Down, But Not Out
To say that the coronavirus has infected the stock market would be to state the obvious. Less obvious is the answer to the question; what’s the antidote?
Investors don’t seem to care that Joe Biden, the market’s favored Democratic candidate, is trouncing Bernie Sanders. Trump’s speech last night only seemed to fan the flames of stock selling. And few seem excited to jump into the market after it has fallen into bear market territory to scoop up “deals”.
That said, we did have a decent bounce on Tuesday. And just an hour or so ago the Fed announced it would inject $1.5 trillion to try to shore up erratic market disruptions (the market was down 8% or so at the time). Also, it’s all but a given that we will get some sort of announcement from the White House on other measures to shore up the economy and help everyone get through this (people are saying we’ll get that today – hope it’s good).
Unfortunately, all of this illustrates just how serious this has become. How quickly the pendulum swings.
Big picture, most people are trying to come to terms with the growing body of evidence that this new virus, which people haven’t developed immunity to, and for which there is no approved vaccination (yet), can spread quickly and widely.
This is one of those things that seems exceedingly obvious after the fact. Thankfully, as awareness rises the ability to curb the spread of viruses does too. And, while this doesn’t sound like a dream virus by any stretch, it also doesn’t seem to be the worst one in existence (not a bright silver lining, I know).
That’s not to say it’s not concerning. It is. But if we can trust what’s going on in China (I don’t utter those words often!) then the “antidote” for the market will be some sense that we are on the other side of the virus breakout hump.
That would mean a series of days and weeks when the number of confirmed cases consistently drops. I think that will be our signal to start getting more aggressive. What happens between now and then is a bit fuzzy though.
The playbook for such uncertain times is one we’ve had to pull out before. While the details are always different, the big picture isn’t.
There are really two things we want to do. First, make sure we have plenty of capital available for when the time comes to start buying stocks again (there won’t be a crystal clear signal, however).
And second, make sure that you have the conviction in what’s still in your portfolio to hold on. In all likelihood many of these stocks will be ones that you’ve taken partial profits on, and which you’ll likely average back into once things start to improve.
There is no one-size-fits-all approach as these are all very personal decisions. One good thing is that, while we’ve added a number of positions recently that have been hit hard, we’ve also been getting incrementally more defensive and have pared position sizes in many of our stocks, and had gains to play with in many of the others.
Here are brief updates on our positions now. Clearly, the theme is to become more defensive, and raise a little cash. But we’re not yet jumping ship.
Arena Pharmaceuticals (ARNA) moves to HOLD
Avalara (AVLR) moves to HOLD
Fiverr (FVRR) moves to HOLD
Goosehead Insurance (GSHD) SELL 1/4
ModelN (MODN) moves to SELL REMAINING HALF
Luna Innovations (LUNA) moves to HOLD
Q2 Holdings (QTWO) moves to HOLD
Repligen (RGEN) moves to HOLD
Updates
AppFolio (APPF) is back to where it was this past summer, even though management reported good numbers last Monday. No doubt this is a harsh correction but if shares can hold above 85 or so we could have a good opportunity to add to this position soon. Keep holding. HOLD
Arena Pharmaceuticals (ARNA) was gaining ground heading into this correction but has since broken below support at 42 and is near our entry point. From the beginning this has been about the long game and Arena is well funded and has big data releases planned for later in the year. We could easily see those data releases get pushed back some, but for the time being I’m inclined to stick with the position. Still, given the environment, I’m moving to hold today. HOLD.
Avalara (AVLR) is one of those secular growth stocks that you just don’t want to part ways with. I’ve been bullish on the stock for some time and it still represents the future of sales tax automation. If you need to raise a little cash you could pull in your position some as you likely have gains to play with, despite the 30% pullback. With the stock still holding up OK (a relative term) I’m reluctant to sell from our portfolio. That said, let’s not be blind to what’s going on in the world – it’s likely that there will be some disruption to Avalara’s business in Q1 and Q2, at least. Let’s move to hold and see what develops. HOLD
Cardlytics (CDLX) has been on a rollercoaster ride. The stock went vertical in January after management pre-announced Q4 revenue would be up over 44%, then shares plummeted last week when the official quarterly results came out and management said the current environment for consumers is extremely uncertain. Another wrinkle was a management shuffle, and potential delay of the Wells Fargo rollout. This week’s market rout hasn’t helped matters at all. Big picture, this is a company that will likely see revenue rise and fall based on consumer spending. We’ve seen the leverage in the business (witness the stock’s ascent in 2019 as it posted huge growth), but also the downside risk. We’re still in the black, and with the stock so far off its high it’s looking quite interesting. But we don’t need to try to be heroes. Let’s keep holding and see what a few more days brings. HOLD
Domo (DOMO) reported earlier this week and I detailed the results, and suggested selling half your position, in a Special Bulletin. No new news. Continue to hold half. HOLD HALF
Everbridge (EVBG) I’ve said before that this is the ultimate “lemonade” stock. Suffice to say the lemonade stand has been open. Shares hit an all-time high yesterday, likely because this type of event (the virus outbreak) is what Everbridge is built for – to help keep businesses running and people safe during critical events. It’s a bittersweet success, that’s for sure. And Everbridge is a bit like Teladoc Health (TDOC); a company that appears to have a rosy outlook because something bad is happening. How long that can last remains up in the air, especially since there’s a lot of meat on this bone if investors need to sell something. If you’re on edge, I wouldn’t argue with you if you wanted to sell a few shares. But officially, I’m keeping at hold. HOLD
Everquote (EVER) has been at hold for a while and I’m keeping it there. All things considered the stock is holding up OK. But if it falls much below 30 we’ll likely have to change our thinking and reduce our half position to a quarter position. HOLD HALF
Fiverr (FVRR) was last week’s new addition, so no surprise we’re down on the stock. The company has developed a platform that helps people buy and sell digital services online. Growth is good and it’s a big idea, but still relatively unknown. I suggested averaging in but given the market conditions I’m moving back to hold today. HOLD
Goosehead Insurance (GSHD) was bucking the broad market trend and hit an all-time high last week, then has fallen every day this week. Purely as a risk mitigation measure, I’m suggesting you sell a one-quarter sized position and hold the rest. SELL A QUARTER, HOLD THE REST
Health Catalyst (HCAT) is in the dumps and I recommended selling half a position earlier this week. Keep holding the rest. The stock is trading near its post IPO low and right at the IPO price, which could provide some support. HOLD HALF
Inspire (INSP) is another stock that was performing well until it got pulled down by the market. We still have a little wiggle room here before we’re negative on the position and all indicators are that this is a stock that big investors wanted to own (good numbers, good chart, good story, etc.). I won’t hold it forever, but let’s give it a few more days and see what happens. HOLD
Luna Innovations (LUNA) is right back to a support zone at 5.37 where the stock consolidated in September and October. I’m moving to hold to see if we can get a bounce here. If we break lower, we’ll sell it. HOLD
ModelN (MODN) was moved to Sell a Half on Monday and I’m suggesting you sell the other half as well. We might have a better market to sell into tomorrow, and strategically I see this as an opportunity to raise some cash that can be deployed back into other portfolio positions. SELL REMAINING HALF
Q2 Holdings (QTWO) is another stock I’d like to hold on to as I see a long-term winner, despite the 33% correction we’ve endured. Given all that’s going on with interest rates we could easily see disruption in the business with some deals pushed out. But at the same time I believe this is a stock that big investors are reluctant to part with, which should help it be one of the leaders when things turn around. In the meantime, moving to hold. HOLD
Repligen (RGEN) is hanging in there pretty well. If there’s ever an environment in which investors might be inclined to buy, or at least hold on to, a company that specializes in production of biologic drugs and process efficiencies this is it! Shares are 20% off highs and we need to respect that by moving to hold. But that’s as far as I’m demoting RGEN today. HOLD
