Stocks in the Cabot Small-Cap Confidential portfolio are up an average of 86% right now, with an average holding period of just 316 days. That’s less than one year! Today, I want to show you how we’ve achieved such stellar results. And suggest a number of small-cap SaaS stocks I think you can buy right now to capture similar returns.
But first, let’s briefly talk about a stock most investors buy when they want exposure to software-as-a-service (SaaS) stocks, which represent one of the strongest performing areas of the stock market. I’m talking about the colossus of cloud, Salesforce.com (CRM).
The Colossus of Cloud
Salesforce.com is a pioneer in cloud computing software and a household name given the immense success of its Customer Relationship Management (CRM) platform. Its market cap of over $100 billion means it’s one of the five biggest enterprise software companies in the world. Despite its size, Salesforce.com has grown revenue by more than 24% over each of the last eight years!
Management has kept investor interest high by pledging to grow revenue to $20 billion within the next four to five years, a pace that implies a 138% increase from 2017’s revenue of $8.4 billion. Analysts think this is possible given market share gains and loads of upsell and cross-sell opportunities across Salesforce.com’s growing product lineup, which includes Sales Cloud, Service Cloud, Marketing Cloud, Commerce Cloud and Platform Cloud.
The company’s profit growth is as impressive as its topline growth. Over the last three years annual EPS growth has been 10% to 20% faster than annual revenue growth. This fiscal year, analysts see revenue growing by 25%, but EPS surging by 71%, to $2.31. The pace of EPS growth will likely come down to around 17% next fiscal year as the company invests an incremental $1 billion in distribution, security, engineering and partnerships. Investing in the business to maintain a leadership position in the massive $70 million CRM market is a compelling part of Salesforce.com’s growth story.
This is what the chart looks like.
The stock has performed well over the last 18 months – shares have doubled in value – and any dip to the 50-day line has attracted buyers.
In short, if you’re interested in SaaS stocks, you could do a heck of a lot worse than buy shares in Salesforce.com.
But you can do a heck of a lot better too!
Average Gain of 86% in 316 Days
Our Cabot Small-Cap Confidential portfolio is up an average of 86%, with an average holding period of 316 days.
A big portion of that performance is due to the strength of small cap SaaS stocks. If you’ve been a reader of Wall Street’s Best for any time, or have attended one of Cabot’s annual Wealth Summits, you know the cloud software/SaaS theme is one I’ve been pushing for a while. And for a very simple reason: it’s a megatrend that has the power to endure for years.
Salesforce.com’s rise to greatness is just one example. Another is the return to greatness of Microsoft (MSFT), which is up 130% over the last three years, largely because of a well-designed transition to the cloud.
There are many more examples out there too, including Adobe (ADBE), HubSpot (HUBS), Shopify (SHOP) and ServiceNow (NOW), among others, which provide cloud infrastructure, platforms and/or applications that are driving strong adoption rates, revenue growth and earnings growth.
One of the lesser-known small-cap SaaS stocks in the Cabot Small-Cap Confidential portfolio is Everbridge (EVBG), a company that I’ve profiled several times before in Wall Street’s Best Daily.
Everbridge developed a critical events management platform that helps protect people and property. Given the increasing number of natural disasters, terrorist attacks and disrupting events of all other manner, this is, unfortunately, a growth market.
Technology can play a role in improving response times and reducing injuries, anxiety and property damage. And Everbridge has been landing bigger and bigger deals with states, cities and municipalities, including my native state of Vermont. Fortunately, the only alerts I’ve received from Everbridge are about snowstorms and severe thunderstorms.
In time, I wouldn’t be at all surprised to see Everbridge’s platform in use across the U.S., especially given that it is progressing toward FedRAMP authorization. That would mean it has passed the federal security and risk management requirements necessary to have its solutions pre-approved for use by federal agencies.
Today, Everbridge’s 3,800 clients include nine of the U.S.’s 10 biggest cities, all 25 of North America’s busiest airports and nine of the 10 largest investment banks.
With the recent acquisition of Unified Messaging Systems (UMS), a Norwegian company with 1,200 customers throughout northern Europe, Greece, India, Cambodia and Colombia, Everbridge is now the world’s largest global critical event management organization.
Analysts currently see revenue growth of around 33% this year. And shares have mostly held above their 50-day line since early December, which puts the stock in rare company!
This is what Everbridge’s chart looks like now.
10 Small-Cap SaaS Stocks You Can Buy Now
Given the strength in small-cap SaaS stocks, and demand from subscribers for more similar ideas, we published a Special Report two months ago featuring 10 small-cap SaaS stocks, most of which are growing revenue far above the pace of their peers.
Since it was first published, nine of these 10 stocks are up, and the average gain is 16%. For sake of comparison, the broad market has delivered a gain of 0% over the same time frame.
Most of these stocks are trading above their 50-day lines, which, like Everbridge, puts them in good company.
For instance, the chart below is for a company that provides cloud-based security solutions. It’s expected to grow revenue and EPS by 20% and 30%, respectively, in 2018.
The chart below is for a small-cap stock that develops cloud-based SaaS solutions so leading colleges and universities can deliver online education programs. It should grow revenue by 40% this year.
Then there’s this stock, which is up the most since publication. It sells big data integration and cloud software solutions to large enterprises.
To be clear, I’m not advocating that investors go out and throw money at all these small-cap SaaS stocks hand over fist right now just because they’ve been going up.
But I am suggesting investors need to have exposure to small cap SaaS stocks if they want to capture outsized gains. You can start averaging in now and build up your position sizes over time.
We currently have many of the market’s best-performing SaaS stocks in Cabot Small-Cap Confidential. And 10 more in Cabot’s Small-Cap Cloud Software Special Report.
For a very limited time, a subscription to Cabot Small-Cap Confidential gives you access to research on all of these stocks, plus more. You can get started here.