With the market having come back strong since its swift retreat in early June the immediate threat of a larger correction has diminished. The S&P 500 index is back above its 50-day line and within a couple percentage points of its all-time high.
The S&P 600 Small Cap Index, a.k.a the dog of all the major market indices I follow, is still below its 50- and 200-day moving average lines. But it has rebounded nicely off the dip to 889 two weeks ago and is back in the 920 to 980 trading range that’s been a comfort zone for much of the last year.
As always, the real action has been on a stock specific level. We saw another software acquisition this week as Salesforce.com (CRM) stepped up to the plate and took a swing at Tableau (DATA) in an all-stock deal.
On the heels of that news, software infrastructure, business intelligence, big data and stocks of other companies that collect, store and disseminate enterprise information surged.
The strength wasn’t necessarily long-lived among the big movers in our portfolio. Upland Software (UPLD) and Domo (DOMO), which were both up big on the news, retreated the next day. The wave came in, the wave went out.
Still, our portfolio made progress this week. Over the last five sessions, including the performance of new position EverQuote (EVER), which is up 10%, our portfolio rose 3% over the past week. We have an average gain of 90%. All but three of our stocks were either flat, or up.
We’re not making any major changes in our strategy. Keep pecking away at the stocks rated buy that you like and sit pat with the ones rated hold. One of our positions moves from Buy to Hold given that it’s about to bump up against resistance. Without a lot of news this week I’ve included some notes to refresh your memory of what each of our companies does.
Changes this week
CareDx (CDNA) moved from Buy to Hold
Domo (DOMO) moves from Buy to Hold
Updates
AppFolio (APPF) pulled back a few points and is now 6% off its all-time high. The company was formed in 2006 to provide cloud-based software solutions for small businesses in the property management and legal services industries. Analysts see revenue growing 32% this year and 28% in 2020. HOLD.
Arena Pharmaceuticals (ARNA) is a biopharmaceutical company that develops novel, small-molecule drugs with optimized receptor pharmacology designed to work across a wide range of therapeutic areas. The pipeline includes potential treatments for pulmonary arterial hypertension (PAH), ulcerative colitis (UC), pyoderma gangrenosum (PG), primary biliary cholangitis (PBC) and pain associated with Crohn’s disease. The pathway to commercialization is long (potentially 2021), but Arena is well-funded so patient investors should just sit tight. The stock was flat this week. BUY.
Avalara (AVLR) is a cloud-based provider of sales and indirect tax compliance software. Over 20,000 customers currently use Avalara. The stock was down 7% this week after spiking near its all-time high last week. Analysts expect revenue to grow by 29% (to $350 million) this year, up from 23% growth a couple months ago. BUY.
CareDx (CDNA) is applying the latest advancements in genomics and bioinformatics technology to improve the lives of organ transplant patients. It specializes in noninvasive diagnostics solutions for heart and kidney transplants. The stock went through a rough patch in late March and April, but has come back strong, rising 11% last week and 5% this week. Look for revenue growth of 16% this year to accelerate to 29% in 2020. Management will present at the Raymond James conference next Tuesday then the Piper Jaffray conference on Wednesday, June 26. CareDx is just 4% off its all-time high so we could encounter some resistance soon. Moving to Hold. If we break higher, I will consider moving back to buy. HOLD.
Codexis (CDXS) is an industrial biotechnology company with a proprietary technology platform, CodeEvolver, that uses AI and machine learning to create new proteins for use in customer products, manufacturing processes, and other commercial dimensions. In their natural form proteins come up against inherent barriers that limit their commercial potential. Codexis engineers novel proteins that overcome those limitations. Look for 16% revenue growth (to $70 million) and adjusted EPS of -$0.25 this year. The stock was up 3% this week. HOLD.
Domo (DOMO) has been a wild stock lately, prompting me to wonder if the timing for this stock is wrong. We jumped in back in early May when the stock was moving sideways, then it trended down into the earnings report and gapped down afterward. The stock came back during the following session, and I advised buying into the weakness. That worked out very well in the short term since Domo rallied hard on news of Salesforce.com’s (CRM) proposed acquisition of Tableau (DATA). But that day’s gain is now gone. One of the hardest things to do in investing is to recognize that you might sometimes have a stock with a lot of potential, but the timing just isn’t right. Do you hold and wait while it declines or moves sideways? That’s the million-dollar question. We need to consider more than just what the stock chart is telling us.
Stepping back to look at Domo’s end markets of business intelligence, what seems clear is that it’s a hot market. Enterprise data is valuable, and large companies want it, as well as the applications that generate the data. Salesforce.com is taking out Tableau. Recall that Salesforce.com also bought MuleSoft a while back, Google just bought Looker (private), Infor bought Birst in 2017, Alteryx (AYX) bought ClearStory in 2019 and Microsoft appears to be doing well on its own with its Power BI solution. Morgan Stanley says Oracle/SAP doesn’t appear too interested in data/analytics acquisitions (though you never know), but that Amazon hasn’t done much in the space and has a Quicksight solution that isn’t gaining much scale.
Are Domo and Alteryx the only publicly traded pure-play business intelligence/data plays left? It would appear. That doesn’t necessarily mean both are acquisition targets, but it’s silly not to consider the possibility. Given the mixed signals of weak stock but huge market potential and possible acquisition interest, I’m moving Domo to Hold right now. That seems the best balance at the moment. HOLD.
Everbridge (EVBG) was founded in 2002, shortly after the 9/11 attacks, to provide fast, automated communications services during life-threatening situations and mission-critical business events. The software platform powers apps that help organizations and government entities keep people safe, and business running. The stock was up 4% last week and 2% this week. Management announced it recently became the first U.S. emergency notification provider to achieve Germany’s BSI C5 attestation, an accreditation that means it complies with all security requirements defined by C5. This is an incremental step to helping Everbridge expand in Europe. HOLD.
EverQuote (EVER) is our newest stock, added to the portfolio last Friday. The company offers an online shopping place where consumers can compare and buy insurance policies. It was started in 2011 and went public in 2018. With over 11 million consumer visits per month, EverQuote operates the largest online marketplace for insurance shopping in the United States. While we’re still early in the shift to online insurance shopping, the trend is unmistakable, which is why insurance carriers continue to integrate their marketing efforts with EverQuote and pay the company for referrals. Management recently reported Q1 results (revenue was up 28%) when it guided for full-year revenue to be better than expected, in a range of $197 million to $203 million (versus $193 million expected), implying better than 20% growth. The stock is up 10% since last Friday. BUY.
Goosehead Insurance (GSHD) has been trading around the 30 to 41 level for about a week. The company is shaking up the insurance brokerage market by building an independent personal lines insurance sales and support platform and deploying it at a national scale, through a hybrid corporate and franchise distribution model. It’s the only publicly traded insurance broker of its kind out there. Its focus on auto, homeowners’ and other personal lines (boat, umbrella, etc.) gives it access to a sticky market with high renewal rates. A few subscribers asked if future success of Goosehead or EverQuote would be damaging to the other. I don’t think so. Or, if either company grows to the point where they really do damage to the other, we will probably be up very, very nicely. There is a lot of room in the insurance brokerage and lead generation market, where over $120 billion is spent annually on agent commissions and marketing. BUY.
Q2 Holdings (QTWO) battled back to gain 4% this week, after giving up 5% last week following a convertible note offering. This is a bullish sign as the stock’s strength suggests strong demand for shares. Q2 holdings is a pure-play provider of digital banking solutions to the highly personalized community banking and credit union market. It offers a purpose-built platform that brings small banks and credit unions up to speed with solutions for deposits, money movement, lending, security and fraud, giving them the power to compete with the mega banks for depositor accounts. Analysts see 29% revenue growth this year. BUY.
Quanterix (QTRX) was moved to hold last week after the stock blasted off and rallied 26% to an all-time high. It didn’t cool off this week, rising by another 15%. We’re now up over 30% since I first recommended the stock on April 5. Quanterix is commercializing a disruptive protein analysis technology that has the potential to detect disease in seemingly healthy, asymptomatic people, with simple blood draws taken as part of routine health screening. The industry term for this emerging field is proteomics. It encompasses both genomic and protein research. Just like the sequencing of the human genome advanced our understanding of the human body, proteomics has the potential to change the game with respect to diagnosing, treating and even preventing disease and injury. The recent strength has come on the back of an equity offering and a new product launch. Analysts see revenue up 33% this year and 40% in 2020. HOLD.
Rapid7 (RPD) offers cloud-based software solutions that help customers better understand, prioritize and address the threats facing their physical, virtual and cloud assets. It is landing larger deals, more multi-product deals, and more customers. And that’s why the stock did so well early in the year. It’s been moving sideways for the last two months. HOLD.
Repligen (RGEN) broke out to fresh highs above 72 a couple weeks ago and has been consolidating for the past two weeks. It’s still a buy. Repligen sells bioprocessing supplies to life sciences and biopharmaceutical companies around the world. It plays in a highly specialized field, and with the trends pointing toward more personalized medicine and small batch drug production, the company’s equipment is more critical to its customers’ long-term success than ever. Analysts see revenue up 29% this year then 12% in 2020, but I suspect unannounced acquisitions will boost those 2020 numbers. BUY.
Upland Software (UPLD) is basically flat over the past two weeks, even though the stock has been bouncing around a lot, rising to a new all-time near 55 early in the week (after news of Salesforce.com’s proposed acquisition of Tableau). Shares are up 37% since I first recommended them in early March. The company provides cloud-based Enterprise Work Management (EWM) software to companies where collaboration and teamwork are critical to their operations. This software is designed primarily for people in mid to large organizations (Upland has small customers too) that work in dynamic, knowledge-based work environments all over the world. BUY.
