As we move closer to the end of another week, investors continue to focus on the potential timeline to open parts of the economy. New York has just said the lockdown for non-essential businesses remains in effect for at least another month, but clearly there are many areas that haven’t been so badly affected.
We keep getting a mixed bag of news, but what’s been consistent is the need for more testing, which continues to come slowly to the U.S., and that people are going to have to wear masks in many areas when out and about. While it will take some time for us all to get used to that change the alternative is far worse.
The bottom line for the market is that things need to get moving again sooner rather than later. We need some quick wins and some good news, something that will increase investor confidence in all the stocks out there that don’t benefit from surging online activity, working and shopping from home, etc.
On that note, I’ve heard from a lot of people that they can’t understand why the S&P 500 is trading just 18% off its high given all the economic damage. My thoughts are that the Fed and Treasury are working to pump over $4 trillion into damaged parts of the economy and financial systems. That’s an enormous number, and far more than during the financial crisis.
Second, 18% of the S&P 500 is weighted toward four companies that offers crucial services right now—Microsoft, Amazon, Apple and Google. Collectively, these companies are critical providers of cloud infrastructure, productivity software, streaming entertainment services, mobile devices, computers and online retail and delivery services.
In many ways (but not all) this group of companies benefit from a pandemic like COVID-19, at least in the short-term. Their services help people work and shop from home, stay connected with friends and loved ones and provide entertainment and education opportunities for out of school kids.
Equally, if not more important, they provide the critical infrastructure that allows countless of thousands of other companies, including many that we hold in Cabot Small-Cap Confidential, to provide services and deliver goods to people and organizations around the world.
We would have a bigger problem on our hands if they all went dark!
Just keep this in mind when thinking about what’s working and what’s not in this market. It’s totally different now than it would have been even a decade ago when the average investor didn’t know what “the cloud” was.
For us, it’s time to maintain a conservative stance. We have several stocks that we’ve owned for a while that are working well now, including Repligen (RGEN), Arena Pharmaceuticals (ARNA), and Everbridge (EVBG).
Many of our new stocks are surging too, including Ping Identity (PING) and Fiverr (FVRR), both of which benefit from more online activity.
And we have a number that are looking better, but still have quite a bit of room for improvement. One of these, Inspire (INSP), moves back to buy today after a secondary offering and glimpse into Q1 trends.
Big picture, we’re clearly in the very early stages of a potential recovery, but it’s tenuous. We have to go with the trends and acknowledge that the massive amounts of stimulus spending is paving the way for investors to put some money to work, but there will likely be ups and downs as we move forward.
Take any buying slow and stay healthy.
Changes This Week
Inspire (INSP) moves to BUY
Fiverr (FVRR) moves to BUY
Updates
AppFolio (APPF) hasn’t moved much this week and we have no new news to report. Earnings are due in early-May. HOLD
Arena Pharmaceuticals (ARNA) remains in good shape after a quiet week in which the stock was largely unchanged. BUY
Avalara (AVLR) was up 8% this week and regained its 25-day moving average. As I said last week this is a tempting stock to buy on this retreat but around 2/3rds of the company’s nearly 12,000 customers skew to the small- to medium-sized category and we just don’t know enough to move to buy with confidence. Keep holding. HOLD
Cardlytics (CDLX) is swinging around depending on speculation about how strong or weak consumers may be in the coming quarters. With too much uncertainty to buy and the stock having fallen too far to want to sell, we are sitting tight. There is a ton of upside, depending on how things shake out. Things that could increase my confidence would be insight into what management is doing to increase offers around what people are buying now, and some sense of the trends they see around marketing budgets. HOLD
Domo (DOMO) rallied roughly 30% this week after management announced cost cutting measures to help keep the company on track to get to cash flow breakeven without external financing. I detailed the news in a Special Bulletin, and explained why this is better news, but not a super-attractive stock to buy right now given other opportunities. HOLD HALF
Everbridge (EVBG) jumped this week on news Norway is using the platform for location-based mobile messaging. The solution was implemented in just nine days and, over a one-week period, sent 5.4 million messages related to COVID-19 to every mobile phone in the country. It is not hard to see other countries doing the same. HOLD
Everquote (EVER) is roughly flat over the past week and remains a hold. We have little visibility into insurance purchasing trends right now with so much disruption in the world. And with the company having moved into new markets over the last year, we don’t have a lot of historical data to work off. I would expect that there are very few new auto and home policies being written, and demand for rental and business insurance policies must have fallen off a cliff. But then, people could be spending more time comparison shopping on Everquote with all this time on their hands at home. After all, other online businesses are benefiting in various ways given more eyeballs. Keep holding. HOLD HALF
Fiverr (FVRR) blasted off the week before last and has held onto those gains, plus a little. The catalyst was an early look at Q1, in which revenue (not detailed) came in above guidance. Activity around animation, video, online lessons and ebooks has been particularly strong, while digital marketing and other business activities have decreased. It sounds like there are some areas of the business that are speeding up and others are slowing down (as is to be expected) but that net-net the vast numbers of people working from home and looking to remain productive is driving more business on Fiverr’s platform. Provided the economy doesn’t fall off past a certain threshold (determining this is impossible), I expect business to remain strong, and there’s ample potential for Fiverr to keep a good deal of gig workers on the platform when people are able to move and work more freely. With the stock looking stable a week after its blastoff I’m moving back to buy. BUY
Goosehead Insurance (GSHD) has been able to hold above support at 38 so far. Provided it continues to do so we’ll hold our current position. HOLD THREE QUARTERS
Health Catalyst (HCAT) looks stable but there’s not enough momentum to move back to buy. Fundamentally, I think the business is fine, though there could be some challenges signing new customers given potentially limited bandwidth within health care organizations this summer. It is a little tough to tell without more information. On balance the stock is a hold now. HOLD HALF
Inspire (INSP) was up 10% this week after management updated us on the first quarter and announced a secondary stock offering priced at 58. Management says procedures have been significantly limited lately (no surprise there) but that with so many people at home the company is connecting with patients through virtual tools and telemedicine. Management is also continuing to recruit Territory Managers based on the expectation that procedures will bounce back once allowed. In terms of Q1, preliminary results suggest revenue was up 31%, which is only 3% below consensus. Full-year guidance was withdrawn, for obvious reasons, but Inspire ended the quarter with $142 million in cash and with the announced secondary should be well-funded to invest in the future. Given the stock’s positive reaction to the secondary in the face of everything I am moving shares back to buy—but take it slow. BUY
Ping Identity (PING) provides identity security solutions to enterprises and is squarely in the “work from home” circle of tech companies, albeit being a little out of focus due to being new-ish to the public market. Shares have been on fire since we added it, having risen 35% in the last two weeks. Continue to take it slow here by averaging in. Earnings are due out in early May and while I expect things are going well with existing clients I’m not expecting a surge in new business right now simply because of potential challenges getting them up and running. That said, Ping has been working to streamline onboarding, so there could be an upside surprise. Keeping at buy. BUY
Q2 Holdings (QTWO) has been a little sluggish as compared to other cloud software stocks lately because of its exposure to online banking and digital transformation within banks and credit unions. It is fair to expect that demand from new customers is likely slowing as potential clients prioritize other stuff over major technology implementation projects. Also, it must be difficult, if not impossible, to advance implementations right now and that’s sure to push back current projects, while creating something of a bottleneck in the future since Q2 can’t just pull on a lever and have 20% (or whatever number) new implementation teams. Longer-term the stock is a buy and at 30% off its high this stock look like a terrific value right now. That said, it is not without risks in the near-term and I’d prefer to move to buy at a slightly higher price with less uncertainty. For now, keep holding. HOLD
Repligen (RGEN), which develops consumable bioprocessing products, is marching toward its February high of 110 on no new news. It will be very interesting to hear how demand is being affected by COVID-19 and what role Repligen is playing in the development of potential antibodies and vaccines. HOLD
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
