We’re finally starting to see signs that investors are realizing that risk actually does exist in the market (I think).
Perhaps it is growing concern over the possibility that coronavirus cases will rise as people venture back out into the world, that social unrest is as high as anytime in recent memory, that the Fed is saying an economic recovery will take a while, that speculation is running rampant in certain areas of the market, or that yield caps will go into effect and potentially limit upside potential in heretofore recovering value stocks.
Most likely it is some combination of all of the above that has led to a pause in the rally and driven something of a selloff this week. This is a good thing, in my view. While the Fed and the Treasury have signaled a willingness to do “whatever it takes” to get the economy moving again there are rational limits to how high stocks should go so quickly given all that is going on.
Market recoveries should be met with some pauses and gut-check moments. We’ve had a dearth of either.
In Cabot Small-Cap Confidential, the recent turbulence has driven our portfolio down by 3% over the past week, on average. That’s not concerning to me. Thus far most dips are totally within the realm of what we’d expect to see.
Accordingly, we’re not making any major moves today. In fact, one stock is being upgraded to buy given that shares have pulled back into an attractive buy range.
Big picture, the message this week is to expect some more turbulence ahead, and to embrace it. We’ve had a nice stock market recovery so far, but we don’t want the market to get too detached from what’s going on out there.
Changes This Week
Repligen (RGEN) Moves to BUY
Updates
AppFolio (APPF) broke out a few weeks ago and surged to new highs near 180. Shares have pulled back this week and remain a hold. Management just announced a number of tweaks to products, all aimed at helping customers adapt to a changing world in which flexible payments, virtual tours and online communications are becoming the norm. HOLD
Arena Pharmaceuticals (ARNA) surged to a new high two weeks ago after Bristol-Myers Squibb (BMY) announced progress on a potential treatment for ulcerative colitis (UC). The candidate is an S1P modulator and has a similar mode of action as Arena’s candidate, a good endorsement of Arena’s potential. We’d love to see shares stick above this 64 level as that was where the stock peaked just under a year ago. Keeping at buy for now, but if the stock falters I may move to hold. BUY
Avalara (AVLR) is looking strong, trading roughly 10% off its recent all-time high. It’s not as stretched as many high-growth software stocks. BUY
Cardlytics (CDLX) has come up nicely from a harsh correction and given all that’s going on it seems appropriate that the stock remains well off its prior high (roughly 30% above where the stock is now). We’ll need more evidence of a strengthening employment market and positive travel, dining and shopping trends for CDLX to move materially higher. You can still buy, but if this rally begins to fade we’ll move to hold quickly. BUY
Everbridge (EVBG) peaked about a month ago and has been wandering around in a roughly 20% trading range since. This sort of action isn’t cause for concern in my view. The stock had enjoyed a fierce 50% rally to new all-time highs as it became one of the leading “COVID-19” small-cap software stocks. It’s still a great story but investors need to know that this isn’t just about COVID-19; it’s a play on all varieties of critical events. That said, the latest news is that management has released a fully-integrated solution in Europe to help organizations manage and get back to work after lockdowns. If you like the stock you can dabble a bit here, but our official position is to keep at hold. HOLD
EverQuote (EVER) is holding up beautifully near all-time highs. There’s no news to share. Just keep hoping for clear skies ahead. HOLD
Fiverr (FVRR) rallied from 20 to 70 over a three-month span and, not surprisingly, has finally taken a breather. We took profits on a quarter of the position a couple weeks ago and are holding the rest. Thus far it’s performing about as expected. Keep holding. HOLD
Goosehead Insurance (GSHD) blasted off two weeks ago and remains near all-time highs today. There’s no major news to report. HOLD
Inspire (INSP) has continued to grind higher and is now trading within a stone’s throw of its previous high. The company just released the Inspire Sleep app to help patients learn about Inspire therapy and connect them with their physician, either in person or digitally. HOLD
Karyopharm Therapeutics (KPTI) continues to move sideways after releasing detailed results from the Phase 3 BOSTON study evaluating once-weekly XPOVIO® (selinexor) in combination with once-weekly Velcade® (bortezomib) and low-dose dexamethasone in patients with multiple myeloma who have received one to three prior lines of therapy. Should the drug candidate gain FDA approval it would expand the patient population. Management also just announced that dosing has begun in a Phase 1/2 study of selinexor in combination with standard of care therapy for patients with newly diagnosed or recurrant glioblastoma. BUY
Palomar (PLMR) was last week’s new addition and is our latest foray into high-growth insurance stocks. The company provides specialty insurance products for individuals and businesses. Residential and commercial earthquake insurance (55% of revenue) still accounts for the majority of business, while commercial all-risk (17%) and specialty homeowners (14%) are the other leading products. While Palomar has expsoure to signficant events it has a reinsurance program that offloads a good deal of the risk. It’s an intersting story with a ton of upside potential long-term. We started with a half-sized position since PLMR has performed very well lately. BUY A HALF
Q2 Holdings (QTWO) has moved up near its previous high but hasn’t broken out just yet. The growth trajectory is dependent on what banks do in terms of investments in digital banking. While there could be some delays in implementations I think the big-picture trend remains intact. BUY
Repligen (RGEN) has pulled back roughly 17% from the all-time high it hit three weeks ago. With the stock trading around its 50-day line and others in similar end markets, such as Danaher (DHR), looking strong, I think RGEN has a good chance at turning higher soon. Moving to buy. BUY
