The S&P 500 crossed above its 25-day moving average line on April 6 and is back above its 50-day moving average line today. It is only 16% off its previous high. Granted, under the circumstances that doesn’t seem quite right. But nevertheless, there it is.
I’m quite certain over $4 trillion in stimulus spending, combined with both explicit and implicit guarantees by the Fed and Treasury that systematic failures will be avoided at all costs, is playing a significant role here.
Somewhat ironically, the S&P 600 Small Cap Index is doing terribly. I say ironically because our stocks are up an average of 117% and we’re wholly invested in small-cap stocks. But our portfolio doesn’t represent the index, which is much more diversified (to its detriment).
In terms of the index, it is currently 32% below its 52-week high and 36% below its all-time high (from late-2018). That’s a huge amount of underperformance compared to the S&P 500.
There are a number of reasons for this. First, the S&P 500 is significantly weighted toward Amazon (AMZN), Microsoft (MSFT), Apple (APPL) and Facebook (FB), which have a combined weight of over 20% and, for the most part, are doing great.
There is nothing that resembles anything even close to that weighting of sustainable growth stocks in the small cap index.
Moreover, small caps have significant allocations to sectors that have dramatically underperformed large caps. The most obvious example is financials, where the small cap index has a 17% weighting and which is down 40%, as compared to down 30% in large caps. Consumer discretionary is another major drag. Small caps in that sector, which has an 11% weighting, are down 40% as compared to down 16% in large caps. And in industrials, where small caps have an 18% weighting, they are down 34%, as compared to down 28% in large caps.
Unfortunately, in my view the small cap index continues to face structural challenges that I think will make for a tough performance comparison with large caps for the foreseeable future.
Still, for the majority of investors that don’t dig into the details of the index there’s a compelling case to be made – based off historical precedent – that small caps tend to lead coming out of recessions. That’s going to mean more bullish calls on the asset class in the coming weeks, especially given that the latest stimulus is directed primarily toward small- to medium-sized businesses.
I can’t say this is going to directly help our companies, which are mostly in the technology and health care sectors. But it could mean a little tailwind in terms of momentum if there is buying at the index level, and could open up opportunities in sectors that we don’t have much exposure to.
More to come on that in the future, perhaps. For now, let’s turn our attention back to our portfolio.
This week we’re moving incrementally, and somewhat hesitantly, more bullish based on the action in stocks (not economic data), moving two stocks to buy. That doesn’t mean to go in huge with big positions. Rather, continue to be cautious and start slow with any new buying.
Here’s what’s new.
Changes This Week
Cardlytics (CDLX) moves to BUY
Q2 Holdings (QTWO) moves to BUY
Updates
AppFolio (APPF) management has, predictably, been as quiet as a mouse through all of this. Shares are roughly flat over the last week and we’re just waiting for the next earnings call to see if a 30% selloff is overdone, or not. HOLD
Arena Pharmaceuticals (ARNA) had another quiet week. Nothing new to report. Keeping at buy. BUY
Avalara (AVLR) was up another 5% this week after an 8% move higher last week. Earnings are out in two weeks and I expect to keep at hold until we get the update. HOLD
Announced Earnings: Thursday, May 7
Cardlytics (CDLX) is hugely exposed to consumer spending and therefore very prone to a recession/depression scenario. That’s why I’ve kept it at hold through this. However, I have seen more offers from online vendors in the platform lately and considering the stock is 60% off highs and will benefit massively from any improvement in the economy I’m tentatively moving back to buy today. To be 1,000,000% clear … this decision isn’t because I think CDLX will knock it out of the park over the next two quarters. It’s because there is so much stimulus out there going to protect against a depression scenario that I think many families and companies that don’t actually end up needing financial help will get it (assuming the country starts to open up this spring/summer). That has the potential to lead to some extra cash circulating throughout the system and a “less bad” scenario for consumer spending in categories where Cardlytics is exposed. Remember, we’re just talking about people that bank with select financial institutions here (in the U.S. that’s Bank of America, Wells Fargo, U.S. Bank and JP Morgan). If you have some risk tolerance, it’s worth picking up a few shares here. Holding my nose and moving to buy. BUY
Domo (DOMO) was flat this week after rallying 30% the week before on news that management announced cost cutting measures to help keep the company on track to get to cash flow breakeven without external financing. I sent you a link to the company’s COVID-19 Tracker website a few weeks ago. This week we learned that Domo’s COVID-19 Crisis Command Center is being used by Nebraska, Iowa and Utah to help coordinate public and private organizations in the fight to slow the spread of the virus. We don’t know anything about revenue implications at this time. HOLD HALF
Everbridge (EVBG) still looks extremely strong. Management announced the U.S. Army will be using its critical event management (CEM) solution to assess and respond to the COVID-19 impact, and I’m sure there are plenty of other organizations considering the same (if they aren’t already using it). We haven’t heard much about using the platform for tracing people in the U.S., but I expect that will be discussed on the upcoming Q1 earnings call. It’s a hot stock that continues to have long-term potential because of so many uses cases beyond COVID-19. We’re up over 680%. HOLD
Announced Earnings: Tuesday, May 5
Everquote (EVER) is a stock I’ve been conflicted on lately. Theoretically, it should be in a great position given that it operates an online marketplace for comparing personal lines insurance products. With everyone at home and spending more time online, while trying to save money, it’s reasonable to expect an uptick in web traffic to Everquote’s sites. Plus, most employees work with data and software engineering, so their job is to figure out how to bring people in—it’s a good time to do so. On the flip side, nobody is buying new cars now, and they aren’t likely to for a while. Same goes for houses, and/or securing new apartment/house rentals.
In the last quarter Everquote drove over 80% of revenue from auto (up 86%), while the Other category (renters, commercial, health, home) drove almost all of the rest (up 130%). Those are huge growth numbers, helped along by the data/engineering teams. Could they crush it again this quarter with so many eyeballs online? Possibly. Plus, Everquote doesn’t necessarily need people to lock in policies to make money. In the last quarter the bulk of revenue growth was driven by quote requests (Everquote generates revenue from referrals to insurance carriers and agents).
At the end of the day a lot will depend on what’s going on with insurance carriers and how they are managing their customer acquisition spending right now on personal lines insurance products, and that likely depends on their respective business mix. Overall, I’m hugely encouraged by the uptrend in shares of EVER now (up 12% over the past week yet still 20% off its high) but wary because it’s such a high beta stock. The bottom line is that if you already own it there’s little incentive to change anything. If you don’t own any, you could dabble a little here with a small starter position and revaluate after earnings. HOLD HALF
Announced Earnings: Monday, May 4
Fiverr (FVRR) has broken out to multi-month highs a few weeks after pre-announcing Q1 results and seems to be looking to its post-IPO closing high of 39.90 as the next target. As I’ve discussed ad nauseum lately this is another company in the “work from home” basket that everybody is shopping from these days. We were a little early to the table here given we bought on March 5, literally just before the market crashed. But we didn’t freak out and stuck with Fiverr, which runs an e-commerce platform for people to buy and sell digital services. If you bought at any point during the crash, you’re up huge. Congrats. Even if you bought before the crash when I first recommended the stock, you’re in the black. Aggressive investors can still pick up shares at these levels, though the stakes are clearly higher now and I’ll be moving to hold if it gets much above 38 soon. BUY
Goosehead Insurance (GSHD) remains stable and in an established trading range. As a broker of personal lines insurance, with a significant tilt toward homeowners insurance, it’s likely to see a dip in activity during the lockdown. I’m not hugely bullish on the real estate market for the rest of 2020 either. That said, Goosehead will make a lot more money when policies come up for renewal since commissions are so much lower, and that’s part of why investors want to own the stock now. Keep holding. HOLD THREE QUARTERS
Health Catalyst (HCAT) has huge upside potential but investors aren’t going to start buying again until we get through the Q1 report and management updates us on business trends. Notably, they’ve introduced numerous COVID-19 related products that could help on the new customer acquisition front (as well as with existing customers), but it’s too early to gauge the impact since health care organizations are so focused on dealing with the pandemic. Keep holding. HOLD HALF
Inspire (INSP) was moved back to buy last week based on the stock’s uptrend, even after a secondary offering, and the potential for elective surgeries to be soon allowed again in parts of the country. This week we heard that Inspire therapy I was approved for patients 18 to 21 years old (the previous minimum age was 22). It’s a positive incremental development. BUY
Ping Identity (PING) has been chugging higher since I recommended it at the beginning of the month. We’re up 35% since. It’s another work from home play as Ping sells identity security solutions to enterprises. Keeping at buy. BUY HALF
Announced Earnings Date: Wednesday, May 6
Q2 Holdings (QTWO) isn’t soaring but the stock continues to chug higher and is now back above its 50-day line (albeit just barely). As I said last week it’s fair to expect that demand from new customers is likely slowing as potential clients go with other priorities resulting from the pandemic over major technology implementation projects. Still, longer term the stock is a buy and at 30% off its high it looks like a terrific value right now. Risks are still high (stating the obvious!) but we can’t ignore the trend. Moving back to buy. BUY
Announced Earnings Date: Wednesday, May 6
Repligen (RGEN) is a stock we’ve had since late-2018. For much of that time it has been a buy and the stock is showing why right now—RGEN just broke out to a new all-time high this week. One would think it’s in the sweet spot now given that business was already good, and now drug development and manufacturing is top of mind. We’ll find out what the latest is in two weeks when management reports. HOLD
Announced Earnings: Wednesday, May 6
