The Great Rotation Continues
Since the start of the pandemic, there has been a huge wave of positive momentum in mega-cap technology growth stocks. However, as that momentum continues to slow, we are seeing a shift back into small-cap value investments. As of Dec. 7, the Nasdaq had a P/E ratio of 32.7 while the Russell 2000 was at 17.1. This valuation difference also can be seen in a P/S and P/B comparison where the Russell 2000 has ratios of 0.91 and 1.77, respectively, the S&P 500’s figures are more than double that at 2.55 and 3.80, respectively. In the fourth quarter through Dec. 7, the Nasdaq has returned 10.5% while the Russell 2000 and Russell Micro-Cap indices have returned 25.8% and 27.6%, respectively. Given this wide disparity in returns and valuations between large-cap growth and small-cap value stocks, we believe now is the time to focus your attention on small-cap value stocks as we are starting to see a new strong rotation back into small-cap stocks.
Emergent BioSolutions, Inc. (EBS)
$144.00 Price Target, Buy, Current Price: $82.16 (12/7/20)
Emergent BioSolutions is a global specialty life sciences company that develops and commercializes vaccines, drugs, and devices that address biodefense threats. The company is a preferred provider of biodefense products and services to the U.S. government under multi-year contracts. The firm’s most valuable product, BioThrax, is the only FDA-approved anthrax vaccine. The company’s products are sold mainly in the U.S. as well as internationally.
Overall sales improve 24% to $385.2 million due to a COVID 19-related surge in demand for vaccine development and manufacturing services. Product sales fell 21% mainly due to timing delays that push smallpox vaccine sales into the December quarter and 2021. NARCAN nasal spray sales rose 18%, sales of anthrax vaccines rose 83% and other products gained 34%. EBS has emerged as a major player in the COVID 19 vaccine space, having signed approximately $1.5 billion of CDMO contracts since March. Another $60 million of new collaborations and contract extensions was signed during the September quarter. The company launched its next generation NARCAN device during the September quarter, advanced its COVID-HIG therapeutic candidate into Phase III trials, with study results anticipated in early 2021, and remains on track to submit a Biologic License Application for its next generation anthrax vaccine AV7909 in 2021. EBS already is making deliveries of AV7909 into the Strategic National Stockpile. EBS tightened its FY:20 revenue guidance to $1.52-$1.58 billion from earlier guidance of $1.5-$1.6 billion. Guidance for adjusted net income increased from $340-$390 million to $375-$405 million. The company ended Q3 with $1 billion of liquidity, the strongest in its history. EBS has $415 million of cash, net debt of $476 million and expects to end 2020 with a below 1x ratio of net debt to adjusted EBITDA.
Entravision Communications Corp. (EVC)
$5.00 Price Target, Buy, Current Price: $3.03 (12/7/20)
Entravision Communications Corporation is a Spanish-language media company owning diversified television, digital media, and radio assets that reach Hispanic consumers across the U.S. and parts of Mexico. The company owns 54 television stations in 20 of the nation’s top 50 Hispanic markets, including California, Colorado, Connecticut, Florida, Kansas, Massachusetts, Nevada, New Mexico, Texas, and Washington DC.
Investment Thesis (Recent Initiation)
Hispanics are America’s fastest-growing demographic, expanding 8x faster than the general population and expected to reach 72 million (21% of the U.S. population) by 2028. EVC’s radio stations rank No. 1 or No. 2 in Latino markets and reach 96% of U.S. Hispanics. The company’s local TV news ranks No. 1 or No. 2 in their markets across both English and Spanish programming. Through its affiliation with Univision, EVC offers prime-time Spanish language TV programming ranked No. 1 for 27 years in a row. The October acquisition of a 51% stake in digital ad firm Cisneros Interactive expands product offerings in the high margin digital segment and is expected to add $200 million to annual sales and $10 million in annual EBITDA. EVC has one of the media industry’s strongest balance sheet with cash and marketing securities of $136.4 million and 3.6X leverage, providing the resources for M&A while riding out the COVID-19 storm. More than $11 million of cost-cutting positions EVC for an EPS rebound when ad spending recovers. Shares appear undervalued at a 0.6x P/B and a 6x P/CF based on TTM cash flow.
Esports Entertainment Group (OTC:GMBL)
$8.00 Price Target, Buy Long-Term, Current Price: $4.95 (12/7/20)
Esports Entertainment is an online gambling company that offers esports entertainment, e-sports wagering, i-gaming, and traditional sports betting. The company offers odds wagering, fantasy, and pools on various e-sports events on its licensed and secure Vie.gg wagering platform and owns and operates an online sports book at SportNation.bet. In late 2020, Esports Entertainment became the first e-sports-focused gaming business to acquire a U.S. gambling license.
The e-sports market is expanding to 590 million fans and $3.6 billion of gross revenues by 2022. The COVID pandemic serves as a catalyst for accelerating industry growth by moving e-sports into the mainstream, with e-sports tournaments broadcast on ESPN, Fox Sports, and other national networks. Through its partnership with Twin Rivers Casino, GMBL becomes the first e-sports-focused gambling business to acquire a US license. GMBL plans to roll out its e-sports wagering platform in the U.S. in early 2021, initially in New Jersey and expanding into other U.S. states in 2022. Via its acquisition of Argyll Entertainment, GMBL acquired UK and Irish gambling licenses in August as well as the popular SportNation brand. The company already held a Malta license that allows marketing its services across 150 jurisdictions, including many EU countries. Pending acquisitions of Helix and ggCircuit will provide GMBL with e-sports gaming facilities, e-sports analytical software and a player-vs-player wagering platform. Assuming the deal closes as planned in FY:21 GMBL is guiding for growth in pro-forma FY:22 revenues to $42 million and EBITDA to $2 million.
Good Natured Products (GDNP.V)
Price Target Under Review, Buy, Current Price: $0.89 (12/7/20)
Good Natured Products Inc., formerly Solegear, is an award-winning, publicly traded bioplastics company founded in 2006 and based in Vancouver, British Columbia, Canada. Good Natured is an innovator in the field of next generation bioplastics made from annually renewable plant-based sources.
GDNP grew sales 47% YOY to $4.7 million as a result of organic growth and a full-quarter sales contribution from the acquired Shepherd Thermoforming business. COVID-related weakness in industrial sales was more than offset by strength in the grocery and foodservice segment as well as strong demand for PPE, testing and medical packaging. Gross margins improved year-over-year to 37.6% but declined sequentially. Q2 gross margin benefited from a surge in demand for COVID-related protective equipment and test kit packaging. SG&A excluding acquisition activity rose 57% year-over-year to $2.0 million due to increased IR activity, a full quarter of Shepherd costs and higher transportation costs related to COVID-19. GDNP ended the quarter with cash and equivalents of $3.8 million. During the quarter the company generated gross proceeds of $3.3 million from a private equity placement. By redeeming its remaining 10% debentures due February 2022, GDNP trimmed the interest rate on its debt facility by 2%. The balance on its US $8.5 million credit facility currently stands at $6.0 million.
Silvercrest Asset Management Group Inc. (SAMG)
$15.50 Price Target, Buy, Current Price: $14.27 (12/7/20)
SAMG is a full-service wealth management firm focused on providing financial advisory and related family office services to ultra-high net worth individuals and institutional investors. The firm seeks to attract and serve a base of individuals and families with $10 million or more of investable assets.
Q2:20 AUM was $23.8 billion, up 16% from Q2:19 due to organic growth in each segment of the business and supportive equity markets. Discretionary assets under management which is the primary driver of revenue growth rose to $17.3 billion, up 8.1% vs. $16.0 billion in Q2:19. Revenue was $24.0 million, up 0.5% YOY compared to $23.9 million in Q2:19. Adjusted EBITDA was $6.7 million (or a 27.7% margin), almost flat compared to $6.6 million (or a 27.5% margin) in the prior year quarter. Adjusted net income was $3.9 million in Q2:20, or $0.27 per diluted share, versus adjusted net income of $3.7 million or $0.27 per diluted share in Q2:19.
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Disclosure: I am/we are long EBS, SAMG, EVC, GDNP.