Marching Toward the Peak
We are headed into a three-day weekend (the market is closed tomorrow for Good Friday) and what is expected to be the peak of COVID-19 infections in many hard-hit places like New York.
Already, the last few days have shown some flattening of the curve (I include a resource for you to review the data in my writeup on Domo (DOMO)) and, combined with enormous amounts of financial stimulus/relief, the market has responded by marching higher.
Clearly the fundamentals of the U.S. and global economy look awful right now. But the market is looking past the first half of 2020 and into the second half of the year and 2021. The message to CEOs is clear – if you have any bad news you need to get out there at some point but were reluctant to do so before, do it soon!
The message to investors is also clear – the economy and financial markets are being bailed out by unlimited amounts of monetary and fiscal stimulus. While one can parse the details and find examples of too little here and too much there the big-picture takeaway should be that, for now, investors are getting their bailout too.
That’s why we’re not dumping stocks. In the absence of the above measures this health care crisis would have already evolved into a financial crisis and depression. Stocks would have cratered more than they did. In many ways we should be thankful for the financial crisis of 2008-09 since much of the playbook was sitting there on the shelf and just needed to be dusted off and expanded upon.
For now, there are enough positives to begin plotting a path to reopen the economy. Things will be different in many places, for sure. And it’s not going to be a straight line to prosperity.
But this pandemic will have taught us many valuable lessons and inspire innovation that has yet to be fully understood or valued. And it won’t have destroyed as much productivity or value as was at risk a few weeks ago.
For our part, we’ve marched through this without making too many moves and, hopefully, can continue on that same trajectory moving forward. That means for now, we’ll remain cautiously optimistic and keep most stocks at hold.
Have a great weekend and stay healthy.
Changes This Week
None
Updates
AppFolio (APPF) never fell far below support in the 80 to 85 range and is up 14% over the past week. It’s hard to know exactly what the impact on the business will be in the short-term as we’ve heard a lot about how so many renters didn’t pay rent in April and that will likely have some impact on transaction volumes for AppFolio’s Value+ Services. Still, I think it’s unlikely that property managers will abandon efficiency tools at this early-stage and may easily be more reliant on them given lack of face-to-face interactions. At roughly 30% off its highs AppFolio has already corrected sharply. Let’s continue to hold. Earnings are expected in early May. HOLD
Arena Pharmaceuticals (ARNA) has come back with a vengeance after falling to 33 in mid-March. Shares are now around 48 and are up 9% over the past week. I’ve kept at buy since; other than potential disruption in trials schedules due to site activation and enrollment delays, the big-picture story here hasn’t changed. Things should start to get very interesting in the second half of 2020 and moving into 2021 as data on major trials begins to roll out. At a recent meeting with analysts, management said that, for the time being, clinical timelines remain intact. We also heard this week that the controlled-release version of etrasimod looked good in a Phase 1 study and that it reduced average heart rates as compared to the more concentrated version. The formulation (a once-daily tablet) will begin to be integrated into all future Phase 3 trials and Arena will seek eventual approval through supplemental filings. BUY
Avalara (AVLR) remains a hold until we have more clarity on how COVID-19 is affecting the company. Big picture, I don’t think this pandemic impacts the trend to automate sales tax collections and, in fact, we could see increased interest in companies trying to streamline operations through technology given reduced workforces. At the same time, Avalara has nearly 12,000 customers and roughly two-thirds of them skew to the small- to medium-sized category, which are more sensitive to economic disruptions. The risk vs. reward seems balanced right now with the stock trading 23% off its high and having rebounded 35% off the low from mid-March. Earnings are expected in early May, but as with a lot of companies I wouldn’t rule out a pre-announcement. HOLD
Cardlytics (CDLX) has the rare and dubious distinction of being one of our biggest short-term winners and losers. The stock is trading 60% off its high but has rallied 40% over the past week! This stock is the ultimate indication of how much uncertainty there is around the consumer, which accounts for 70% of GDP spending. Management is sure to be working on many fronts to pull in marketers for clients with in-demand goods and services these days and should be prioritizing technology development in the current climate. With so much uncertainty the stock remains a hold for all but the most risk-tolerant investor. HOLD
Domo (DOMO) has bounced back near a monthly high but that’s of little consolation – the stock is still in the doghouse. There’s value here so we’re not bailing completely. If you want to get an idea of the type of work Domo can do with data, check out its Coronavirus Tracker website by clicking here. The site collects, processes and visualizes data every 10 minutes from reliable sources, including WHO, CDC, Johns Hopkins University, Worldometer, and Enigma. You can see exactly what the headlines are saying – that confirmed cases are starting to flatten out. The cool thing about Domo’s site is the granular detail. This website illustrates the type of value that businesses can get by using Domo’s platform and why I think the stock might be worth holding on to. HOLD HALF
Everbridge (EVBG) was one of the safest places to park money during the worst of the market crash but has pulled back roughly 24% since. It’s now back at a level where you can begin to peck away at a few shares if you’re feeling like you want more, but officially I’ll keep at hold a little longer. HOLD
Everquote (EVER) is up over 30% in the past week but still 30% off the high. It was hard to know exactly how this business was tracking before this pandemic given all the new products and it’s even more difficult to know now. Consumers have taken a hit and there aren’t a lot of new cars and houses being sold so not a lot of new policies being written. But then, Everquote is an online marketplace so people don’t need to be doing new policies only – they could also be changing insurers too and that could be a benefit. In any event, in the absence of new information it’s a hold. HOLD HALF
Fiverr (FVRR) exploded almost 30% higher yesterday after the company gave an early look into Q1 earnings. Revenue is expected to exceed guidance of $32 million to $33 million despite a 10% to 15% decline in business in the third week of March. Since then activity has bounced back with weekly upticks continuing into April and more gigs being created. Activity around animation, video, online lessons and e-books has been particularly strong, while digital marketing and other business activities have decreased. Management didn’t get into specifics on the rest of 2020 and acknowledged how uncertain things are, but stepping back it looks like there is a shuffling of the deck in terms of who’s buying and who’s selling, and what services are trading hands, but that for now things are evening out and Fiverr remains on track to meet expectations. After such a big surprise move the stock remains a hold. HOLD
Goosehead Insurance (GSHD) hasn’t given us anything new to think about over the past week and shares are relatively unchanged. HOLD THREE QUARTERS
Health Catalyst (HCAT) still doesn’t look all that great, despite having cloud-based infrastructure, over 90% recurring revenue and having rapidly released new products (albeit being offered for free, for now) to help in the COVID-19 response. Shares were beginning to rebound but then sold off yesterday on news that the company will sell $200 million of 2.5% convertible senior notes due 2025 (with an upsized offer of $230 million if demand is high). Roughly $57 million will go to pay off a term loan, some will go to cover transaction costs and the rest will be to bolster the balance sheet and, in my view, be used for acquisitions. As is typical there was nothing specific mentioned in terms of acquisitions. Continue to hold. HOLD HALF
Inspire (INSP) has rallied more than 20% over the past week on no company-specific news. The baseline expectation here is that elective surgeries are being postponed in many areas of the country and this will dent first-half 2020 revenue but that things will begin to improve in the back half of the year. HOLD
Ping Identity (PING) was last week’s new addition and our latest effort to jump on a cloud software stock that has a lot of growth in front of it. The immediate catalyst here is that there should be a modest uptick in identity security solution demand due to more work-at-home environments. With exposure to the enterprise segment of the market and a lot of selling done with partners I expect the near-term benefit may come more from existing customers than with new ones. That said, the company is doing a lot to make it easier to sell, including new bundles and increasing availability of modules through AWS Marketplace. So far, our timing looks quite good with Ping up roughly 20% since being added. Continue to average in. BUY HALF
Q2 Holdings (QTWO) is up roughly 15% over the past week and back above its 50-day line. Management announced it has rolled out an end-to-end digital lending solution to streamline and digitize the Payroll Protection Plan program to help banks and credit unions field applications and speed up acceptance. The solution is included in the Q2 Cloud Lending platform. Recall that most of Q2’s business comes from banks that use its mobile banking apps instead of building their own internally. The shift to mobile and online banking isn’t going to reverse course and digital transformation should remain at the top of the list for financial institutions, even if projects are pushed out in the near term. HOLD
Repligen (RGEN) hasn’t given us anything new to write about lately but remains a strong stock due to its pure-play exposure to drug development. Keep holding. HOLD
