The market is off to a superb start to 2020 with many growth sectors finding their groove and ripping higher. The S&P 600 Small Cap Index continues to trade above the all-important (my opinion) 1,000 level and we’re seeing participation from a wider breadth of sectors than in the past.
In our portfolio, most of our stocks are doing great. We have a smattering of new all-time highs and many of our SaaS stocks that pulled back in the fall of 2019 continue to recover.
That said, we do have a few warts here and there and this week we stepped aside from a few stocks so we could focus more on what’s working and try to keep our swelling portfolio to a manageable size.
Even after those actions (sent via Special Bulletin) we still have 15 stocks so we’re far from running lean and mean. This is one of the practical challenges of running a long-term-oriented portfolio—we need to keep holding many of our positions so they can do what we hired them to do!
The big, global issues of trade, conflict with Iran, etc., haven’t tripped up the market and in many ways seem to have actually helped stocks so far this year. Given that, the biggest concern out there is more just a general sense that this market is running higher too fast and that raises the question of whether or not expected calendar-year 2020 gains are all going to be delivered in the first quarter.
That’s a valid concern for sure. That said, I do think the improved performance of previously uninspiring areas of the market (Consumer Discretionary, Industrials, Consumer Staples and many sub-sectors) is helping this move so it’s not just a couple of huge stocks (MSFT, AAPL, TSLA, CRM, etc.) that are driving the gains (full disclosure: that’s just my sense from looking around at new opportunities and isn’t the result of a statistical analysis of stocks YTD).
The best thing to do is keep your head screwed on right. Don’t go wild buying stocks and when you do buy be sure to average in. There’s nothing worse than buying a great stock at the high, selling it if it drops 15% to 25%, then missing out on the next 100% rally! You can avoid all that by averaging in.
At the same time, some buying likely makes sense. It’s just a matter of maintaining balance and at the end of the day this comes down to what you already own and what capital you have available for new purchases.
Changes this week
Health Catalyst (HCAT) Moves from HOLD to BUY
Inspire Medical (INSP) Moves from BUY to HOLD
Updates
AppFolio (APPF) was moved back to buy when the stock hit 110 in late November. It dipped soon after but has since rallied back to fresh highs and is looking ready to keep moving higher. There’s no news, but I’m keeping at buy as I respect this strength. As a side note, APPF is only trading 30% above its 2018 peak of 91.5, after which the stock endured a painful 40% correction. The historical trading pattern suggests shares could very well eclipse the 130 mark on the next big push. BUY
Arena Pharmaceuticals (ARNA) continues to post lackluster performance, but this is about the long game and sitting in a relatively low-risk biotech stock until a big move higher, which I continue to expect in the 2020 to 2021 timeframe. Stay patient. BUY
Avalara (AVLR) is up 8% YTD, bringing our gain back above 110%. But shares of the company, which specializes in software that automates sales tax collection and compliance, are still 11% off all-time highs. I think it can go higher. BUY
Cardlytics (CDLX) was moved to hold following the breakout that accompanied the Q3 earnings beat. While I’m being a little conservative and the stock keeps ripping higher, I’m sticking with the hold rating for now. We’re up over 80% since we got into the stock in September. 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. HOLD
Construction Partners (ROAD) was slammed after reporting Q4 results back in December and has been kept at hold recently since the stock is now just trading sideways. No news. HOLD
Domo (DOMO) is our biggest loser by far but our patience has served us well as the stock is well off its lows of 14.80, and with a big jump after the December earnings report there is hope for a recovery among some investors. Still, it’s a polarizing stock with many investors thinking it’s burning far too much cash and will never amount to anything. But management has said it expects to get to cash flow breakeven with what it has now, though it wants flexibility around the precise timing so it can balance growth initiatives with the desire to conserve cash. Domo’s big idea is all about business intelligence, and it’s one of the few small-cap players in this market with a product/platform that has the power to deliver the goods. HOLD
Everbridge (EVBG) is trading up 5% YTD but is still almost 20% off its all-time high of 104 from July. Granted, the stock had a crazy run from the beginning of 2019 to get to that level, but in my view will ultimately get back there so I’m keeping at buy. It’s still small, with a market cap of just $2.9 billion, and has a big global opportunity in front of it into which to sell population alerting and critical events response software. BUY
EverQuote (EVER) has been volatile lately, prompting me to recommend selling another quarter position at a 172%+ gain earlier this week. This leaves us with half a position in the stock, which has been more stable over the last couple of days. Big picture, we’ll need to see continued progress on the growth front, including with new products, for shares to keep moving higher. Earnings are due out in mid-February. HOLD HALF
Goosehead Insurance (GSHD) has been consolidating since the beginning of June, trading in the 38 to 52 range. Management of the personal lines insurance broker recently announced a number of senior management hires and promotions, including a Head of Investor Relations (Dan Farrell). It will be interesting to see if this changes anything in terms of how Goosehead communicates with investors.BUY
Health Catalyst (HCAT)
was moved to Hold late in 2019 due to dismal performance. The stock has been looking better lately (up 10% YTD) so I’m moving it back to Buy today. The company, which specializes in data and analytics solutions for healthcare organizations, is scheduled to have its IPO lockup expiration on January 21 (a week from Tuesday). Consolidated data from JP Morgan has shown that, on average and in the recent past, expiration isn’t a big factor, and can even lead to positive gains as investors are well aware of the event. We will see. BUYInspire (INSP) is up 36% since we jumped into the stock in October and with an early-2020 breakout to new highs is looking terrific. Shares are up 7% YTD. The company specializes in solutions for Obstructive Sleep Apnea (OSA) and is seen growing revenue by nearly 60% in 2019. My only concern here is that INSP’s trend has been to break out and go on a big run, then correct by around 25% to 30%. We jumped in during the last of these corrections so we should be relatively well-insulated against the next decline, whenever that may be. However, until that pattern (which in the company’s short trading history of roughly 18 months) breaks, I feel the risks of buying well into a breakout phase are just too high. Accordingly, I’m moving INSP to hold today. HOLD
Model N (MODN) is our newest position, having just been added last Friday. Shares are basically flat since we added the stock and there’s no news. Model N specializes in revenue management software solutions for the life sciences (82% of revenue) and technology industries (18% of revenue). It helps customers maximize their revenue, find growth opportunities and cut compliance risk. In the markets where Model N is focused, including biotech, pharma, medical device, generics, semiconductor, electronic components, consumer electronics and software, this means cloud-based software that covers pricing, quoting, contracting, regulatory compliance, rebates and incentives. Management has guided for FY 2020 revenue of $153.5 (at the midpoint), which implies 9% growth, with adjusted EPS guided for a range of $0.22 to $0.31 (flat to up 41%). Looking to FY 2021, analysts see revenue up around 12%, to $170 million. BUY
Q2 Holdings (QTWO) is still trading 10% off all-time highs and, relative to many other SaaS stocks, has had subdued performance lately (up 1% YTD). That’s not a negative in my mind, quite the opposite in fact. I think the stock is looking stable and could easily go on a series of making higher highs and higher lows. I believe it’s an analyst favorite in the digital banking/fintech space. BUY
Quanterix (QTRX) has been weak for a while so we sold our remaining half-position earlier this week (via Special Bulletin). There’s no news and shares are still weak. SOLD
Rapid7 (RPD) has been cranking higher along with the broader security stock group. Shares are now just 6% off all-time highs. While the risk of a pullback here certainly seems higher, it’s worth noting that RPD has just emerged from a 35% correction that lasted 110 days. In small-cap SaaS land, corrections like that are often followed by sustained moves higher. That said, the exact timing of such a move is impossible to pinpoint and there could easily be a period of consolidation before a breakout. In short, I’m bullish on RPD and am keeping at buy because it looks fantastic, but if you’re a more conservative growth investor there’s no harm in just sitting on your position here. BUY
Repligen (RGEN) keeps ripping higher and is up 4% year-to-date, now trading just 2% off its all-time high. Big picture, this pure-play supplier of bioprocessing products for the life sciences market has a lot going for it, not the least of which is technological leadership in niche markets, including pre-packed columns and single-use products. It’s also one of the few small-cap players in its market. Expected revenue growth near 40% in 2019 (to $270 million) and EPS growth near 50% (to $1.03) should continue to attract buyers in early 2020. I like it. BUY
Veracyte (VCYT) has been underperforming for us, in part because we jumped in right near the stock’s all-time high in July. Since then shares have been moving sideways. We decided to step aside earlier this week to reduce our exposure to a bigger downside move. SOLD
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
