The upward trajectory for growth stocks that was smooth sailing in November has turned far bumpier in December.
Just look at software stocks. While they peaked this summer and trended down through September, the group found stability in October and then grinded higher through November. But software stock performance has been spotty, at best, over the last two weeks.
Word on the street is that this weakness is being driven by valuation concerns. While software stocks, broadly speaking, are off record valuations posted this summer, they are still well above their long-term averages. There are plenty of rational arguments for why they should be there, ranging from maturing business models to market leading margins, improving profitability and increasingly stable recurring revenue. Plus, there is little to no exposure to China in most software stocks, so they’ve been a bit of a haven from that whole mess.
But they’re not perfect. This week, while the S&P 500 jumped out to new highs, software stocks stumbled. It’s not a bear market in software by any stretch of the imagination. And this could just prove to be a little pullback in an otherwise healthy uptrend. But I’m definitely keeping a close eye on them. For now, ratings on our software stocks remain the same as they were last week.
Elsewhere, MedTech stocks have also softened a little, though the retreat there hasn’t been as broad based as it has within software.
The punchline is that most of the stocks in our portfolio have lost some ground since last Thursday’s close. The big outlier was Domo (DOMO), which posted a snapback rally last Friday after reporting quarterly results. But double-digit declines in Construction Partners (ROAD), Cardlytics (CDLX) and our newest position, Health Catalyst (HCAT), along with modest declines in most of our software stocks, have offset that jump.
Taken together, the evidence in front of us says to be a little cautious here. I’m not reversing course on any stocks. But I do think that with a couple of wonky weeks on the horizon given the holiday schedule it’s probably a good time to do more watching than buying.
Changes this week
None
Updates
AppFolio (APPF) has dipped back below 110, which dumps a bucket of cold water on the breakout thesis that was beginning to shape up a couple weeks ago. Oh well. I’ll keep at buy a little while longer but will have no problems moving to hold if this stock, and the broader software group, can’t shape up. BUY
Arena Pharmaceuticals (ARNA) is still moving sideways. Management presented at two investor conferences over the last two weeks but with no news the stock hasn’t done much. You can still buy. BUY
Avalara (AVLR) recently published its annual sales tax report, which points to more of the same in the sales tax compliance market. Specifically, the company sees continued turmoil as states roll out more laws and online marketplaces grapple to stay current while also fighting against some proposed sales tax assessments. At the same time international selling continues to ramp up, adding many more dimensions to the already complex task of efficient and fair sales tax regulation. Avalara is right in the middle of all this. There was also a recent announcement that the CFO, Bill Ingram, will retire from the CFO role and join the Board of Directors. His replacement, Ross Tennenbaum, has been with Avalara for almost a year in the role of Executive VP of Strategic Initiatives. He has investment banking experience from Goldman and Credit Suisse and is seen as being very well qualified for the job. BUY
Cardlytics (CDLX) has been on fire lately (all year in fact) but after a little pullback is now about 13% off its high. I like the stock but am keeping at hold given the 40%-plus jump since reporting earnings about a month ago. Keep holding on. HOLD
Construction Partners (ROAD) took a hit this week after reporting a Q4 miss on both the top and bottom lines and giving 2020 guidance in a wide range that straddled consensus and failed to impress in terms of backlog. I detailed the situation in a Special Bulletin on Wednesday that boiled down to saying the quarter wasn’t great but the outlook doesn’t really change the story. The stock’s still digesting the news and I’m keeping at buy, for now. But I’m also keeping a close eye on it. BUY
Domo (DOMO) released earnings last week that beat expectations and drove the stock back up into the mid-20s and to the level it traded at before the Q2 earnings disaster. Management essentially said things are now looking slightly better than it expected at the beginning of the year. But confidence was shaken in Q2 and it’s going to take more than one quarter for investors’ nerves to settle down again. I’ve seen and heard enough to say we should hold on and see where DOMO goes next. But I’m certainly not prepared to move back to buy. Keep holding. HOLD
Everbridge (EVBG) went back to the market this week to offer $375 million in five-year convertible notes (with an additional $75 million available) that yield 0.125% a year and have an implied conversion price of 112.36 (about 40% above where EVBG trades today). Roughly $95 million of the proceeds will be used to pay for capped call transactions and to repurchase some of the existing 1.5% convertible senior notes (due 2022). The more compelling use of the remaining capital raise would likely be to fund acquisitions or expansion, probably overseas. We aren’t likely to get much more on this until the next earnings report in February. I think the message for now is that management wants to be in a flexible position. The stock is pulling back along with other software names. BUY
EverQuote (EVER) is trading 13% off all-time highs and remains a hold. A subscriber sent me a short report that was recently published on the company by a guy named Matthew Wiechart, writing under the name of Bonitas Research. The link is here. I don’t know if this author is remotely credible or not but I do know that most of these types of short reports don’t have much lasting impact on a stock. That’s not to say all stocks that get featured in short reports do well, just that their fortunes tend to be determined by the results management generates and not the content in a short report.
In terms of his short thesis, most of it revolves around what he found for web traffic to www.everquote.com using an analytics website called SimilarWeb. He says that site reports 64% less traffic in September 2019 than EverQuote management reported in its 10-Q. To see if this made any sense at all I entered the website for Cabot and sent the results to our marketing folks. They said SimilarWeb’s measure of web traffic was 83% below what we actually generated. They also said it’s best not to take what a tool like this says as gospel. There are too many variables and accuracy is wildly different across industries. In short, I’m not going to put much stake in Bonitas’ short report.
Right now, EverQuote is rated hold because the stock has shot up after reporting Q3 results and, while the results were great, this is a business that’s still relatively early-stage so we don’t want to assume it will knock it out of the park every quarter. HOLD
Goosehead Insurance (GSHD) is still trading near 40. The stock’s trading pattern is very close to resembling what it did last year, namely peaking in September and pulling back into the end of the year. Recall that GSHD then went on to make a big run to new highs in 2019, starting in early summer. Will there be a repeat performance in 2020? We’ll just have to see. BUY
Health Catalyst (HCAT) was last Friday’s new addition and is a data and analytics company serving the healthcare industry. It is just getting started tapping into an $8 billion addressable market, has a predictable revenue stream with over 90% of revenue recurring, and customers tend to stick with it (net revenue retention is around 107%). The big-picture thesis is that healthcare is everchanging and organizations need help navigating that complex environment. Health Catalyst helps them and should grow revenue by well over 20% for the coming years and deliver its first year of profits in four years.
Despite the attractive growth profile, Health Catalyst has been hit hard this past week on no news. Part of this is likely due to the company being a recent IPO (just came public in July). While the stock was in a nice stable trend just before I recommended it, that’s changed this past week. HCAT fell to 34.26 yesterday. Does this mean it’s not a buy any longer? No. It’s still a buy in my view. In my report I said the stock could dip down into the 32 to 34 range and if it did there should be some support there. In the absence of any material bad news I’m sticking with that. Keeping at buy. BUY
Inspire (INSP) peaked near 76 last week and remains above its July and August highs. The longer it stays up there the more that zone near 70 begins to look like a solid support level. There’s no news this week. Keeping at buy. BUY
Q2 Holdings (QTWO) just dipped below 80 but, in my view, this is a buyable pullback. The company continues to innovate and acquire assets in the digital banking and lending market and increasingly offers solutions that can help customers compete with bigger financial institutions as well as virtual-only financial institutions. This is true across consumer banking, lending and loan origination, and that breadth of offerings seems to be helping with cross-selling. Big picture, there could be some turbulence as we head into an election cycle, but I like what Q2 is doing and think there’s a lot of room for the company to grow. BUY
Quanterix (QTRX) is up slightly this week on no news. HOLD HALF
Rapid7 (RPD) hasn’t done much over the past week and there’s no news to speak of. The stock is roughly 20% off its July high and around 23% off its October low. Keeping at buy. BUY
Repligen (RGEN) keeps getting pulled higher on no news. With the stock still 10% off all-time highs and the potential for a buyout I think the trend can continue. BUY
Veracyte (VCYT) investors have had some time to digest the acquisition of an exclusive license from NanoString (NSTG) for the nCounter platform for diagnostic use, and the reaction seems to have been largely positive. The stock ran up near all-time highs and has stalled there, which isn’t a huge surprise given some softening in the broader market lately. It will take a little push to drive a breakout here so there’s no huge rush to buy. But I’ll still maintain that rating. BUY
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
