Category Archives for Best Small Cap Stocks

Microcap Stock Analysis: Hudson Technologies

Depending on whether you’re Team Al Gore or you believe global warming was created by the Chinese to promote manufacturing like Trump, you may or may agree to this report on Hudson Technologies (NASDAQ:HDSN) (“HT”).

HT is in the business of refrigerants, the chemical used in cooling like in air conditioners and refrigerators. The company provides new, reclaims old, and recycles refrigerants. HT passed the initial screening so am taking a closer look. Let’s see what we can find…

While doing preliminary research on Hudson Technologies, my key initial questions specific to this company are:

  • Environmental issues?
  • Trend of refrigerants?
  • Face any regulation challenges to reduce emissions that could affect refrigerants?
  • Did the business innovate/change over time?
  • How many refrigerant companies are out there as targets?
  • How helpful is their energy optimization?
  • How many certified reclaimers are there?
    • HT has 35% of market share in reclaim refrigerants
  • Uhhh

Wait, hold on.

Went into the financials. Yikes.

Three-months ending March 31, 2018 was abysmal. Problems:

  • Excluding the revenue from the acquisition of ARI, organic revenue decreased by $17.5 million YoY, mainly because of a decrease in the selling price per pound of certain refrigerants sold, which accounted for $8.5 million decrease and another $10.3 million decrease was due to a decrease in the number of pounds of certain refrigerants sold, which was due to colder temperature.
  • Cost of sales did not decrease in proportion to a decrease in selling price, which resulted in a significant loss in the quarter.
  • They have $100 million of debt on their books due to the acquisition of ARI.
  • ARI only contributed $3.6 million of revenue in the first quarter, which is not doing much.
  • Their operating cost was off the charts.

So, my friends, my analysis of HT ends here. The company’s financial position is way too risky. The acquisition of ARI did not prove to be synergistic. They have to sort out the transition with ARI. And let’s face it, they’re holding on for dear life in a dying industry – classic example of consolidations in a declining industry until last man standing.

Overall, there are too many uncertainties from external factors that affect the company’s performance.

I do believe that the refrigerant industry isn’t going to die off in the seeable future. Until there is a mass introduction and adoption of cooling air with renewable energy without refrigerants, air conditioners and refrigerators are going to exist.

The story doesn’t end here though. I’m going to bookmark HT until their next set of financials that shows an improvement in their operating cost and their debt position; i.e. that they are deleveraging and meeting their covenants. The summer months ahead isn’t going to be a good indicator since their sales will increase naturally due to hot weather anyway, but there might still be some positive changes the management proves such as negotiated decrease in cost of sales, etc.

Too bad, I had high hopes for this company.

Microcap Stock Analysis: DLH Holdings Corp

Questrade Democratic Pricing - 1 cent per share, $4.95 min / $9.95 max

DLH Holdings Corp (NASDAQ:DLHC)

DLH Holdings Corp. (NASDAQ:DLHC) is in the business of providing healthcare services military personnel and veterans.

DLH’s services help veterans in some way from the beginning of their military life to the end. This includes setting up military treatment facilities, providing nurses in the hospitals, training the medic, all the way through to providing pharmacists, pharm techs and people who ship out prescriptions to veterans.

The Business – What Exactly Does DLH Do?

100% of DLH’s revenue comes from federal agencies including the Department of Veteran Affairs, the Department of Health and Human Services, and the Department of Defense.

Their revenue streams with these federal agencies as their direct clients are comprised of (as of March 31, 2018):

1. Health solutions for military personnel and veterans – 63% of revenue

      • DLH’s project managers and biomedical engineers perform R&D, testing, and development of new medical systems and devices intended to enhance medical readiness of troops in combat theaters across the globe.
      • Medical logistics support assists the uniformed services plan for fielding these new systems and devices above.
      • Deliver clinical drug and alcohol counseling services to Navy installations worldwide as part of the clinical preceptorship program.
      • Provides a range of case management, physical and behavioral health examinations and associated medical administration services to enhance assessment and transition process for military personnel.
      • Also engaged in efforts to alleviate homelessness among Veterans and other case management services to support Veterans’ transition back into the community.
      • Ensure that Veterans receive their out-patient prescriptions on time through DLH’s cloud-based enterprise system.

2. Human services and solutions – 33% of revenue

      • Provides a systems-based approach toward assuring that underserved children and youth throughout the country are getting proper educational and environmental support, including health, nutritional, parental, and behavioral services, using an evolving system of monitoring, evaluation, tracking and reporting tools against selected KPIs relative to school readiness.
      • Provides the enterprise-level IT system architecture design, migration plan, and ongoing maintenance (including call center) to manage the implementation.

3. Public health and life sciences – 4% of revenue

      •  Services include advancing disease prevention methods and health promotion to underserved at-risk communities through development of strategic communication campaigns, research on emerging trends, health informatics analyses, and application of best practices including mobile, social, and interactive media

So, this is quite confusing because their core capabilities on their website encompass a lot more than the 3 above. It’s explained in their quarterly report that they are technology-enabled health solution provider by outsourcing the business process. It looks like their core capabilities include the capabilities of their outsourcing.

The obvious question is whether reliance on government agencies is a safe bet for the company in the long-term. Firstly, the have to bid and win contracts and although this gives them visibility into their revenue projection 1-2 years in advance, by the same token, they have to sustain the company with their own capital during that time until the project comes online. It’s crucial to maintain overlap so that they don’t have dip in revenue in any given year.

Secondly, the process of winning contracts means it’s not guaranteed and therefore you can’t really say that their revenue is recurring. I love recurring revenue model, so this concerns me. So one of the analysis questions is around the security of their revenue, which I added to my analysis questions below.

Leadership

Zachary Parker has been CEO and director since 2010, which is not a long time given the company has been around for more than 2 decades. He has held leadership roles in company divisions dealing directly with the government such as GE Government Services (now Lockheed Martin). He is active in the defense and veterans government associations. I imagine having a strong relationship with the government is critical since 100% of their revenue comes from the government.

The rest of the senior management is a roster of strong background in government programs. Having worked closely in my day job investing in a company that gets the majority of the revenue from federal agencies, the most significant difference I found in government facing companies is that they have to be “cautious” in maintaining their relationship with their customers. They can’t be too aggressive and they have to follow the rules but they also can’t be completely nonchalant and expect the customers to come to them. So their management team seems to be stacked well to face the federal agencies as customers.

The company’s recent acquisition of Danya International whose capabilities are in the “human services and solutions” coupled with the composition of their management team’s experience suggest that their long-term vision is to solely focus on selling to government agencies.

The company has strong corporate governance with a proper audit committee, management compensation committee and governance committee.

Financial Health

The company’s had a successful growth in its revenue and EBITDA over the past 3 years although the jump in growth in 2017 is attributed to the newly acquired Danya International.

The good news is that the company has a positive cash flow and their interest cost is more than covered by its cash flow. The company has been deleveraging, paying off the debt each year. And with enough cash in the bank as at March 31, 2018 and a revolving credit line of $10 million, they would be able to pay the interest if they had a cash flow shortfall in a given year; i.e. they wouldn’t go belly up if they had a negative cash flow year in an odd year (if they consistently produced negative cash flows, then that would be a different story). Compared to their peers, their debt to equity ratio is slightly below the industry average. The debt is also at a reasonably low interest rate.

The bad news is that compared to its peers (although the peers are much larger), DLH’s margins are lower than the industry average. DLH’s operating cost as a % of gross profit (not as revenue since gross margin for each consulting business in the industry varies) is much higher than the industry average.

All in all, the company’s financial health is in an okay shape. They have positive cash flow, they are deleveraging and have enough access to liquidity to pay off their debt over the next 3 years. But their margins are lower than the industry average. Notably, an EBITDA margin of 5.2% for the most recent 6 months they reported is very low. The 3 year average EBITDA margin has been 4.9% so the profitability of the business is inherently very skinny.

Until the acquisition of Danya in May 2016, DLH’s organic financial statements didn’t look all that great. In 2013 and 2014, the company’s EBITDA were below a million dollars each year with 0.5% and 1.3% EBITDA margin, respectively. In 2015, they increased their revenue and improved their margins significantly and increased EBITDA and EBITDA margin to $3.2 million and 4.9%. I understand now why they needed the acquisition of Danya. This leads me to 2 interpretations:

  • Before the acquisition of Danya, their business model was basically only in delivering prescriptions and providing logistics related to medical activities to the department of defense and department of veterans affairs. Margins were skinny in this business model and there was a cap in their growth.
  • Because of the cap, the only way to grow is inorganically by acquiring companies that service the government so they can expand their portfolio of capabilities. The problem with the business of Danya is that the overarching project management services doesn’t scale either.

Hmm, I don’t know about this company anymore.

Is DLH under or overvalued?

A discounted cash flow model in this case is not the best to use because of the non-recurring nature of the revenues and because as an illiquid microcap company, the stock isn’t going to hold much weight in reflecting the intrinsic valuation.

So in this case, I used multiples to compare to DLH’s competitors. The competitors were found in DLH’s annual report. They are all much larger than DLH.

best microcap stocks

Compared to the industry average multiples in the table above, DLH’s share price now at $5.45 is undervalued. The company is better positioned in terms of leverage with a lower debt-to-equity ratio, which would actually be lower had DLH not acquired Danya International in May 2016.

But most of DLH’s competitors have established themselves as large-cap companies and pay a dividend. After the acquisition of Danya International in May 2016, the company’s stock rallied up for a little over a year until October 2017. Then the share price started declining gradually, which I have to think is attributed to the results of the acquisition after a year highlighted in the annual report.

Overall, the share price is undervalued compared to the peers but you have to discount the company’s valuation anyway because of its illiquidity, so I would say it’s fairly valued with that perspective.

Reasons to be Bullish about DLH

According to this chart by Statista, the number of veterans in the US is projected to grow albeit small growth.

best microcap stock watchlist

  1. Consulting business with outsourced processes thus no inventory and no capex. So the key focus is on sales, outsourced cost control and opex control. Outsourced costs are out of their control to a certain extent so gross margin may fluctuate. Operating cost is within their control. It increased from 2015 – 2017 but the first half of FY2018 has seen a decrease again in both annualized and YoY.
  2. Sales are based on contracts won so they typically have visibility of 1-4 years beforehand for each project. As of Sep 30, 2017, the backlog of project commitments was $174 million, of which $93 million was not yet funded.
  3. In terms of A/R and risk of bad debts, since the government is the counterparty which has a high credit worthiness, there is not too much worry in collecting receivables. The company allocated $0 allowance for bad debts.

Reasons to be Bearish about DLH

  1. DLH has a relatively high debt on their balance sheet which was for the acquisition of Danya. It’s not a huge concern as they have been deleveraging as the debt is amortized upto 2021.
  2. Customer concentration is a big concern because more than 60% of their revenue comes from the Department of Defense and the Department of Veterans Affairs for their technology-enables enterprise system that helps to deliver healthcare such as prescriptions to veterans and medical logistics to active duty. Although they acquired Danya in 2016 to expand their portfolio of capabilities and reach into other federal agencies, DLH is still providing services to a small number of federal agencies and programs. If any one of them has a budget cut or the demand goes down, then DLH’s revenue and profits will quickly erode.
  3. DLH is not paying dividends. Five out of seven of their competitors pay a dividend. Dividends indicate somewhat of a discipline for the company to control their spending in order to maintain a dividend yield no lower than dividend yield paid previously. So that’s a bummer.
  4. Capabilities are limited and not scalable. Currently their services are very specific to veterans and military personnel and social work under the human services and solutions business unit. What they offer is difficult to provide on a mass scale to corporations. They would have to look for companies that are large organizations needing service in for example coordinating pharmacists and prescription shipping for a specific group of people. There are opportunities but pharma companies tend to already have a strong grasp in that which is already vertically integrated into their overarching supply chain.
  5. CEO only owns 1% of the company. Especially for a microcap company, I want to see that the founder is still around and/or that the CEO owns enough shares to be incentivized to work their ass off and do whatever it takes to not let the company fail because it’s their blood, sweat and tears and lifeline. Not the case here as the current CEO and other senior management members came on board relatively later stage and relatively recently.
  6. Directors, William Alderman and Frederick Wasserman, have both been selling for the last year in the open market. If they were selling their options to make some bucks, then who am I to question their personal reasons… but still it’s concerning that they’ve been selling for a year, particularly the last half a year. Do they not believe in the company’s long-term super growth?
  7. I’m struggling to see the multiplying growth opportunities from their acquisition of Danya International in May 2016. I understand that the company’s capabilities is human skill related – i.e. there is no tangibility like construction; rather, they provide services. So in order to expand their capabilities of providing project management skills and a technology-enabled enterprise system in project management for government programs, they acquired Danya. And Danya also services government agencies so they wanted to expand their reach into other governmental units. It makes me question whether the reason was because there isn’t enough growth opportunities in defense and veterans affairs alone. We saw from 2013 to 2015 that their margins in that business alone was quite skinny. So I can understand that they needed a business unit that can expand their sales sideways, but I see limitations for revenue growth in both the Defense/Veterans Affairs and educational/health solutions for underserved children. I think leveraging their enterprise level system of project management to reach as many clients as possible could help them grow organically but if they continue to face government agencies as their only customers, then I see a cap on growth.

Summary of Analysis

The main things to note are that the share price is slightly undervalued but if you take into account the discount for DLH being an illiquid microcap company, then it’s relatively fairly valued.

DLH’s financials looks okay as they have a positive cash flow, they have cash in the bank and they’re deleveraging after having taken out debt to acquire Danya International in May 2016. But since the acquisition, their operating cost has gone up quite a bit relatively speaking, so they need to contain their spending after figuring out the synergies.

They have enough access to liquidity if they have an odd shortfall cashflow year and although they have a high accounts receivable, the good thing is that the counterparty is the government so they have not had bad debts from ageing accounts receivable. But by the same token, the government is the only customer and more than 60% of their revenue comes from 2 departments of the government so there is major concern for customer concentration risk.

The leadership team is very experienced in dealing with the government as clients. But the CEO only owns 1% of the shares of the company and two of their directors have been selling their shares over the last year.

All in all, I picked this company to analyze because I saw potential. But after a rigorous investment analysis and following my investment checklist, I believe there is a cap on growth for the time being until they figure out how they can scale and there are too many risks that outweigh the potentials, so I’d rather not bet on this company.

I know, I’m bummed too. Days of analysis just to get to the conclusion to NOT invest my money in DLH. Well, at least you know I’m real and I don’t get paid by these companies to promote.

Thanks for reading and see you in the next one!

Questrade Democratic Pricing - 1 cent per share, $4.95 min / $9.95 max

Microcap Stock Pick: Manhattan Bridge Capital

Questrade Democratic Pricing - 1 cent per share, $4.95 min / $9.95 max

Manhattan Bridge Capital (NASDAQ:LOAN)

best microcap stocks

The first company I am adding to the official microcap.co portfolio is Manhattan Bridge Capital (NASDAQ:LOAN). I have to say that at first glance of their website, I was completely put off. The website looks like a school project. But it passed my initial sniff test, so I decided to look past the unprofessional looking website.

From learning more about the company, the aesthetics match my analysis of the company. It’s a small group, really a one-man band. The business is lean and very simple – a hard money lender (i.e. short-term lending to real estate development investors with real estate as collateral) in the New York metropolitan area. There aren’t layers of complex operations but rather, what you see is what you get which is good because there are only few factors that could go wrong to drive the business into the ground, but on the same token, there isn’t blue sky upside.

So, is Manhattan Bridge Capital stock worth it?

First, The Business

The company was founded by Assaf Ran in his basement in Queens in 1989. Ran started a Jewish yellow pages publication company known as DAG Media. In 2007, the company started a lending operation, allocating $5 million lending to businesses. In 2008, the company reported that its lending operation was the most profitable, so Ran changed the name from DAG Media to Manhattan Bridge Capital and listed on NASDAQ under the symbol LOAN. And so the story really begins in 2008, ironically, a great year to really launch a lending business.

Despite many challenges MBC went through over the years, I appreciate that Ran is a scrappy entrepreneur who wouldn’t let his business fall by the wayside. When the Jewish yellowpages business wasn’t performing as well as it used to, Ran started lending to businesses, and when he saw that this was a more profitable business, Ran pivoted the company completely to lending in the niche of short-term lending to real estate investors in metropolitan New York.

The Business Model

Manhattan Bridge Capital lends typically in the range of $300,000 – $600,000 for 12 months (often with extensions) to real estate investors developing residential or commercial buildings in the New York metropolitan area.

Every loan is secured with a first lien on the building and a personal guarantee from the borrower, which may or may not include the borrower’s equity interest in the real estate project. The company apparently has as rigorous due diligence as the big banks but the approval of the loan is much much quicker at 3 to 10 business days. The loan-to-value is a conservative 75% and 80% for construction costs.



The loan portfolio consists of 3 types:

  • Purchase, fix and flip
  • Small/New Construction Projects single and multi-units
  • Income Producing Properties

The loans are currently charged at 11% – 14% interest rate. Currently they have ~120 loans outstanding. Since 2007 when they started lending to real estate investors, the company has closed ~620 loans and *knock on wood* there has not been one default on the loans.

How I Analyzed the Business

As a microcap analyst, analyzing the financials of the business is not as important. The company might be at the cusp of an explosive growth. The business might not be breaking even yet but have been working on an innovative idea that could disrupt the industry.

More important in my experience of microcap companies are looking at the capability of Management, the idea/product – can it scale and is it innovative, and is the business’s operation robust or are they amateurs without a proper system in place?

This is one of the reasons I truly enjoy analyzing and investing in microcap stocks. It’s a more qualitative process more than anything else. You can approach looking at a microcap stock in any number of different ways and there is no right or wrong. I admire analysts’ work but it gets pretty boring for me looking at blue chip stock analyst reports that follow a certain template. Picking the best microcap stocks involves more about really understanding the underlying operations of the business, not about hype or what the mob thinks. Don’t get me wrong – if you don’t have a disciplined investing philosophy, it could be a disaster.

Anyway, the reason why I like this company particularly is because the business model is simple, which means there isn’t a myriad of factors that could screw up the business. On the flip side, if one of those few factors go wrong, it can be detrimental to the business.

This is how I valued Manhattan Bridge Capital, starting with the most critical questions in Tier 1.



Tier 1 Analysis Questions:

1. Are they earning a spread on interest earned and the funding cost?

They’re earning 11% – 14% interest on 1 year short-term loans. Plus, if the borrower can’t pay the principal in a year when it’s due, the company will often extend the loan at a premium.

The cost of equity – which is critical for MBC since they’ve been raising equity financing every year – is probably 6% – 8%. The company’s cost of debt is 6%.

So, the company’s spread on the interest earned and their cost of capital is 3% – 8%. If the company’s operating cost; i.e. CEO compensation, staff salary, office cost, is reasonable, then that’s a chunky spread. Since 2014, the company has been registered as a REIT, so 90% of their earnings is passed through to the investors, which means there’s more meat on the bones for the investors because there’s no corporation tax and 90% has to be paid as dividends.

2. Reasonable operating expense?

So that brings me to the next question of whether the operating expense is reasonable. 2017 G&A was $1.227m which is a 22% increase from 2016 G&A of $1.006m. Their annual report says that the increase is “primarily attributable to bonuses to officers and increases in payroll, board compensation, travel and meal expenses.” That is a pretty hefty operating cost considering the company consists of 2 officers, 3 operations personnel and 3 board members excluding the CEO. But the company’s net income and dividends paid did increase by the same amount of $600,000, so the company isn’t cutting their bonus check from what the investors “earned”. This indicates to me that the business is still a “family” business run very close to heart of the CEO so he will take what he thinks he deserves first and foremost but more importantly, he won’t take more than what is on the table to the detriment of the investors. A good sign of a CEO’s character.

3. Do they ensure creditworthiness of their clients?

The company states that their due diligence process is as rigorous as the banks but their approval time is much much quicker at 3 to 10 business days. In their annual report, they discuss the due diligence process as:

“In terms of the property, we require an assessment report and evaluation. We also order title, lien and judgment searches. In most cases, we will also make an on-site visit to evaluate not only the property but the neighborhood in which it is located. Finally, we analyze and assess financial and operational data provided by the borrower relating to its operation and maintenance of the property. In terms of the borrower and its principals, we usually obtain third party credit reports from one of the major credit reporting services as well as personal financial information provided by the borrower and its principals. We analyze all this information carefully prior to making a final determination. Ultimately, our decision is based on our conclusions regarding the value of the property, which takes into account factors such as the neighborhood in which the property is located, the current use and potential alternative use of the property, current and potential net income from the property, the local market, sales information of comparable properties, existing zoning regulations, the creditworthiness of the borrower and its principles and their experience in real estate ownership, construction, development and management. In conducting our due diligence we rely, in part, on third party professionals and experts including appraisers, engineers, title insurers and attorneys. Before a loan commitment is issued, the loan must be reviewed and approved by our Chief Executive Officer. Our loan commitments are generally issued subject to receipt by us of title documentation and title report, in a form satisfactory to us, for the underlying property. We require a personal guarantee from the principal or principals of the borrower.”

4. Does Management have a track record of success?

Assaf Ran, the CEO and founder of the company started the business in 1989 as a Jewish yellowpages business. Slowly and steadily, he grew the business. He saw an opportunity to lend to small businesses and when the lending arm became more profitable and the yellowpages was declining as expected from switch to technology, he made the decision to pivot the company completely to a real estate lending business. He didn’t start out as a real estate lender but being in this business since 2007 has earned him the stripes.

Tier 2 Analysis Questions:

5. Is their revenue generation defensible?

Here what I’m looking for is where they originate their deals from. How much of their revenue is recurring and is there a risk that the number of borrower approaching them declines? According to their 10K, the company relies “on our relationships with existing and former borrowers, real estate investors, real estate brokers, loan initiators, and mortgage brokers to originate loans. Many of our borrowers are “repeat customers.””



Great news as long as the New York metropolitan market continues to rise. But if there comes a day when the market is no longer attractive or the market is saturated and the real estate demand (whether residential or commercial) starts to decline, they’ll be in trouble. I don’t see that happening in the short term or medium term, for that matter.

6. Does the company have a positive, increasing cash flow?

MBC doesn’t have any capex or taxes since it’s a pass-through. So looking at net income is a good proxy for free cash flow. MBC has been reporting an overall trend in increased and positive EPS for the last 5 years.

best microcap stock | manhattan bridge capital

best microcap stock | manhattan bridge capital

Source: NASDAQ



7. Has the series of equity financings been issued at a higher share price each time?

In other words, is MBC’s growth attributed solely to injecting fresh capital or is the underlying business’s organic growth fueling the growth? And Public offerings have been at higher stock price each time, i.e. organically increasing retained earnings from the business and the business isn’t growing just from fresh capital

8. Is the share price fairly valued?

For a financial asset company, I figured P/E and EV/EBITDA multiples and Discounted Cash Flow Method aren’t really going to work. For MBC, I looked at the Price to Book Value (or Net Asset Value in this case). My go-to place to look up general current trading multiples by industry is Professor Damodaran’s page. The closest industries’ P/BV multiples are:

  • Financial Services (Non-Bank & Insurance): 2.20x
  • REIT: 2.05x
  • Real Estate (Development): 1.60x
  • Investments & Asset Management: 2.12x



There is no multiple for the exact niche we’re looking for; i.e. hard money lending business, but looking at the proxy industries above, the average P/BV that we should be comparing MBC’s valuation to is about 2.0x.

So, looking at the latest quarterly report ending March 31, 2018, its net asset value/book value is:

Assets $46.856m

Minus:

Intangibles ($0)

Liabilities ($23.635m)

Net Asset Value $23.230m

The company is currently trading at a market cap of $60m. So, the P/NAV (or P/BV) is 2.58x, which is a lot richer than the average industry comparables for P/BV; i.e. MBC’s stock price is quite overpriced at the moment.

The stock could be trading higher as investors are expecting a higher earning and growth in its June quarterly report that’s coming out soon (since today is June 27th, 2018) and a bit of rallying to this point. Also, investors may be buying to meet the shareholder record date in order to meet the ex-dividend date. You must own by July 10, 2018 to be paid on July 16, 2018. The stock price may decline after the ex-dividend date, but I’m greedy and I want a piece of the dividend pie. 

9. Any sign of pump & dump?

Three things to look for to detect any sign of pump & dump for a microcap stock is 1) is there a lot of hype around the company? And the answer is no, I haven’t found it online; 2) does the company keep changing names and the direction? And the answer here is no; and 3) are there periods of stock momentum for no reason? There has been an instance of this but really, the company has been reporting higher earnings every quarter, so I would expect it to be attributed to that rather than a pump & dump.

10. Short high interest debt on their balance sheet?

Normally, I don’t like debt but for a hard money lender whose assets are money, using leverage to lend rather than issuing new capital at a high cost of equity is effective as long as the cost of debt is lower. At an average of 6% cost of debt, it’s not too risky to hold debt on its balance sheet.

Additional Rationale to Buy the Stock:

  • Requires the borrower to have equity participation
  • Requires strong financials of the borrower
  • Loans have never defaulted
  • Collateral is good – first lien on all real estate developments in New York metropolitan area which is not a market that’s declining anytime soon
  • Pays a dividend, which has been steadily increasing

Potential Risks:

  • Downturn in the metropolitan New York real estate market
  • Loan defaults
  • Bad collateral in the case of loan defaults
  • Decreasing interest rate

Questrade Democratic Pricing - 1 cent per share, $4.95 min / $9.95 max

Summary of Analysis

A simple business as a hard money lender. Focuses on the New York metropolitan area which is a hot market and will be for a long time. The CEO and founder has 30% of the stock and he has been with the company through thick and thin since founding it almost 30 years ago. The CEO is scrappy; pivoted the business when he saw a more profitable opportunity. Board members have been with the company for over a decade on average.

The stock is overvalued but on the flip side, is seeing momentum because of consistently reporting higher earnings and growth. The stock also pays a dividend that’s been increasing steadily every quarter, so it’s a nice income stream and diversification to your portfolio. I wrote this post on June 27th at night so am buying on June 28th at a slightly higher price. Damn it.