Artko Capital recently released its Q2 2020 Investor Letter, a copy of which you can download here. The fund posted a return of -11.4% for the quarter, underperforming its benchmark, the S&P 500 Index which returned 20.5% in the same quarter. You should check out Artko Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.
In the said letter, Artko Capital highlighted a few stocks and Research Solutions Inc. (NASDAQ:RSSS) is one of them. Research Solutions Inc. (NASDAQ:RSSS) is a software publishers company. Year-to-date, Research Solutions Inc. (NASDAQ:RSSS) stock lost 27.8% and on August 6th it had a closing price of $2.51. Here is what Artko Capital said:
“Research Solutions(RSSS) – Research Solutions continues to remain our biggest and highest conviction holding at close to 15% of the portfolio, its size mostly as a function of holding somewhat steady while the rest of the portfolio participated in the draw down during the spring. The company’s synergetic segments, Transactions and Platforms, continued to grow above their trendlines at 6% and 34% in the first quarter of the year, with the recurring revenue Platforms component growing at 39%. The main part of our core thesis, that the growth of the Article Galaxy platform would be the significant driver of growth in revenues and profits, continues to bear out as the company recorded a record annual recurring revenue number at $4.1mm with 374 subscriptions and signaled that its experiencing significant momentum in growth of Platforms. As we discussed previously, what makes stocks go up is growth in revenues and profits. For the last few years RSSS has used the $5-6mm in operating earnings from its slow growing and 22-23% gross margin Transactions business to invest in R&D and SG&A of its high growth and 82-83% gross margin Platforms business. During this period, the company’s combined $8 to $9mm in gross profits were used to cover its $8-9mm in fixed SG&A and R&D expenses while continuing to lower its losses every quarter, reaching breakeven this year. We have high confidence that the company is at the end stages of growing out its fixed cost base, having filled out its sales suite in the last year and in the early stages of high growth in the Platforms segment, with the expectation that each additional revenue dollar will fall to the operating earnings line and will grow in high double digits for the foreseeable future.
This is a clear example of the operating leverage concept we discussed earlier where the market underestimates the earning power of a business model, especially in under-covered small capitalization companies, until the earnings and the recurring revenue nature of the business model begin to show up in results. So where do we see this company going from here? On the downside its steady cash flowing Transactions business, which notably would have lower growth without the Platforms segment, and the $8mm in net cash on the balance sheet continue to provide good downside protection at today’s stock price and $60mm market capitalization. On the other hand, there is significant opportunity to penetrate the 700,000 corporate and academic research organization market. With Covid keeping most workers at home, this has provided a bigger opportunity for the company to demo its product in addition to increased interest in streamlining the R&D processes of research organizations. We believe that even keeping on the current revenue growth trendlines should result in significant profitability for the company with an eventual re-rating to their information services peers such as CoStar or Verisk Analytics, with similar strong defensible moats, resulting in many multiples from today’s price.
Unfortunately, as is usually the case in closely held nanocap stocks with significant insider ownership, even small moves in changes of holdings of their biggest owners, can create stock moves contrary to the company’s fundamental moves. When we originally invested in RSSS it was an Over The Counter (OTC) stock with barely a thousand shares a day traded and it had taken us over a year to slowly build up our position in the stock between $1.00 and $2.00 per share. In order for the stock to be more investable for institutional investors it needed to get uplisted to Nasdaq by adding only a couple of more million dollars to its book value equity cushion. While the company would have reached this milestone organically within a year by growing its earnings, its largest shareholder helped to speed the process along by converting their warrant position in the 1st quarter of 2020 and adding almost 2mm more shares to their already large, 25%+, holding which understandably they needed to reduce. These actions and seemingly forced liquidation by another large shareholder caused the stock price to drop over 20% in the 2nd quarter, accounting for a large part of our partnership’s negative returns in the quarter. While unfortunate in its timing, we strongly believe the aforementioned stock dynamics are temporary and should reverse as the company continues to deliver on our thesis.”
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