Our portfolio rose by an average of 1% over the past week, led by Repligen (RGEN), up 7%, and Quanterix (QTRX) and Avalara (AVLR), both up 5%. Domo (DOMO) and Codexis (CDXS), both down 3%, were our biggest laggards.
Altogether it felt like a calm week. Considering the worsening performance of the S&P 600 Small Cap Index (chart below), which broke below its comfort zone, and the S&P 500, now 6% off its high, our portfolio’s resiliency continues to stand out.
I must admit our relative performance comes as a bit of a surprise. I mean, I know we have good stocks and have been fortunate to focus on the strongest areas of the market (cloud-based software and, to a lesser extent, select biotech and MedTech stocks). But still. As I sit here and look at sector after sector roll over it’s hard not to wonder when our stocks will get hit.
Sure, they could be higher before the next wave of selling hits them. And I’m not saying a selloff is imminent. But it’s only prudent to be aware that the spotlight of market leaders is narrowing. That’s not particularly healthy. And it doesn’t help that investors are getting yanked around by hardline trade negotiating tactics waged over Twitter.
I’m not ready to turn bearish. But I am suggesting we pull back on buying a little. This week one stock moves from Buy to Hold as we watch and wait to see what current concerns blow over, and which ones stick.
I must admit our relative performance comes as a bit of a surprise. I mean, I know we have good stocks and have been fortunate to focus on the strongest areas of the market (cloud-based software and, to a lesser extent, select biotech and MedTech stocks). But still. As I sit here and look at sector after sector roll over it’s hard not to wonder when our stocks will get hit.
Sure, they could be higher before the next wave of selling hits them. And I’m not saying a selloff is imminent. But it’s only prudent to be aware that the spotlight of market leaders is narrowing. That’s not particularly healthy. And it doesn’t help that investors are getting yanked around by hardline trade negotiating tactics waged over Twitter.
I’m not ready to turn bearish. But I am suggesting we pull back on buying a little. This week one stock moves from Buy to Hold as we watch and wait to see what current concerns blow over, and which ones stick.
Changes this week
Codexis (CDXS) moved from Buy to Hold
Updates
AppFolio (APPF) is essentially unchanged over the last month. With the only volatility in the stock arising on the day after reporting earnings (it tumbled down to 84 intraday but closed in the low 90s) I think investors feel confident in the future here. The stock is trading at 12.9 times forward revenue on an enterprise value basis (EV/Forward revenue), which is a little high but still well below peak valuation of 16.3 times last September. One of the compelling things here is that while EPS should be roughly flat this year due to investments, EPS growth was 100% in 2018, will be down this year, then is expected to rebound and grow 44% in 2020 (to $0.79). Revenue growth should be around 30% for each of the next two years. With strong fundamentals it’s always easier to justify a stock that trades at a bit of a valuation premium, especially if its peers are doing the same. HOLD.
Arena Pharmaceuticals (ARNA) was up a few points this week and, importantly, has stayed above prior resistance in the 50 to 51 range. Last week I suggested that we may have finally seen Arena move up into a new trading range but need a month or so above 50 to become confident in that stance. Keeping at buy, with an eye looking toward 60 in the relatively near future. BUY.
Avalara (AVLR) is an absolute beast and jumped 7% this week. I suspect most investors that have heard of Avalara have bought shares! If you don’t know the story, 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. We’re now up over 80% since I added the position in February. The stock’s not cheap, trading with an EV/Forward Revenue ratio of almost 14. The counter argument to looking too closely at valuation, however, is that the company has been trouncing estimates and analysts aren’t sure exactly how big the near (or long-term) opportunity is because demand for sales tax compliance software is so huge following the Supreme Court decision. What we do know is that analysts expect revenue growth of 30% this year and 23% in 2020, but those numbers could easily go up. And, EPS could turn positive in 2020, which is a major milestone. Don’t go crazy but you can keep adding a few shares, preferably on little pullbacks. BUY.
Bottomline Technologies (EPAY) was moved to sell last week given lackluster performance. Nothing new to report this week, and the stock is largely unchanged. SOLD.
CareDx (CDNA) wiggled around a little but is basically unchanged this week and looks strong enough to keep buying, despite the unresolved litigation with Natera (NTRA) regarding marketing claims and patent infringement (CareDx is suing). Representatives from the company will go to the American Transplant Congress next week in Boston to formally announce the launch of KidneyCare, which pools the company’s technologies to offer individualized treatments for kidney transplant patients. The idea is to both reduce risk and cut the need for immunosuppression treatments post-transplant. Management hosted investor meetings yesterday at the Craig-Hallum Institutional Investor Conference in Minneapolis, and moves on to the Jefferies 2019 Global Healthcare Conference in New York City next Wednesday. BUY.
Codexis (CDXS) is an interesting stock to watch right now because, on the one hand, shares just dipped below their 200-day moving average line on Wednesday, but on the other they’re well within a trading range between 15 and 23 that’s held up since the end of November. Volume has been trailing off lately, so my guess is the current, modest weakness is just a supply vs. demand issue and not attributable to anything unattractive about the stock or story. Still, with the stock now trending down I’m moving to hold. Management spoke at Craig-Hallum on Wednesday and KeyBanc on Thursday, and will be speaking at the Jefferies next Thursday in New York. HOLD.
Domo (DOMO) is a stock to watch right now. It’s the only one in our portfolio yet to report earnings and will be doing so next Thursday. What to expect? Consensus is for Domo to grow revenue by 27% in the quarter and for EPS to improve by 28%, but still come in at a steep loss of -$1.28. For the full year, analysts expect revenue to grow by 19% and EPS to improve by 22%, to a loss of -$4.02. It’s worth pointing out that Domo beat earnings expectations by $0.30 in the last quarter, however, so I wouldn’t put too much stake in consensus estimates at this point. Domo is investing a lot in the platform, plus ramping its sales team back up after reducing it in 2018. There are a number of ways the pins could fall here. 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. It has the potential to be disruptive and do great things. But it’s also not likely to be a linear success story. Expect some ups and downs. BUY.
Announced Earnings Date: June 6.
Everbridge (EVBG) is 6% of its all-time high. There’s no news this week. We’re watching for any potential news out of Europe, where Everbridge’s business has huge potential 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 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. HOLD.
Goosehead Insurance (GSHD) had a great May and while it’s pulled back a little the recent action is encouraging evidence that the stock may be coming back to life after a rather dull five-month stretch. You can keep averaging in. BUY.
Quanterix (QTRX) is one of those stocks that doesn’t give a lot of clues as to where it’s going. It just tends to meander about and go on streaky little runs here and there, while suffering sharp little pullbacks too. It’s just the nature of this type of stock. 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). Keep averaging in, trying to take advantage of the dips. Quanterix is bucking the broad market downtrend this week and jumped on huge volume yesterday, likely as a result of recent share issuances hitting the market. BUY.
Q2 Holdings (QTWO) is a digital banking stock and is trading just 3% off its all-time high after rising a couple points this past week. There’s no news to share. Shares broke above their 2018 high of 67.10 in February and have since stepped up into the mid-70s. Expected revenue growth of 30% this year and a return to EPS growth in 2020 (EPS of $0.45 expected) looks good to me. BUY.
Rapid7 (RPD) is up a couple percentage points this week but there’s no change in the trend – shares are still moving sideways, and the 50-day line is catching up. The stock looks healthy to me and IT security stocks have been solid lately so I’m feeling good about Rapid7’s future. I think this is just a cooling off period after a heck of a run year to date. At the same time, the market is in a risk-off environment so there’s no compelling reason to ramp up exposure in the stock right now. HOLD.
Repligen (RGEN) is bucking the broad market weakness as well as weakness in the healthcare sector. The stock hit an all-time high yesterday and volume has been above average since earnings came out in April. I’ve been bullish on Repligen and remain so, as I believe scarcity value, technology leadership and (thus far) management’s execution of a rational growth strategy are all compelling reasons to buy and hold shares. BUY.
Upland Software (UPLD) sells enterprise work management solutions and has been snaking its way higher since I added in March (up over 35% since). Growth has come from acquisitions mostly (though organic growth in the high single digits is emerging) and this week management announced it acquired Kapost, which sells cloud-based software that helps companies manage their sales and marketing content. Kapost will become part of Upland’s Enterprise Sales Enablement and Customer Experience Management solution suites. The $45 million deal (plus $5 million holdback) brings $15 million in recurring revenue under the Upland umbrella and brings the company up to $220 million in annualized revenue. Full-year revenue guidance goes up to a range of $209 million to $213 million. I like it. BUY.
