BWLKF - My Top Small-Cap Ideas For 2023

Summary

• 2022 was a rough year for most equities, with the S&P down 19% and the Russell 2000 down nearly 22% on the year.
• In large part because of rough market conditions, several names I cover or follow are at attractive risk/reward levels.
• Some of these names likely suffered or stalled at EOY22, at least in part, because of tax-loss selling, which could bode well for them in early 2023.
• This article highlights some of these stocks and provides brief updates on them as we await their December quarter results, most of which will be reported fully in mid-March.

Calendar year 2022 was a rough year for the vast majority of investors. Not only were stock indices in deep red territory on the year, but bonds were also weak. Hence, even the classic 60/40 portfolio suffered. In short, there was "blood in the streets" for most of 2022! There is no getting around the fact that this type of market environment is painful and frustrating for most investors.

Regardless, for those willing to ride it out, the precipitous market drop has presented us with multiple attractive opportunities in specific equities. I have written in-depth about most of the companies I discuss below. For the one on which I have not written, I will provide you with a link to the contribution of fellow Seeking Alpha author, Florian Buschek , who is one of the best analysts I have worked with over the past few years.

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

Quipt Home Medical

Quipt Home Medical ( QIPT ) is my top holding. I have written about them extensively for Seeking Alpha, with my most recent full article available here . I am pleased to see two fellow Seeking Alpha authors also pick up coverage on the company in 2022. QIPT is my top holding not because it has the biggest potential reward in my portfolio, but because I believe it carries the lowest risk-with multiple upside potential still!

QIPT just recently reported stellar Q422 results . In short, for the fiscal year, the company reported 37% growth in both revenue and AEBITDA. I plan to write more extensively about QIPT once they report their 1Q23 results, which should be out in the next 4-8 weeks.

I can sum up the situation at QIPT using the words of a fellow investor who owns a good chunk of the company but is not an insider: "We had a very good year in 2022 and we will do even better in 2023." Now, to be fair, this investor is talking about QIPT's fundamental business performance, not the stock price. On the year, QIPT was down 16% in 2022. I believe this was due to multiple factors that have nothing to do with QIPT's business performance. Namely, the Russell 2000 (the best comp for QIPT) was down nearly 22% on the year; further, QIPT shares had to work through two derivative headwinds over the past 18 months from warrants and convertible debentures.

Fundamentally, QIPT is in better shape than ever. Not only have they cleared the derivatives off the balance sheet, but they also announced in September the closing of a $110M senior credit facility. This is significant because it means QIPT will not have to tap into the equity market in the foreseeable future to fund additional acquisitions. In other words, current investors do not need to worry about any more derivatives being issued. Moreover, on the 4Q22 conference call , management indicated their 2022 investment in key salespeople should lead to at least 7-10% organic growth in 2023. This would be on top of numerous acquisition opportunities that should lead to much greater growth on the whole.

Now, as for the reason I believe QIPT is a low-risk name: they are currently valued at roughly 5x EV/AEBITDA (EV/AEBITDA is a standard industry valuation; in some of my past articles I have used other acquired companies to show comps to QIPT). The industry norm has been 8-12x EV/AEBITDA, depending on the growth rate of the company and market conditions. While 7-10% organic growth sounds anemic for those chasing popular SaaS software companies, it is absolutely off the charts for a company in the durable medical equipment (DME) business. Add to this the fact that QIPT is growing even more through accretive acquisitions, and you have a recipe for success. Either the company's valuation grows because their AEBITDA expands or because their multiple comes into line with more industry norms. Or both-which would be a very nice win on a low-risk stock.

One thing to note with QIPT for 2023 is the possibility the company is added to the Russell 2000 index. My estimation right now is that the company's market capitalization needs to reach around $200M for that to happen. At the close of 2022, the company's market cap was $167.7M. Of course, my estimation for Russell 2000 inclusion could change between now and May 2023, the time at which Russell identifies the stocks for inclusion in its index, based on the performance of small cap stocks between now and then. In any case, I believe QIPT has an excellent opportunity to reach the necessary market cap for inclusion. This is not just because I expect QIPT to perform well without further acquisitions, but because I also would not be surprised to see QIPT add $20-40M worth of revenue from accretive acquisitions between now and May 2023, which alone may justify that higher valuation.

The final thing to note now with QIPT is why the possible inclusion into the Russell 2000 is so important. Inclusion in the index would mean that certain institutions would be "forced" to buy QIPT in order to track the Russell 2000. With QIPT being a thinly traded name, this scenario can create quite the boon for a company's stock price as institutions begin adding the name to their portfolio. Many times, this scenario leads to company's becoming overvalued in the short-term, meaning shareholders are rewarded for being in the name early. This could especially be true with QIPT as right now they are likely not on the list of stocks institutions start buying in January and February with the expectation of them being added to the Russell 2000. So, if QIPT remains below that $200M threshold for a while, the forced buying could be compressed to several months-or even several weeks-leading to extremely attractive returns for current shareholders.

Again, I look forward to providing an in-depth analysis of QIPT later this year.

InfuSystem Holdings

InfuSystem Holdings ( INFU ) shares suffered mightily in 2022. Regardless, as I indicated in my latest article , dated June 1, 2022, I believe the business is back on track. Truth be told, the business never "went off the rails." Rather, the company, long known as being reliable with its estimates, disappointed and confused investors when they missed earnings estimates on multiple occasions in 2022.

In the linked article, I discussed the reasons why INFU missed earnings estimates and showed how the reason behind that is long-term bullish. In sum, the company began new business with GE Healthcare, and the startup of that business was delayed for reasons outside INFU's control; however, the long-term opportunity with both GE and other potential INFU customers in that space increased . Furthermore, since my last article, INFU announced a new wound therapy partnership with Sanara MedTech ( SMTI ). This partnership presents a potentially transformative opportunity for both companies, and I hope to write more about that as the year progresses and I learn new details.

In the meantime, INFU's current core business continues to expand, and the company's organic growth opportunities are large and plentiful. In addition to the overall market conditions and the missed earnings estimate, the company faced two major headwinds in 2022. First, the company was removed from the Russell 2000 index. That creates the reverse scenario I mentioned above with respect to QIPT possibly being added; namely, that institutions are "forced" to sell since they no longer need INFU shares to track the Russell 2000. This can lead to a stock becoming undervalued. Then, in the second half of the year, INFU was almost certainly a victim of tax-loss selling. The stock was down to about a third of its all-time highs, so investors could harvest some pretty large losses.

The good news for 2023 is that these two situations could reverse themselves. Specifically, all tax-loss selling is now presumably complete, but also, the company quite feasibly could be added back to the Russell 2000 this year. They ended 2022 with a market cap of $179.3M. Frankly, that could be enough, if the Russell re-balanced today, to see them added back to the index. However, as noted in the QIPT section above, I would feel more comfortable if the company was more in the $200M market cap range. Given that the company should report decent Q422 results and, perhaps, strong 2023 guidance in mid-March, I believe there is a decent chance INFU finds itself back in the Russell 2000 mid-year 2023. If that is the case, shareholders could see the same dynamic at play as I mentioned above with respect to QIPT.

In short, I view a current share price of $10-12 as fair value for INFU, with a 3-5-year target of $30+ as a possibility, given their current business opportunities and initiatives. While this may seem like a stretch, we should note INFU traded for over $22/share as recently as April 2021. And while the company has more recently disappointed, if we step back and actually look at the core business, INFU is a stronger company than it was then. Further, like QIPT, I view the risk with INFU as low at current share prices, especially since, in a worst-case scenario, it seems the company's revenue would merely stall and not decline. Obviously, however, my base case scenario is that revenues continue to increase steadily, and the company thrives.

Perma-Fix Environmental Services

I just recently wrote about Perma-Fix ( PESI ) on December 15, so I will not reiterate all of my points from that extensive article. However, I will provide a little further context and an important update since that article.

First, let me provide some more clarity around the Hanford project and PESI's three potential ways to benefit from the work planned there. PESI can benefit in one of three ways-or potentially in all three of these ways.

1. The Hanford Integrated Tank Disposition Contract ("ITDC"). The upcoming 15-year ITDC was bid, to the best of my knowledge, by two large bidding conglomerates. PESI was part of one of those conglomerates. My research leads me to believe there is a good chance PESI's group will win the bidding process. I have spoken about my reasons for this belief in more depth on the Breakout Investors platform. This is likely the nearest-term opportunity at Hanford. I will discuss an update since my article on the ITDC below.
2. Direct Feed Low-Activity Waste ("DFLAW"). This refers to the treatment method that is proposed to begin in the next one to two years at the Hanford site. The cleanup will involve vitrification of the waste. However, as part of the vitrification process, effluent waste will be emitted. That effluent waste itself needs to be treated. PESI's Northwest facility sets about 15-20 miles from Hanford-by far the closest treatment center to the Hanford site. The company believes that once the vitrification plant is up and running fully, they will be treating around 1M gallons of effluent waste from that plant on an annual basis, leading to a significant increase in revenue at high margins.
3. Test Bed Initiative ("TBI"). This refers to PESI's proposed grouting process to supplement the Hanford site cleanup. For numerous bureaucratic and political reasons, TBI is facing challenges. Regardless, multiple federal agencies, as well as Senators, are now pushing for the TBI Phase II testing to take place in 2023. If this were to happen, PESI would treat 2,000 gallons of Hanford waste. If successful, they would then be prepared for Phase III, which would be 300,000 gallons. All told, the company has the capacity to treat up to 300,000 gallons per month from the Hanford site. In a best-case scenario, this lucrative opportunity would not start seeing meaningful revenue until the end of 2024 or into 2025. I believe it is much more likely that before this, PESI will benefit from the other two opportunities mentioned above. The TBI, to me, is essentially a "free call option" on PESI shares.

The final thing to mention here on PESI is an update I received since my article was published just a couple of weeks ago. I have heard that the ITDC decision mentioned above is now expected to be announced in January 2023. If the contract is announced and PESI is part of the winning bid, then I expect PESI to be bought out towards the end of 2023 or in 2024. In addition to their numerous other opportunities, they would have a 15-year "annuity" service contract with the Department of Energy. That should be extremely attractive to numerous businesses. And from what I can gather, it appears there are multiple interested parties in acquiring PESI.

As stated in my most recent article, I believe PESI could ultimately be valued at/acquired for $15/share or higher. Please see that article for more details.

Intrusion, Inc.

Intrusion ( INTZ ), at least to me, has been the most interesting story of 2022 for the names I have covered on Seeking Alpha. In June I wrote about the new CEO, Tony Scott, bringing credibility to the company. Scott previously served in executive roles at GM, Disney, Microsoft, and VMWare. I then followed that re-introductory article with another article in September about INTZ reaching a pivot point. While the company ended up disappointing investors by not yet landing a major strategic partnership, they did deliver on having their transformative Shield Cloud and Endpoint products commercially available late in the year.

The release of these products should set the stage for CEO Scott and team to begin selling the high-margin Shield products. On the November 3Q22 earnings call , Scott noted that the company's qualified leads, proofs of concept, and quotes had all risen by multiples. This is a good leading indicator, and I believe the first half of the year could result in numerous wins for the INTZ team.

The recent passing of the Federal Omnibus Bill should open up some money for INTZ on the government side, where Tony Scott has numerous contacts from his time serving as the nation's Chief Information Officer under the Obama Administration. Moreover, I have heard recently that Shield has proven itself quite capable in helping to fight the spread of child pornography, which has caught the attention of certain foreign government institutions whose countries are sadly known as hotbeds for the origination and dissemination of this illicit material. I would not be at all surprised to see INTZ report some progress in this area, as well as with multiple commercial businesses in 2023.

Finally, we should note that no potential major strategic partner has spurned INTZ. Rather, the talks have at least temporarily stalled for reasons outside INTZ's control. CEO Tony Scott remains confident that at least one-if not multiple-deals could be reached in this respect sometime in 2023 or beyond. With all of these things in mind, INTZ is a name that could conceivably be a multi-bagger over the next few years. With them having inked a distribution deal with Super Micro ( SMCI ), which then deepened into a distribution deal (see the 3Q22 call linked above), I believe the core Shield product is legit, which had always been investors' concern from the time of Tony Scott's predecessor. Now that SMCI and other resellers have essentially verified the product, I expect to see the sales team to start delivering impressive results in 2023 and beyond.

Boardwalktech Software

Boardwalktech ( OTCQB:BWLKF ) was extensively covered in this article by my colleague and fellow Seeking Alpha contributor, Florian Buschek. While the stock actually bucked the overall trend and was up in calendar year 2022, the price has actually come down since Florian's article, all while the company is today in a better position than it was on September 12, the date of his article.

As Florian explained in his article, "BWLKF offers a digital ledger technology that is specifically focused on extensive and complicated Excel spreadsheets and the unstructured data that comes with those. The digital ledger is the heart of it all and the core of all the products they are selling." Further, he notes that BWLKF is not "trying to replace the spreadsheet, but integrate the [it] and allow it to be at the core of the processes built around it."

Since Florian's article, and right before Christmas, BWLKF announced they extended and expanded a contract "with a Fortune 50 California-based technology company to deliver additional data management, analytics and supply chain visibility solutions." This technology company is widely believed to be Facebook/META. Further, there is an expectation that META may have a joint press release announcement with BWLKF early in 2023. Such a move would certainly provide some nice visibility for this small company.

As part of pre-Christmas press release, the company teased that they expect "future progress announcements" in 1Q23. In addition to growing their relationship with META, it is likely that BWLKF will expand within the banking industry, after having landed Citigroup in 2022. Finally, of note, BWLKF has several "teaming agreements" with companies. These have allowed access to big banks and help to deliver sales/implementation without BWLKF needing to hire a large salesforce. I am currently expecting to hear about more of these types of deals in 1H23, which would allow BWLKF to accelerate growth and scalability.

All in all, BWLKF has multiple avenues of growth, with its SaaS business model providing an opportunity to begin quickly scaling earnings and cash flow. I expect the stock to ultimately be a multi-bagger over the next few years.

Other Companies

In addition to the companies mentioned above, I continue to maintain positions in TechPrecision ( OTCQB:TPCS ) and Smith Micro ( SMSI ), even though I have not written extensively about them recently. TPCS ended the year on a strong note, and I believe the stock could conceivably double from its current price if the integration of the acquired Stadco division is successful. An upcoming stock split and likely listing on NASDAQ will help to provide visibility and liquidity.

As for SMSI, the company has no doubt underwhelmed and the stock underperformed. The reason for this is simple: none of the major carriers have fully launched and fully marketed SMSI's SafePath 7 product. If even a single carrier were to do so-and there are still reasons to believe at least one, if not all three, will do that-then the stock should return multiples from current levels. In a worst-case scenario, it appears the company could significantly cut operating expenses, which have been bloated to develop and integrate SafePath 7 with the carriers. In that case, the company should still be able to return attractive free cash flow to shareholders, which itself would likely justify a higher valuation.

Conclusion

While 2022 was an undoubtedly rough year for most investors, opportunities abound for 2023 and beyond. The companies covered in this article each have the possibility to double or more within the next 1-2 years, with several of them having multi-bagger potential.

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