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Small-Cap Confidential
Undiscovered stocks that can make you rich

Cabot Small-Cap Confidential Weekly Update

The S&P 600 Index just made another run but called it quits at 990 and has turned south.


Small-cap stocks, when viewed as an asset class, remain about as exciting to watch as a short-term treasury ETF. Yawn.

The S&P 600 Index just made another run but called it quits at 990 and has turned south. If you’re a gambler you would look at this chart and think it’s time to buy a leveraged short S&P 600 index ETF now, sell below 940, and buy a leveraged long one at or near 920.


But we don’t mess around with that kind of thing. There’s plenty of profit potential in individual small-cap stocks, as evidenced by the average gain of 8% posted by our portfolio over the last five sessions and the 46% rally put up by star performer Cardlytics (CDLX) over the same time frame!

Other notable performance shout-outs were earned this week by Construction Partners (ROAD), up 8%, Q2 Holdings (QTWO), up 13%, Everbridge (EVBG), up 9%, and Avalara (AVLR), up 5%.

On the flip side, Arena Pharmaceuticals (ARNA), EverQuote (EVER) and Quanterix (QTRX) were all down 5% to 7%. So, it’s not like everything we own is working.

But, there’s enough positive momentum out there again to continue to lean bullish. And this week’s additions to the buy list reflect that sentiment.

Here’s what’s new in our portfolio right now.

Changes this week

EverQuote (EVER) moves from Buy to Hold (via Special Bulletin)

Cardlytics (CDLX) moves from Buy to Hold (via Special Bulletin)

Everbridge (EVBG) moves from Hold to Buy

Rapid7 (RPD) moves from Hold to Buy


AppFolio (APPF) is up about 7% from last Thursday’s close and is back above 100, and roughly 7% off its all-time high. The stock never really broke down after hitting summer highs, which differentiates it from many other software peers. The question now is – is it time to move back to buy? On valuation, APPF trades at 13.5 times forward revenue on an enterprise value basis (EV/Forward revenue ratio). That’s not far from the peak valuation of 14 from this past summer, but a good deal below the 16 multiple from back in 2018. So it’s a pricy stock, but not wildly so. As a point of comparison, Everbridge (EVBG) trades at a similar multiple and is being moved back to buy today.

Another data point using takeout prices in this real estate software space is provided by the recent Buildium acquisition by RealPage (RP). Buildium was set to deliver roughly $60 million in 2019 revenue and was growing at around 30% in the small- and medium-sized markets. At that growth rate 2020 revenue should be around $78 million. Takeout price was $580 million, implying an EV/revenue multiple near 7.4. That’s well below APPF, in part because Buildium was not yet profitable. Yet another data point is RP, which now trades with an EV/Forward Revenue multiple of 5.5 after suffering a post-earnings announcement selloff. RP is projected to grow revenue in the 12% to 13% range this year and next, while APPF should grow 37% this year and 23% in 2020.

In short, the data points here tell us that APPF is trading at a premium to its closest publicly traded peer, and for good reason. It’s delivering faster growth. In my view, there’s a base of investors that won’t really get excited about the stock until there is some fundamental development that makes a splash. But management isn’t about splash – it seems more focused on the blocking and tackling and incremental growth initiatives that aren’t necessarily headline worthy, but deliver consistent growth on both the top and bottom lines. For now, in my view, this all works out to making APPF a hold. I like the recent strength, but based on history I believe that a breakout to new highs is the more reliable indicator of another significant run. In the meantime, I suspect APPF could continue to be range bound and is therefore a hold (until I’m proven wrong!). HOLD.

Arena Pharmaceuticals (ARNA) gave a business update last week in which management went through the plans for each of the ongoing programs. The bottom line is we’ll start to get more significant data releases later in 2020 and heading into 2021. That still seems like a long way off but in actuality once the calendar flips I think investors will realize it’s not that far off at all, especially when Arena is going after combined market potential of over $50 billion with current drug candidates, plus whatever new indications it has yet to reveal. I expect the stock to wander around in the near term but ultimately trade much higher, provided that trial results come in positive (as expected). BUY.
Earnings: Done

Avalara (AVLR) reported last week and the stock never exploded higher, but it has moved up a modest 5% since last Thursday’s close. I think management struck a conservative tone, which is wise given the huge outperformance the company posted over the last three quarters. I moved back to buy last Wednesday and am sticking with that rating now. Current analyst consensus estimates are calling for revenue to be up 37% in 2019 (just one quarter to go) and 27% in 2020. BUY.

Cardlytics (CDLX) reported on Tuesday and I sent out a Special Bulletin detailing the blowout quarter. Shares soared 42% on Wednesday! That’s just about the best reaction ever. And when considering a similar post-earnings move was seen in EverQuote (EVER) when it reported it’s fair to say this has been one of our best earnings seasons in recent memory. We’ve had Cardlytics for just two months and the stock is showing a 54% gain. It’s looking great but is a little too hot for me to say jump in now. If you want to nibble on a few shares, no problem. But best to let it stop steaming before taking a big bite. Analysts’ estimates are soaring. Last week the consensus was for 27% revenue growth in 2019. That’s now up to 33%, with another 30% growth currently forecasted for 2020. HOLD.

Construction Partners (ROAD) was just added a couple weeks ago and the stock has continued its steady uptrend, rising roughly 9% since we jumped in. The company is a vertically integrated pure-play roadway construction and maintenance company operating in five states across the southeast U.S., where funding for its sweet spot of projects—highway, road, bridge, airport, commercial and residential developments—is going up. Organic revenue growth should be in the high single digits to low double digits. But acquisitions will add to that. We’re currently looking for 18% top-line growth this year and 8% in 2020, though management should be able to boost that through at least one more acquisition. We have an earnings date of December 10. BUY.
Announced earnings date: December 10

Domo (DOMO) has been in the doghouse for a long time now and is still moving sideways. We’ve been a bit stuck here and somewhat reluctant to take a large loss on something that I believe has more value than is currently appreciated by the market. That all said, this isn’t a value-oriented advisory service so we’re working out of a different playbook than we normally do here. The next potential catalyst will be on December 5 when Q3 fiscal 2020 results come out. I’ll have some thoughts to share ahead of that event to help guide us through next steps. In the meantime, Domo is a hold. HOLD.
Announced earnings date: December 5

Everbridge (EVBG) has been gaining momentum since the stock bottomed near 60 at the end of September, aided by a nice rally after management reported Q3 results. The stock added another 9% over the last five sessions. If you’ve been in this one since the beginning you’ve likely already taken partial profits along with us—and therefore, might be reluctant to buy any more shares above where you sold some previously. However, stepping back, I think the stock will go higher from here. If one just looks at the here and now and thinks about what stocks are capable of generating outsized returns over the next 12 to 18 months, I think Everbridge needs to be on that list. Long story short, I’m moving back to buy. BUY.

EverQuote (EVER) exploded last Monday on a massive earnings-driven move. The stock enjoyed a little follow through but has come in a little over the last week. I had it at Buy for aggressive investors then moved to Hold via Special Bulletin on Wednesday. I’m sticking with that Hold rating now. HOLD.

Goosehead Insurance (GSHD) is up 3% over the last week as the stock looks to recover some of its post-earnings release drop. I said then, and am repeating now, that I think the dip is another buying opportunity. We’ve seen phases where this stock trades sideways in a well-defined trading range, then breaks out and goes on a run for a month or two. It’s hard to precisely identify those breakouts because the stock’s trading action is quite choppy, so best to buy on the dips and just sit back and wait. BUY.

Inspire (INSP) reported last Tuesday and was up and down after the event. Technically, we’re up 8% since last Thursday’s close but that’s because INSP had a rather dreadful day last Thursday. It’s more accurate to say we’re about even from where the stock was after it reported. Big picture things for the company, which develops an implantable device to treat obstructive sleep apnea (OSA), still look good. Revenue is seen up 60% this year and 38% in 2020. BUY A HALF.

Q2 Holdings (QTWO) reported last Wednesday and was all over the place after reporting, until management held the morning conference call on Thursday and set clearer expectations for the PrecisionLending acquisition. I moved back to Buy and the stock has been strong since. It’s up 13% since last Thursday’s close. Analysts are generally positive on the stock and one firm, BTIG, has been publicly quoted as stating they see the company as an attractive acquisition target. I don’t disagree with that assessment. But don’t hold your breath. Q2 Holdings is doing just fine on its own. BUY.

Quanterix (QTRX) exploded 23% last Thursday after reporting a much-better-than-expected quarter on Wednesday. I had said before the event that consensus estimates were not aligned with the guidance management has put out there so it’s not that surprising that the stock took off. Analysts are still behind the eight ball, even though management reiterated that it expects to be a 40%+ grower. Consensus is now calling for 25% revenue growth in 2019 and then 40% in 2020. I’ve had at Hold because, despite the growth and potential, the chart doesn’t look that great. Since reporting, QTRX has been trending down so I’m keeping at Hold. HOLD HALF.

Rapid7 (RPD) reported last Tuesday and had a muted reaction but the stock has been trending steadily higher since (shares up 4% from last Thursday’s close). Combined with broader strength in software stocks I think we can move back to Buy here. BUY.

Repligen (RGEN) is flat over the last week but the mid-term trend is up, and the stock still looks like a buy to me. No news to share. BUY.

Veracyte (VCYT) has been all over the place lately. The stock rallied to 28 going into earnings then fell back to 20 afterward. It has since climbed back up to 24. There’s too much noise in the chart for me to make a confident bullish call right now. Continue to hold and let’s see what develops over the coming week. HOLD.