January Correction Leads To Attractive Opportunities

Feb. 07, 2022 5:00 AM ETINFU, INUV, QIPT, SMSI, TPCS, QIPT:CA7 Comments14 Likes
Aaron Warwick profile picture
Aaron Warwick
1.63K Followers

Summary

  • The market dropped precipitously in January 2022, with the Russell 2000 down by nearly 10%.
  • Like many sudden market “corrections,” this one “threw out the baby with the bath water,” meaning virtually all stocks were hammered regardless of their underlying fundamentals.
  • Several stocks I have covered in previous articles are now at extremely attractive risk/reward levels after this drop.
  • This article highlights some of these stocks and provides brief updates on them as we await their calendar year 4Q21 results, most of which will be reported in mid-March.

Piggy Bank,3d Render

Sezeryadigar/E+ via Getty Images

The other day, I began to look through companies that presented at the 2021 LD Micro Main Event, hoping to find some companies that might pique my interest. Of course, I realized the Russell 2000 (IWM) was hammered by nearly 10% to begin the year in January 2022, which of course signals bad news for small and micro-cap stocks. But “looking under the hood,” I quickly saw the situation was even worse than I would have expected. In a random sample of companies, I found that about 80% of them were trading off their 52-week highs by 40% or more. Another roughly 10-15% of my sample companies were down by roughly 25%, with a mere 5% doing better than that. Notably, none of the companies I randomly sampled were at their 52-week high, although one was within a few percentage points.

In the short term, I understand how this can be discouraging for investors, especially those like myself who tend to focus on small-cap companies. I found solace in January 2022 by checking my investment accounts much less regularly than I did for most of 2021! I had to remind myself that while 2021 was a fun year—especially in January and February, when many small cap stocks ripped to all-time highs—my general approach is to look for companies that I believe can double to triple (or more) in a three to five-year timeframe. In other words, I remembered that fundamental investing often requires patience and the willingness to ride through normal market storms.

In the meantime, I realized the market was doing what it normally does during such times of turbulence: “throwing the baby out with the bathwater.” Punishing good stocks with the bad. These types of corrections and scenarios are not uncommon, but many investors forgot that (or do not have enough experience to have witnessed this before). They may have also forgotten that these circumstances also lead to attractive opportunities since fundamentally-strong companies are now available for a cheaper price, with all the upside still present. With that in mind, I want to present a couple of stocks on which I have previously written, which I believe offer extremely attractive risk/reward scenarios at present. In each case, I will provide a brief recap and update on the company. In most cases, I will likely present a longer, more detailed article on the company later this year, especially after companies begin to present their annual results, most of which I expect by mid-March.

Below are the companies I believe present huge opportunities right now for long-term investors.

Quipt Home Medical

As many know, Quipt Home Medical (QIPT) is my top holding. I discussed this in more depth in a recent SA Pro Interview. I have also written about them extensively for Seeking Alpha, with my most recent full article available here. Another good primer on this company would be to view a presentation and interview I conducted with CEO Greg Crawford.

QIPT just recently reported its Q421 results, which were stellar. I plan to write more about QIPT once they report their 1Q22 results, which CEO Crawford indicated should be out in a couple weeks.

In terms of a brief update, the company reiterated their calendar year 2022 guidance that was a key topic in my last full article on the company, linked above. Based on my own due diligence, I believe the company is likely to exceed their guidance, which they have done frequently in the past. Regardless, at current prices of $5.50/share, QIPT trades at less than 5x EV over guided '22 run-rate AEBITDA. As mentioned on the 4Q21 earnings call linked previously, the company has the ability to expand its line of credit to $100M, which means it is highly unlikely the company will need to tap into its equity for future acquisitions.

As a preview for my next QIPT article, I will point out that investors should pay close attention to the quality of management and directors QIPT has been able to attract recently. To wit, the company recently announced the appointment of Mr. Brian J. Wessel to its Board of Directors. You can read the linked press release for details about Mr. Wessel’s career. In short, he is clearly a high-quality addition to QIPT’s Board; but more importantly, it shows QIPT’s current business trajectory is helping them to attract top-level talent.

Smith Micro Software

I have written extensively about Smith Micro Software (SMSI) on Seeking Alpha, with my most recent full article available here. The stock has certainly been a bit of a roller coaster over the past few years, with the T-Mobile (TMUS)-Sprint merger and Covid-19 significantly disrupting the business.

SMSI stock chart
Data by YCharts

However, these disruptions were temporary, albeit frustrating, and SMSI should now have a relatively clear path forward. I say this because SMSI now has all three tier-1 US carriers—TMUS, Verizon (VZ), and AT&T (T)—as customers, with each currently working on and planning a major launch of SMSI’s SafePath product.

The first expected to launch a complete and integrated version of SMSI’s SafePath 7 is TMUS. CEO Bill Smith guided for the TMUS launch to occur “as soon as possible” in 1Q22. Based upon research shared with me, I believed there was an outside chance TMUS would launch the new SafePath (which will be branded as FamilyMode by TMUS) product in January 2022. However, it became apparent towards the end of the month that was off the table, with an expected launch still to take place by the end of March, if not sooner.

In reviewing LinkedIn hirings and position listings, it is clear SMSI is working hard to fulfill big plans with the carriers, both from a product development and marketing standpoint. As I have argued, SMSI’s success with Sprint, which was the smallest of the big four carriers at the time, bodes well for SMSI’s future. If even one of the carriers has the kind of success with SMSI that Sprint enjoyed, then the stock should easily triple from the current $4.00/share price range. But with CEO Smith guiding on that same conference call linked above for VZ to begin moving its customers over to the more lucrative SafePath code base, with completion of that migration expected "well before the end of the year," and with T likely to be launched by EOY22 or early in 2023, it is entirely feasible the stock could be a ten-bagger from the $4.00/share level over the next three to five years.

TechPrecision Corporation

I have not written on TechPrecision Corporation (OTCQB:TPCS) for a while, although I have maintained a position in the company. The reason is that I was trying to wrap my head around the company’s recent acquisition of Stadco, a key supplier of large flight-critical components for several high-profile commercial and military programs, including military helicopters. I have recently increased my position in TPCS meaningfully as I have learned more details about Stadco, and as I have seen TPCS’s backlog grow materially.

I believe most of the recent pressure on TPCS shares relates to the Form S-1 filed in early January 2022. It appears that some of the shares issued as part of the Stadco transaction may be sold in the near future. My diligence indicates that a key funder for the Stadco acquisition (holding 600,000 shares) never intended to be a long-term holder. The threat of 600,000 shares being sold of a stock that is extremely illiquid has likely frozen potential buyers and stimulated some short-term, preemptive selling. Still, I expect that fear to evaporate once the shares are cleaned-up, and with a good report or two over the next couple of quarters, I would not be surprised to see the stock back to 52-week highs around $2.30/share (roughly 35% returns from the current $1.70/share range). Of course, shares could eventually be worth much more as the business develops, but I see a short-term boost to TPCS once the above-mentioned shares are cleared.

TPCS stock chart
Data by YCharts

As with the other companies in this article, I plan to provide a more detailed look at TPCS in the near future. But my thesis from my last article on the company is still in play, and I believe there is now even further upside with the Stadco acquisition. In fact, I believe the Stadco business may end up being even more lucrative than the submarine business that was the key focus of TPCS previously.

Inuvo

Inuvo, Inc. (INUV) has taken a 40% haircut since my introductory article on the company. INUV may have been pressured by tax loss selling to end 2021, given the fact that the company traded for significantly lower than its prices earlier in the year. And certainly January 2022 was not friendly to companies like INUV, which as of its last report was not profitable. It is also possible some investors were spooked by the fact that INUV’s auditor resigned.

However, nothing has changed with INUV since my article, except the price—and a fantastic report and conference call regarding 3Q21 results. The company noted they reached EBITDA positive in the month of September and their discussion of 4Q21 expectations seemed bullish. In addition to my article linked above, CEO Richard Howe’s presentation and Q&A with me will help those new to the name understand their potential.

As for the auditor issue, research indicated the audit company did not specialize in INUV’s type of business, and also dropped another public company client for the same reason (not specializing in their industry) at the same time. In addition, the company was able to quickly replace their auditor with a new one.

I fully expect INUV to report solid results for their seasonally-strong 4Q21. I was also encouraged by the fact that in the Q&A from the linked conference call, management indicated they are no longer planning to acquire a company to help booster the adoption of their IntentKey product. Based upon management’s answers to my questions on the call, it appears to me that IntentKey’s organic growth picked up so significantly that the company now believes an acquisition is unnecessary, leaving them with plenty of cash on hand. Since I believed at $0.67/share the company could double, the drop to the $0.40/share range now means the stock could be a triple from here.

InfuSystem Holdings

The final stock I want to discuss in this article is InfuSystem Holdings (INFU). As with most of the names in this article, I have written multiple times about INFU, with my most recent article found here. Readers might also appreciate the presentation and Q&A session I hosted with CEO Rich DiIorio.

INFU has offered numerous attractive entry points over the past two years, as I have detailed in some articles. First, INFU was punished during the Covid crash of March 2020. Then, last summer, after reaching all-time highs, investors punished the stock when management lowered its 2021 bottom-line guidance due to unplanned investments focused on increasing its future growth prospects.

INFU stock chart
Data by YCharts

To be clear, I fully support and respect management’s decision to invest in growing their business. But the move caused some rotation of investors out of the stock. At the time, most investors viewed INFU as a cash cow, growing its high-margin integrated therapy services (ITS) business at a nice, sustainable clip. However, for reasons detailed in my article linked above—and primarily due to previously unexpected market opportunities—INFU briefly paused the cash cow machine to invest the cash back into their business. As I noted, if INFU executes well, as it has in the past with adding new therapies, then INFU will eventually become a much larger cash cow.

In any case, INFU is yet another small cap name that was punished with the general market. Based on their last earnings conference call, I am expecting the company to grow revenue by around 20% in 2022, with AEBITDA growing at a similar clip. Furthermore, the company is likely on a trajectory to continue that type of growth for at least another 3-5 years with multiple new ITS therapies being added to their platform.

With respect to INFU, the biggest near-term risk I see is that the Covid Omicron variant could have delayed some of their expected progress in ramping business with new partners for their ITS platform. I know from my own research and personal experience that many healthcare systems and companies were negatively, but thankfully temporarily, impacted by the latest variant that swept through the nation and much of the world. But from my perspective as a long-term investor, any temporary delay—if it even happens—is not cause for concern. Nor does it alter the underlying fundamental value of the company. For these reasons, I view INFU as an extremely attractive investment in this $15/share price range, with a belief the company could triple in share price over 3-5 years, with relatively little downside.

Other Companies

In addition to the companies mentioned above, I continue to like Perma-Fix Environmental Services (PESI) and Gatekeeper Systems (OTCPK:GKPRF), especially at current prices, but I have no meaningful updates on those companies at this time. In addition, while I am waiting for a little more information to re-establish a material position in these names, I do think that companies like IRIDEX (IRIX) and Nemaura Medical (NMRD) are attractive at these prices. As with PESI and GKPRF, I have no significant updates on these names, but believe if they execute on their plans, they are significantly undervalued. You can find my most recent articles on each of these names below.

Conclusion

Several of my followers have been asking about the stocks mentioned in this article. As I shared here, I believe each of them has been punished with the general market selloff, most especially the precipitous drop in the IWM, and not specifically because of any fundamental change to the company’s current or future prospects. Looking beneath the surface, and especially at companies too small to qualify for the IWM, I have found dozens upon dozens of stocks that are down 30%, 40%, even 50% off 52-week highs. In the case of the five stocks I specifically highlighted here, I believe this selloff provides an attractive opportunity to establish or increase a position in the name. While I intend to provide a deeper dive on most of these names in the near future, I want to update my followers while we await news given these attractive risk/reward levels.

This article was written by

Aaron Warwick profile picture
1.63K Followers
I collaborate with other "Breakout Investors" at app.breakoutinvestors.com as we try to be ahead of the curve, looking for opportunities where the market has not yet figured out or appreciated a company's fundamental business or upcoming catalysts. I have an accounting degree from Creighton University and a Masters in Philanthropy and Nonprofit Development from the University of Northern Iowa. I invest for retirement and as a hobby. I primarily engage in fundamental analysis and look for large discrepancies in what I believe a company is worth and their current share price.
Follow

Disclosure: I/we have a beneficial long position in the shares of QIPT, TPCS, SMSI, INUV, INFU, PESI, GKPRF, IRIX, NMRD either through stock ownership, options, or other derivatives. 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.

Recommended For You

Comments (7)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.