The only news anybody seems to care about is the coronavirus. While that’s clearly a concern and not something to take lightly, I don’t think it changes the bigger picture trend that stocks are the place to be over the coming years.
We’ve been moving incrementally more conservative in Cabot Small-Cap Confidential because stocks have been racing higher and it seemed the odds of some sort of pullback were growing. Now we’re in the middle of one. As is the norm, it hasn’t looked exactly like what we might have pictured. But at the end of the day stocks go up and stocks go down but until the longer-term trend (and expectations) has fallen apart the wise move is to try to stay invested and make incremental, rather than bold, moves.
In our portfolio we’ve taken some lumps but have had some success over the past week too. Everbridge (EVBG) is up 8% over the past week and up roughly 600% from when we jumped in. Inspire (INSP) is up 14% since last Thursday and up 57% since October 4. And Goosehead Insurance (GSHD) is up 3% since last Thursday and 82% since we discovered it.
On the downside, our quick paper gain on new position Luna Innovations (LUNA) has turned into a 10% paper loss, while Health Catalyst (HCAT) is also in the dumps and ModelN (MODN) is now in the red. Several of our other positions are acting about as expected during a big market retreat, with many down 10% to 15% over the past week.
Is it time to jump ship? Not on my watch. As you should know by now I try to maintain a steady hand through this type of thing and have come to understand that if you’re investing in stocks you’re going to go through a lot of ups and downs, especially if you’re going after the big, long-term gains.
Is it time to get aggressive? No. There’s no reason to catch a falling knife and I’d much prefer to see some signs of stability before buying. That said, there are pockets of opportunity for investors who can stomach the volatility. On that note, I’ve moved Repligen (RGEN) back to buy today.
Stepping back, let’s continue to monitor our positions and let the market work through the uncertainty of this virus. It’s not going to be fun, especially since the market’s swings are alarming and we’re being hit from all angles with headlines about the virus spread. But a steady hand is likely to serve us better than a shaky one.
Changes This Week
Goosehead Insurance (GSHD) moves to HOLD
Repligen (RGEN) Moves to BUY
Updates
AppFolio (APPF) has been tripped up by the market’s retreat, having fallen 18% from the all-time high hit just last week. I think this is mostly related to the stock being a high flyer (most of these types of stocks have pulled back) than any fundamental change to the growth story resulting from a virus outbreak. At the end of the day people still need a place to live and property owners will still want to rent out and maintain their properties. We’ll hear from management on Monday when AppFolio reports Q4 earnings. Revenue should be up around 32% to $66.6 million while EPS likely dipped to $0.03 from $0.11 (I won’t be surprised if EPS beats, however). This all implies 2019 revenue growth accelerated to 37% from 32% in 2018 and EPS jumped 66% to $0.93 from $0.56. I’ve had the stock at hold and will keep it there through the earnings report. HOLD
Earnings Date: Monday, March 2
Arena Pharmaceuticals (ARNA) gave a business update this week and as expected the focus was on etrasimod and what to expect in 2020, 2021, and beyond. There are three studies that we should get data on in the second half of this year. First is the Phase 2 ADVISE study in atopic dermatitis that evaluates both 1 mg and 2 mg etrasimod. We also are looking for data from the Phase 2 CAPTIVATE study evaluating olorinab in irritable bowel syndrome (IBS). Of lesser importance (for now) is Phase 1 data for APD418 in decompensated heart failure, which is supposed to be released before June. Moving into 2021 we should get the first round of data from the Phase 2/3 CULTIVATE trial evaluating etrasimod in Crohn’s (first half of 2021) and closer to the end of the year we should get data on the Phase 3 ELEVATE trial evaluating etrasimod in ulcerative colitis (UC). The company is likely to burn just under $100 million a quarter in the upcoming quarters and is sitting on $1.1 billion in cash. Big picture the potential here remains huge, and the stock doesn’t reflect it, especially after a significant pullback to where the stock traded in January. BUY.
Earnings: Done
Avalara (AVLR) has pulled back a little over the last week but remains above its 200-day moving average. Should global economic activity slow down Avalara’s revenue could take a hit but I wouldn’t expect a lasting impact. I just don’t see a future in which companies decide to abandon the trend toward automating sales tax compliance in favor of antiquated methods that are error-prone and time consuming. BUY
Earnings: Done
Cardlytics (CDLX) will report official results on Tuesday, though preliminary results were released a few weeks back so the upcoming event will be more about the details than the headline results. With the stock now trading 25% off all-time highs and back in the neighborhood of where it was just after the pre-release, I expect investors who “missed the boat” are starting to nibble on shares. That’s fine by me if you wish to do the same. The company’s platform, which used purchase data from over 2,000 financial institutions to help marketers put offers in front of consumers in their native banking channels, has huge potential. But the stock has also been on a tear (until the middle of last week). I’m not officially moving back to buy but feel free to pick up a few shares here and there. HOLD
Earnings Date: Tuesday, March 3
Domo (DOMO) has given us a Q4 fiscal 2020 earnings release date of March 12, which is a week from next Thursday. We may get a pre-release, however, as management is attending the Morgan Stanley Technology, media & Telecom Conference next Tuesday. Shares have fallen over the last three sessions but there’s no company-specific negative news. This remains a big idea business that is still in the early stages of figuring out the most effective go-to-market strategy. In the upcoming release analysts are looking for revenue to climb 16% to $45.7 million and for EPS loss of -$0.96. That said, recall that in previous quarters management sought to pull in expectations (which it may have been too effective at doing, hence the stock’s poor performance) so I’d hope that Domo will deliver a beat. HOLD
Earnings Date: Thursday, March 12
Everbridge (EVBG) is the ultimate “lemonade” stock and is trading near all-time highs because the critical events platform helps people stay safe and keeps businesses running, even when bad things happen (like coronavirus). Recall that management reported last week and beat on the top and bottom lines, while landing record size contracts and growing revenue per customer. The international opportunity remains huge and largely untouched too. Some of the current strength is likely because investors see Everbridge as one beneficiary of coronavirus concerns since the platform can help companies keep employees, customers, suppliers and partners reasonably safe and productive despite all the disruptions. I moved to hold recently and am keeping it there. We’re up roughly 600%. HOLD
Earnings: Done
Everquote (EVER) reported this week and beat on both the top and bottom lines. Revenue was up 85.4% to $73.8 million (beating by 8%, or $5.67 million) while adjusted EPS of -$0.04 beat by $0.02. Management said Auto was up 78% while Other (i.e. new products) was up 130% and now makes up over 18% of revenue (versus 15% a year ago). Another good sign was that revenue per quote request was up 4% after declining 11% in the prior quarter, and quote requests were up 79%. This growth in traffic and conversions shows the marketing teams continue to do more of what’s working. Management also issued 2020 guidance, calling for revenue up 27% to 31% ($315 million to $325 million), well ahead of consensus estimates. Behind the scenes, management talked at length about what it’s doing to ensure continued success, including investing in data science, building out the sales and customer experience teams and working with insurance carriers to integrate technologies as much as possible to ensure a good experience for consumers. This was a good quarter across the board, and I wouldn’t read too much into the stock’s retreat following the event. Shares have been performing exceedingly well and some profit taking is to be expected, especially in the context of what the broad market is doing. Everquote is 20% off its highs so I think a hold rating is the right call for right now. HOLD HALF
Earnings: Done
Goosehead Insurance (GSHD) keeps chugging higher and is trading near all-time highs. No new news. I love the stock and think we can see it trade above 60 in the next couple of months but am moving to hold today since, if we do see a broader market retreat, investors will begin to look for stocks that haven’t yet taken a hit. We’ve already received preliminary results but are waiting for the official release date. HOLD
Health Catalyst (HCAT) has had another rough week but we’ll get earnings after the close today so at the very least we’ll have more information to help make a decision on what to do next. I’ll send an update on my review of the earnings result and conference call tomorrow. Analysts are looking for revenue growth of 16% to $41.8 million and an adjusted EPS improvement to -$0.29 from -$0.38 a year ago. For the full year 2019 revenue is seen up 33% to $150 million. HOLD
Earnings Date: Thursday, February 27
Inspire (INSP) reported this week and beat on both the top and bottom lines. Revenue was up 62.4% to $26.9 million (beating by $3 million) while adjusted EPS of -$0.38 beat by $0.02. Capacity is increasing significantly, with 33 new implant centers added in the quarter bringing up the total to 299. Management also provided 2020 guidance for revenue to grow 40% to 45% ($115 million to $119 million). It also now expects to open 20 to 24 medical centers per quarter as compared to 15 to 17 as previously expected. This expected growth trajectory is the result of additional hiring to build out the bench of territory managers. Inspire is also ramping up its online marketing efforts to drive people to inspiresleep.com, as well as do selective TV advertising.
Bigger picture, with significantly more prior authorizations (751 in Q4 2019 versus 395 in Q4 2018) Inspire is dealing with far fewer appeals. This trend is expected to continue as it gains 100% Medicare coverage across the U.S. in 2020. The company is still working on expansion initiatives overseas, including in Germany, the Netherlands, Japan and Australia, as well as a pediatric label expansion in the U.S. Nothing concrete to report on these projects yet.
All things considered this was a great quarter and forward guidance is a pleasant surprise. The stock has broken out to fresh highs and had been trading in wide ranges over the last two days. Given the quarter, and the broader market environment, the best thing to do now is keep holding on. Once things settle down, I’ll consider moving back to buy. HOLD
Earnings: Done
Luna Innovations (LUNA) was up almost 10% from our entry point last Thursday but has taken a hit and is now down roughly 10%. There’s no concrete news to explain the selloff; it’s just been a tough market. We have an earnings report date of next Thursday, March 5 and I expect to keep the stock at buy through the event. I’ll update you on any changes, should I have them, early next week. And, of course, I’ll detail the report next Friday after we hear what’s up. BUY
Earnings Date: Thursday, March 5
Model N (MODN) reported two seeks ago week and was trading near all-time highs just after the event. But then coronoavirus fears crept into the market, and the stock is now down 18% from all-time highs. I don’t like the action but don’t think the big picture has changed (i.e. growth accelerating due to customer demand and better delivery model). Keeping at buy. BUY
Earnings: Done
Q2 Holdings (QTWO) reported a solid quarter last week and gave guidance that left plenty of room for management to overdeliver. The stock was initially strong after the event then sold off this week, roughly in line with the market. Shares are now 18% off their all-time high. I see this as a buying opportunity and am keeping at buy. BUY
Earnings: Done
Rapid7 (RPD) was moved to sell two weeks ago to lock in the 109% gain. No new news. SOLD
Earnings: DONE
Repligen (RGEN) is trading roughly 20% off all-time highs a little more than a week after reporting results that beat on the top and bottom lines. Guidance was conservative, as is typical, setting management up to continue to overdeliver. I’m not saying RGEN will bounce back to all-time highs in the next week or two but with the stock’s recent retreat it’s now a buy in my book. Moving back to buy. BUY
Earnings: Done
