCS, a homebuilder that bought PICO’s ‘subsidiary’ UCP. This means that it now only owns the water assets that should continue to be sold off. While the management situation is far from ideal, it is better than in the previous years, and thus, the thesis is unchanged. In my initial article, I estimated that the company could be worth around $23 per share and thus more upside could be present, although the price action might become volatile if management decides to return capital to shareholders.

I believe that November release of PICO’s financials could bring more clarity about the next steps.

The LGL Group (LGL)

Another positive performance can be seen in this niche semiconductor, which appreciated 24% in the past two months. The share price action was due to the recent events. LGL was offered a buyout of its operating business. While this is obviously positive, the management also decided to do a share offering, which will dilute the shareholders. This might not be as negative if it does end up selling the business, but if it does not follow through on the offer, this will impact the valuation.

That being said, the lead shareholder, Mario Gabelli, who is a well-known value investor, might present a slight margin of safety as he might have a clear view of the situation or he might know what he wants LGL to become if it does sell the operations.

I believe though that my original thesis largely played out, and thus, it might be worth revisiting the business once the dust settles as holding LGL likely amounts to a guessing game now. We do not have much information about the offer or about the next steps of the management if it does sell the business, and we know that shareholders will be diluted.

Mills Music Trust (OTCPK:MMTRS)

This peculiar dividend yield play reported another distribution for three months ending September 30th. Unfortunately, the per unit distribution will be relatively low due to the slight decrease in royalties as compared to the quarter in 2016. The expenses were also slightly higher. While this might not be overly positive, it is worth saying that the company managed to receive almost the same amount of royalties as last year and thus it is likely that most of the thesis is intact.

The stock has so far done very well and, including the distributions, returned over 20% since I wrote about it in February. I believe that investors that are not ready to hold the entity for the next 10 years though might be better off cutting their exposure and realize at least portion of the gains in order to shield themselves from the potential volatility.

Macro Enterprises (OTC:MCESF)

After slight volatility connected to the earnings release, the stock has settled at a nice performance for the month. I remain optimistic mainly because of the below management commentary.

'The Company expects third quarter revenues to exceed total revenues recognized during the first six months of the year with margins continuing to improve...'

The company also announced that it signed MoU with Kinder Morgan (KMI) regarding building an 85-km pipeline which will certainly strengthen this point.

As you can see, the improvement in the operations is likely to continue and thus a positive share price move next earnings is likely. While the long-run remains hazy as it is connected to the macro environment, one can safely say that, given the discount to tangible book, investors are currently sufficiently protected. That being said, I would think twice before continuing to hold the stock after the next earnings release as the share price might start to get ahead of itself.


The company has announced that it received another order, which is part of the $35 million IDIQ contract which it won earlier this year. The order is for $2.4 million, which will act as a further boost to revenue. While the company has not yet started to generate a significant amount of free cash flow this is understandable, given the slower ramp-up of the orders and the associated expenses which need to be realized now.

Last month, it also announced developments in the commercial markets which could further increase the potential of the company. This focus has been ongoing for a while but has yet to yield a material revenue stream, thus the news might be something to have an eye on. The company expects to fully launch its offering next year as highlighted in its latest presentation released a few weeks ago.

I believe that the stock should continue to trade at roughly the same price before it starts to hit the runaway revenue stream from the IDIQ contracts which will continue to increase cash from operations. So far, the margin of safety is in these contracts, and thus investors are likely to benefit from patiently waiting.

Paradise Inc. (OTCPK:PARF)

The stock continues to be the worst performer out of the OTC group, but due to the past volatility of the share price, I believe the share price action is not connected to the fundamentals. They remain meaningful even despite the fact the company lost a portion of its revenue stream connected to molding plastics.

HMG/Courtland (HMG)

There are few stocks that I wrote about that still have not made a significant move. While the case for most comes down to no new fundamental information, with HMG, this might be because investors are still reluctant to agree that the value of this peculiar REIT is likely to be higher than the current market cap. This seems unreasonable, given the positive developments regarding the Orlando project, which could be either sold or start to produce cash flow for HMG.

This remains true as the company released the August report which confirmed most of the points as it showed that it is not burning cash and that the Orlando Project is now almost fully occupied. Thus, the catalyst remains unchanged, and while it might be of long-term nature, given the discount to tangible book, I believe it is worth the wait.

Fund.com (OTCPK:FNDM)

The investment thesis connected to this peculiar legal opportunity remains largely the same. The lawsuit connected to AdvisorShares is now finished as Thomas was able to achieve the judgment against the company, which is worth over $2 million, which acts as a margin of safety.

While AdvisorShares are behind their payments likely due to the fact that they are unable to come up with the amount, it should not be an issue for Thomas to collect the amount in one way or another as he now has the official judgment.

The URL case is also clearer now as there is a timeline that sets the end of the lawsuit on March 2018. This is positive as the URL could be the real catalyst for a significant gain. It is likely that Thomas will win due to the track record of Galanis et al., but the crucial question will be how. Another judgment might be positive, but it could prolong the thesis. The best case would be a settlement with immediate payment to FNDM. We will see what will happen.

Finally, the Gentile claim, which amounted to $0.5 million was rejected, which is positive for shareholders as they do not have to worry about dilution of the future proceeds.

Technical Communications (TCCO)

This niche manufacturer of military grade communication equipment has been behaving strangely as the stock shot up a couple of months ago without any clear fundamental news supporting such move. The earnings were nothing to be overly excited about as the revenue stream remained immaterial and cash flow was negative. The management did announce that it is likely to receive further orders from Datron, its main customer. However, it did not quantify anything. Thus, unless it is going to show material revenue growth, I am skeptical of the sustained rally.

As per the intro, the next set of performance updates will come early January of next year. Feel free to message me if you have any questions about any of the stocks on the list in order to have a more in-depth chat.

Once again, thank you for reading my research!



P.S. Please do let me know if you think that the way I present the review is missing something.

Disclosure: I am/we are long MCESF, HMG,AEY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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