A Couple Sells. Earnings Season Heats Up.
The market has been a little iffy over the last five or so sessions. This action, coming on the back of great earnings from mega cap tech stocks last week, but not great reactions, suggests a more conservative stance is appropriate right now for some of our high-growth names.
That’s not to say we should go crazy hitting the sell button as many of our stocks are still working well, others are holding steady, and there do look to be some attractive entry points shaping up. But clearly this earnings season is also showing that the bar is set extremely high.
Many companies that greatly surpass expectations are still having negative reactions in the days after reporting. That’s a little concerning as we move deeper into what will be a really busy two-week stretch for earnings from our portfolio stocks.
Adding to the blah feeling is Yellen’s comments today that interest rates may have to rise to help cool off the red-hot economy. While an uptick in rates is expected at some point before too long, given where many stocks are now (especially the high-growth small- and mid-caps) the amplification of that comment has most definitely added to the selling pressure today.
As always, a lot depends on what your portfolio construction looks like, your risk tolerance and what your cash needs/desires are in the coming months. For our portfolio, on balance, it appears time to lighten up a little.
We’ll continue to evaluate things on a stock-by-stock basis as we work through earnings over the coming days. On that front, earnings on deck after the close today are coming from Sprout Social (SPT), Upwork (UPWK) and Lyft (LYFT).
Varonis Systems (VRNS) reported after the close yesterday that Q1 revenue grew by 38% to $74.8 million (beating by $5.9 million) and adjusted EPS loss improved by 58% to -$0.08 (beating by $0.06), versus a loss of -$0.19 in the year ago quarter. This is the fourth consecutive quarter of accelerating revenue growth, and comes after four quarters of decelerating growth, trends that illustrate the downs then ups of the transition to a subscription model. With profit margins expanding and earnings trending toward break even Varonis is another example of why the subscription software model is superior to the on-premise model. The trends here should continue for several years (expect 25% to 30% revenue growth through 2023) as Varonis’s place as a protector of critical data makes it one of the more attractive players in the cybersecurity space.
As far as the stock goes, this result “should” have been enough to get VRNS moving in the right direction again after roughly two months of sideways action. But as I just discussed, investors aren’t all that interested in high-growth software names these days as money has seemed to continue flowing toward value, reopening, retail, energy and other areas of the market.
That leaves us looking at VRNS’ stock reaction for clues as to what our next move is. I see 48.5 as a price that, if breached, will likely have us heading for the exit. With VRNS dipping to that level earlier today but subsequently recovering back to around 50 we’re very much on the fence right now. Let’s stick with a hold rating and continue to watch closely. HOLD
Chewy (CHWY) has been moving sideways for a few months without showing any real potential to break higher, despite a quick pop after earnings were reported in late March. I like the company and believe it will continue to succeed; my hunch is simply that we can move on here without giving up too much near-term upside and avoiding the risk of a break below 76 (which the stock is on the verge of doing today). Let’s go ahead and lock in a gain of over 140% on our remaining half position. SELL REMAINING HALF
Pinterest (PINS) has been trading lower in the days after reporting last week, the culprit being slowing monthly average users (MAUs) and engagement. Management talked about the pull-through of business during lockdowns and with economies reopening there is an argument to be made that fewer eyeballs will be staring at their smartphones all day. Ultimately, I think PINS is just fine, but the stock is back to support around 60 and if it breaks lower here it could get ugly quickly. Our current gain is just shy of 30%. Let’s take half the position off the table and give PINS a few days to show us if it can bounce. SELL HALF, HOLD HALF