The market has been tripped up by what seems to be an overreaction to the potential economic disruption of the coronavirus, but which is more likely the result of a trifecta of potential issues including coronavirus, a previously elevated market trading at high multiples, and uncertainties related to this year’s Presidential election.
Adding fuel to the fire is the immeasurable impact of programmatic trading that has seemed to intensify the speed and severity of corrections in recent years.
The result? A market selloff that will make it into the history books.
Still, our portfolio is doing better than the broad market (details below).
While the details are different every time we have a major correction, the bottom line is that we’ve been though things like this before and will come out the other end in fine shape. Still, this type of correction creates a lot of stress and tends to separate different types of investors.
Those without the stomach to endure a correction will cut bait and sell a lot of stocks in a reactionary fashion. These people may need their money sooner, or previously had too much market exposure to be able to handle the volatility. If this is you, the message is that, in the future, make more conservative and incremental moves (i.e. average in and out, diversify over time, etc.). Just don’t sell everything and turn your back on the market as that will ultimately be the most costly move.
Then there are those with a higher comfort level for volatility. These investors will likely hold onto a good portion of their stocks despite the discomfort that will create. They have been through this several times and will be patient and begin to selectively buy when the time seems right.
Our actions will be closer to the second groups. We want to try to hold on (though we do need to keep in touch with what the market is telling us) and be selective buyers when things look like they’re improving.
To bring it back around to our big picture strategy, we are in the business of buying high-potential, early-stage stocks. If you play on this playground you are guaranteed to endure a certain amount of volatility in certain markets, and even more when there are major corrections. But over time you should vastly outperform the market.
On that note, I calculated the average return of current BUY and HOLD rated stocks since we started Cabot Early Opportunities through yesterday’s close. On average, our stocks are up 5% (many are still up double digits).
In comparison, had you purchased the S&P 500 Index ETF instead of each of our stocks on the day I featured them, your average loss would be 8%.
That means our current portfolio is outperforming the broad market by 13% through yesterday’s close.
While that margin will surely change over the coming days and weeks, it’s about the best endorsement for investing in these types of stocks that I can think of, and it also adds some perspective to this week’s downmove.
On that note, let’s take a quick look at all stocks that were rated BUY leading into today.
Ratings Changes
Lawson Products (LAWS) moves to HOLD
Varonis (VRNS) moves to HOLD
Wingstop (WING) moves to HOLD
BUY Rated Stocks
Arco Platform (ARCE) hit an all-time high two weeks ago and has fallen 13% since but remains just above its 200-day line. Earnings are due out on March 16.
Axonics Modulation (AXNX) hit multi-month highs on Wednesday and recovered from a big drop earlier today. Demand for shares appears to still be high. Earnings come out next Wednesday.
Chewy (CHWY) is still the best-positioned company to capitalize on demand for online pet supplies and is likely to be the market leader for years to come. No new news and CHWY is about 10% off its recent multi-month high, but shares are far from looking broken. If the coronavirus does spread across the U.S., are pet owners more likely to want to go to a store, or buy products online? Just food for thought.
CrowdStrike (CRWD) took a hit around the time management announced co-founder Alperovitch will step down as CTO and be replaced by Michael Sentonas. It hasn’t bounced back yet and remains roughly 10% off multi-month highs. Long-term the company has huge potential.
Five9 (FIVN) is 12% off all-time highs (and at its 200-day line) about a week after reporting Q4 results in which revenue and EPS beat expectations. Revenue was up 28% to $92.3 million while adjusted EPS of $0.27 beat by $0.05. The contact call center specialist is doing well internationally (bookings up 40% in the quarter) and within larger companies (i.e. the enterprise segment), and selective acquisitions (like Virtual Observer) are helping both growth and profit margins. Analysts like the quarter and are bullish. I am too.
Freshpet (FRPT) is 19% off its all-time highs after delivering a messy quarter in which revenue (up 27.3%) missed expectations by a fraction and EPS missed by $0.05 (adjusted EPS was $0.12). That news was followed up by a secondary stock offering that caught the market off guard. At a high level, the likely reason for the fundraising was to help management ramp up investments to increase distribution while avoiding taking on more debt. The company didn’t need money this minute, but with a share price at all-time highs in a market that looked pretty rosy (at that time) you can’t blame management for being opportunistic and raising over $200 million. The bottom line here is that Freshpet is a great growth story and cash is needed (at some point) to take advantage of the big opportunity in front of it. There might be more downside as the market tries to figure out how the money will impact growth so there’s likely no need to rush to buy now. But I’m keeping at buy and suggest pecking away at shares on weakness in order to build a long-term oriented position.
Livongo Health (LVGO) is near the low end of its four-month trading range but has an earnings report coming out on Monday that could catalyze a move (provided it is good). The company, which has developed a digital health platform that helps people manage chronic conditions (diabetes, hypertension, asthma, COPD, mental health) is seen growing Q4 revenue by 132% to $49.3 million and cutting its adjusted EPS loss by 62% to -$0.05.
ModelN (MODN) is back to where the stock was in November, but big picture the growth potential is there and the transition to a SaaS business model, while not entirely appreciated by the market, is a good move.
Slack (WORK) is still rated buy but I fully expect the recent IPO to continue to be volatile for many quarters. It’s a high-profile stock but is trading right at its IPO price and has a huge market to grow into. Don’t underestimate acquisition potential either. Earnings are out on March 12, the Thursday after next.
Smartsheet (SMAR) was approaching its all-time high a couple weeks ago but this retreat has shares trading 18% off that high-water mark. Still, this hypergrowth stock (revenue seen up almost 50% in the upcoming Q4 release on March 17) has a product that’s gaining adoption (we’re now using it at Cabot) and is a clear acquisition target in my opinion.
Solaredge (SEDG) peaked at 142 a couple weeks ago but has pulled back 15% since, despite beating on the top (revenue up 58.6% to $418 million) and bottom lines (adjusted EPS of $1.65 beats by $0.40), which prompted a bump in analyst price targets that are roughly 15% above where the stock is now. That said, there is likely to be some supply chain disruption due to the coronavirus so don’t buy now if you’re not willing to endure some ups and downs as this whole thing plays out. Long-term, this is a great way to play the solar boom given strong fundamentals.
Sprout Social (SPT) is a recent IPO and has traded in a very wide range over the last two months. That trend has continued following the Q4 earnings release, after which shares surged to an all-time high (briefly). Revenue was up 26.4% and beat expectations while adjusted EPS of -$0.25 beat by $0.09. Growth is coming from new modules and profitability should improve even with heavy investments.
Survey Monkey (SVMK) is 20% off its recent high even though it delivered a terrific quarter a few weeks ago. I think that quarter indicated that the big picture story is getting better, but due to some pricing changes behind the scenes, the story isn’t entirely easy to understand. Still, I think the trend is in our favor here. Keeping at buy provided SVMK doesn’t dip below its established support zone.
Sunnova Energy (NOVA) is another solar leader that represents one of the best ways to play the alternative energy movement. It’s also a buy because Q4 earnings just came in about as expected on revenue and $0.08 ahead of expectations on EPS (NOVA delivered EPS of -$0.21). As expected, storage solutions continue to be added to installations as attach rates have grown from 11% to 15% to 24% over the last three quarters, respectively.
Y-mAbs Therapeutics (YMAB) is down but shouldn’t be viewed as out. The company just announced a positive pre-BLA meeting for omburtamab for treatment of CNS/LM from NB. This means YMAB and the FDA are on the same page with respect of the Accelerated Approval Pathway for the drug candidate. The story remains intact.
New HOLD Rated Stocks
Lawson Products (LAWS) has been hammered lately given the company is quite sensitive to swings in economic activity (remember it distributes maintenance and repair parts like fasteners, cutting tools, fluids, chemicals, etc.). It didn’t help that Q4 results missed slightly on revenue (up 2.7%), even though they demolished expectations on adjusted EPS ($0.48 beat by $0.24). The bottom line is that in this environment nobody cares much about an operational improvement story from an industrial supply stock, no matter how good the long-term potential. Moving to hold now and we may simply exit the position if we don’t get some support soon.
Varonis (VRNS) has pulled back 16% from its recent high on no new news. I like the story but will move to hold until we see some stabilization.
Wingstop (WING) is taking a hit because people aren’t going to be too excited to go out to quick service restaurants if there is a major virus outbreak. Still, in the Q4 report (which added details to high level results that were pre-released) management detailed how ad spending, digital sales and national advertising for delivery are all helping to keep the growth story alive. Revenue was up 31% and beat by a slim margin, while adjusted EPS of $0.14 missed by $0.03 mostly because of one-time items. This is a stock that’s going to keep getting hit if people do stop going out to eat, but which should roar back if those fears prove to be overblown. Moving to hold to balance out the risk vs. reward for now.