Under normal market conditions growth investors like to get pulled into strong stocks and buy them as they head higher. This is anything but a normal market, however!
Opinions diverge on exactly how the economic recovery will take shape and over what time frame—or if there will be recovery in the near-term at all.
Every day I’m amazed at the range of headlines. Everyone is voicing an opinion on everything, and if you try to connect the dots you wind up with what looks like a map drawn by my youngest son. Good luck figuring that one out.
Still, states are opening up, we’re all more than ready to get back to some semblance of normal life, and spring is in the air (except for early this week in Vermont, where I’ve been for the last two weeks, where we had two nights of snow!).
But there’s still a lot of risk out there in the world and in the market. Given the rapid and sustained advance of so many growth stocks, and the winding down of a catalyst-rich earnings season, it makes a lot of sense to proceed with a good dose of caution right now.
I’m not calling for a massive retreat in stocks, nor am I looking for a huge decline in the growth outlook for the types of companies that we seek out, which are primarily cloud, internet, software and MedTech names. Generally speaking our companies have been quite resilient and I’ve liked what management teams have had to say.
But for right now, until we get at least a little consolidation phase in stocks, I see little reason to get overly aggressive. That means there are not a lot of buy ideas in our current portfolio, which is a little frustrating for me. But it is what it is. We have to go with the evidence in front of us, and for now, with most of our stocks, that just means sitting on our hands for a bit.
Changes This Week
Cardlytics (CDLX) moves to HOLD
Updates
AppFolio (APPF) reported early last week and beat expectations by a small amount. Management pulled 2020 guidance due to COVID-19 and acknowledged that while demand was strong in Q1 it expects variability throughout the year due to the pandemic. Management said, “… it is presently unclear whether the cumulative impacts will be positive or negative.” AppFolio’s solutions allow customers to run many of their property management activities remotely and while that won’t necessarily translate to growth if end-market dynamics get weaker it likely does provide some amount of insulation. The stock reacted well to the report but has slid over the last two sessions, making the last week’s change -5%. Analysts now see 25% revenue growth this year. HOLD
Arena Pharmaceuticals (ARNA) slipped 6% over the past week, entirely due to the market’s retreat yesterday. Long term, this company still has a lot going for it. In terms of upside potential it’s all about moving potential treatments through the pipeline. Analysts are currently modeling later-stage treatments with an 80% probability of success, while mid-stage treatments have a roughly 45% probability of success and earlier stage treatments have a 15% to 25% probability of success. As treatments move through trials the chances of success go up and so too does the stock. Given the rather long trials for Arena’s drug candidates, but huge end-market potential, this story is taking some time to develop. BUY.
Avalara (AVLR) reported last Thursday and beat expectations while management said Q2 (ending in June) likely represents the trough of the COVID-19 inspired challenges. Management issued 2020 revenue guidance in a range of $455 million to $465 million, which is roughly what analysts had expected and which represents around 20% growth. That should accelerate in 2021. The stock has been strong since, having recently popped up to a fresh high. Tax automation represents the future and while there is competition Avalara should win over time. Keeping at hold. HOLD
Cardlytics (CDLX) was moved to buy a couple weeks ago and has remained there after the company’s report suggested a worst-case scenario can be ruled out, for now. Management said its purchase intelligence data is extremely helpful to marketing clients in this environment. As predicted revenue from retail, travel and restaurants has been hard hit. But an uptick in direct-to-consumer and internet retail in areas like sporting, pet supplies, grocery, beauty, etc. has helped offset those declines to some degree. Customers are trying to figure out how and where to return to spending and Cardlytics’ can help though, admittedly, with April down 50% there are clearly strong undercurrents affecting advertising buyer demand. The company has $102 million in cash and expects to keep investing in the platform in areas like richer media and self-service. I kept at buy after the report but said if the breakout failed I’d move to hold. It failed yesterday. Moving back to hold now. HOLD
Domo (DOMO) continued to recover through most of last week then stalled just below the 22 level this week. There’s no new news other than we now have an earnings date of June 4. Still holding on. HOLD HALF
Earnings Date: Thursday, June 4
Everbridge (EVBG) is molten lava hot and has blasted off and run higher because its platform is near perfectly positioned to help businesses, governments and other organizations through this pandemic, as well as other critical situations (severe weather, terrorist attacks, etc.). The company beat expectations when it reported last week but interest remains sky high about what could happen in terms of growth, and that’s sending EVBG higher. Management said it is seeing record volumes of messages on its platform during COVID-19 and the company has rolled out additional solutions specific to the pandemic. Moreover, Everbridge’s technology can allow for contact tracing without revealing sensitive personally identifiable information, which makes the platform attractive to authorities who want to trace COVID-19 outbreaks but need to be sensitive to privacy concerns. There is also the European opportunity, where countries are mandated to implement mass alerting solutions by June 2022. How much business could EVBG win? It could be huge, especially if there is a waterfall effect with many countries landing with the company and building out a network effect consistent across borders. This remains an intriguing story that even at such elevated levels can pull in new money. We’ll remain cautious, for now. EVBG is up 7% over the past week, bringing our gain to 925%. HOLD
EverQuote (EVER) reported last Monday and beat by a wide margin, sending the stock back to all-time highs. The company beat on both the top and bottom line and raised full-year guidance, an impressive assertion of confidence given what’s going on in the world. The company has the largest online insurance marketplace out there, yet online advertising in this industry is still far from mature, representing less than 40% of total spend. There’s also the commission potential when EverQuote matches buyer with carrier, and that’s growing across both core auto and homeowners as well as new verticals (health, commercial, life, renters, etc.). At a recent conference management said more people are tuning into online ads since there are no sports to watch. Interesting comment. I hadn’t realized I’ve been missing funny insurance ads, but I guess I have! EVER looks to be consolidating its gains just above its previous all-time high. Watching and waiting to see if it can hold, which will be key to considering a move back to buy. HOLD HALF
Fiverr (FVRR) exploded higher after last week’s report in which the company did even better than expected, despite having pre-released just a few weeks prior. The numbers were good across the board with revenue up 44%, active buyers up 17% and spend per buyer up 18%. Nothing like a pandemic to get more people buying and selling digital services online. #silverlining. Management says there is a $250 billion freelancing market across the U.S. and Europe that’s still mostly seeing convoluted transactions happen offline. While Fiverr’s take rate of 25% clearly adds costs (though split between buyer and seller) the efficiency of the platform and relatively high satisfaction scores suggest sustainable growth here. Moreover, management says that, thus far, it’s seeing people stay on the platform even while some COVID-19 driven restrictions are lifted. Time will tell. I’ve received many questions from subscribers who like this stock and are interested in buying into the strength. My advice is that’s perfectly fine for a small starter-sized position as we could easily see FVRR run much higher before consolidating and/or pulling back. Just don’t go in with a big position right here. Officially, I’m keeping at hold. We’re up nearly 70% and the stock held up great yesterday. HOLD
Goosehead Insurance (GSHD) reported a couple weeks ago and a solid report propelled the stock back to its previous high, then this week happened. Shares are now 10% off their high, due in large part to a 4% retreat yesterday. Management remains confident and reiterated full-year guidance. We’re looking for a more intriguing entry point for new money. Continue to hold. HOLD THREE QUARTERS
Health Catalyst (HCAT) reported Tuesday after the close and I detailed the report yesterday morning, when I moved the stock to sell. The bottom line is that as much as I like the story I’m not confident in the stock’s upside potential in the near term so the money is best put to work elsewhere. I’ll keep a close eye on HCAT to see if the market disagrees. Sell remaining half. SOLD
Inspire (INSP) reported last week and the sleep apnea specialist has seen shares flatline since. The earnings announcement didn’t matter too much since management pre-announced several weeks earlier. A secondary offering was also reasonably well received in April. After the quarterly report I moved INSP to hold because of the murky outlook for procedures to bounce back (likely at different rates around the country) and overall lackluster momentum in the stock. I see no reason to shift strategies now. Keep holding. HOLD
Karyopharm Therapeutics (KPTI) was last week’s new addition and represents an effort to get into a high potential name that’s flying under the radar right now. The cancer drug specialist (compounds are also shown to have broader effect and are even being considered as treatments in severe COVID-19 cases) has one drug approved for one indication and several more indications being considered. Shares gapped up and rallied 47% after the last big pipeline advance and have since pulled back 37% from their recent high, offering new investors an opportunity to buy into a somewhat de-risked (but still risky) biotech name. BUY
Ping Identity (PING) reported last week and while results were good management pulled 2020 guidance and said Q2 revenue would be well below prior expectations. While Q2 is likely the trough, I moved the stock to sell because it seems like the 2020 disruption will be somewhat larger than previously thought. Ping grew revenue by 21% last year and is seen growing by 21% again in 2021, but analyst are currently forecasting a 1% revenue contraction this year, along with a 36% decline in adjusted EPS ($0.25 versus $0.39 in 2019). The stock got close to its previous high this week but hasn’t punched through. Watching closely to see if my take on earnings and strategy to step back for now (with potential to re-enter in a few months provided things start to look better) was the right move. We booked a 37% profit in one month. SOLD
Q2 Holdings (QTWO) reported last week and results topped expectations. The takeaway is that the company should continue to do reasonably well and the user base for digital banking solutions will likely go higher and stay higher after this pandemic subsides. That said, implementation and bookings delays are likely given travel/work restrictions, and banks have a lot going on right now so moving a major software platform implementation to the top of the to-do list could be a challenge. Shares popped on the report but have declined over the last four sessions due, in part, to the launch of a secondary offering priced at 76.50. Demand appears high as the offering size was increased. We’ll watch how this affects the stock. If the offering is inhaled, as has been the case in the past, I’ll likely move to buy. HOLD
Repligen (RGEN) reported last week and beat on both the top and bottom lines. Clinical-stage manufacturing drives around 70% of revenue while vaccine development drives around 10%, and management has said that while there are a few moving parts the overall growth trends remain intact. Guidance was maintained at 10% to 14% organic growth, but analysts see faster growth of around 18%. Shares have been trending higher after breaking out to new highs a few weeks ago. You can peck away at a few shares around this level if you’re game but for bigger purchases let’s wait for a consolidation phase. HOLD
