First a quick programing note. There will not be a Weekly Update next Friday, December 27. This is one of the few weeks of the year that we take a break from publishing and my working time will be focused on preparing the January Issue, which is scheduled to come out the first week of January. That said, if anything requires attention next week, I’ll be in touch through Special Bulletins. Thank you for all the support over the past year and here’s wishing you a Happy Holiday season!
Back to the market, there is a bit of a rally going on with small caps. It’s about time.
The S&P 600 Small Cap Index, which hadn’t broken above 1,000 for most of 2019, is now comfortably above that level and appears to be heading higher. This is significant because there is little in terms of overhead resistance until the index gets back to 1,100. It also illustrates participation from a broader group of sectors (materials, consumer staples, energy, industrials, etc.) than we’ve seen in recent quarters.
Under the surface there’s likely some year-end positioning changes going on with institutional investors. It’s impossible to nail down the exact cause but there could be some window dressing happening, as well as some buying in stocks that funds expect to do well in 2020. At the same time, there could still be some tax-loss harvesting going on.
This all boils down to an increased likelihood of some strange stock specific trading action in the next two weeks. This happens every year and honestly the best thing to do is not worry too much about it. A lot of people are stepping back from the market and I think that tends to amplify short-term market efficiencies that are less pronounced at other times of the year.
In terms of our portfolio we don’t have a lot of major news to report on this week. Most of our stocks are doing just fine—after all our average gain is near 90%—but there are some that have pulled back, like our latest position Health Catalyst (HCAT). I believe some of the stagnation is happening because new buying is being directed into the aforementioned sectors that have just recently begun to show strength.
Stepping back, the market looks healthy to me. There has been positive progress on the trade front with Treasury Secretary Steven Mnuchin saying the U.S. and China will sign a “phase one” trade agreement early in the New Year. And the House has cleared the USMCA trade deal, which Mnuchin believes will add 0.5% to U.S. GDP growth.
While there’s been a lot of debate about trade, I think most people can agree that with all the changes over the years, including on the technology evolution front, it’s time for trade agreements that represent the realities of the current global economy. Hopefully positive progress can continue to be made and U.S. companies can get back to business in 2020.
Changes this week
Health Catalyst (HCAT) Moves from Buy to Hold.
Updates
AppFolio (APPF) has quietly been doing its own thing and is trading 10% off all-time highs. This is happening while rental market software rival RealPage (RP) trades 20% off its highs and appears to be trying to boost growth through acquisition (another one just announced). This may be an oversimplification, but when you look at the two companies at a high level and see APPF poised to grow at over 30% this year and RP at half that rate, it’s a hard conclusion not to make. At any rate, I like what APPF is doing and am keeping the stock at buy since it seems the next move will be higher. BUY.
Arena Pharmaceuticals (ARNA) is doing absolutely nothing of interest. We’re just hanging out here waiting for more trial related data in the back half of 2020, which should begin to kick-start the stock again as we move through the first two quarters of the year. BUY.
Avalara (AVLR) had a quiet week in which shares were flat and no news was published. Keeping shares of the tax software specialist at Buy. BUY.
Cardlytics (CDLX) made a big move after reporting Q3 earnings, which inspired me to move the stock to hold to let it calm down some. The company is using purchase data from financial institutions to roll out a marketing platform that helps brands reach consumers directly in native banking channels. Current programs with Bank of America, Chase and Wells Fargo (rolling out now) are powering 30%+ growth in 2019. I still like it, I just want to see the stock cool off and digest gains. Keep holding. HOLD.
Construction Partners (ROAD) was slammed after reporting Q4 results a few weeks ago but I’ve kept the road construction and paving company at Buy since I think the market’s reaction was a bit over the top and that the stock remains an attractive portfolio addition for small-cap funds. I still believe in that thesis. ROAD is already well off its lows and is trading right around our November entry point. BUY.
Domo (DOMO) hasn’t given us any news since reporting Q3 results and the stock is still digesting the move back near 24 after that event. Shares are likely to jump around in the near term. Some investors may be harvesting losses, while others may see this beaten-up asset (53% off all time highs) as representing a good deal right now. Management will present at the Needham Growth Conference on Wednesday, January 15. HOLD.
Everbridge (EVBG) went to the market last week with a convertible note offering and shares are currently digesting that event. There’s no news and I like what the software company, which has an innovative critical event alerting platform, is all about. Keeping at Buy. BUY.
EverQuote (EVER) has been relatively unaffected by the short report that was recently published. As I discussed last week, I’m not putting much stock in the report, in part because it relies on web traffic data reported by SimilarWeb, which isn’t remotely accurate for tracking Cabot’s own website. EverQuote, which runs an online marketplace for insurance shopping, continues to be rated hold because shares need to digest the run to 39 after Q3 earnings. HOLD.
Goosehead Insurance (GSHD) pulled back after Q3 growth was below expectations, but the stock, which doesn’t have a ton of trading volume, isn’t doing anything wildly unexpected. Shares tend to go through extended consolidation phases and that’s what we’re seeing now. Goosehead is shaking up the insurance brokerage market with a unique business model that splits the sales and service functions and relies on modern cloud-based software to run operations. BUY.
Health Catalyst (HCAT) has been a raging disappointment since I added it a few weeks ago. Shares have been dropping by the day on no news. This isn’t entirely unusual for a newly public company, but still, it’s not what I was expecting. I don’t think there is anything “wrong” with the stock, it’s just going through some growing pains. On the one hand this likely makes it a great value right here. On the other, this isn’t a value investing advisory service and I much prefer to be buying stocks that are in uptrends, as HCAT was when we jumped into it. I’ve kept at buy but for now the best option is to simply move HCAT to Hold. HOLD.
Inspire (INSP) develops solutions to help patients with obstructive sleep apnea and is up 21% since we jumped into the stock in October. It’s now 7% off its high. Revenue should be up around 58% this year on the back of expanding coverage. Keeping at Buy. BUY.
Q2 Holdings (QTWO) recently dipped below 80 but I’ve kept at buy since I think the long-term growth story here is very much intact. The stock has been trending up for the last week and is nearing that 80 level again. Keeping at Buy. BUY.
Quanterix (QTRX) hasn’t done much lately but enjoyed a little bump yesterday. It’s a volatile stock at times but should grow at 40% or more and could be a nice little acquisition for another life sciences company. HOLD HALF.
Rapid7 (RPD) peaked in July and slid through October but has been climbing back since. The security software stock is up 11% over the last week and trading 12% off all-time highs. BUY.
Repligen (RGEN) has been trending higher since the beginning of October but just flattened out near 90, which is 9% off the stock’s all-time high. I still like it. BUY.
Veracyte (VCYT) was our July addition and that timing wasn’t ideal. The stock retreated in the months afterward in what appeared to be a normal pullback. It has since climbed back and is now trading right near our entry level. As I said last week it will take some buying to get the stock to punch above 31 and break out, but I think there’s a decent chance that will happen. BUY.
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
