For the first time in a while we’ve had a relatively calm week. On average, our portfolio is unchanged from last Thursday’s close.
Turning to the small-cap index, the S&P 600 was mounting a run to multi-month highs. But momentum stalled and the index pulled back, somewhat predictably, 30 points shy of the 1,000 mark—just as it has several times this year.
Digging under the surface a little and looking at the data month-to-date, we see that small caps have outperformed large caps in September across almost all sectors. As discussed last week, and as evidenced in the chart below, this outperformance has been delivered courtesy of broad-based strength across all small-cap sectors, something that had been notably absent prior to September.
The irony is that our stocks, which are concentrated in software and MedTech, had been cranking up until the small-cap index came back to life! While small cap tech is done handsomely so far this month it’s not because of software but rather other areas of the sector.
It will be very interesting to see if the old pattern re-emerges here with the small-cap index pulling back (but staying in its established range between 900 and 1,000), while high growth sectors recover from their recent weakness.
I’m not going to make any predictions. But I will say that as I look to the October portfolio addition I am equally tempted to step into software stocks that have pulled back, and I am eager to venture into a sector where we don’t yet have much, if any, exposure. We’ll just have to wait a few more weeks!
In the meantime, let’s sit pat. We took partial profits in several stocks a few weeks ago and stepped aside from some that were beginning to break down. It’s a little early to tell if we made all the right calls and/or if the action in early September foreshadowed a more durable rotation from growth-oriented names to value. So doing nothing makes the most sense in my mind right now.
Changes this week
None
Updates
AppFolio (APPF) is moving solidly sideways and, as is customary for management, there hasn’t been any news flow for weeks. We didn’t hire the stock to entertain us, however. Let’s do what we’ve been doing. Sit still and hold on. If you’ve been lulled into forgetting what this company does, it offers software solutions for property managers and property rental companies, as well as small legal offices. I still like it. HOLD.
Arena Pharmaceuticals (ARNA) recently announced that it’s going to present new pre-clinical data for etrasimod in atopic dermatitis at a meeting in France taking place this weekend. I don’t expect anything earth-shattering here. But, given how long the timeline is to bigger news (a year or so), we’ll take it. The stock was off 3% this week, but the trend is really just sideways. BUY.
Avalara (AVLR) popped back this week, posting a 5% gain since Thursday’s close. There’s no news, just that the frantic selling from earlier in the month has subsided. Recall that in the last quarter Avalara demolished analyst expectations by landing 630 new customers, more than double what analysts expected. And management put forth guidance well above consensus. On the conference call management said there is no doubt that the Supreme Court’s Wayfair decision is helping drive retailers to purchase sales tax compliance software. And that Avalara’s IPO has helped raise the company’s profile as the safe and sure bet to supply that software. But also that demand alone doesn’t generate revenue—a software provider needs to have built the platform to handle the needs of its clients. Avalara has done this, which is why it’s winning right now. We took partial profits a few weeks ago (one-quarter position) when the market was getting sketchy. I’m not against moving back to buy if things start to look better. We’ll be patient for now. HOLD.
Bandwidth (BAND) is our unified Communications-Platform-as-a-Service (CPaaS) specialist and was flat on the week, thought there was a seemingly concerning spike down to the 200-day line early yesterday. The stock bounced back throughout the day. What was the catalyst? Morgan Stanley came out with an extensive report on the CPaaS space and one of the punchlines was that investors should sell BAND and buy TWLO. In my research report I covered the similarities and differences between the two, namely that BAND owns its own infrastructure (much like the larger telecom carriers) whereas TWLO rents theirs. Bandwidth is much more heavily slanted toward voice, which contributes roughly 90% of revenue, versus closer to 40% for Twilio, which is heavier in messaging. Bandwidth also caters to larger clients and uses a direct sales force to target senior executives within them. Twilio focuses on developers and relies on inbound inquiries to drive sales. This is why Bandwidth has less than 2,000 customers, but generates average revenue well over $100,000 from each, while Twilio has around 150,000 customers paying closer to $9,000 a year each, on average. Bandwidth management says it only competes in roughly 20% of deals with TWLO.
So, should you follow MS and sell BAND in favor of TWLO? I don’t think so. As I said in my report it’s better just to own both. They do different things and we don’t have to pick sides. If Bandwidth’s business starts to falter, that’s a different story. Even MS’s report said the analyst sees the company doing well in the short term but isn’t sure about the second half of 2020. I say let’s take it as it comes. And I am keeping Bandwidth at Buy. BUY.
Cardlytics (CDLX) was recommended two weeks ago and is doing about as well as can be expected given the growth stock selloff in September (it’s down roughly 5% from our entry point). If you missed the issue, Cardlytics has developed a purchase intelligence platform that is used by major financial institutions, including Bank of America and Chase, to send special offers to banking customers through their online banking platforms and mobile apps. Revenue growth should accelerate from 15% in 2018 to 27% this year and 32% in 2020, in part because of a go-live with Wells Fargo coming later this year. The secondary stock offering I discussed last week is in the rear-view mirror and shares have weathered it just fine. If history is any guide, that spells strength in the coming months. BUY.
Domo (DOMO) hasn’t given us anything to cheer about since being added to the portfolio but at least the expected “dead cat bounce” is beginning to happen. How high a dead cat can actually bounce depends on how many lives it has left. Some get up, brush it off and keep on trucking (maybe they’re just on their second or third lives?). Others have been around the block a few more times and never recover. Right now, I like how Domo is acting and while I still expect to sell it, the very short-term trend is up so we’ll continue to exercise patience. HOLD.
Everbridge (EVBG) was flat this week. The stock is now below its 200-day line and looking to find firm footing. I missed it last week, but it turns out an 8-K was filed with the SEC announcing that the Go-To-Market President, Bob Hughes, would be resigning on September 30. This is happening soon after new CEO David Meredith came in, along with a new Chief Revenue Officer (CRO), Vernon Irvin. Mr. Hughes has been with Everbridge through a lot of its growth (the last two years) and it’s possible that his role just isn’t the same under the new leadership. Some close to the company feel the new CRO (Mr. Irvin) will be spending much more time out in the field with sales teams than Mr. Hughes did.
Irvin joined Everbridge a few weeks ago and previously spent time with Verisign, British Telecom, Carter Communications, CenturyLink and, most recently, Synivers, a telecom company spun out of Verizon. It seems his depth of knowledge in both telecom and large enterprises, doing considerably more business then Everbridge, could be a huge asset in getting the company to the next stage. It’s unlikely his presence made a big impact in the two country-wide deployments recently announced (Iceland and one other, yet to be named) as those were probably in the pipeline for some time. But you never know. He could really help push Everbridge to cover a much larger piece of the globe. I’ve had the stock at Hold because of the weakness and will stick with that until it looks stronger. HOLD.
EverQuote (EVER) is unchanged from last Thursday’s close. The insurance comparison website operator has seen the stock rally throughout the year, though to be fair it just barely broke above its IPO price of 18. There’s no new fundamental news. But BofAML did downgrade it on valuation, and management announced a new Chief People Officer this week. Elyse Neumeier hails from Wayfair and will be working to develop talent around AI, analytics and data science as insurance shopping moves online. I’ve had EVER at Hold and am keeping it there. HOLD.
Goosehead Insurance (GSHD) was also unchanged this week. The stock has been moving sideways for a couple months now and is trading 10% off its all-time high of 51.47 from early July. It seems clear to me that money is moving into this stock then staying there, probably because both revenue and EPS growth should surpass 35% for several years as Goosehead rolls its franchise model out across the country and passes proven technology on to it after testing it within its corporate channel. I like it. BUY.
Q2 Holdings (QTWO) is our digital banking stock, and compared to many other software stocks it’s held up pretty good lately. Sure, it took a blow at the beginning of the month. But the stock is just below its 50-day line for the fifth time since the beginning of January. As I said last week, revenue growth is seen accelerating from 26% last year to 29% this year. And while EPS will dip this year it should surge almost 200% higher in 2020 as investments fall off. I think this is a pretty darn attractive profile. Plus, each time this stock has pulled back to its 50-day line this year it’s been a good entry point. You’ve got to go with the evidence. Keeping at Buy. BUY.
Quanterix (QTRX) has been in a funk lately, having moved back to where it was trading this spring. One good bit of news: management announced that of all the companies presenting at a recent conference for Multiple Sclerosis research, 49 of them had used its Simoa technology, 40% more than the previous year. The stock is still likely to be volatile for the foreseeable future. HOLD.
Rapid7 (RPD) is taking a breather after a big pullback in August and then another in early September. Shares of the software security specialist were flat this week and are modestly below where we took partial profits. I think it will come back; RPD went on a tear early this year and some profit taking is to be expected. But it will probably take a little while. In the meantime, let’s keep Holding. HOLD.
Repligen (RGEN) is looking much better than it did right after the announcement that it will move out of the S&P 600 Small Cap Index and into the S&P 400 Mid-Cap Index. That drove some small-cap fund selling (most likely) and created somewhat of a vacuum as there weren’t a lot of buyers on the other end. I came across a report that the net change in index selling is -$13.6 million from this one change. That said, that’s index selling, not non-index tracking funds. So I wouldn’t read into it too much. I think this little pullback is a great time to step in or add to an existing position. It’s a Buy in my book. BUY.
Veracyte (VCYT) is also a Buy in my book, even though the stock has been a snoozer since I added it in the beginning of July. It’s been trading mostly between 22 and 26 since, with a few pops and drops outside of that range sprinkled in. No news over the last week. BUY.
