It’s all about earnings right now.
While things will start slowly for us—first up is Veracyte (VCYT) on Tuesday—the action has already heated up in the market as results from many closely watched large-cap stocks pour in.
The results have been good enough to keep the broad market near all-time highs. In fact, the S&P 500 is just 1% below its high water mark as I write this. In small-cap land, things are looking better than they did two weeks ago. But we’re still 15% below the S&P 600 Index’s all-time high from last August.
Side note here—if you just look at the S&P 600’s distance from its 52-week high it’s only 4% below that mark. That just tells you it’s been over a year since we hit a new high in this index!
There are no major trends, either positive or negative, that we need to zero in on this week. It really is just all about earnings and trying to decipher what they tell us about which direction the economy is headed.
On the one hand, if things begin to look more dour, that increases the odds of more accommodative interest rate policy. You can bet President Trump doesn’t want to seek re-election with a sliding economy.
On the other hand, if things start to look up, the Fed will likely hold off on more interest rate cuts. That should be a positive, but it’s hard to say how the market will interpret that turn of events—especially if overseas markets continue to look shaky and interest rate policy in the U.S. gets even more out of step with what other developed economies are doing.
In short, a lot of uncertainty out there, which isn’t an entirely new scenario. We’ll continue to try and play it a little safe right now by keeping all stocks previously rated hold at the same rating. And continuing to average into new positions like Inspire (INSP), which is rated “Buy a Half.” We’ll also try to limit downside risk by stepping back from stocks that continue to slide, such as Bandwidth (BAND), which was cut loose this week via Special Bulletin.
Changes this week
None
Updates
AppFolio (APPF) will report a week from Monday. The stock’s been trading in the 88.5 to 109 range since the end of April so it would be nice to see it get moving again. Analysts are looking for revenue to jump 34% to $67.1 million and for EPS to decline 44% to $0.09. That quarterly EPS figure isn’t a concern; full-year EPS should be up 61% to $0.90 while revenue should be up around 32%. I expect to keep APPF at hold through the earnings release. HOLD.
Announced earnings date: October 28
Arena Pharmaceuticals (ARNA) posted a modest rally this week as shares rose 5%. They’ve been a little beaten up lately, but I’ve kept at buy since long term, Arena should be fine. This is development-stage biotech and the data is good. That doesn’t mean shares won’t move around with the broader biotech group. This week, the group moved up, and took Arena with it. There’s no news lately. Keeping at Buy. BUY.
Estimated earnings date: November 5
Avalara (AVLR) was down 5% this week, mostly because of a drop on Wednesday that was felt in a lot of software names. The compelling thing about Avalara now is that all the positive secular trends that have propelled the stock since its IPO are still intact. Recall that last quarter it added 730 new customers. That was over 2.5 times more than what analysts expected. Was it just one huge quarter? No. New customer additions have been picking up for six quarters in a row. And it’s hard to imagine a scenario where companies stop trying to automate their tax collections. I mean, who wants to keep paying people to figure out that mess?! Avalara will report in early November. HOLD.
Announced earnings date: November 5
Bandwidth (BAND) fell below the 64 level I’ve been watching so I cut it loose this week via Special Bulletin. I still like it but we can’t sit and watch the stock trickle lower since we don’t have a gain to play with. I’ll keep an eye on BAND and consider adding it back if the trend improves. If you decide to hold onto some shares, earnings are due out on November 6. SOLD.
Announced earnings date: November 6
Cardlytics (CDLX) is up 12% over the past week and hit an intra-day all-time high yesterday. There’s little doubt investors are looking forward to the beginning of the launch with Wells Fargo in the fourth quarter. I see M&A activity on the menu in 2020 as well. Analysts see revenue up 45% to $50.1 million in Q3 while EPS should stay flat at -$0.15. For the full year, revenue is seen rising 27%. BUY.
Estimated earnings date: November 5
Domo (DOMO) is still in the dumps after a big Q2 billings miss because of roughly 10 deals that slipped out of the quarter. The only positive things we can say about the stock are that two of these deals have since closed, expectations are very low, and management is retooling a few things to better address the mid-market opportunity and forge partnerships with the kings of cloud (Microsoft, Google, Amazon). Plus, the stock is cheap. But management needs to figure out its refreshed go-to-market strategy and the market may just not quite be ready for Domo. New guidance, and analyst estimates, assumes no recovery in deal closure rates so there is significant upside potential if Domo’s salespeople can deliver. This is now a self-help story. And that means it’s also a show me, not tell me story. Keep Holding. HOLD.
Estimated earnings date: December 6
Everbridge (EVBG) was up 6% this week and did a nice job of sidestepping the carnage on Wednesday that many software stocks felt. Maybe because shares are still 30% off their high? There’s been no material news since Everbridge announced it won a five-year contract with California to upgrade the state’s outdated 911 system. I expect many more significant deals, including international deals, in the year ahead. So do analysts. Revenue is seen rising 32% in Q3 while EPS loss should be chopped in half, to -$0.05. In 2019, revenue is expected to jump 33% and EPS should be -$0.25. HOLD.
Announced earnings date: November 4
EverQuote (EVER) was flat this week but looking at the chart it’s clear the stock is slipping. Shares are now modestly below where they closed when they gapped up after the Q2 earnings release. Can EverQuote deliver another blowout quarter? That’s the million-dollar question. Analysts see revenue up 40% in Q3 and up 40% in 2019. The company’s still losing money, in part because of investments in new verticals (renters’ insurance, health insurance, etc.), all of which should drive growth. EPS should be -$0.47 this year. HOLD.
Estimated earnings date: November 11
Goosehead Insurance (GSHD) has been one of the most resilient stocks in our portfolio. Shares were up 4% this week and are trading just 7% off their all-time high. We’re expecting big things out of the company’s franchise channel over the coming two years. And that’s a large part of why analysts see revenue up 35% in Q3, up 33% in 2019 and up 50% in 2020. Goosehead is profitable. EPS should be around $0.08 in Q3 and $0.40 this year. BUY.
Estimated earnings date: November 5
Inspire (INSP) has been with us for two weeks now. We jumped into it after a little pullback and I recommended starting with half a position given the cross currents in the broad market. Inspire is down 5% from when I first recommended it. It’s not yet time to fill the other half of our position. Inspire sells an implantable device for obstructive sleep apnea (OSA). It is gaining insurance coverage across the country and management is putting together a roadmap to expand into Japan as well. One of the big accomplishments over the last year has been insurance coverage, which means that far fewer resources (for Inspire and for customers) will be devoted to gaining pre-approvals and moving invoices through the appeals process. Revenue should be up around 60% this year, with 47% growth (to $19.2 million) expected in Q3. BUY A HALF.
Announced earnings date: November 5
Q2 Holdings (QTWO) was flat this week and is trading around the same level it was before the big August rally that followed the second-quarter earnings blowout. Management has been active on the M&A front to build out the digital banking business. And the recently announced acquisition of Precision Lender was another step. Precision Lender extends the product offerings for commercial and corporate purposes by offering software that helps bankers structure, price, and negotiate good lending deals through a variety of insights and coaching tools. It should help Q2 land more large deals with Tier-1 banks and expand its addressable market by around $2 billion. I like it, and the stock. BUY.
Announced earnings date: November 6
Quanterix (QTRX) was up 4% this week but the stock is still banged up, despite the rapid growth (revenue should be up 25% this year and 40% next) and a broad range of diseases Quanterix’s next-generation, ultra-sensitive digital immunoassay platform is helping to detect in seemingly healthy, asymptomatic people. All that’s needed is a simple blood sample. Management is working on making the technology 100 times more powerful, and is kicking around the idea of expanding from research into diagnostics, a larger but more regulated market. We reduced our position size to half a few weeks back because of the weakness. Keep holding the rest. HOLD HALF.
Estimated earnings date: November 1
Rapid7 (RPD) has been trying to figure out which way it wants to go over the last month. Shares are down 10% from the beginning of September, but up 2% this week. Security spending should be a defensible area of software spending so the business shouldn’t be as cyclical as many other names out there. But when we see other security stocks like Forescout (FSCT) get taken down a notch (Forescout pre-released last week) because of weak international results, the outlook does look a little less murky. On the plus side, Rapid7 generates 82% of revenue from within the U.S. and is focused on cybersecurity, with offerings that span vulnerability management, cloud application security, incident detection and response and automation. In comparison Forescout is much more focused on network security. So it’s not an apples to apples comparison. Still, I like the stock at hold right now and am glad we’ve booked a partial profit already. HOLD.
Announced earnings date: November 5
Repligen (RGEN) is one of the few remaining small-cap bioprocessing pure plays out there and at 20% off their high shares represents a decent value in my view. Revenue is seen rising 33% in Q3 and 42% in 2019. Plus, the company is profitable. EPS should come in around $0.19 in Q2 (down 5%) but be up 40%, to $0.97, in 2019. The stock was up 4% this week. BUY.
Estimated earnings date: October 30
Veracyte (VCYT) was up 2% this week but is still down 14% from where we got into it in the beginning of July. That’s largely due to timing; the market hasn’t exactly been hot since I covered Veracyte. Stepping back, the chart shows the stock moving sideways in the 21 to 31 range. Looking forward we should expect revenue to jump 28% in Q3 and see the EPS loss reduced by almost 50%, to -$0.07. In 2019 revenue should climb 33%. There are two catalysts in the immediate future. First up is preliminary clinical data for the first of its kind nasal swab test for lung cancer. That’s being discussed at the CHEST annual meeting that starts today and runs through Wednesday. Then next Tuesday Q3 earnings come out. I expect management will tip us off to the nasal swab data over the weekend, or on Monday, and then get more into it on the earnings call. There will also be more data discussed on the Percepta and Envisia genomic classifiers. It should be an interesting week! BUY.
Announced earnings date: October 22
