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Small-Cap Confidential
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Cabot Small-Cap Confidential Weekly Update

Looking at the broad market, it seemed like a calm week. Even a good week! The S&P 500 moved up near all-time highs and even the languishing S&P 600 Small Cap Index broke out of its funk and shot up near 2019 highs for the first time since early May.


Looking at the broad market, it seemed like a calm week. Even a good week! The S&P 500 moved up near all-time highs and even the languishing S&P 600 Small Cap Index broke out of its funk and shot up near 2019 highs for the first time since early May.


It could even break out and move toward 2018 highs if the trend continues!

Meanwhile, our stocks were banged this way and that early in the week in what was, by far, the most unsettling period we’ve had in many months. Things did calm down on Wednesday and Thursday, when many stocks bounced back to recover some, and in some cases, all of their early-week retreat.

But the overall action of the last five days has one question on the tip of many investors’ tongues: What the hell is going on?

It looks like a classic rotation. Many of the big leaders are being sold and money is flowing into other names. You could say growth is being sold and value is being bought. But that’s probably oversimplifying it.

I’ve mentioned several times this year that the huge outperformance of a relatively small subset of stocks—many of which we own—wouldn’t go on forever. This market action is that statement playing out. And as has become somewhat more evident in recent years these rotations—or shakeouts, or corrections, or whatever you want to call them—are happening very quickly.

I’m not saying the run in our stocks is over. I don’t think that’s the case. But broadly speaking, I do think the pause button has been pressed and we’re going to see some of our stocks settle down before they resume any sort of sustained uptrend. As always, we want to look at things on a stock-by-stock basis, so pay close attention to the updated ratings this week.

We made many incremental moves this week, locking in partial profits on stocks in which we have sizeable gains. I don’t think we’re going down, down, down. We’re just pumping the brakes a little and taking a little money off the table.

The simple average gain (a very simplified method of analysis) on partial positions sold this week was 98%. That included 213% on AppFolio (APPF), 94% on Avalara (AVLR), 83% on EverQuote (EVER), -6% on Quanterix (QTRX) and 103% on Rapid7 (RPD). Congrats if your gains matched up with these!

Changes this week (since Monday’s Special Bulletin):

Repligen (RGEN) Moved from Hold to Buy


AppFolio (APPF) dipped with the market earlier this week, prompting me to recommend selling one-quarter of your position (via Special Bulletin) to lock in a partial gain of 213%. Since then the stock has bounced back up to its 50-day line and remains within the trading range of 88 to 110 that’s held up since late June. No new fundamental news on the software specialist, which offers solutions for property managers and property rental companies, as well as small legal offices. I still like the stock. HOLD.

Arena Pharmaceuticals (ARNA) was also shaken up a little early in the week and dipped to its 200-day line, but never cracked far below it. The stock’s 18% off its high (from July), but most of the decline happened in early August, not this week. On Monday we received a small update on olorinab, Arena’s potential treatment for visceral pain associated gastrointestinal disorders. Patient-reported outcomes seemed to improve after eight weeks of treatment across all aspects of the ongoing study. This isn’t groundbreaking data! But it’s a little tease of what could be more definitive news when Phase 2b CAPTIVATE trial data is released, which should be in the second half of next year. BUY.

Avalara (AVLR) broke lower on Monday to post its biggest one-day loss of 2019. We sold a quarter position for a 94% gain just to take a little off the table. The stock seems to have stabilized since and has traded higher over the last two days. There’s no change to the big picture thesis here—I still expect Avalara has a lot of upside and future growth as sales tax becomes automated. But we’ll keep at Hold for a little while given the recent bout of volatility. HOLD.

Bandwidth (BAND) pulled back from the high 80s this week and is now in the middle of the 68 to 82 trading range where it was just before I recommended the communications specialist in early August. This week management announced that it’s made more improvements to its phone number porting solution. This doesn’t seem like a huge deal for the average person, but if you’re a large company moving to a new communications platform and have hundreds, if not thousands, of phone numbers to move it’s best if it goes smoothly. BUY.

Cardlytics (CDLX) was last Friday’s new recommendation and is trading at the same price as it was then, though it’s been up and down over the last five sessions. The company has developed a purchase intelligence platform that is in the early innings of being adopted by major financial institutions, including Bank of America, Chase and Wells Fargo (set to launch later this year). The platform analyzes purchase data and sends special offers to banking customers through their online banking platforms and mobile apps. It’s a new way for brands to reach customers and it seems to be catching on. Revenue was up 15% last year and growth should ramp to 27% this year and 32% in 2020. Positive earnings should come at some point in 2020.

Shares were a little volatile this week due to the growth stock selloff, as well as news that Cardlytics would complete a secondary offering of 2.7 million shares, 1.2 million of which are to be offered by institutional investors. The stock dropped on the news, as is typical, then rallied when it was announced shares would be offered at 34 (a good price). That’s become the norm with many of our stocks that have announced secondary offerings. And it shows there is huge demand for these stocks out there. Yesterday, Cardlytics closed at 37.37, just 5% off an all-time high. The offering should close tomorrow so expect the stock to move around a little. I think the trend will remain up. BUY.

Domo (DOMO) is trying to recover following a horrible beatdown after management lowered the bar for forward growth on the Q2 earnings call. I went over all that in last week’s update so I won’t rehash it today. The punchline is we’re hanging on here to see if we can get a better price to sell into. There’s certainly ample room for the stock to move higher and it’s not like the business is going down the drain. It’s just that management is shifting the sales strategy to rebalance down to slightly smaller (but still large) customers, in addition to continuing to pursue the mid-sized ones and the really large enterprises. That change in the go-to-market strategy creates uncertainty, hence the drop. I still expect to sell out of the position. But it is where it is after a big one-day drop and I don’t think it will hurt any more to be a little patient. HOLD.

Everbridge (EVBG) sold off this week, breaking below its 200-day line in the most volatile selloff since this time last year. Perhaps not coincidently, the depth of the October-December correction in 2018 was 33%. That matches up precisely with how much Everbridge is off its all-time high right now. I suspect some investors are wondering why one would hold on to a stock after a move like this. The answer is simple: big corrections happen with great stocks. But that doesn’t mean they won’t go on to higher highs in the future. For sure, there are no guarantees in this game. But I think Everbridge is a quality company and a good stock and there’s a lot of growth left. On that note, management announced this week that its countrywide alerting deployment is now live in Iceland and that another large country outside of Europe has selected the platform. The name of that country will be released after all procurement processes are done. We’ve been expecting overseas growth to persist for a while so this is not a surprise. I expect many more such announcements over the coming years. HOLD.

EverQuote (EVER) pulled back with the market early this week prompting me to suggest selling a quarter position to lock in an 83% gain in three months. Like many of the other stocks we took partial profits on this week, this move was simply meant to protect gains should leading growth stocks slip further. EverQuote, which offers an online comparison shopping tool for various insurance products, firmed up mid-week and has bounced back from 20 to 22 over the last two sessions. I still like it and expect to move back to buy at some point. HOLD.

Goosehead Insurance (GSHD) bounced around this week but overall has been as stable as anything in our portfolio. Shares are virtually unchanged from a week ago and continue to consolidate in the 40 to 51 range. I’m keeping the insurance brokerage stock at buy. BUY.

Q2 Holdings (QTWO) dipped below its 50-day line on Tuesday in what looks to be a market-driven retreat and not a stock-specific one. Big picture, the growth trajectory here still looks very much intact with revenue growth expected to accelerate from 26% last year to 29% this year. Investments will likely drive EPS contraction ($0.13 expected) but then push earnings up roughly 200%, to around $0.39, in 2020. Keeping the digital banking software stock at Buy. BUY.

Quanterix (QTRX) closed near a four-month low last week then broke below its 200-day line early this week, prompting me to suggest selling half your position to protect against a deeper downside move. As with many of our stocks, Quanterix has bounced back over the last three sessions and is now up 6% from where it was a week ago. We have a modest gain on our remaining position, and I’ll continue to monitor it closely. It’s a volatile stock. HOLD.

Rapid7 (RPD) had been stable as a rock in August, consolidating above the 51.5 level. The security software stock looked ready to break higher late last week but was pounded on Monday and pushed below the 51 level on Tuesday. I recommended taking partial profits on a quarter position to lock in a 103% gain on Monday. Like our other partial sales, this was meant to protect against a bigger selloff, which isn’t off the table just yet. Keep Holding. HOLD.

Repligen (RGEN) was slaughtered on Monday in what was easily its biggest one-day decline of the year. As I stated in Monday’s Special Bulletin, I believe the move is the result of small-cap fund rebalancing. It was announced last Friday (after the close) that Repligen will move out of the S&P 600 Small Cap Index and into the S&P 400 Mid-Cap Index on September 23. This is likely driving some small-cap funds to sell out of the stock, but it’s not a reflection of anything fundamentally different in the stock, just the ownership base. The long-term growth prospects are great with revenue expected to jump 42% this year and EPS set to rise 39%, to $0.97. Growth rates will settle down into the mid-to-low teens in 2020, although acquisitions could easily change those figures. I moved to hold in Monday’s Special Bulletin because of the volatility. That said, mid-cap funds should be moving in over the next two weeks, so I won’t be surprised if the stock recovers. If you’re an aggressive investor you could buy in now or increase an existing position size. If you’re more conservative, there’s no harm in just sitting pat. I’m quite bullish on this stock and am moving back to buy due to high confidence in my aforementioned hypothesis for what drove the selloff. BUY.

Veracyte (VCYT) specializes in genomic diagnostics solutions that can help detect disease early and inform treatment decisions. It has four commercialized first-to-market genomic tests that address significant unmet needs in disease diagnosis: Afirma for thyroid cancer, the companion Afirma Xpression Atlas (XA) test for genomic alteration content, Percepta for lung cancer, and Envisia for idiopathic pulmonary fibrosis (IPF). The stock moved a lot intra-day this week but from last Thursday’s close has only changed -2%. There’s no change in the big-picture story; revenue should be up around 33% this year as new products hit the market, and EPS, while negative ($0.24 expected this year) is trending in the right direction. BUY.

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