Small Caps Start to Report Next Week
The broad market remains at all-time highs and the Russell 2000 Small Cap Index is still wallowing in the mud. In other words, nothing is new!
I’ve railed against the Russell 2000 enough recently so won’t go too far down that path again today. Except to say that I’m glad you know that it’s not representative of the returns that can be generated from this exciting asset class.
Our portfolio is outperforming the index by roughly 100%, on average. But we’re not the only ones. Many targeted mutual funds are also demolishing the Russell 2000 Small Cap Index.
We’re going to be seeing more SMID Cap Funds come out (SMID stands for “Small and Mid-Cap”) as money managers tweak their products to better address the evolution of the stock market, which isn’t rewarding funds that track an outdated index (like the Russell) that suffers from upward migration. Upward migration is when the most valuable companies, which are often the ones you want to hold on to, eventually grow too big and migrate out of the index.
News flow from our portfolio holdings remains slow given the quiet period that comes before earnings reports. Next week, the action heats up. We will have six positions reporting (see calendar below).
I’ll get you updates as the results are released. We also have the next Issue of Cabot Small-Cap Confidential scheduled for next Friday. It will be a busy week!
Next Week’s Earnings Calendar
Monday 7/29: AppFolio (APPF)
Tuesday 7/30: Veracyte (VCYT)
Thursday, 8/1: CareDx (CDNA)
Thursday, 8/1: Rapid7 (RPD)
Thursday, 8/1: Repligen (RGEN)
Thursday, 8/1: Goosehead Insurance (GSHD)
Changes this week
Domo (DOMO) moved from Hold to Buy
Updates
AppFolio (APPF) will kick off earnings next Monday. I’ve had it at hold since my sense is big investors are looking for some insights into what the company’s investment spending will look like in the near-term and how that will impact earnings. Revenue in Q2 is expected to be up 35% to $63.7 million and EPS is seen coming in around $0.11, almost half of what it was a year ago (when EPS was $0.21). That’s the impact from the higher spending. For the full-year 2019, look for revenue to rise 32%, to $250 million, and EPS to dip 14%, to $0.48. HOLD.
Announced Earnings Date: 7/29/19
Arena Pharmaceuticals (ARNA) is attracting attention as it begins dosing patients in a couple of trials. A few weeks ago management said it had dosed the first patient in the first of two Phase 3 trials (ELEVATE UC 52) evaluating etrasimod in patients with severely active ulcerative colitis (UC). And this week management announced it had dosed the first patient in the CAPTIVATE Phase 2 trial evaluating olorinab in the treatment of visceral pain associated with gastrointestinal (GI) disorders. Olorinab is an oral, highly-selective, full agonist of the cannabinoid type 2 receptor, and the trial will evaluate how safe and effective three different dose levels are in roughly 240 patients. If you’re wondering about potential consider this; Arena has a market cap of $3 billion, won’t generate any meaningful revenue until 2021 or beyond (assuming success), and the stock is in a nice uptrend. Be patient and try to buy on pullbacks if you’re still filling a position. BUY.
Estimated Earnings Date: 8/5/19
Avalara (AVLR) was basically flat this week on no news. Earnings are due out the week after next. I like it and think we can keep buying into earnings, even though we’re up 112% since adding the stock almost six months ago. BUY.
Announced Earnings Date: 8/7/19
CareDx (CDNA) has taken a lot of punches lately. There was that short attack from Kerrisdale a few weeks ago. And also the lawsuits filed against Natera (NTRA) alleging IP infringement for Natera’s Prospera test and misleading claims relative to CareDx’s AlloSure test. Despite all this CareDx has remained above its 200-day line since September 2017, though there have been a couple of close calls. As I said last week CareDx can defend itself, and will have that chance next Thursday when it reports Q2 results. Analysts see revenue up 57% in the quarter, to $28.1 million, with EPS at break even. For 2019, look for revenue to climb 50%, to $120 million, and EPS to improve to $0.08, from a loss of -$0.15 in 2018. If the results are as expected, or better, with forward guidance on target, I see shares moving higher. BUY.
Announced Earnings Date: 8/1/19
Codexis (CDXS) is 20% off its high and hasn’t done a heck of a lot lately. It’s still moving sideways between 18 and 19, where it’s been for a month. There’s nothing new to report for the protein engineering specialist. The official earnings date hasn’t been announced just yet. BUY.
Estimated Earnings Date: 8/8/19
Domo (DOMO) has been trending down since the middle of March. That doesn’t mean it’s a bad company—a lot of stocks go on slides then recover and make new highs for many months and years afterward. Domo hit its 200-day line a few times in July and has managed to move a few points higher this week (up 8%). But I think we need to get to the earnings date before we’ll see any real change in the stock’s trend. The bulls are expecting Domo’s transformation to a more enterprise-focused company to shine through with higher renewals, more enterprise-scale deals and bigger average deal size. Bears question Domo’s potential to deliver on its ambitious business intelligence goals and ability to reach cash flow breakeven this year.
The company recently put out an interesting graphic of how much data is being created these days. Just to pull out a few tidbits; did you know that, every minute, over 694,000 hours of video are streamed on Netflix? That Instagram users post 278,000 stories and 55,140 photos? And that AirBnB books 1,390 reservations? That’s just the tip of the iceberg. And Domo is one of the ways enterprises can capture the data they create, share it, and allow people to make decisions based on what it says. All from their smartphones. The stock is looking better and if the quarterly report supports the bull case I see a significant jump in the shares. If not, it could be painful. I’m moving back to buy for aggressive investors. But be forewarned, if the stock takes a big hit after earnings there’s a good chance we’ll be forced to drop coverage until the trend improves. BUY.
Estimated Earnings Date: 9/6/19
Everbridge (EVBG) hit an intra-day high of just over 99 on Monday. There’s no new news this week, but management will be reporting the week after next. We’re up almost 540% and I have the stock at hold going into earnings. I’ll revisit that rating after the event. HOLD.
Announced Earnings Date: 8/5/19
EverQuote (EVER) will also report the week after next. The stock has been grinding higher all year, largely on rising optimism that management is expanding the company’s addressable market in the online insurance marketplace with successful new product launches. BUY.
Announced Earnings Date: 8/5/19
Goosehead Insurance (GSHD) just announced yesterday afternoon that earnings are due out next Thursday, roughly a week before we were expecting them. The stock broke out back in May, dipped, then rallied to fresh highs in June. It’s an under-the-radar name that will begin to gain more followers eventually. Next week, look for management to deliver quarterly revenue growth of at least 33%, to $19.7 million, and EPS of $0.09, up from a loss of -$0.25 in the year ago quarter. In 2019, analysts are expecting revenue to grow 50%, to $90 million, and EPS to surge to $0.41 from a loss of -$0.21 in 2018 (part of that loss is due to the company going public). BUY.
Announced Earnings Date: 8/1/19
Q2 Holdings (QTWO) will report the week after next and isn’t likely to say anything of substance before then. I’ll present the latest analyst estimates next week. I think you can buy this little dip. BUY.
Announced Earnings Date: 8/7/19
Quanterix (QTRX) pulled back 3% this week but is still up 26% since the beginning of April when we first got into it. Shares peaked a little above 36 a few weeks back and pulled back about 20%. That type of action isn’t unusual in a stock like this. It only has a market cap of $794 million, it’s MedTech, rapid growth, and not well known. Lots of factors can make the stock move a lot on any given day or week. Like when it went from 22 to 36 in June! We don’t have an official earnings date yet but are eyeing the week after next as the most likely time frame. HOLD.
Estimated Earnings Date: 8/8/19
Rapid7 (RPD) was our second best-performing stock this week (behind Domo), rising by 7% and hitting a new all-time high above 64. We’re now up over 140%. Management will report next Thursday with the market expecting Q2 revenue up 29%, to $75.1 million, and EPS improving to -$0.07, from -$0.13. For the full-year, look for revenue to climb 33%, to $320 million, and EPS to come in positive for the first time, at $0.05, versus a loss of -$0.41 in 2018. I’ve had a bullish outlook on Rapid7 after moving back to buy over a month ago, when it was emerging from a three-month consolidation phase. Security software is hot, and Rapid7 is right in the mix. Aggressive investors can still buy ahead of earnings but recognize that’s always a bit of a gamble. More conservative investors should just sit tight. I’ll report back once the results are in. BUY.
Announced Earnings Date: 8/1/19
Repligen (RGEN) was up 4% this week and 7% last week and has now risen 54% since I recommended it. The stock is at an all-time high and earnings are coming out next Thursday, August 1. We’re looking for quarterly revenue to jump 34%, to $63.9 million, and for EPS to rise 56%, to $0.25. And we’d like management to signal that full year results will produce at least 37% revenue growth and 32% EPS growth, to $0.96. Some of this is due to acquisitions. The stock is trading at all-time highs and aggressive investors can still buy. BUY.
Announced Earnings Date: 8/1/19
Upland Software (UPLD) was flat this week on no major news. We have an earnings date of August 7, the week after next, and management will speak at the Canaccord Genuity Growth conference the next day (Thursday, August 8). Recall that the company raised around $140 million in May, then acquired Kapost, a content operations platform, for roughly $50 million. Upland is a cloud-based enterprise work management software company that is consolidating its products into suites, and, we hope, becoming more of a “self-help” growth story that can deliver modest organic growth to supplement the acquisitions that have powered most of the 40%+ annual growth in the last two years. BUY.
Announced Earnings Date: 8/7/19
Veracyte (VCYT) got whacked early this week when the stock closed down 7.5% in one day on no news. That action tripped a few emails from curious shareholders wondering what was up. The answer is … who knows! It’s not rare that a small, or even a mid-cap, stock will move around on no public news. It could be that a big investor is unloading some shares. Or that somebody got nervous based on something that another company’s CEO said, or it was a down morning and then sellers starting piling on. Really, it could be any number of things. Or nothing at all. Without any public info it’s impossible to say.
When these things happen I take a look at the daily and weekly charts and see how often the stock in question moves as much as it did on the day in question. In Veracyte’s case, the stock has traded down 6% or more at least ten times since October, in most cases on no news. In other words, this week’s action isn’t all that unusual. We’re down 3% on the position since I recommended it on July 1, and the stock was down 3% this week. No biggie. More important is that the stock is above its 50-day line and there is no tangible, negative change in the growth story.
Management reports earnings on Tuesday. We’re looking for revenue to be up 27% to $28.8 million and EPS to improve to -$0.10 from -$0.18 in the year ago quarter. For 2019, we’d like to see revenue up 33%, to $120 million, and EPS 50% improved from last year, at -$0.30. BUY.
Announced Earnings Date: 7/30/19
