Capitulation? Hard to Say. But Moving Slightly Less Defensive
As financial markets begin to thaw, global leaders build consensus on how to address this pandemic, options of potential interim treatments for Covid-19 surface and the framework of economic relief starts to firm up (even though it won’t be enough), the stock market may be showing early signs of stability (a relative term).
None of this means it’s time to be super aggressive because it can all go south in a hurry. But taking it all in we are becoming slightly less defensive and moving a few of our favorite stocks back to buy. In all cases it’s best to keep new positions small.
Bigger picture – and this is just a summary of what I’ve been thinking over the last 24 hours, not an in-depth analysis of the situation – I suspect the market is starting to try and look past the growing sense of concern about the pandemic from the public, which (if we’re lucky) could peak this weekend and next week. As more shelter-in-place orders are issued and the number of confirmed cases of Covid-19 go up, worries will probably build.
But those concerns will quickly rotate to wonderment about the level of damage all this is doing to the economy, especially in those places where there just aren’t many people getting sick and which are at relatively low risk.
Provided those most in need get some sort of financial help very soon (a still-outstanding question), I think the government can buy a few weeks of time during which most people will steer clear of public places and one another (again, in the places that aren’t hardest hit). But they won’t do it forever, especially as pressure mounts to open businesses to save them, and families, from financial ruin.
The good news (I think) is that more people are doing what they’re being asked to do and that should help us move through the most extreme aspects of this quickly (again, I hope). They don’t need to stay locked up forever, just a few weeks.
Provided this social distancing strategy works (which it has been proven to time and time again) then as we move into early and mid-April we can move out of this phase of total insanity into just extreme paranoia, during which businesses can start to open for limited hours and use the extra time to take necessary, extra precautions to clean and disinfect.
Then, by summer, everyone properly educated about how to avoid viruses, maybe we can get back to some semblance of normal.
Arena Pharmaceuticals (ARNA) moves to BUY
Avalara (AVLR) moves to BUY
Updates
AppFolio (APPF) sells property management software for professional residential property managers. It’s not entirely insulated from the impacts of this virus since there will likely be some disruption in rent payments, lease signings, and maintenance of properties, though the location of properties will dictate that (even in Seattle the housing market remains strong, according to the Wall Street Journal). But I expect property managers would cut costs in many other areas before bailing on the software solution they use to manage the property since this software is exactly what helps them keep tabs on operations. The stock has been swinging wildly, along with everything else, but has found relatively firm footing near where it based last summer/fall, around the 85 level. At 38% off its high APPF’s pullback is roughly in line with other major corrections. I won’t argue with anybody who starts to pick up a few shares here, but my official stance is sill that AppFolio is a hold. HOLD
Arena Pharmaceuticals (ARNA) has been beaten up but the fundamentals of this company haven’t changed. It still has tons of cash and isn’t expected to generate revenue anytime too soon. As mentioned last week the biggest risk, other than failure in the pipeline (which has always been the same), is that trials are delayed due to all the chaos of social distancing, working from home, etc., and difficulties finding (and keeping) people for the trials as a result. In any event, longer-term the huge potential is still here. That’s why the stock hasn’t been slaughtered. BUY
Avalara (AVLR) has fallen 40% from its high and 14% from last Thursday. Covid-19 disruption will have an impact on this business because transactions are falling, especially in areas like hospitality, travel, retail, etc. And they won’t bounce back right away. That said, Avalara’s customers aren’t the small businesses out there with just a few employees, meaning there’s not likely to be a huge exodus of customers, provided this forced recession doesn’t turn into an extended one (which is not off the table). Longer-term, the trend to automate sales tax collections should remain strong. Going into this mess Avalara was still in investment mode, building and buying assets that could help it expand its tax library in new categories, and internationally. It wasn’t expected to be profitable until 2021. On the upside, Avalara ended 2019 with $467 million in cash and no debt (thanks in large part to a secondary offering in June). I think it’s well positioned to get through this and could even be an opportunistic acquirer if smaller targets with less cash are hit hard. Trying to be balanced here and thinking longer-term (six months to a year) I think Avalara is a buy. If it falls below 54, where there should be some support from last spring, I will reassess. Moving back to buy but take it slow. BUY
Cardlytics (CDLX) has been hard hit for good reason. The stock is like a leveraged bet on consumer spending and marketers are slashing spending budgets in categories where Cardlytics has a significant presence, including retail, dining and travel. That said, it will be interesting to see if management is able to pivot quickly to other categories, and if consumers even notice. Looking at my Chase account the offers I currently see are for Advanced Auto Parts, Dropbox, Fanatics, VUDU, Supercuts, Starbucks, Saatva, Home Chef, 1-800-Flowers and CVS, among others. In other words, the offers still span a range of potential spending targets that people can hit at home or out and about. How much of this is the tail end of campaigns that were previously paid for is impossible to know. On the upside, management recently announced that it has signed with U.S. Bank to begin a phased launch of its program. With Chase, Bank of America and Wells Fargo already in the hopper this helps to expand the platform’s reach and in any other market would be viewed as very good news. This stock is likely to be extremely volatile over the coming weeks and months as we learn more about evolving consumer spending. I think it’s a brilliant acquisition target (many fintech firms are) and the stock’s prior performance shows just how big the potential is, provided consumers have cash and outlets where they can spend it. Given the “falling knife” profile right now it’s tough to formally move back to buy, though I do think the selling is overdone. If you want to add a few shares and be willing to swing with the punches, I won’t argue. But officially, I’m keeping at hold. HOLD
Domo (DOMO) has been hard hit during this market crash and is now trading at a level that suggests imminent doom. Management has said it can easily sell to corporate customers over the phone, but does need to meet with larger, enterprise customers to move those deals forward. I think it’s likely that new IT spending on solutions like this has taken a big pause. That said, I expect current customers will continue to use Domo since business intelligence is exactly what they need right now, and Domo gives it to them on their phone. This is a growth stock that’s turned into a value stock and when that happens it’s either going to go up huge, get acquired, or go bankrupt. I think the first two scenarios are far more likely than the last one. There is too much risk to buy now. But it’s too beat up to sell. HOLD HALF
Everbridge (EVBG) has been incredibly resilient through all this since the software platform was designed to help in events just like this. Exactly how it will translate into sustainable revenue growth is yet to be seen, but the trends were strong going in and I don’t see them getting weaker coming out. Still, as I said last week there’s a lot of meat on the bone here and that makes the stock vulnerable to at least a short-term correction. For that reason it’s still a hold. HOLD
Everquote (EVER) is an online marketplace for buying insurance and has been quickly growing in new categories (renters, life, business, health, etc.) outside its core market of home and auto insurance. This crisis should only accelerate the trend of people buying insurance online. That said, consumer spending isn’t going to get through this untouched so demand for new insurance products could fall. We’ve already taken partial profits and the stock has corrected by 40% so it would seem this is all priced in. Keep holding half. HOLD HALF
Fiverr (FVRR) is a software platform that helps people buy and sell digital services online. This seems like a great market right now given that everyone is hanging out at home. But on the downside, the customer base is mostly small businesses and, depending on the end market, many of these are getting crushed right now. Hopefully the impact is short-lived and we see things start to pick up in three weeks. But at this point it’s a little early to say this is a conviction buy. By the way, did you see the stock yesterday? At one point it was up 40%! Let’s just sit pat here and see what develops. HOLD
Goosehead Insurance (GSHD) has been a relative safe haven but we still sold a quarter position last week just to take a little something off the table. Big picture, remember this company sells personal lines insurance and is leveraged to the franchise channel, which sees lower initial commissions but which grow significantly when renewals occur. Franchise channel revenue has been driving the majority of premiums (67%), but just 40% of revenue. Revenue growth should be solidly in the 30% to 40% range for years. The company also has an online client portal for new clients and self-service capabilities. I think there could be some disruption in franchise growth because of this mess (at end of last quarter there were 334 franchises signed but not yet operating), but that policy cancellations will be muted, provided this doesn’t go on for too long. Operating cash flow is positive and the company should be in a solid enough financial position to get through all this. HOLD
Health Catalyst (HCAT) was destroyed last week but we still have a half position and it’s firmed up this week. Part of the reason is a trio of Covid-19 specific solutions for customers (at no cost, for now) and, in my view, a general realization that companies like this that provide data and analytics to health care organizations could see long-term benefits from all this. Health Catalyst also renews customers once a year and has a cloud-based software delivery model, so customers shouldn’t see any disruption. Keep holding. HOLD HALF
Inspire (INSP) has been hard hit over the last week, likely on concerns that elective surgeries will be postponed (they will). On the other hand, this will lead to pent-up demand, which could translate into a strong second half of the year and 2021. The balanced approach is to keep at hold. HOLD
Luna Innovations (LUNA) was moved to sell earlier this week on concerns of significant disruption in end markets (auto, aerospace, infrastructure), at least in the short-term. I’m keeping Luna on my watch list for potential inclusion in the future. SOLD
ModelN (MODN) was recently sold and will remain on my watch list for potential inclusion in the future. SOLD
Q2 Holdings (QTWO) has been hit hard by this pandemic due to exposure to financial institutions. Still, longer-term the types of cloud-based digital banking solutions the company sells will remain in demand, even if there is some financial institution consolidation. I’d like to see a little more stability before moving back to buy, however. HOLD
Repligen (RGEN) was in a good spot going into this with a strong market in bioprocessing and pure-play exposure with many products in high demand. I don’t think anything has changed. Drug development, and the speed with which treatments can get to market, are top of mind/priority. Let’s hang in there. HOLD