With all the focus on the U.S. and China trade war and the escalating battles in Washington, D.C., it felt like investor sentiment plummeted over the past week.
But looking at the broad market we see that the S&P 500 is just 4% off its recent high, has thus far held above support around 2,800 and remains above its long-term (200-day) moving average line. The Nasdaq dipped to its May 13 low near 7,627, but it too is above its long-term moving average line.
More concerning to me is that the S&P 600 Small Cap Index dropped below support in the 920 range Thursday, when it fell by 2.2%. If the index doesn’t recover quickly this could signal a change in a trading range that’s persisted since the beginning of February. Going back even further, to last fall and to the beginning of 2018, this same trading range seemed to mark something of a comfort zone for the small-cap index. In my mind, it’s something to watch closely over the next week.
On a brighter note, this dip has pulled leading stocks back a few points so investors that are looking to put a little money to work can pick up a few more shares than they could have a week or two ago.
It’s frustrating that the market continues to get yanked around based on what seems like an off-hand comment or Twitter post from the White House. But that’s the world we live in now and based on the early evidence this morning it looks like we could end this week on an up note. That would probably send most investors into the long Memorial Day weekend feeling a little more confident than if there is just a sea of red going into the close, like there was yesterday.
In the Cabot Small-Cap Confidential portfolio, most of our stocks have weathered this little pullback just fine. The biggest one-week declines are in the -4% to -6% range. But those have been offset by a 15% gain in one stock—thank you Goosehead Insurance (GSHD)—and a few single-digit gains in others, so on average our portfolio is flat over the past week.
Year to date, our benchmark, the Russell 2000 Small Cap Index, is up 12%. But the Cabot Small-Cap Confidential portfolio is up 32%, so it’s hard not to feel good about that relative outperformance of 20%.
I’m not advising any big changes in strategy right now, even though I don’t like the way the S&P 600 Small Cap Index is looking. Continue to average into the stocks rated buy that you want to build larger positions in. And be cautious on those rated hold as in most cases we’re waiting for shares to consolidate recent gains before deciding on the next step.
We are making one change to the portfolio today. That’s to let go of a stock that’s underperformed the Russell 2000 by 9% since I added it last August. The company is Bottomline Technologies (EPAY). Details on the rationale behind that sale, as well as updates on all other positions, below.
Changes this week
Bottomline Technologies (EPAY) moved from HOLD to SELL
Updates
AppFolio (APPF) seems unfazed by broad market volatility. Shares of the real estate software specialist are unchanged over the past two weeks and are trading just 3% off their all-time highs. The breakout over 90 in March was a convincing show of strength, especially after what had already been a nice move up from the mid-50s at the end of 2018. AppFolio will experience an earnings growth lull this year as it invests in the business (EPS of around 9% expected) then should grow earnings much faster, by around 64%, in 2020. HOLD.
Arena Pharmaceuticals (ARNA) pulled back 5% this week but is still trading above previous resistance in the 50 to 51 range. An uptick in trading volume over the last two weeks suggests some new money flowed into the stock. I expect we’ve finally seen Arena move up into a new trading range, but it is still early in the process and we’ll need a month or more above 50 to become confident in building significantly larger positions at this level. You can continue to add a few shares down to around the 51 area. If it goes much lower than that, I’ll move back to hold. BUY.
Avalara (AVLR) gave back 5% this week but is trading just 9% off its all-time high so the stock is far from damaged goods. The company specializes in sales tax compliance software and with automation essentially a given, but only a small portion of the market there yet, there’s a lot of white space for Avalara to grow into. The stock’s been white hot this year (up over 100%) and has held onto the gains from its early-May gap up, which came after a better-than-expected earnings report. You can peck away at a few shares around this level. BUY.
Bottomline Technologies (EPAY) continues to be thorn in our side because the stock is underperforming but it feels like there is strategic value here (i.e. acquisition potential) and the stock has been moving sideways in recent weeks so there’s not a lot of pressure to sell it.
I added it to the portfolio because it was a relatively conservative growth stock and well regarded by small- and mid-cap funds. I didn’t anticipate the deceleration in growth that has emerged in recent quarters, and neither did the market (hence the big dips after the last three earnings calls).
The decision of what to do now basically comes down to opportunity cost. Or, said another way, what else can be done with the money that’s currently invested in Bottomline. I think the stock will ultimately come back, but in the meantime the trend isn’t strong, and shares could easily go down more. In that event, it would be better just to hold the cash.
Alternatively, there are plenty of stronger-looking stocks out there that would be a better use for the funds right now. I don’t like being indecisive. With our portfolio relatively full and more stocks on my potential buy list it’s time to move on. Bottomline moves to Sell and goes back on the watch list. SELL.
CareDx (CDNA) moved back above resistance in the 30 range a couple weeks ago, giving a buy signal for risk-tolerant investors. Shares haven’t performed well over the past week, mainly because of a 5% dip yesterday. But they’re still above 30 and holding up well enough to keep at buy. CareDx sells noninvasive diagnostic solutions for heart and kidney transplant patients. There is ongoing, unresolved litigation with Natera (NTRA) regarding marketing claims and patent infringement (CareDx is suing). I hope to get an update from management sometime in June. BUY.
Codexis (CDXS) has wiggled around a little but really hasn’t done much in a few months. Shares of the protein engineering specialist are prone to swinging around, but if you step back and look at a weekly chart you see that the stock’s long-term trend is up and to the right. Let’s stay focused on the big picture here. Management will speak at two upcoming conferences, starting with Craig-Hallum on May 29 and KeyBanc on May 30. BUY.
Domo (DOMO) was recommended on May 3 and hasn’t been with us long enough to make much of an impression. The big-picture story is that Domo a business intelligence (BI) platform that allows every worker in an organization to access real-time data from their mobile device. Think of Domo as being like a corporate operating system that executives use to see how the company is doing. The platform is capital intensive to build, but Domo is targeting a $20 billion to $45 billion market, depending on how you slice it. It has the potential to be disruptive and do great things. Since we’ve all been introduced, the stock is down 4%. Not great, but still 3% better than the Russell 2000 has performed over the same time frame! The glass is half full, guys. BUY.
Announced Earnings Date: June 6
Everbridge (EVBG) has fallen five points after reaching a new all-time high of 85 last week. The critical events communication platform has global reach and with both government and corporate customers there is a ton of growth potential left. We could easily see a big jump in Everbridge’s European business given that the EU gave a directive in 2018 that member states, as well as countries that want to remain part of Europe’s Economic Area, have two years to enact legislation on population alerting, and 40 months to deploy solutions. Everbridge already has deals with Finland, Sweden, Greece and the Netherlands, and management thinks deals in the $5 million to $10 million range are possible for smaller countries, with $20 million to $30 million a more likely range for larger countries like France. There are no guarantees, but you can be sure Everbridge will be at the table. HOLD.
Goosehead Insurance (GSHD) exploded over the last month as shares rallied from 26 to over 40. They’ve given back some this week but are still up 15% over the last two weeks. I would have liked to see shares hold above 38 as that’s the upper bound of an extended consolidation phase that persisted for 170 days. You can keep nibbling on shares of Goosehead but I would suggest keeping new positions small. It is a somewhat thinly traded stock and we have seen multi-day declines that can dent confidence. You want to stay in position to stick with Goosehead for the long term. BUY.
Q2 Holdings (QTWO) is a digital banking stock and is trading just 5% off its all-time high. This is going to be a down year in terms of EPS growth (expect down around 50%, to $0.13). But with revenue growth expected to accelerate to almost 30% and the long-term market potential growing, investors are right to be focused less on the next quarter or two and more on 2020 and beyond. BUY.
Quanterix (QTRX) was just added in April and like Domo, hasn’t been with us long enough to make much of an impression. The company has developed an ultra-sensitive digital immunoassay for precision health in life sciences research. It makes instruments (manual benchtop and automated floor-standing models) and has a growing library of consumables (assays). The stock spiked after reporting two weeks ago, sank to a four-month low on news of share issuances, and, until a 4% drop yesterday, had been recovering. Quanterix has a market cap of around $500 million and is likely to be lively at times (both to the upside and the downside). Average in. BUY.
Rapid7 (RPD) jumped out to new highs above 40 in February and kept walking higher until it reached the mid-50s in March. For the last two months shares of the IT security software stock have been consolidating, mostly in the 50 to 55 range. The company has been delivering big earnings beats and with 2019 expected to mark the first profitable year (EPS of $0.05 expected) and massive EPS growth in 2020 (660%, to $0.38 expected) it’s easy to see why the stock is standing tall in the face of some broad market volatility. HOLD.
Repligen (RGEN) is also hanging tough, trading just 6% off its all-time high. I’ve been looking for the bioprocessing technology stock to break above 70, but that hasn’t happened just yet. As with Everbridge (and a lot of our stocks, for that matter) there is scarcity value here since there just aren’t many small-cap bioprocessing stocks out there. And certainly not with the technology edge in niche markets that Repligen possesses. BUY.
Upland Software (UPLD) spiked to a new high last week and has pulled back a bit since. It’s now 7% off its high. The company develops cloud-based enterprise work management software and has historically been all about growing through acquisitions. More recently, it’s begun to turn on the organic growth spigot. And the flow could pick up as management pools various products together into functional suites. Because unannounced acquisitions aren’t factored into forward estimates it looks like Upland’s growth is set to deaccelerate from around 33% in 2019 to 5% in 2020. But I’ll be very surprised if that’s the way things work out. Upland is much more likely to grow well above 10%, even if management pulls back on the frequency and magnitude of acquisitions. BUY.
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
