The Eye of the Hurricane?
The past week has seen the market rocket higher on hopes for a massive $2 trillion economic stimulus plan that would try to help consumers and businesses get through the tunnel of productivity and financial devastation that this pandemic has created. As of now this package has passed the Senate (96 - 0) and is expected to be voted on in the House today.
On the one hand this package is good news for the market. We’ve seen the U.S. is willing to backstop financial markets. It now appears willing to backstop a large swath of consumers and businesses too.
This will help buy valuable time that will reduce the risk of this forced recession turning into something worse. And it clearly is having a positive impact on stocks (for how long remains up in the air, however).
On the other hand, the lengths to which the government is having to go illustrates just how dire the situation is. This may just be the first package. Many lenders are offering businesses and consumers up to three months of loan forbearance if they can identify financial hardship directly resulting from COVID-19. Schools across the country are closed for now and with every passing day more are saying they’ll remain closed into May.
Along with all the businesses and other organizations that are closed, the evidence suggests a massive contraction in Q1 and Q2. The payroll numbers today were grim and will continue to be so for a while, especially given the incentive (unemployment at full rate) to lay workers off.
As we’ve been expecting, this week we’ve seen the numbers for confirmed cases of the virus explode, and it’s going to keep going up, while spreading further. As people flee the most afflicted areas to seek shelter in smaller towns across the country, many of which are in the offseason where short-term renters are ready and willing to snag some income they otherwise wouldn’t get, they are bringing the virus with them. Some towns are prohibiting hotels and short-term rentals from non-area residents, unless they are healthcare workers or provide essential government functions.
The glass-half-full perspective here is that none of this is a big surprise. We could see where this was going last week, and the market has priced much of the known information in at this point.
That could easily translate into a market that remains volatile but trades in a much tighter range as the realm of potential outcomes, and the timeline to get back to “normal,” becomes clearer (but still somewhat murky). This is the bottoming process we all want.
From an investor’s perspective the game plan now is to remain patient and be incredibly selective. By focusing on quality stocks we should be able to skew our exposure to more of the stocks that are working, and away from those that aren’t.
The other good bit of news is that with so many stocks having sold off there are a lot that look attractive now. I don’t think we’re going to see a big V-shaped recovery here since the underlying problem (the virus and resulting economic devastation) won’t be solved overnight.
In short, we want to be somewhat opportunistic, but not at the expense of letting down our guard. We are not out of the eye of this hurricane yet.
In terms of what’s on the buy list this minute, there’s not much. Only Arena Pharmaceuticals (ARNA) is rated buy today. I want to see how we end the week and come out of the weekend before making any more decisions. Plus, we have the next scheduled Issue of Cabot Small-Cap Confidential scheduled for next week, so we’ll have a new buy idea coming very soon.
As a final note, thanks to everyone that has written to see how things are going, ask questions about stocks or just to say “hi.” One nice thing about our business here at Cabot is that we’re able to keep the lines of communication open with all of you regardless of social distancing practices!
Have a happy and healthy weekend.
Changes This Week
Avalara (AVLR) moves back to HOLD
Updates
AppFolio (APPF) seems to have found firm ground around 84 and is inclined to re-establish last summer’s consolidation range (roughly 85 to 110) as a near-term comfort zone. On a fundamental level, there’s nothing new to say this week. HOLD
Arena Pharmaceuticals (ARNA) has bounced back 8% since last Thursday’s close and should be able to get back up to near the 45 level soon, provided this market stabilizes a bit more. Nothing new on the fundamental front. The pipeline’s potential is the same as before, as is the hefty cash balance, and trial schedule (so far, at least). BUY
Avalara (AVLR) has bounced back 29% from last Thursday’s close and is now trading roughly 23% off its high. I’m glad we moved it back to buy last week to catch this move off what we hope is a bottom. That said, taking all things together I think the big move has been made and a little more conservativism in the near-term is in order. Moving back to hold for now. HOLD
Cardlytics (CDLX) has rallied hard off the bottom and is up 36% since last Thursday’s close. As discussed in recent weeks this is a leveraged bet on consumer spending and, long-term, I like it, but short-term it’s likely marketers will be scaling back on advertising budgets. The unknown is how quickly Cardlytics can pull in advertisers for what will be the strongest areas of consumer spending this quarter and next. On balance, it’s a hold right now, but it’s certainly a stock that should do well once the economy starts to open up again. HOLD
Domo (DOMO) is so beat up it’s hard to even look at the chart right now. As I mentioned last week this one is 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. We’re holding a half position and will stick with that for now. HOLD HALF
Everbridge (EVBG) has been one of a select group of stocks making highs in this market because it can directly benefit from COVID-19. The company has recently made a number of announcements illustrating just how it can help people and businesses through this tricky time. Specifically, Everbridge has acquired one2many, a global leader in cell broadcasting technology, which is able to avoid congested networks. This tech can be combined with Everbridge’s in a complementary way so that 100% of end users get the messages. The company also released a COVID-19 Shield package of turnkey templates that pulls info from over 22,000 sources to help companies understand the risk to their people, locations and assets (such as inventory). At a recent analyst day management said it had sent 33 million COVID-19 messages over just a one-week period. The solution can be up and running for clients in two days. Finally, Everbridge announced that the state of Massachusetts has selected the platform for its statewide COMMalert program, which will be introduced in phases. There will be a vehicle for allowing local municipalities, universities and other organizations to sign on as well. We’re starting to see the positive network effect here in the northeast with both Massachusetts and Vermont now using Everbridge. We don’t know details on how this will all affect growth in the near-term, but they are all supportive of my long-term positive view on Everbridge. That said, it’s been a hot stock and these COVID-19 plays have started to look a little crowded, so let’s keep at hold for now. HOLD
EverQuote (EVER) is up 6% from last Thursday’s close and I continue to think the roughly 40% correction has priced in a decent reduction in potential business. That said, given that EverQuote runs an online marketplace for buying insurance I think there’s also good reason to believe the business will continue to thrive with more people hanging out at home. The balanced approach is to keep at hold right now. HOLD HALF
Fiverr (FVRR) is up modestly from last week but still down from our entry point in early March (most stocks are). As I said last week it could be in a sweet spot now given that everyone is hanging out at home, and with the economic relief package there could be enough cash floating around to keep small businesses active, despite the pandemic. Let’s keep at hold until we get a little more insight on the fundamentals. HOLD
Goosehead Insurance (GSHD) is flat from last week on no new news. The stock ran to fresh highs just before this disaster struck and has corrected 30% since, but it’s still trading smack in the middle of the trading range (roughly 38 to 52) that’s become well established since last June. As discussed last week 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. HOLD THREE QUARTERS
Health Catalyst (HCAT) firmed up last week after a trio of COVID-19-specific solutions for customers were announced (Patient & Staff Tracker, Public Health Surveillance, and Staff Augmentation Support). Shares are up another 15% over the past five sessions on news that many health care organizations are already using them and that there has been an uptick in clients using the company’s agile open Data Operating System’s (DOS) ingestion, warehousing, analytics and services capabilities to meet COVID-19 demands. In short, health care organizations are scrambling to address this pandemic and Health Catalyst is there to help. The immediate impact to the business is unknown but, as mentioned last week, it’s hard to imagine this won’t have a positive long-term impact if management puts the right products in front of the right people. With the stock trading back around its 50-day line it’s looking interesting but for now, let’s sit tight. HOLD HALF
Inspire (INSP) has been trying to put in a workable bottom and is up 9% over the past week. We’re hearing that elective surgeries will be postponed in many areas of the country so this isn’t great for the near-term but should lead to pent-up demand, which could translate into a strong second half of the year and 2021. There is no new negative news related to the underlying technology or demand. HOLD
Luna Innovations (LUNA) was moved to sell last week given likely disruption in end markets (auto, aerospace, infrastructure) in the short-term. The stock remains on my watch list for potential inclusion in the future. SOLD
ModelN (MODN) was recently sold and remains on my watch list for potential inclusion in the future. SOLD
Q2 Holdings (QTWO) has firmed up for now but hasn’t rebounded as much as many other stocks. Shares are only up 2% over the last five sessions. This is likely due to its exposure to the financial sector, which has been absolutely decimated during this correction. Q2 typically has over 90% revenue visibility for the upcoming 12 months and while I imagine there will be some implementation delays I don’t think the underlying business will fall apart. Financial institutions will still be looking for digital banking solutions to improve their operations, grow their depositor base and put relevant offers in front of users. Interested, but keeping at hold for now. HOLD
Repligen (RGEN) is just about flat over the last week and at less than 20% off all-time highs has held up relatively well in this market. As I’ve been saying, drug development, and the speed with which treatments can get to market, are high priorities right now. Repligen specializes in bioprocessing technologies that help both happen. HOLD
