The market has gotten a little jumpy given the potential impacts of a broader coronavirus outbreak and the trickle of earnings-related announcements, which have the grounding effect of telling us what’s actually going on inside companies these days.
Given all this, I want to provide a brief update on our stocks, as well as make a couple of ratings adjustments to reflect the crosscurrents in the market right now. I also have expected earnings dates for you for those stocks that have released them, as well as a quick report on Dynatrace (DT), which is rallying after reporting this morning.
At a high level, we’re moving incrementally more conservative today as three stocks are being switched to hold. We’re also taking a roughly 25% profit on one stock, Cryoport (CYRX) that’s traded all over the place lately and which just isn’t inspiring a lot of confidence.
Stepping back to the market, my preference is to keep leaning more bullish than bearish as there’s so much growth out there that we want to try to remain in the best names we can to capture upside moves. That said, we have jumped into a fair number of stocks at great prices in recent months. I don’t want to see those gains evaporate if the market does take a leg down.
Bottom line: I feel good about most of our stocks and see plenty more early-stage opportunities out there. But we will try to stay in tune with the market and make incremental adjustments as seem appropriate. As always, a balanced approach that’s not too reactive works best over the long-term.
One administrative note: I’ve made an adjustment to our table of stocks (featured at the end of Issues and this Update) to include a second table of stocks that are featured in current Special Reports. As mentioned in previous communications, I don’t provide regular updates on these stocks since we already have a huge number of stocks to follow. But I do want you to know they are being monitored “behind the scenes,” and after speaking with a few subscribers I felt some level of transparency into what they are doing makes sense. At the moment, all the stocks featured in current Special Reports are doing great.
I also wanted to respond to one recent question that was as follows: If you had to pick just three of your stocks to buy now what would they be?
That’s a tough question to answer because we have so many good ones. But if I had to flag just three, I’d say Crowdstrike (CRWD), Freshpet (FRPT) and Axonics Modulation (AXNX). From the Special Reports Zendesk (ZEN) is also looking strong, and far from overheated right now.
Changes this week:
10x Genomics (TXG) moves to HOLD
Cryoport (CYRX) moves to SELL for a roughly 25% gain
Digital Turbine (APPS) moves to HOLD
Frontdoor (FTDR) moves to HOLD
Updates
10x Genomics (TXG) is a life sciences company developing instruments and consumables for genetic analysis that give researchers the power to measure biology at the highest level of resolution. The stock has been a rocket ship since we jumped on it in December, having risen 60% since. Part of the optimism surrounds Chromium instruments, of which there are over 1,500 out and about, mostly in academic markets. But the company also launched Visium (for gene expression) in November and the product seems to be pulling in new customers. There’s more in the pipeline, and analysts are bullish on the growth profile (revenue seen up 65% in 2019 and another 44% this year) and the stock. That said, shares are a little hot to the touch right now. Therefore, moving to hold for now. HOLD
Arco Platform (ARCE) offers a disruptive, 100% subscription-based software platform for delivering integrated education content to K-12 private schools in Brazil. It’s our only pure-play Latin American stock and offers exposure to a market that’s largely untouched by what’s going on here in the U.S. Arco is growing both organically and through acquisitions, and has the potential to turn into an education powerhouse in Brazil, while delivering high growth and fat profit margins. BUY
Axonics Modulation (AXNX) is an up and coming MedTech stock with a disruptive solution for patients that suffer from overactive bladder (OAB), Urinary Retention (UR) and Fecal Incontinence (FI). It has developed a neurostimulator that appears better than Medtronic’s (MDT) version, which has been the market leader so far. Axonics could change that. With the product just having launched, revenue growth is huge. Analysts see sales growing from $14 million in 2019 to $80 million in 2020 (up 470%). Preliminary Q4 results were already released, with the full quarterly details set to be released on March 4. BUY
Chewy (CHWY) is the largest pure-play online retailer for pet supplies in the United States and is seen growing revenue by 37% in 2019 and getting to breakeven at some point this year. If you think pet supplies sales will grow, and that they’ll continue to move online, this is your stock. BUY
Crowdstrike (CRWD) is a cybersecurity stock that was born in the cloud and provides endpoint protection solutions. It has a very efficient platform that offers both immense power and tremendous flexibility. That adds up to a good value proposition for customers in a large and growing addressable market that’s estimated at nearly $25 billion. It is one of the fastest growing cybersecurity companies out there. Revenue was up 110% in 2019 should be up around 87% this year. It’s not profitable but management has said it will be free cash flow positive in fiscal 2021. It’s one of the higher potential cybersecurity stocks out there, but you will pay a premium for the growth. Still, I like it. And I like the odds of it morphing into a long-term big winner. BUY.
Cryoport (CYRX) specializes in cold chain logistics solutions for temperature-sensitive life sciences materials. It offers end-to-end solutions that span protection, monitoring, logistics, storage and chain of compliance. The company is growing quickly, in large part due to its support of global rollouts for products from Gilead (GILD), Novartis (NVS) and Bluebird Bio (BLUE). Management announced preliminary earnings a couple weeks ago which sent the stock in a tizzy. Shares initially plunged, then rallied to multi-month highs. CYRX has been weak over the last two days. I like the story and the growth here but the stock’s action is a little unsettling. We have a gain of over 25% since October. Let’s take it and move on. SELL
Deciphera Pharmaceuticals (DCPH) has been our best-performing position, having surged 90% since we jumped on it back in October. The reasons behind the move include increasing probability of approval of ripretinib for gastrointestinal stromal tumors (GIST), and possible early approval at that (before August?) that could set up a 2020 launch. There are other programs in the pipeline as well, meaning Deciphera could be more than a one-trick pony. I’ve had the stock at hold and will keep it there for now. HOLD
Digital Turbine (APPS), our Top Pick from September, offers a mobile delivery platform for the Android OS that helps consumers find apps on their mobile devices, and increasingly, on other devices (like TVs) as well. The core product is Ignite, a software platform that lets mobile operators and OEMs control, manage and generate revenue through app installation. While the potential for big gains is here the stock has stalled until we get more clarity on device growth of Android devices. We’re still up 5% or so, but with shares having retreated since they peaked in November it has required some patience to stick with the position. Let’s continue to hold on but take a pause on buying for now. Moving to hold. HOLD
Dynatrace (DT) sells cloud-based application performance monitoring (APM) software, which helps companies monitor all their applications. It is also expanding into infrastructure monitoring and log management. The company was spun out of Thoma Bravo (who remains a major shareholder) in 2014 and then went through a transition from perpetual licenses to a SaaS business model. Lockup expiration for just under nine million shares just passed, but a larger block will be available to trade after Thoma Bravo, which still holds around 59% of shares outstanding, passes its lockup date on March 5. Beyond the mechanics of all that, the big picture story here is one of Dynatrace being in elite company, along with Splunk (SPLK), Elastic (ESTC), Datadog (DDOG) and New Relic (NEWR), as having potential to gaining major scale in its end markets. That potential came back to the surface today after the company reported Q3 fiscal 2020 results that beat expectations. Revenue was up 25% to $143.3 million (beating by $5.7 million) while adjusted EPS of $0.10 beat by $0.03. Management also issued full year guidance of revenue around $543 million (up 26%) and adjusted EPS of $0.28. The market likes those numbers and has sent DT higher this morning. We ended yesterday up 40%. Keep holding. HOLD
Endava (DAVA) is a U.K.-based company providing next-gen technology services to companies that need help with digital transformation initiatives. Revenue should be up around 26% this year. I moved to hold a few weeks ago as the stock has been moving sideways this year. No change today. HOLD
Five9 (FIVN) has developed a cloud-based call center platform that’s cashing in on the trend for customers to opt for SaaS based solutions to help keep their customers happy. While the stock has meandered about day-to-day, if you step back and look at the weekly chart you see a pattern of higher highs and higher lows dating back to the end of 2015. That’s largely because the company keeps delivering mid-20% top line growth and faster EPS expansion. We’re up just over 10% on the stock, which is trading a few percentage points off all-time highs. BUY
Freshpet (FRPT) sells refrigerated, fresh pet food for dogs and cats using preservative-free, cooked ingredients. It’s been a consistent grower and has a defensible business model because it owns 20,000 of its own refrigerators, effectively managing inventory on site so grocery stores don’t have to. There is budding competition online, which is something to keep an eye on. But it’s not as if Freshpet can’t break into that market too, if it so chooses. However, in the near-term there seems to be plenty of room to grow in stores. Freshpet has already said that in Q4 it added 791 stores, which is twice as many as added in Q3. This is associated with higher advertising spending, all of which could drive $1 billion in revenue by 2025. That would represent a three-fold increase over expected 2019 revenue. It’s a neat, pure-play story that’s likely underfollowed because it’s “just” pet food. Don’t ignore it. We’re up just over 20%. BUY
Frontdoor (FTDR) is another of our more “conservative” growth stories, with expected 2019 revenue growth of 9% and 20% EPS growth. It’s another spin-out story. Frontdoor used to be part of Servicemaster (SERV), but was spun out in 2018 to become a pure-play provider of home service plans, a market in which it is the clear market leader (4x bigger than the next closest competitor). The stock’s been a dud for us, especially over the last two weeks when it’s begun to slide from what was an otherwise nicely-developing upward trend, albeit still in a trading range of 42 to 53, which has held since last summer. But the potential remains and the stock isn’t broken. Behind the scenes, there’s optimism on the on-demand launch of the Candu brand on December 9, which will offer flat-fee pricing, two hour scheduling windows and six month guarantees on appliances. Acquisitions and the on-demand launch will hamper profit margins in 2020 (and maybe 2021) but this is a company that’s investing for growth in a large market where it’s already a leader. Provided the stock can find support around 42 I’d like to stick with it. That said, given the weakness I am moving to hold today. HOLD
Kornit Digital (KRNT) specializes in industrial digital printing technologies for apparel and textiles. The big picture trends behind the growth are mass market adoption of custom-printed textiles and personalized garments. Customers include Adidas, Hanesbrands, Spreadshirts and Amazon, which uses Kornit’s equipment in its Merch by Amazon self-service program. Revenue should be up around 26% this year and EPS up 22%, to $0.45. It will be very interesting to see what the holiday season was like for Kornit when it reports Q4 earnings. We’re up almost 30%. HOLD
Lawsons Products (LAWS) distributes maintenance and repair supplies to small- and mid-sized businesses. It’s had new leadership since 2012 and a renewed focus on doing the right things consistently well has driven shares higher. Revenue was up 14% last year and growth should dip to around 6% this year, but M&A activity could easily add to that. BUY
Lemaitre Vascular (LMAT) is a medical device company specializing in implantable and disposable devices for 15 markets, worth near $900 million altogether. To keep growth consistent Lemaitre introduces new products through internal R&D and through acquisitions. Revenue grew by 10% (to $110 million) in 2018 and likely expanded at about the same rate in 2019. Adjusted EPS was up 6% to $0.91 in 2018 and will be roughly flat in 2019, in large part due to acquisitions, which often mean transitioning manufacturing. It also pays a small dividend. BUY
Lightspeed (LSPD.TO), (LGHEF) is a Montreal, Canada-based company with a cloud-based commerce solution for small businesses. The platform offers a point-of-sale (POS) system for brick-and-mortar retailers and restaurants, as well as an e-commerce system for online businesses. It’s young, growing fast and diversified (no customer accounts for over 1% of sales). Also, 30% of revenue comes from outside the U.S. Lightspeed just acquired a small company, Gastrofix, providing hospitality software in Germany. And management will present Q3 fiscal 2020 results next Thursday, February 6. Analysts see revenue up 58% to $41.9 million and the EPS loss should decline by 90%, to -$0.11. We jumped into the stock at a great price around 32 and are up over 40% since. I wouldn’t go in with a huge position right ahead of the earnings report but if want to pick up a few shares that’s OK. I keep wondering when the U.S. listing will be announced! BUY
Livongo (LVGO) helps employers offer Type 2 diabetes digital health management solutions to employees via a subscription-based software platform. The platform integrates data science and behavioral insight technology with blood glucose finger sticks to create a holistic and digitized care experience centered on consumers with chronic conditions. Expansion into hypertension, weight management and behavioral health are in the early innings. It’s a good company with insane revenue growth (sales rose 128% in 2018 and should be up 148% in 2019) and potential first profits in 2021, but shares have been underperforming. Why? For context, the company did just come public last July at 28 and has gone through its post-IPO slump. Then we had lockup expiration this month. But more importantly, the market is still trying to figure this company out. What’s the competition like? Can it really hit $1 billion in revenue and get to profitability in 2021? What about this new partnership with Dexcom, which allows members to synch data from their Dexcom G6 Continuous Glucose Monitoring System to the Livongo platform? On that, one plus is that Livongo will then capture more patient data and have opportunities to better personalize coaching and address treatment needs. We’re down 8% on the stock, but it’s not time to walk. Earnings come out on March 2. BUY
ModelN (MODN) helps customers in the life sciences and technology industries maximize their revenue, find growth opportunities and cut compliance risk. It has been transitioning to a subscription business model (SaaS) and converting major clients (Gilead, Novo Nordisk, etc.) over, which is a roughly 12 month process. For that reason the numbers are a little wonky. For instance, revenue was up 18% in 2018 and EPS jumped from a loss of -$0.59 to $0.04. But in 2019 revenue was down 9% while EPS soared 450% to $0.22. This is all part of the transition to the new business model and the numbers will level out while the business of selling solutions and introducing new ones will become more efficient. Looking to FY 2020, analysts see revenue up around 8%, then 11% in 2021. First quarter fiscal 2020 results are due out on Tuesday, February 4. We’re back to roughly break-even on the stock after a quick trip up to, and back from, 36. BUY
Smartsheet (SMAR) has developed a flexible, cloud-based, low-code collaboration platform that helps teams organize, capture, manage, automate and report on their work at a huge scale. It’s not profitable but top-line growth of 50%+ puts this software stock in elite company. BUY
Solaredge (SEDG) is a solar energy stock that’s developed an innovative smart string inverter solution for harvesting power and managing it in a solar photovoltaic (PV) system for residential and commercial use. The company also makes power optimizers, which are electronics that attach to the back of solar panels. It’s a play on growth in rooftop and distributed solar, which are the fastest growing areas of the market. Revenue should be up 57% in the December-ending quarter. Shares have been on a nice run, which could make them suspect to any pullbacks. But the growth opportunity here is big enough that SEDG should continue to attract big investors looking to put money to work. BUY
Survey Monkey (SVMK) is the leading online survey platform for businesses and has a ton of current initiatives, spanning new enterprise-grade solutions, a growing sales force, M&A activity and efforts to convert monthly subscriptions to annual plans. The punchline is that revenue growth should jump from 14% in 2018 to 24% in 2019. Earnings come out on Thursday, February 13. Shares briefly broke out to an all-time high a couple weeks ago, which had me thinking SVMK was going much higher. But it’s since fallen back and is now 12% off it’s high. I suspect we won’t see to much more action here until after earnings come out. BUY
Wingstop (WING) is one of the smaller quick service restaurant (QSR) chains out there. It offers investors a relatively high growth business with a focused product offering (wings, fries, veggie sticks, dips) and an efficient business model. The company has been digitizing its business and expanding delivery services. It’s profitable (adjusted EPS should be $0.78 in 2019) and should grow revenue around 30% this year. It also pays a small dividend. Fourth quarter 2019 results are out on Wednesday, February 19. The stock has been grinding higher since it bottomed in mid-November. BUY
