It’s been another sideways week in small-cap land. The S&P 600 index is essentially unchanged from last week, and despite some cross-currents under the surface, is holding firm just above 910.
Digging a little deeper, we see that small-cap healthcare was weak over the past week (down 2%), while energy (which we barely talk about anymore) was also down. It’s worth mentioning that large-cap healthcare was also down around 2%.
The big news to me wasn’t what was going on with these sectors, however, but what was going on in the large-cap realm with earnings. We saw monster quarters out of both Caterpillar (CAT) and 3M (MMM), which I consider to be pretty good indicators of how the industrial economy is going. And last night, we also got great quarters from the big tech firms, Microsoft (MSFT), Amazon (AMZN) and Google (GOOG). While none of these firms’ reports translate directly into small-cap strength, I think they should help keep investor confidence from sliding, which seems to be a rising risk these days.
Another positive is that this morning’s Q3 GDP report showed the U.S. economy growing at 3%, well above the estimated 2.5% rate.
The bottom line is that, as expected given the recent surge in small caps, it feels a little dicey out there. But the big picture looks good. I suspect this earnings season will kick us out of a few stocks that we can replace with better prospects, but as is the norm, it’s very hard to tell which ones those will be (if any) until we get the results. Primo Water (PRMW) and Asure (ASUR) seem the most likely candidates given their weak performance of late, but as I’ve said with respect to both, the potential for a surge is there.
Our earnings season got started last night with LogMeIn (LOGM). And we’ll have a busy week next week as well. Let’s get to it.
Updates
AppFolio (APPF) has pulled back to its 50-day line for the first time since May. This week’s 8% retreat represents the stock’s biggest dip in some time, and yesterday’s frightening early session spike down to 40 (shares closed at 45) and the fact that the stock is now down in eight consecutive sessions shows the trend is weakening. It could certainly regain steam (a strong earnings season for tech stocks so far could help) but the evidence in front of us suggests caution. The property management software provider will report earnings a week from Monday. Until then, I’m moving to Hold. I’ll update my rating based on earnings and the stock’s reaction. HOLD.
Announced earnings date: Monday, November 6
Asure Software (ASUR) lost 5% this week and is now back to where it was in early September. I don’t believe anything significant has changed over the past week. Last week, I discussed how potential changes in the ACA could put a small dent in revenue (if proof of insurance forms are no longer required), but also stated that this probably isn’t a big piece of the revenue pie. Over the past week, shares of competitor Paycom (PAYC) have been strong, and there’s been no change in the trend with Ultimate Software (ULTI), which is basically moving sideways. My conclusion is that Asure is still just a relatively unknown and thinly-traded stock and, at the moment, there isn’t huge demand for shares. That should change, provided the next earnings call shows management executing on its growth agenda (integrating past acquisitions, and giving an update on what we should expect for the next round). An earnings release date has been set for two weeks from Monday. I’ll keep the stock at Buy for now, but if it breaks below 10 prior to earnings, that will change. BUY.
Announced earnings date: Monday, November 13
AxoGen (AXGN) continues to do well and there is, thus far, no notable weakness even though EW Healthcare Partners has filed to sell out of its position (roughly 14.5% of total shares outstanding). When we first learned of the liquidation, I suggested it could be a good thing since it could increase liquidity in the stock. It’s still early to tell if this is that case, however. Trading volume hasn’t really gone up over the last month, so I don’t know if the group has begun selling shares yet (perhaps they are doing so very slowly). In any event, the chart looks terrific and the company, which specializes in nerve repair solutions, will give us an update during next Wednesday’s earnings call. I’m looking forward to it! BUY.
Announced earnings date: Wednesday, November 1
BioTelemetry (BEAT) continues to struggle and has dipped back to 30, which is where it was just after the Off Wall Street short attack came out. Over the past week, both SunTrust and Raymond James initiated coverage of the heart monitoring specialist with price targets of 41 and 37, respectively. Those targets represent 23% to 36% upside from here, which you’d expect would motivate a few clients to hit the buy button. Not yet, it appears. I have a relatively high level of conviction that BioTelemetry will recover from this weakness, so keeping at Buy. The company should provide an earnings date soon given that the event should occur within the next two weeks. BUY.
Datawatch (DWCH) has been steady out of the gate for us and the big data software specialist is on the verge of breaking out to multi-year highs. No doubt, next Wednesday’s earnings report will dictate if that will happen or not. We’re looking for the fourth consecutive quarter of double-digit revenue growth (around 10%) and EPS just above breakeven (between $0.00 and $0.02). The big picture trends we’ll want to hear about are bookings, especially for the core Monarch Complete platform, and the newer solutions (Monarch Swarm and Panopticon), as well as an update on management’s desired pace for transferring customers with perpetual licenses to the cloud (about 20% of license sales). As I mentioned in my report, it believes it could do this more aggressively than it is, but doesn’t want to put too big a dent in the bottom line so is taking a more measured approach (perpetual licenses generate higher up-front revenue, but lower over the long term). Keeping at Buy. BUY.
Announced earnings date: Wednesday, November 1
Everbridge (EVBG) was quiet for yet another week and is still up around 70% from our entry point. The company, which sells critical communications software solutions, will report a week from Monday. HOLD HALF.
Announced earnings date: Monday, November 6
LogMeIn (LOGM) did what it normally does by beating expectations once again. Analysts were looking for revenue of around $272 million and LogMeIn beat by $4 million (revenue was up 225%). EPS was expected to come in at $1.11, and LogMeIn delivered $1.16. The company also gave 2017 full-year revenue and EPS guidance of $1.02 billion (as expected) and $4.16 to $4.22 (well above consensus of $4.05). Profit margins are well above expectations, and that’s turning in to higher free cash flow, which is very, very good. Breaking the business down by segments, Collaboration Cloud was up 7% (55% of total revenue), Identity and Access Management Cloud was up 12% (28% of revenue), and Service Cloud was up 1% (17% of revenue).
It sounds like integration of the GoTo sales team with LogMeIn’s is largely done and reps from both companies are nailing deals, including cross-selling GoTo products OpenVoice and GoToWebinar into LogMeIn’s join.me accounts. Factoring in the acquisition, management said that sales productivity stepped back to its baseline, which implies there is considerable room for improvement. With the seasonally strongest quarter (Q4) currently underway, we’ll have a better idea of sales productivity after the next earnings call. Management also said it’s on target to achieve its goal of $100 million in synergy savings (from combining data centers, etc.) in 12 months, a full year ahead of schedule.
In terms of products that are doing well, management says its security solution, LastPass (which also now has a premium tier), is selling very well. And that over time, it sees opportunities shifting from remote access to managing a hybrid cloud environment. That implies to me that LogMeIn sees itself as becoming a much larger business, which should be good for investors.
I still like the stock and think this report will help it move higher into a new trading range, broader market conditions permitting. I also expect more M&A out of LogMeIn. Keep holding your shares, which should be up around 110%. HOLD HALF.
Earnings: Done
Primo Water (PRMW) is still a Hold, but it’s notable that the bottled water company saw its stock firm up a little this week and even rise by 2%. That’s not normally an accomplishment we’d celebrate, but given the trend with Primo it’s at least worth mentioning. More importantly, management released an earnings date of November 7, which means we’ll know where the company is at a week from this coming Tuesday. Remember that the Glacier acquisition has jacked revenue up but crushed earnings (in the short term) and driven debt up. We want to see the company begin to generate cash flow again so it can start paying down debt and delivering positive earnings to shareholders. HOLD.
Announced earnings date: November 7
Q2 Holdings (QTWO) still has a good-looking chart and the company, which sells banking software to credit unions and banks, will report next Wednesday. It will be interesting to hear management’s comments on the state of the industry and how rising rates are/will affect its market. The market is looking for around 30% revenue growth and an EPS loss of about $0.03. HOLD HALF.
Announced earnings date: Wednesday, November 1
Tactile Systems (TCMD) is still moving sideways one week after Northland Securities and Guggenheim picked up coverage with price targets suggesting as much as 50% upside. There is no fundamental news to report, but we’ll have plenty to talk about in two weeks, after Tactile provides an earnings update. BUY.
Announced earnings date: Tuesday, November 7
U.S. Concrete (USCR) is still on our buy list heading into next Friday’s earnings report. The company should give us an update on its recent acquisitions, as well as any impact on the business from this season’s storms. It would seem reasonable to think there will be a lot of rebuilding business in Texas, but there has been no mention of that (publicly). BUY.
Announced earnings date: Friday, November 3
