I’m going to go off on a little tangent this week to share something with you that I think will help put this market, and the action in our stocks, into context.
We’re hearing a lot of talk about rotation this September. So I want to share this handy chart from William O’Neill’s PANARAY platform that tries to put this rotation concept into visual terms.
Check it out below. This chart splits the S&P 500 into 11 sectors (see the key on the right) and then places them in this rotation graph according to how each sector has done over 26-week and 4-week periods. I think it’s intuitive, but you’ll probably need a few minutes to study it.
The takeaway message is that the feeling you have that technology (TECH) stocks are fading (moving down and to the left) is accurate. And that sectors like materials (MAT), Capital Equipment (CAP) and financials (FIN) are strengthening (moving up and to the right) is also correct.
This high-level perspective can help inform some actions you may want to take. But for me it’s mostly about perspective and making some sense out of the market’s gyrations. And helping to sort out if a particular stock is behaving how it is because of company-specific reasons, or if broader market/sector forces are at work.
Yesterday afternoon I took things one step further and dug deeper into a few sub-sectors because I wanted to better understand why our two insurance stocks are holding so close to 52-week highs while other high-growth names have been weak.
To try and answer that question I pulled up a PANARAY chart of the Computer Software – Enterprise sub sector, within which both Bandwidth (BAND) and Everbridge (EVBG) fall, along with 68 other stocks. Here’s that chart. As you can see, it’s in a short-term downtrend (so far).
The PANARAY chart of Computer Software – Security, within which Rapid7 (RPD) falls, along with 32 other stocks, looks even weaker.
Now let’s pull up a chart of financial stocks (4016 of them!). They look pretty good.
If we drill down even further and pull up a chart of Insurance-Diversified, which holds 15 stocks, including EverQuote (EVER) we see this group is trading near recent highs.
The chart of Insurance – Property/Casual/Title, which holds 70 stocks, looks about as good as it gets. This is the group within which Goosehead Insurance (GSHD) lives.
This type of work can help us understand why our stocks are acting the way they are. If you were a trader and investing in sector ETF you may be able to act on this. In our case, since we’re more long-term oriented, this information is informative, but not necessarily actionable.
If you wanted to take things to the next level of finding a stock to buy, or to add to a watch list, you can dig deeper into the constituents of the strongest sub-sectors, pull out names that fit your size criteria, and then take a closer look to see if investment is warranted. I do this all the time and stocks come and go from my watch list as a result.
Now, let’s pull back out of this wormhole and take a look at what our stocks have done over the past week.
Big picture, not much has changed. The strong ones remain strong and the weak ones remain weak. There are a few company-specific updates, but nothing so major as to warrant any ratings changes.
Next week the October Issue will be out, and I have a short list of stocks from which to pluck the best. Stay tuned!
Changes this week
None
Updates
AppFolio (APPF) continues to move sideways on no new news. The stock is currently trading with an Enterprise-Value-to-Forward Revenue (EV/Forward Revenue) multiple of 12.7, which is toward the low end of the stock’s valuation range dating back to the beginning of April. We’ve seen that multiple get up toward 14 this year, and even near 16.5 in 2019. This seems like a comfortable valuation for the time being, and the stock just seems to be working its way through a consolidation phase. Keep Holding. HOLD.
Arena Pharmaceuticals (ARNA) recently announced new data from the Phase 2 OASIS trial for etrasimod in moderately to severe ulcerative colitis (UC). The data showed that 2 mg dosing is effective and supports management’s strategy to focus on that dosage in the ongoing Phase 3 ELEVATE UC program (initiated in June). The stock has been drifting lower, but not due to any company-specific news. This is just an annoying retreat and investors need to remain patient. Arena is marching toward a more significant 2020 in terms of news flow with potential for data from the Phase 2 CAPTIVATE trial (olorinab in IBS pain) and Phase 2 ADVICE trial (etrasimod in atopic dermatitis). Moving into 2021 we should then get data from ELEVATE. And soon, we should get news that the trial for etrasimod in Crohn’s is starting up. Patient investors can buy into the weakness even though the chart looks like garbage. BUY.
Avalara (AVLR) is still grinding it out in the 70 to 80 range in what looks like a classic pullback/consolidation phase. The stock’s EV/Forward Revenue multiple sits at 14, toward the lower end of the valuation range going back to the beginning of June. We saw that multiple peak at 17.3 when software stocks were going bonkers. We took partial profits here (one-quarter position) and I don’t see any reason to get aggressive right now. Keep holding your remaining position. HOLD.
Bandwidth (BAND) has pulled back to its 200-day line for the first time since last December. With the stock trading near 67 now, and 64.5 looking like the last zone of support before shares slide off and into the abyss, this is a critical time for BAND to start firming up. Risk tolerant investors can still step in here. But if the stock falls much below 65 I will likely cut it loose. Recall that in the last quarter new active customers jumped by 34% as an expanded sales force kicked into gear. We also saw dollar-based net retention jump to 113%, vs. 111% in Q1. That means CPaaS customers are using the platform more. BUY.
Cardlytics (CDLX) has pulled back to its 50-day line and into the zone where shares were trading just before we got into the stock roughly a month ago. I don’t see any change in the big picture story here and this pullback isn’t out of the norm in terms of magnitude. Cardlytics is still looking to ramp up usage with Chase and then launch with Wells Fargo later in the year. Both are strong tailwinds to grow users (at roughly 120 million now, trending toward 150 million) which should drive higher billings/revenue over time. BUY.
Domo (DOMO) continues to wallow in the mud after a very short-lived bounce that briefly carried the stock above 18. We’re still holding on and looking for a better price and some strength to sell into. HOLD.
Everbridge (EVBG) is in the midst of as big a correction as we’ve seen since the company went public in 2016. Part of that could be due to the huge run in the stock. Some could be from the one-two-three punch of the new CEO David Meredith arriving, and bringing a new CRO, Vernon Irvin with him, followed by the departure of Bob Hughes, who has been the Go-To-Market President for the last two years. I talked about this transition last week so won’t rehash it today. Clearly, we’d like to see some stabilization in the stock here. It’s certainly trading at as attractive a valuation as we’ve seen in a long time. The EV/Forward Revenue multiple currently sits at 10.25, well off it’s high of 16.5 from this past summer and back in a range where it’s been many times since mid-2018 (see time series valuation chart below). I’d like to move back to buy but will hold off until we see some signs of strength. HOLD.
EverQuote (EVER) has been one of our most resilient stocks lately and is just 11% off all-time highs. Recall that Q2 was a huge quarter, marked by a 50% jump in insurance quote requests (up from 19% growth in Q1). That suggest EverQuote’s doing more than just OK in terms of generating consumer traffic to the website. And, it was also able to drive 40% revenue growth in auto revenue. Revenue in the other verticals (home, life, health, renters) was only up 5% but this bucket holds new verticals so we should see some uptick, especially in health (my opinion), which just launched in June. There is no doubt expectations are much higher now than a few months ago so the stakes are higher too; we need EverQuote to perform in Q3. For now, keep Holding. HOLD.
Goosehead Insurance (GSHD) is also hanging out near all-time highs. Part of this is because the business is so darn attractive. But a good portion of the credit for the strength goes to recent strength in financial stocks in general, and insurance stocks specifically. A breakout to new highs isn’t out of the question here guys. Goosehead has been consolidating in the 40 to 51.5 range since the end of June. I’m not saying a big move is imminent; just that it’s well within the realm of possibilities. BUY.
Q2 Holdings (QTWO) stands out from many other software stocks because its pullback has been somewhat orderly. The stock is only 12% off its all-time high and firmed up right near July highs. If you look at the chart the takeaway is “yeah, ok, we’re down a little but this makes sense to me.” That’s very different from the takeaway when we look at charts of other software stocks, like Everbridge, that look far worse, seemingly for no reason. Part of the reason is due to the encouraging fundamentals in Q2’s business which point toward accelerating top-line growth and, looking out to 2020, a jump in the bottom-line growth rate as well. But also, part of the strength here could be because Q2 is lumped in with financial software stocks, not enterprise software stocks. This group has been far more resilient lately. Keeping at Buy. Management announced this week a partnership with Socure to add a digital identity verification capability to the Q2 Open platform. This is expected to improve fraud protection and customer onboarding processes. BUY.
Quanterix (QTRX) continues to deliver uninspiring performance, as do many of the other MedTech stocks. It’s bent, but not yet broken. Keep holding on. HOLD.
Rapid7 (RPD) has taken another leg down this week, moving in lockstep with the broader security software group. There’s nothing wrong with the business. We took partial profits and are watching this pullback while maintaining a Hold rating on our remaining position. HOLD.
Repligen (RGEN) has been sliding this week in a somewhat hard-to-detect-on-a-daily-basis manner, but one which has pulled the stock 7% lower from last Thursday’s close. As with many of our other ailing stocks, there isn’t anything wrong here; these stocks are just not enjoying the same strength they were in the spring and early summer. I still like it and am keeping at Buy. BUY.
Veracyte (VCYT) continues to remain on my Buy list. We’ve never had a gain on this stock. But it hasn’t beaten us up either. Shares are moving sideways, and the broader medical research equipment and services group (within which Veracyte falls) has been stronger than the medical device group. BUY.
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
