stocks, bonds, ETFs straight out of downtown Chicago. This is Zach's Market Edge. Welcome to Zach's Market Edge, the podcast about investing in your life. I'm your host, Tracy Rinek.
This week, I'm joined from our favorite guest, I want to say now, on the podcast, Zach's very own Mark Zinski, who is the small cap analyst here at Zach's. That's small cap stocks. That's a little bit different title than what my title is. I am a stock strategist, and I focus on the value stocks, and I run the value investor portfolio here at Zach's, Mark is an actual analyst, so he's specializing in those small cap stocks.
The strategist like myself, we look at the bigger picture, we look at what's going on in the economy, I do look at certain sectors that I like to study, like energy and housing. For those of you who follow me who know this, but I am not a covering analyst on either of those sectors, and Mark is much more of a specialist on the small caps. He joined us a couple of weeks ago in 2024 with some small cap AI stocks, and he's back with more. To start 2025, I promised you I would have him back on.
I will have him back on to talk about other small caps beyond AI, but if he's got some small cap AI stocks that are intriguing for us, why not take a look? Now, these two stocks happen to be obviously small caps, but they're also trading under $5. I know many of you love these stocks that are under $5. I tend to stay away from them a bit, but they are fun to take a look at, and in the small cap realm, you do tend to find a lot more stocks trading down in this level under the $5 mark.
So, he's brought us two stocks again this week that are small caps. They're under $5. They're in AI. One of them even has a Zax rank, but only one.
But as I mentioned, I love having him on. So, welcome back to the podcast, Mark. Thanks for having me, Tracy. Good afternoon.
Yes. Yes. Okay. So, you're back again with some more AI stocks, and in full disclosure, you own both of these in your family portfolio.
I do not own either one of these. And until you told me about them in the last couple of weeks, I had no idea what these stocks were. So, I don't own them. You own them in the family, and you actually have been talking to one of them as well.
So, I'd love to get your insights on both of these companies, because as I just mentioned, you're the analyst on these small cap stocks. So, you have some great insights. So, let's start with the first stock that you wanted to talk about, and that is fiscal note holdings. The ticker is note, N-O-T-E.
And this is the stock that has a Zax rank. It's a number three right now. But what is it about fiscal note holdings? Obviously, you said these were in the AI area.
What do they do? Why is AI so important with this stock? Well, obviously, AI is still a hot topic. That's why we're talking about it again.
If you recall, last time the two names we talked about were more what we would call picks and shovels place. They are kind of barnacles on the bigger tech companies. They provide some sort of service that helps them accommodate their AI products and services. The two companies today are actually AI companies.
These are software companies that have proprietary software, and hence have very high gross margins. They are also very nuanced. They're not currently having the kind of parabolic top line growth that those other names that we talked about previously are enjoying. However, they do have some interesting nuances.
I think just objectively, they look undervalued to me. So we're going to dive into the details to try to explain why we think they're undervalued, and why the bet here is severalfold. Number one, we think they have very good stories and good products that are competing very well in the market. And secondly, we're hoping for some multiple expansion.
We think that they're not really getting the kind of multiples that we're seeing in the AI space. And so the hope is that over time, through some more execution on a quarterly basis, that those multiples can expand. And that will potentially give us a lot of upside for the investor. Now, wait, one question I have.
So when you mentioned both of these are software companies, and when I think of software and AI, I kind of think of the big guys, like even like a Microsoft or something, and that they're making these generative AI products, and that's kind of in my mind so far what I think the applications are that are out there. But that's not what this is. Right, you know, I actually I spoke with management over at fiscal note last week. And one of the first things that kind of comes across is how they're different than chat GPT.
So just a quick little little breakdown of fiscal notes. So their AI is breaking down all the regulatory and legislative data that's out there that impacts, you know, companies on a daily basis. So about half of their clients are, you know, private sector companies that are impacted, you know, by these by this regulatory environment. Then the other half is our actual government agencies.
The growth is really coming more from from the private sector. That's employing AI. So they're taking their data set that they're using is different than what chat GPT is using. So they have a very robust data ecosystem, with over 50,000 different data sources.
So they're combining not only local government type of legislation and regulations, but also at the federal level, international regulations, think, you know, international trade regulations by a country for a country basis. And so if you were to query, let's say you're a company looking to expand, you're an automaker looking to expand into some country in Europe, and you're wondering what the regulations and electric vehicles are there. If you were to ask chat GPT, the management for fiscal note would argue that you'll get kind of a generic response from chat GPT, and it may not be entirely accurate. So the two key points that they think differentiates their products because of their more robust ecosystem is that you're going to get with their products more reliable, accurate and precise answers to your questions regarding certain regulation and certain legislation.
Now, where are they getting their ecosystem though? Do they have to pay to get access to, you know, a lot of this regulatory data from various countries and states and provinces and everything else cities? And is that part of the cost of their business now? Correct.
That is part of their their cost. But as of the last quarters here, there, let's see, the gross margin, excuse me for a sec, actually the gross margin increased a thousand bips in the last quarter to 79%. And so the gross margin is, you know, that's a discussion for another day, but it's one of my favorite quantitative metrics to look at because it has the you know, the selling price of the product in there. So it's market driven.
There's not as much room to kind of, you know, massage the numbers, which is possible at the operating expense level, but that's another discussion. So anyway, very high gross margin business. So obviously pretty coveted product in the market. Let's take a look.
Since we do have a rank on it, it does appear to have several analysts that are covering it, even though it has a market cap of just 168 million, it is trading under $5. As we said, the 52 week high is 227. The 52 week low is 75 cents. It's not yet earnings positive, but still again, has these analysts on it.
It has quite a decent trading volume on it. But here I'm showing the price consensus and surprise. So it looks like they went public or became a public company in 2022. Was this a SPAC that was converted over?
I don't know if you know. Yeah, I do think there was a dispatch involved, but I'm not. Okay. Because that's usually when I see a chart like this, that's usually what it means.
But you can see it has had a bunch of earnings misses, but it has had quite a few of the beats in there. But now that it's got a couple of analysts, let's look at the detailed earnings estimates on ZACS.com. We have three different estimates for revenue, and we've got two on the earnings now. This year, though, actually it looks like it does look like it's supposed to be make seven cents this year.
So that could be good. But 2025, which is our current year, we have an estimate of a loss of 38 cents. But Mark, why don't you explain to a lot of listeners to you why with small cap companies, it's not always that big of a deal to see negative earnings for a while while they're growing. Right.
So a couple of things going on with this company. The first one, the real, one of the big overhangs to the stock was their level of debt. And they recently divested one of their businesses for $90 million. And that was the board, that org part of their portfolio.
And they got a nice multiple for that, because that business was doing about 15 million in revenue, on an annualized revenue recurring basis. And so a six-ish multiple they got on that business. So they're able to pay down a significant part of their senior debt. And so that has certainly helped the stock and has kind of helped to save some fears that investors are having.
They have been doing some of these kind of piecemeal divestitures on a regular basis at very nice multiples and using the proceeds to deliver the balance sheet. And in talking to management, it looks like that's going to continue. So I think part of the upside of the story is that they continue to divest some of these non-core assets of their business at attractive multiples, and that they can use those proceeds to continue to to deliver the balance sheet. But the debt has become much more manageable now.
And so they, while they're not profitable, I think it's important to look at the adjusted EBITDA margin, which in this last quarter was 11.7% versus 2.2% in the prior year. So they have undergone a real kind of cost efficiency evaluation of the business, and they're clearly executing on it. Revenue was down a little bit because of the divestitures that I mentioned previously. But an Apple Stapples basis, this last quarter, revenue still grew 2%.
So this industry, businesses in this industry, it's very common for them to have adjusted EBITDA margins in the 20 plus range, like even 25 upper, upper 20%. And so they're at 11.7% right now. So that's part of the back here is that they're going to continue improving that EBITDA margin and continuing to get leverage, which is obviously facilitated by that high gross margin. Now an investor might argue, well, geez, the 2% top-wing growth, that's not that great.
They've brought in a new chief product officer who has a lot of experience and was part of, I don't know if you're familiar with this company, Tracy, that's called Case Tax, and it's basically a legal AI assistant. And it was recently sold to Thomson Reuters for $650 million despite having kind of minimal revenue. And so as given your legal background, you can imagine there is an appetite for opportunities to kind of bring down in-house legal costs. And so bringing this person in with that kind of background is very encouraging.
So the hope here is that top line can kind of get rejuvenated, hopefully here in the short term. They're also releasing a new product, a new co-pilot product this quarter as well. And hopefully that will also help kind of rejuvenate top line. But at this point, like I said, it's more of a leverage story continuing to watch that adjusted EBITDA margin improve, and then hoping for that margin expansion.
Because for an AI company, with a 79% gross margin, the stock is trading at less than three times trailing sales. In this industry, AI names are typically getting six to 10 times sales. So this is admittedly a longer arc type story. But that's the bet you're making, is that that execution will continue happening and that valuation multiple will keep expanding.
Yeah, it's always more volatile and risky with the small caps to some extent. And certainly, ones under $5 are going to be more volatile on the trade. For sure, you're going to have bigger, moves in the stock, plus even just someone like us doing a podcast on this stock will likely move it when the podcast launches. And just investors know, they have about 30 million in cash in short-term investments.
They did file an S1 for what was that number? I think it was like a fairly minimal amount, like a 10 million shelf-ish. But again, they're not obviously hemorrhaging cash. Cash flows improving because of the, like I said, the EBITDA margin is improving.
And they have the, hopefully they can divest another business or two that will obviously help the cash as well. But there is a small possibility that there might be a minor raise down the road. Right. Just a little investor always out there.
Yeah. Okay. So that's fiscal note ticker N-O-T-E. So let's move on to the next stock.
Am I saying this right? It's I-CAD? Is that right? Yeah.
Okay. I-CAD, Inc. ticker is I-CAD. I-CAD.
And I have off of their site, they are AI-powered breast health solutions. And I took that to mean, and after talking with you about it, that this is on the mammogram side, perhaps, of using AI to make better mammograms, basically. Exactly. Exactly.
So I think we can all relate to having a meeting with that, whether it's unfortunately on a oncologist or a rheologist and to be analyzing the film. And being like, oh, I see a bunch of clouds on there. What does it all mean? And this is going on for many years.
They've talked about whether or not radiologists will be replaced by this technology. We're not at that point, obviously. I think they're using it more as an extra set of eyes. And more importantly, it's reducing the amount of reading time.
So hospitals like to be productive, obviously. So the more scans they can read as facilitated by the software, obviously the more money they make and the happier they are. So that's, I think, really the key selling point. I think it's important to look at the market share here.
So I can't think that they have about a 46% market share of the US AI market for these radiological readings. And they think that, at this point, still only 37% of the imaging centers are using AI. So they're getting 46% of that 37% for a total market share of about 17%. So the bet here is that AI just becomes more accepted.
And obviously, the efficacy is proven out more. And that 37% penetration, hopefully goes to 100% where all the imaging centers are utilizing AI. Assuming that that 46% market share stays the same, you're looking at a two or three X-er as this grows. With the upside, maybe they grow that 46% market share even more.
There's room to grow that. So they've got a, they've really improved their cash burn. It was only $1.5 million in this last quarter versus 3.6 million at the beginning of 2023. That's been a real point of emphasis for them.
They've got almost 20 million in cash. And they've explicitly said there's no need to raise any funding. I see that they are smaller than fiscal note market cap thesis. They have a market cap of only 50 million.
But you just said they had 20 million in cash. Correct. That 18.8 million. Yep.
Okay, this is 86% gross margin business. So they're clearly doing something right. And importantly, they're high percentage of their revenue. They changed their business model.
So it's more subscription based. So the higher percentage of their revenue is recurring. That's the same as fiscal note, by the way. So those are two key things to know about these businesses is the high percentage of annual recurring revenues.
So while the top line growth may not be as robust as investors are looking for, you've got the downside protection because it's recurring revenue. So a lot of people like those subscription based businesses for this reason. Because it is, especially if you sign a contract, like I see that they signed some kind of three year cloud deal with Charlotte radiology in the third quarter. And then US radiology, they said has 175 outpatient imaging centers across 13 states.
Like you know, for the next three years, what's going to be happening with that deal, at least. Exactly. And we know right that there, you know, there's an issue with some false positives with some of these readings. And so this technology, you know, has been shown to help, you know, alleviate that problem.
And it's been trained on six million images from 100 plus global centers. And so again, I was just talking about the US market. I'm not even talking about what could happen globally. I mean, they're looking at licensing some of their technology globally, but you know, there's that's additional upside, you know, in terms of what they might be able to do, you know, outside the US.
Who's their competition? You said they have 17% of the US market. Who is it? A bigger player out there that's also doing it?
Like I said, that 17% is the 46% of the 37% of the 37% of imaging centers are using AI. And so off that, 7%, they've got the 46, which gets you so they have huge market shares. So they would be competing with like GE Healthcare, you know, the regular, you know, big players in that in that imaging space. But clearly, you know, given the 46% share, I think their technology is definitely holding up.
And I mean, they have a two part, you know, algorithm, I guess that's kind of unique to their technology, which looks a little bit more at the, the dispersion and the concentration of the, of what's appearing on the image and more specifically trying to address the issue of, you know, the breast density complication that can obscure these images and make the readings. So they think they've got a better mouse trap from that in other words. Now, let me just show what's going on on sex.com for the stock because we don't have a rank on it. So that means we're going to have a lot less data.
But you can kind of see I put up the price consensus and surprise chart. We did have analysts on it through 2023. And then you see like no, no retor green arrows, no nothing for earnings. And that's because that's when we stopped getting any analysts coverage on it.
And now you're seeing a start. They've got a lot of cash, so they don't need to get any funding, but that's another thing. Right. Right.
Right. Right. This one 52 week high is $2.65. The low is $1 18.
And as we said, the market caps around $1.50 million. What's the price to sales on this one? What is their looking at? The EV to sales on a trailing basis is 1.7 times.
And so again, this is an AI play trading at 1.7 times trailing sales with an 86% gross margin. So again, the bet here is that we're going to get multiple expansions as they continue to execute. This is arguably, as with fiscal note, these are longer arc plays. These aren't going to be multi-baggers next month.
So I don't want to hold me accountable for that. But I do think this is going to be a nice, steady, eddy. As I just think that more and more of these imaging centers are going to convert over to utilizing AI, because not only is the efficacy pretty well established from a profitability standpoint, it improves the productivity of the radiologist, which means more scans. So it's hard to argue with that.
Right. Right. For sure. Many of us who have had these scans know the backups that happen through the radiology department.
We have to wait to get the results longer than maybe we thought and that kind of thing. So any kind of improvement there is helpful just to the whole system of getting these images done. Yeah. I just think it's remarkable how much data is that the AI is consulting.
I mean, it's consulting these millions of scans that have been done previously, and that which have an outcome attached to them, each of those scans, whether it was cancer or was it a false positive or not. And that's just extremely valuable data, which can be crunched instantaneously. So with no offense to the radiologists, but... Right.
Right. Right. For sure. But don't you think that these...
It's been an eyes-well infallible. Right. Exactly. But don't you think this will be used in conjunction and it already is in conjunction with radiologists?
Correct. I think it's not as so much a replacement for the radiologist, but as a productivity enhancer. And that's kind of right. One of the debates about AI is whether or not it actually is going to replace certain professions, or is it going to be sort of a co-pilot in adjunct that's going to help with productivity.
So there remains to be seen, but I think it's going to be some combination of the schools. Okay. So what else could we look forward to talk about later on this year in 2025? Obviously, we'll probably still be covering some more AI stocks.
At least I hope we will. But what other areas or industries are kind of popular or intriguing? Let's use that word, intriguing here for small caps in 2025. Well, I think a lot of investors are kind of a little bit on hold with what is going to happen with this new administration, especially in terms of trade.
And by the way, let's say our trade policy does change significantly. A play like fiscal note is perfectly situated to benefit from that. You can just imagine these trade departments being like, oh my gosh, what a nightmare. All these new tariffs.
We want to sell products into such and what's going on here to have that kind of tool to help you, I think is definitely an advantage for a company like fiscal note. So generally speaking, as a category, small caps tend not to do a lot of business outside of the United States. So if you do believe that there's somewhat of a potential decoupling from the global network that's going to occur via trade policy, then arguably small caps may benefit because they won't be as exposed to the tariffs and they won't have to kind of quickly readjust their supply chain as much as their large cap brethren. So that's just, I think that's something to really consider and to keep top of mind.
Because it's still, I think there's a lot of uncertainty as to the trade policy. And as we know, the other key element about small caps is they do have a pretty acute sensitivity to interest rates. For better or for worse, there's at least the perception out there that smaller companies are more burdened by an increase in interest rates that they've got less sort of negotiating flexibility in terms of getting access to capital. I mean, obviously you want to look at it on a case by case company by company basis, looking at the company's respect and debt levels, but that certainly is the perception out there.
So small caps as a class, if you just look back and you can run charts correlating the performance with the Russell 2 and interest rates, you'll definitely see a completion there. So, what about this push to have like a return to manufacturing? And we saw some return during the Biden administration, but the Trump administration really wants to press this even further, it seems, and they may even try to get a lower tax, corporate tax rate manufacturers that are manufacturing in the United States. Could there be some renaissance in small cap manufacturing in the next couple of years?
Well, as we know small caps in general have a higher tax burden than their large cap brethren because they can't sort of dilute their tax base with operations abroad, you know, or let's say like an Ireland or what have you to bring down the hybrid tax rate. And so they really benefited when that tax rate went from 35 to 21. Now, if it goes down even further, that definitely disproportionately helps the smaller companies. So, that's another implication to keep your eye on.
So, trade policy and tax policy, and then as well as, as you said, on the onshoring phenomenon, I don't know, I think clearly as it relates to the chips, things that have a national security application, that certainly seems like where onshoring will probably start or makes it a little sense. Now, you know, will it extend, yeah, I don't know, but you're right, I certainly think that's something to keep an eye on, that would benefit the smaller companies. Okay. So, but for now, we are wrapping up our discussion of two AI small cap stocks under $5 to for you to check out and research on your own.
And those tickers are for fiscal notes. Again, ticker, N O T E and I CAD is I C A D. And hopefully, we have Mark back soon with some more small cap names. And as always, you can get all of our podcasts on Apple.
We're on Spotify. We're on Amazon music. You can get all of our video podcasts on the YouTube channel, Zach's investment research over there. I know many of you are subscribing.
Check out our other podcast with Mark. It's from December 2025 and it's two AI small cap stocks. You can check out that podcast and of course, subscribe to our channel on YouTube. But as always, I'm here to bring you whatever is going on out in the stock market.
And that includes these small cap names. So I'll be back next week with some more stocks. This material is being provided for informational purposes only and nothing here in constitutes investment, legal accounting or tax advice or recommendation to buy, sell or hold a security do not act or rely upon the information and advice given in this podcast without seeking the services of competent and professional legal tax or accounting counsel. Publication and distribution of this podcast is not intended to create and the information contained herein does not constitute an attorney-client relationship.
No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investment in securities, companies, sectors, and markets identified and were or will be profitable. All information is current as of the date herein and is subject to change without notice. Any views or opinions expressed may not reflect those of Zach's investment research as a whole.