The market’s shine lost a little luster this week as all small cap sectors fell, led by consumer staples, materials, utilities and energy.
The S&P 600 Small Cap Index fell by 1.3%, underperforming the 0.1% gain in the S&P 500. Small cap valuations (forward PE is still near 20) remain stretched, so Q1 earnings are going to be very important. Earnings season kicks off today as bank stocks start reporting. Also, next Friday, January 20, is Trump’s inauguration. I don’t necessarily like having to tie so many things back to Trump, but the reality is that his election moved the market in a massive way. And you know that infamous line from Jerry Maguire!
Trump will need to show how good he really is in at least a few of the areas where he’s said he’ll do some really terrific things, or the market could start to falter.
At this time of year, my brain is going in a thousand different directions as I contemplate profitable investing themes for 2017, and try to digest all the research I can get my hands on to see what others are thinking. Much of what I focus on will become part of my 2017 Small Cap Outlook, which at the moment, resembles the digital equivalent of a recycling center. I already have a number of stocks that I’m extremely excited about, and which I think will vastly outperform the market in 2017. I’m looking forward to writing those up in future Issues!
In short, there’s a lot going on. But we’ll try to stay on a steady course. This week, I move one stock back to buy after a small pull back. Details below.
Updates
Aspen Aerogels (ASPN) The stock was essentially unchanged over the past week on very subdued trading volume. The company just initiated a 3% price increase on products, which comes after a 4% price increase in the beginning of 2016. It’s worth noting that over 70% of sales go overseas, and a strong U.S. dollar has not been a friend of Aspen’s. With respect to intellectual property (IP), management has recently reiterated that the action it took in 2016 against two European distributors and two China-based aerogel companies to defend its IP “comes with the territory.” It also said that, regarding the second plant, it has knocked down a lot of pine trees but isn’t yet ready to start building in earnest. It wants to see the market improve a little more. Reading between the lines I think this means it would like more clarity on its IP protection suit, sustained oil prices above $50 and an uptick in new energy-related projects. The CEO also said he’s not ready to hang his hat on a handshake at OPEC–he wants multiple million-dollar orders from a variety of markets and geographies before he’s ready to green light long lead-time items for the plant. I think the time will come. Until then, the stock is still trading in an upward sloping trading channel, so keeping at buy. BUY.
Everbridge (EVBG) Everbridge is holding on to most of its gains and 17.50 to 18.00 looks to be emerging as a key level of support. There was a lot of talk about cybersecurity during Trump’s Wednesday press conference, prompting me to wonder if there might be more initiative taken at the state level to implement platforms such as Everbridge’s. The company recently announced that Doctors Hospital at Renaissance Health System, a 530+ bed physician-owned health system in Texas, has implemented Everbridge’s CareConverge solution. Given the 4% pull back this week I’m comfortable moving back to buy, but you should realize that a drop below 17.50 could easily take us back to 16. BUY.
LeMaitre Vascular (LMAT) It was an unusually volatile week for LeMaitre as the stock jumped on Tuesday, reversed course Wednesday, then dipped down to its 50-day moving average on Thursday. It ended up recovering some of that dip and closed the week out with a net change of just 1%. It looks like shares traded in lockstep with the biotech and healthcare groups after Trump spoke out against prescription drug costs and the cost of healthcare during Wednesday’s press conference. Keep holding half. HOLD HALF.
LogMeIn (LOGM) Shares continue to trade right around their upward sloping 50-day moving average line and added 2% this week, despite a 3.6% drop yesterday. The Internet of Things (IoT) is gaining steam as consumer-oriented smart home devices (Amazon’s Alexa, Phillips’ Hue, Nest thermostat, etc.) find their way into more homes. And LogMeIn’s Xively platform won the Global IoT Platform of the Year at the 2016 IoT Breakthrough Awards. HOLD HALF
Marrone Bio (MBII) Shares bounced around again this week but stayed above or around their upward sloping 50-day moving average line, and are actually up 1% as compared to last Thursday’s close. Last week I mentioned that I thought Marrone had the technology to add a mosquito spray to their arsenal for home and commercial use. This week, I’m wondering if they could add a pesticide aimed at the growing marijuana industry. Recreational use was approved in Massachusetts in November, and Rhode Island will be taking another look at it. Clearly, this is the trend. And like most plants, I bet marijuana attracts its fair share of pests. Is it that hard to kill bugs that have been sucking down THC? One wouldn’t think. Scott’s Miracle-Gro is getting into the game. Maybe Marrone should too? I suspect all it would take to move the stock is a simple mention that their products “could be effective against pests targeting marijuana” in their next SEC filing, and speculation alone would help the stock. Regardless, I like the fundamentals, even if Marrone sticks with its current game plan (which is working just fine!). The stock is still a buy. BUY.
MINDBODY (MB) The stock just came off a couple of monster weeks with some positive product development announcements. This week it added another 3%, even after a two-day pullback from Wednesday’s high of 26.60. Let’s continue to be a little cautious after a big move. HOLD.
NanoString (NSTG) Management didn’t reveal any significant news at the JP Morgan conference this week, even after pre-releasing disappointing instrument sales in Q4. The stock didn’t get a big bounce the day after, but yesterday it bucked the broad market trend to rise nearly 5%. The damage over the past week is 15% down, which isn’t great, but also isn’t cut-and-run bad, in my opinion. As I said in my Special Bulletin, I don’t think the fundamental growth story is broken. Nor is the stock. I also haven’t seen any analyst downgrades (rather surprising). Management did say it will get into more details on trends during its next quarterly call (no surprise there). In related news, larger competitor Illumina (ILMN) has forged a number of partnerships. Philips (PHG) and Illumina (ILMN) announced a strategic collaboration aiming to integrate Illumina’s genomic sequencing machines with Philips’ IntelliSpace Genomics clinical informatics platform, and to coordinate marketing and sales efforts. The duo will also work to form clinical research collaborations with health systems in the U.S. that want to develop precision medicine programs in oncology. Second, Illumina has partnered with IBM to integrate Watson for Genomics into Illumina’s tumor sequencing process to help simplify data interpretation. Most significantly, Illumina has introduced a new product, NovaSeq, which offers higher throughput and lower costs as compared to the company’s older generation machines. I don’t believe it’s making a big push into NanoString’s space just yet, but this is something to keep an eye on since it could pose a competitive threat. At the same time, a key piece to growth in this market is consumables (NanoString generates over $100,000 per year, per machine in consumables) and the only way for Illumina to get that is to own the machines that the consumables go with (meaning buy NanoString). In short, there’s some news here to speculate on but nothing concrete. We’re up around 20% on our remaining position, so we still have some wiggle room. Let’s keep holding. HOLD HALF.
Ooma (OOMA) B Riley stepped up and called Ooma one of their top picks for 2017 this week (along with Primo Water). That call didn’t help the stock this week (it was down 1%), but that’s probably because they distributed the note to their clients first. It could have helped move the stock higher in the first few days of 2017. Not coincidentally, Ooma just announced yesterday that an early investor, Worldview Technology Partners will sell 2.85 million of its shares (out of 6.7 million) for $8.65 per share, with B Riley acting as the sole underwriter. B Riley has 30 days to purchase up to an additional 425,000. These aren’t new shares, so there is no dilutive effect to existing shareholders; it’s simply a large shareholder who wants to unload a block. Worldview’s ownership is roughly 37% of shares outstanding, so the offering will increase the stock’s public float (which is currently just 9.8 million of the total 17.9 million outstanding). This should increase trading volume, and I think will be a net positive. That said, it’s hard to know exactly what will happen when a bunch of new shares hits the market at a 6% discount to yesterday’s close. Logic would say it will trade around 8.65 for a few days, but who knows. Ooma is an outlier in the software space because of its high growth rate and low valuation. I think it’s a good buy, but suggest sitting pat for a few days to let this news work through the market. BUY.
Primo Water (PRMW) Management held its modeling call this week and highlighted the strategic rationale for the Glacier acquisition. To recap at a high level, the acquisition significantly boosts Primo’s refill business (Glacier has refill kiosks all over North America) and makes the combined company the market leader in water dispensers, refill and exchange (management believes it has over 90% market share in each category now). In 2018, as compared to 2016, revenue should more than double, and EBITDA (a measure of cash flow before interest, taxes, depreciation and amortization) should grow by 157% (to $61 million). Cross-selling opportunities in dollar stores, drug stores and convenience stores could help boost sales as well. Management put together the following slide of synergistic benefits from the acquisition:
Management also updated their 2016 guidance (they haven’t reported Q4 yet) from 5% revenue growth to 6.4%. Factoring in 20 days of Glacier business, it should have close to 10.4% annual revenue growth. It sees combined revenue growing by over 100% in 2017, followed by a return to around 5% growth in 2018 (conservatively assuming no new revenue opportunities from the acquisition, which I think is very unlikely). To help fund the acquisition Primo has taken on additional debt and there will be acquisition-related costs, so it will take a few quarters for debt to start getting paid down and for earnings growth to kick in. Management didn’t get into EPS estimates, so we’ll get into those after the next quarterly earnings call. It does have $140 million in net operating loss carryforwards, so it shouldn’t be paying tax for a while. Primo is also allocating some capital to growth initiatives (a good thing). I fully expect this company will initiate a dividend in 2018 or 2019, or be sold to a company like Nestle. In short, there’s a lot going on here since this is a major, transformative acquisition. The stock is back to where it was prior to the announcement, which I think reflects the market not wanting to commit to assessing value from the acquisition until at least a quarter or two is in the books. That’s fair. I think the stock will move in the right direction once Primo shows it’s integrating operations well and that some of the expected synergies are coming to fruition. The stock is still a buy. BUY.
Q2 holdings (QTWO) The stock was down 1% to close at 29.45 yesterday, after rising as high as 31.00 on Tuesday. By now you’re probably used to the somewhat volatile trading pattern, especially since the general trend is up. This is clearly one to “buy on the dips”, and probably average in a little more if you ended up buying shares up near 32. The company just released Q2 SMART, a solution that uses machine learning and statistical analysis to identify behavioral traits of account holders at the credit unions and community banks that make up Q2’s client-base. Clients that buy the module will be better able to sell products to end-consumers. I think a good example would be if you used your bankcard to make some purchases at AutoZone and Monroe Muffler, Q2 SMART would tell your bank to send you a promotion offering a low interest rate on a new car. Creepy? A little. But nothing that isn’t being done by all digital companies out there (Amazon, Facebook, Bank of America, and on and on and on). It’s a good move. The stock is still a buy. BUY.
USA Technologies (USAT) We’re still in the pattern of higher highs and higher lows, which is good. This week shares were up 3% as the stock regained 4.50 and moved just a hair above its 200-day moving average line. No new fundamental news. The chart is looking healthier, so keeping at buy. BUY.
U.S. Concrete (USCR) As is typical, the week after recommending a new stock there’s not much more to say since I’ve just said everything I can! Shares pulled back to their 50-day moving average line at 60 this week, which looks like a great place to pick some up. It’s a buy. BUY.
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
