Who’s ready for this week to be over?
The market has been up, down and all over the place lately. So have our stocks. Oddly enough, from last Thursday’s close through yesterday’s close our portfolio is relatively unchanged—down just 2% using a simple average of each stock’s weekly return.
But that number misses the bigger-picture point. It’s been a stressful week with a lot of curve balls.
Between trying to figure out what’s real and what’s part of a strategy, or just venting, from the White House, China and central bank leaders around the world, one can get all twisted around and completely lose sense of direction.
What does seem clear is that the current trend around the globe is one of easing. Does that mean growth is becoming scarce? Hard to say. I don’t see that in the stocks I pay attention to. But then again, I’m not watching many that are super-reliant on global trade. Most of our small caps are U.S. stories, or have exposure to seemingly healthy markets in Europe.
It’s good that earnings have been coming out this week. Earnings numbers are relatively straightforward and give us something to hang on to that’s more tangible than macroeconomic dealings. While we’ve had a few misses here and there, for the most part I’m thrilled with how our companies are doing.
That doesn’t mean the stocks will go straight up, though some have. Did you see EverQuote (EVER)?! Most of the businesses we’re invested in are healthy, and that increases the odds that their stocks will outperform.
One quick scheduling note before I get to stock updates. Cabot’s annual Wealth Summit for subscribers like you is being held next week in Salem, MA. Time will be tight given the various events, so I’ll be paring back my writing. Instead of a normal Weekly Update on Friday I’ll be writing a short and sweet summary of the most pressing news from the week that affected our portfolio stocks.
Changes this week (all via Special Bulletin)
Domo (DOMO) Moved from Buy to Hold
CareDx (CDNA) Moved from Buy to Hold
Codexis (CDXS) Moved to Sell
EverQuote (EVER) Moved from Buy to Hold
Updates
AppFolio (APPF) reported last Monday and shares initially sold off but then popped back up. The stock was down 2% over the past week and, as expected, has begun to level off. I continue to think we’re going to go sideways here for a spell so no rush to buy. HOLD.
Arena Pharmaceuticals (ARNA) reported Wednesday after the close, and as expected the release and conference call were all about the pipeline. Shares sold off yesterday, but there’s no big-picture change to the story here. Arena still has immensely valuable assets, provided they work, and investors need to be patient as it’s still a couple years until a potential treatment could hit the market. Revenue from royalties was $900,000 in the quarter, but $48 million in cash was burned, leading to an EPS loss of -$1.24. Cash and equivalents on the balance sheet at quarter’s end was just over $1.2 billion. Here are the pipeline updates, most of which we’ve already discussed:
Etrasimod: a next-gen S1P modulator that could be an oral treatment for a variety of T-lymphocyte-mediate immune and inflammatory disorders. Etrasimod is expected to be an alternative to JAK inhibitors, which Arena believes have a less attractive safety profile. Phase 3 ELEVATE UC registrational program (two trials) underway assessing 2 mg etrasimod in ulcerative colitis (UC). ELEVATE UC 52 consists of a 12-week induction period with 40 weeks of maintenance, including around 370 subjects. ELEVATE UC 12 is just the 12-week induction trial with around 330 subjects. Arena is designing other trials to help differentiate etrasimod in UC too. Etrasimod is also moving toward a Phase 2b/3 trial in Crohn’s disease, to begin around the end of 2019, as well as the beginning of ADVICE, a Phase 2 study for atopic dermatitis (AD), also expected to enroll this year (around 120 patients, with two doses over the course of 12 weeks). Data for ADVICE could be available in the second half of 2020.
Olorinab: peripherally active, highly selective full agonist to the cannabinoid CB2 receptor. The asset is intended to treat visceral pain. CAPTIVATE, a Phase 2b clinical trial targeting irritable bowel syndrome (IBS) began in July. It’s a 12-week study with three dose levels given to 240 subjects to validate the potential, help design the next trial, and evaluate the efficacy and safety. Primary endpoint is improvement in the weekly Average Abdominal Pain Scale (AAPS). Data should be available in the second half of 2020.
There were a lot of analyst questions about specifics of trial design. But big picture, things keep trucking along here and as I’ve been saying from the beginning, there is huge potential for patient investors. As the probability of success for individual treatments creeps higher the stock should follow. Then, getting into mid- to late-2020, we should start to get some data, which could lead to steep changes in the stock price. I think you can Buy this pullback. BUY.
Avalara (AVLR) reported after the close Thursday with a monster quarter that keeps the bull case scenario alive and well. Side note: Avalara now has a market cap of almost $7 billion and I’m sure some people will look at that and wonder: why is this stock in a small-cap newsletter? I’ll welcome that question all day long! I get excited about the potential to hold mid and large caps in this portfolio because we will have bought them when they were small caps. We don’t have to sell because they get too big, like the small-cap index funds.
Back to the results: Revenue was up 43% to $91.3 million, beating by $6.7 million. Adjusted EPS of -$0.03 beat by $0.08 and improved from -$0.19 in the year ago quarter. That’s terrific. Equally awesome was that Avalara added 730 new customers in the quarter, which is probably twice as many (if not more) than most analysts were expecting. Part of this growth is due to the Wayfair ruling, but clearly there is more going on. What is it? I think just the increasingly obvious trend toward sales tax automation. Who in the world wants to handle this stuff manually? This is exactly what software is designed for, and while sales tax compliance is tricky stuff, Avalara seems on the right track and that’s why customers are flocking to it.
On the conference call a few analysts asked about where the gaps are in the company’s tax library. Said another way, what major sales categories is it not able to handle and either wants to acquire solutions for or develop internally? Management didn’t want to pin the tail on any potential acquisition targets, but did say it has around 60% of content in the U.S. covered now and could be interested in coins, ammunition and things like that. But really, the big opportunity is international, so expect Avalara to keep buying up companies that offer that content.
Suffice to say the market liked the quarter and full-year revenue estimates are going from around $350 million to $365 million, or to roughly 35% from 30%. The company will probably spend more to drive growth, but that’s a good tradeoff at this stage of the game. Avalara is now our fifth stock that’s up over 100% (it’s up around 125%) and while the surge may turn off conservative investors, I think the stock can still go quite a bit higher. Keeping at Buy. BUY.
Bandwidth (BAND) was just added to the portfolio last Friday and the company reported earlier in the week, so there’s nothing new to say today. Shares have been rock solid since reporting, and it’s still rated Buy. If you missed the Issue, Bandwidth is a $1.9 billion market cap company that has developed one of the leading cloud-based communications (CPaaS) platforms out there for large enterprises. This platform helps Bandwidth’s customers build, scale and operate software-based voice, messaging, and emergency service-related communications tools. Google (GOOG) uses Bandwidth Voice in its Google Home smart speaker to power outbound calls. Amazon’s (AMZN) Alexa does too. Microsoft (MSFT) also uses Bandwidth Voice and Messaging in some applications, including Skype. Revenue was up 25% in 2018 and up 18% in Q2 2019. CPaaS revenue is growing faster, up 20% in Q2. Growth should accelerate from 15% this year to 22% in 2020, but it will be 2021 or so until the company is profitable. BUY.
CareDx (CDNA) reported a great quarter last week and management raised guidance. Shares initially bucked the broad market trend and jumped higher, but they’ve fallen below their 200-day line this week, prompting me to move to hold in a Special Bulletin. There’s no new fundamental news. We have a modest gain still but shares are well off their 52-week high. This is a stock I’m watching closely now. Keep Holding. HOLD.
Codexis (CDXS) reported earlier in the week and shares sold off the following day. Earnings missed expectations and the stock, which wasn’t performing well prior to the report, clearly doesn’t have a lot of support. I moved to sell in a Special Bulletin and it now moves back to my watch list. SOLD.
Domo’s (DOMO) management team doesn’t seem in any rush to give us an earnings date. That’s probably because Q2 didn’t end until the end of July, one month after most other companies. But still, every morning I wake up thinking, “This will be the day we get the earnings release date!” Nothing. The stock’s been in a steady trend of lower lows and lower highs, which is never a good sign. Still, with expectations low and the stock cheap, but the potential huge, we’re trying to hang on here to see what happens. I moved to buy a few weeks ago, but back to hold this week given the ongoing weakness. Keep Holding. HOLD.
Estimated Earnings Date: 9/6/19
Everbridge (EVBG) reported Monday and I detailed the results in a Special Bulletin. Overall, the quarter was fine but billings noise caused some indigestion and the stock cracked its 50-day line on a big post-reporting decline. That’s OK. I think the big-picture trend here is good and management has done such a good job over the quarters of executing a rational growth plan that a little noise here and there isn’t a deal breaker. I’ve had at hold and with shares now 17% off their high, and bouncing back yesterday, I’m considering moving back to buy. There could certainly be some more weakness ahead (the last consolidation phase of 90+ days ran from last September through January). But if you’ve wanted to own more of this stock we may be getting close to a good buy price again. Stay tuned. HOLD.
EverQuote (EVER) reported a monster quarter, sending the stock to the moon. Our nice little gain has suddenly become a 70% gain. It was beautiful. I moved the stock to hold afterward because that’s just what you do after a move like that. Keep hanging on. More or less what we want to see is this stock hold on to the majority of the gain as the rally is digested. Then in a month or two start rising into the next earnings report. That may be the time to add a little more. HOLD.
Goosehead Insurance (GSHD) reported last week and both revenue and EPS missed by a small margin. As I said after the event I see any weakness as a chance to accumulate shares. That seems to be the market’s takeaway too. Shares are acting fine and are just 11% of their high. Keeping at Buy. BUY.
Q2 Holdings (QTWO) reported after the close on Thursday and, as expected, this continues to be a story about growth resulting from investments, including the acquired Cloud Lending business and Q2 Open platform (which allows for credit card and bill payments). These have translated into more, and larger, deals, which will pay off for years.
Details: Revenue was up 32.5% to $77.6 million (beating by $1.5 million) while EPS of -$0.39 missed by $0.04. Revenue was up 9% over the previous quarter (Q1 2019). The sales team landed three Tier 1 banks in the quarter, prompting an increase to full-year revenue which goes to $315 million (at the midpoint), implying just over 30% growth.
The stock surged 15% yesterday, putting it well into unchartered territory. Given how this stock tends to act I think we’re going to see some leveling off here so it’s not a stock you need to go out and buy today. But there should be plenty of investors buying on any dips and with great visibility in the business and long-term growth trends intact I see shares going higher in the back half of the year. You can keep adding to existing positions if you wish. BUY.
Quanterix (QTRX) reported on Tuesday and results were great, prompting management to try and temper enthusiasm and keep analysts from saying this is now a 50%+ grower. Management likes 40% better. The stock didn’t have a great reaction to the earnings report, then management announced another secondary offering, this one for $75 million. Recall that there was an at-the-market offering for almost $50 million back in June. Half of that went to scoop up UmanDiangostics, which either has the CFO thinking it is time to reload for the next target, or just in case the market deteriorates. It’s not a bad management decision.
Pricing of $25.25 per share was announced this morning. That should help the stock find support but do expect some volatility through next week as new shares hit the market. If the stock strengthens we’ll know demand remains high and I may move back to buy. For now, Quanterix is a Hold. Yes, growth is huge. But it’s a tiny company (market cap under $700 million) with a potentially disruptive technology, not one that’s yet been widely adopted (trailing-twelve-month sales are under $50 million). HOLD.
Rapid7 (RPD) reported last week with a top- and bottom-line beat and good supporting numbers to boot. The stock pulled back with the market, which I think opens the door to a little buying opportunity. If you don’t own the stock this may be a good time to start a position. Keeping at Buy. BUY.
Repligen (RGEN) reported last week and after a little dip is right back to within 6% of its all-time high. I like the business and the supporting trends. Keeping at Buy. BUY.
Upland Software (UPLD) reported Thursday after the bell and crushed expectations. Revenue was up 48% to $53 million (beating by $1.5 million) while adjusted EPS of $0.76 beat by $0.25. Adjusted EBITDA margin expanded by 1% to 36%, and cash at quarter end was $108.4 million. The company also just expanded its credit facilities to $410 million on August 6, meaning it’s ready for more acquisitions. An added bonus is that the interest rate went down. I’ve been talking about how this stock could really take off if it turns into an organic growth story, and on that measure growth was up 5% in the quarter. That’s a little lighter than last quarter, but still solid progress. Management bumped up full-year guidance slightly above consensus to $210 million - $214 million (vs. $210 million expected), implying revenue should be up 44% in 2019, versus 40% consensus.
On the call management talked about 150 new customers and higher annual recurring revenue per customer (several over $250,000 each). There were also 243 expanded relationships in the quarter, and a whole lot of product upgrades and consolidations, the details of which aren’t too important. The bottom line there is management continues to consolidate products into suites, which should help with cross-selling, and with integrating acquired technologies. Management is still targeting $25 million to $50 million of acquired revenue each year and sees integrations becoming more efficient as Upland grows.
One interesting metric from the call was that management said it pays about $1 in sales and marketing expense to generate $1 of annualized recurring revenue bookings. That basically means it costs a dollar to get a dollar over the next year. But the average customer lifetime is around six years. So that translates into collecting $6 over six years by investing $1. Obviously, there are other costs involved, but that’s a return any of us would gladly take! This was a good quarter and the stock reacted positively. Let’s hope there is some carry-through. Keeping at Buy. BUY.
Veracyte (VCYT) reported last week and was then pulled down by the market. Not a lot to worry about here in my view and I like that shares put up a big day yesterday (+8%). Keeping at Buy. BUY.
