The market has been changing faster than the weather here in the northeast. And like any big change it’s been a bit tough to navigate. That’s because on the surface the changes aren’t immediately apparent. But upon closer inspection, boy, it sure feels different out there!
The simplest way to illustrate the change is to simply look at the performance of growth versus value stocks since the end of August. Since then, growth stocks in the S&P 500 are down 1.7%, while value stocks are up 1%.
In small cap land the difference is more pronounced; small cap growth is down 3.8% while small cap value is up 1.2%.
I know these return differentials (2.7% for large caps and 5% for small caps) aren’t astronomical. But the relative performance has been in the headlines weekly, if not daily. And if you have a diversified portfolio you’ve seen, felt and thought about this for more than a few minutes lately.
Am I making any grand calls on which is going to do better moving forward? Heck no.
But I’m certainly going to try and play both sides of the ball when it comes to stock selection for the next issue of Cabot Early Opportunities, which comes out next Wednesday.
In the meantime, here’s what’s new with the stocks we’ve been following from the September Issue. While the market has been soft and the prices of our stocks are off an average of 3% since the September publishing date, there is no material new news (either hugely positive or negative) that’s affected any of their outlooks.
Management teams are likely holding their cards close to their vests given that earnings season is right around the corner. All stocks are still rated at “buy.”
Updates
Arco Platform (ARCE) has been doing as well as any growth stock out there. The Brazilian education software company completed a few meaningful acquisitions, including Positive (another K-12 content provider), Nave à Vela (supplemental content) and Escola em Movimento (engagement app for parents and students). These deals will move the needle because they more than double the company’s addressable market. Analysts have begun to bump up growth forecasts as a result. Over just the last couple of weeks, 2019 revenue forecasts have gone from 20% to 30%. EPS estimates have smoothed out too, with consensus sitting at 20% EPS growth this year and next (Arco Platform is profitable). I like it.
Digital Turbine (APPS) was unstoppable in the first eight months of 2019 then peaked at 7.84 and has pulled back about 20% since. We stepped in when the stock was 7% above where it is now on the expectation that a dip of 15% to 30% would be about as deep as the stock would go. There’s no new news or change to the story. Digital Turbine is still expected to grow revenue around 30% this year and see EPS jump 125%, to $0.18. The company offers mobile operators and OEMs a mobile delivery platform for Android OS that helps customers find the apps they want.
Kornit Digital (KRNT) has been doing its job, hanging out near all-time highs. It’s been on the verge of breaking out above resistance around 32.2 a few times but it hasn’t happened just yet. Could earnings be the catalyst? There’s certainly potential. We don’t have an official release date but pencil in November 11 as a reasonable estimate.
Dynatrace (DT) just went public in August and the IPO lockup hasn’t occurred yet so we’re still early here. That reality is reflected in the share price, which has anything but a clear trend! The idea with covering the stock now is that it popped from 16 to over 25 soon after the IPO and has come way back in. That’s not an uncommon pattern. The good new issues will shake off this type of action after a few months and go on to great success, so beginning to snap up shares when they’re a little beaten up can work out quite well. That story hasn’t been written for Dynatrace just yet. But we’ve opened the book. If you forgot what it does, Dynatrace develops software that help customers monitor all the new software and technology solutions they’ve been investing in over the last decade. Management just released a new tool that uses AI to analyze business metrics like orders, customer churn, sales conversions and more. Earnings will be out on October 30.
Lightspeed POS (LSPD.TO) hasn’t shared any new news lately and the stock is trading roughly 4% below where it was three weeks ago when I featured it. This looks like classic growth stock pullback. Shares of the Canadian company, which offers a cloud-based commerce solution for small businesses, are 38% off their high. But growth is fantastic (revenue up almost 40% in fiscal 2019). If you like buying good names on a dip, Lightspeed should be right up your alley.
Zendesk (ZEN) wasn’t included in the last Issue but was in a dedicated Special Report, so clearly it’s a stock I like. In fact, in terms of mid-cap software stocks, it’s my top choice. Part of the reason is that growth remains above 30% (should be 35% this year) and EPS is accelerating (forecasted to be up 13% this year and 115% in 2020). I also see the $1 billion revenue mark (set to be eclipsed next year) as one that’s rarely achieved by early stage companies, especially within 13 years of being founded (Zendesk was started in 2007). I know the share price has come down on macro growth concerns, which is a broad term meant to say, essentially, that things look fuzzy out there around the globe and it’s hard to say how companies will react in terms of software spending. The next quarterly report will be telling. I think you can continue to buy now.