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Small-Cap Confidential
Undiscovered stocks that can make you rich

Cabot Small-Cap Confidential Weekly Update

It’s earnings season so most investors are focused on individual stocks. And with the S&P 500 and Nasdaq hitting new all-time highs this week, the big picture is looking pretty good too!


It’s earnings season so most investors are focused on individual stocks. And with the S&P 500 and Nasdaq hitting new all-time highs this week, the big picture is looking pretty good too!

The one issue is that the S&P 600 Small Cap index hasn’t quite moved back up near last year’s high. On the one hand this seems to suggest something bad is going on in the asset class. On the other, small caps rallied much higher than other indices in 2018. Small caps’ September 2018 high was 12% above their January 2018 high, whereas large caps’ September high was only 2% above their January high!

This means small caps have a lot more space to make up before they’ll get back to their previous high. With small caps up 15% year-to-date, versus 18% for large caps, they’re not lagging by all that much. I’m not concerned and think that valuation is still reasonable relative to growth (analysts see 19% EPS growth in 2020 for the small-cap index, compared to 12% for large caps) so it should be just a matter of time before small caps gets going.

Moving on to our portfolio, for the most part things are looking great. A few positions, like CareDx (CDNA), have lost some of their shine. But overall our portfolio was up around 5% this week, led by a jump in Upland Software (UPLD). And that doesn’t include a big upside move in Repligen (RGEN) this morning. More on that in a minute.

Action will pick up next week as we have six companies reporting. And the week after we’ll have six more. Fasten your seatbelts!

Changes this week

AppFolio (APPF) from BUY to HOLD
Avalara (AVLR) from HOLD to BUY


AppFolio (APPF) has been putting on quite a show for us with an 8% gain two weeks ago and another 6% rally this week. Notably, the stock broke out to a new all-time high above 91.49. We’re now sitting on a gain of 210%. Earnings are due out next Thursday and with such a big move this year the safe play is to sit on our hands through earnings and go from there. AppFolio moves to Hold. HOLD.
Announced Earnings Date: May 2

Arena Pharmaceuticals (ARNA) bounced back from last week’s 9% drop on no company-specific news. Directionally the stock moved in line with the biotech index, but Arena’s 6% gain over the past five sessions was much larger. No real fundamental news. HOLD.
Estimated Earnings Date: May 8

Avalara (AVLR) was moved to hold two weeks ago to give the stock a chance to consolidate some of its recent gains. With very little change in the share price over the last six weeks, earnings coming up the week after next (on Tuesday, May 7) and an analyst day on Thursday, May 9, there are potential catalysts that could get the stock moving again. It’s a bit of a speculation, but I’m moving back to Buy. We’ll know more about underlying trends in the business since the Wayfair vs. South Dakota decision when earnings come out. My sense is that the growth potential here is massive, and as the big dog in the sales tax compliance market, Avalara has the most to gain. That doesn’t mean the stock can’t go down, especially if there are any internal hiccups (sales execution, acquisition integration, etc.). But the big-picture trend is towards sales tax complexity and ecommerce, and Avalara has hoisted a big spinnaker to catch the growth from these tailwinds. It’s a compelling story. BUY.
Announced Earnings Date: May 7

Bottomline Technologies (EPAY) bounced 5% this week to keep the stock within its two-month price range of 46 to 52. Keeping at buy with Q3 fiscal 2019 earnings due out next Thursday. Growth isn’t expected to be too rapid; analysts see 4% revenue growth in the quarter, almost 7% growth expected for the year, and 9% growth in 2020. Remember, we are about to get Q3 fiscal 2019 earnings, so the market will be starting to look more toward fiscal 2020. In terms of EPS growth, analysts see EPS rising just 4% (to $1.32) this fiscal year then almost 17% (to $1.54) next. BUY.
Announced Earnings Date: May 2

CareDx (CDNA) reports the week after next and with the stock having given back its March gains investors will be looking for any new information on the lawsuits against Natera (NTRA) and the trend in AlloSure (kidney transplant) and AlloMap (heart transplant) blood tests. Recall that in the last quarter revenue was up 88% (top end of guidance range) and management gave 2019 guidance of $105 million to $107 million (up 37% to 40%). That assumes product revenue growth of around 20%, AlloSure revenue up 100% and AlloMap revenue up mid-single digits. Analysts have been expecting EPS of around $0.59, with spending on growth a limiting factor.

Upside in 2019 could come from private payer contributions, which may or may not start later in the year (Medicare currently represents 70% to 80% of AlloSure volume). On the competitive front, Natera will report the day before CareDx. At last check, the company still expects to commercialize its kidney test (a potential competitor to AlloSure), secure Medicare reimbursement by the end of 2019, and launch via its own direct sales force while also partnering with Thermo-Fisher Scientific (TMO) division One Lambda. Between the two earnings reports we should get a better idea of where the chips will fall.

Yesterday CareDx announced it would acquire a small company that sells organ transplant patient tracking software. The target is OTTR, which supplies software to over 60 transplant centers in the U.S. It integrates with electronic medical records systems Epic and Cerner. The purchase price is $16 million and will bring in around $6 million to $8 million in annualized revenue. The acquisition isn’t factored into guidance, yet. HOLD.
Announced Earnings Date: May 8

Chefs’ Warehouse (CHEF) is on tap to deliver earnings next Wednesday, making it the first of our portfolio holdings to report. Analysts are looking for revenue growth of 9.3% (to $348 million) and EPS of $0.05. For the year, they see revenue up around 8% (to $1.57 billion) and EPS up 25.6% (to $0.98). I’ve kept at buy since I see limited downside risk (the stock’s been rock solid at support around 30) but significant upside potential (the 52-week high is around 39). BUY.
Announced Earnings Date: May 1

Codexis (CDXS) is trading right at a support zone around 19 that it last visited in early March. It should hold up here but could also go a little lower before I’d get too concerned. If we went below the 200-day line (at around 18) I’d likely move to hold, but for now Codexis remains a Buy. The company, which specializes in designing new proteins with its CodeEvolver platform, hasn’t given us an earnings date yet. BUY.
Estimated Earnings Date: May 10

Everbridge (EVBG) dipped below its 50-day line last week for the first time since Christmas. But with earnings coming up the week after next and a tech stock rally this week, shares are back to their 50-day line and a mere 7% below the all-time high from early April. Shares are expensive on valuation, so we’ll head into the earnings report with a Hold rating and see what management has to say. I’m expecting another solid report. HOLD.
Announced Earnings Date: May 6

Goosehead Insurance (GSHD) is still trading in its established range. We’re being patient here because the long-term opportunity is big; Goosehead just needs to “age” a little as a public company and digest the significant gains it made in the months after going public at 10 last April (a huge deal, in hindsight). Our next checkpoint comes next Thursday when earnings are due. Analysts see Q2 revenue up 45% (42% for the year) to $85 million and EPS up 50% (85% for the year) to $0.37. BUY.
Announced Earnings Date: May 2

Q2 Holdings (QTWO) has been at Buy given that I think the stock still has upside before the valuation gets stretched and because internal initiatives (expansion beyond subscription and services with Q2Open, which connects with not-traditional banks, Cloud Lending ramp, TAM expansion, leverage in the biz model, etc.) should drive revenue acceleration (consensus is for 28% growth this year). Shares broke out (up 8%) to a new high above 72 this week, suggesting my bullish call is the right way to lean. BUY.
Announced Earnings Date: May 8

Quanterix (QTRX) was added last month during a dip in MedTech stocks, which weakened further in the weeks after I added it. Still, this is an open-ended growth stock that has a lot of room to grow in life science research and a massive opportunity in diagnostics (along with regulatory risk too) when it dives into that market. Consumer and investor interest in DNA testing is off the charts. Quanterix is developing an earlier-stage protein analysis platform that has the potential to detect disease in seemingly healthy, asymptomatic people, with simple blood draws taken as part of routine health screening. You get pure-play exposure to the trend, but also assume the accompanying risks. Management should give us an update on its plans in the diagnostics market when it reports (no firm date yet). BUY.
Estimated Earnings Date: May 9

Rapid7 (RPD) will deliver the goods next Thursday and I’m planning on keeping at Hold through the event given this week’s 8% rally brought the stock right back to its 52-week high. The market will be looking for any change in the environment for security spending, which has been a resilient space lately due to increasing complexity (partially from the cloud) and elevated threat levels. Analysts see Q1 revenue up 28% and an EPS loss of -$0.08. For 2019, expect revenue to grow 26.4% (to $308.5 million) and EPS to jump to $0.095, from a loss of -$0.41 in 2018. HOLD.
Announced Earnings Date: Thursday, May 2

Repligen (RGEN) had been quiet, until this morning. Management announced it will acquire C Technologies for $240 million. C-Tech is an analytics company with a portfolio of spectroscopy products that are used in biopharmaceutical manufacturing. It should help Repligen gain more market share in the process analytics segment of the bioprocessing market (protein concentration measurement, specifically), while contributing $16 million to $17 million in 2019 revenue (C-Tech total revenue in 2019 should be around $27 million to $29 million). Cross-selling and infrastructure synergies could save $6 million to $8 million, and C-Tech already has 60% gross margins, which is above the 56% gross margin Repligen has. In other words, the deal should help EPS too.

Repligen also pre-announced Q1 results that crushed expectations. Revenue should be up around $60.5 million, way above the consensus of $53 million. EPS should be around $0.27 to $0.28, also way above consensus of $0.19. Overall, this is great news and the stock should react favorably. You can buy shares into strength. BUY.
Estimated Earnings Date: May 8

Upland Software (UPLD) was the big winner in our portfolio this week as shares rallied 13% on the back of a well-received acquisition and an announcement that earnings are due out next Thursday. The acquisition target was PostUp, an email and audience development solution that was started in 1996 as an email delivery service. Upland is paying $35 million and sees around $11 million in annualized revenue ($10.8 million of which is recurring) and a positive contribution to adjusted EBITDA. PostUp will become part of Upland’s Customer Experience Management suite. Factoring in the acquisition management now sees 2019 revenue up $202.4 million to $206.4 million (a 36% improvement from 2018) and adjusted EBITDA of $73.7 million to $76.1 million. This forecast isn’t yet reflected in consensus estimates. I’ve had Upland at Buy and think you can keep pecking away at shares. As it gains scale and packages all its products into suites there appears to be a big opportunity for organic growth to supplement the acquisitions that have represented the bulk of growth thus far. BUY.
Announced Earnings Date: May 2

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