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Small-Cap Confidential
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Cabot Small-Cap Confidential Weekly Update

There’s been some softening in the broad market this past week and yesterday’s action looked a little erratic to me. By the time the market closed yesterday, small caps were down less than 1%. But they traded in a wide range.

There’s been some softening in the broad market this past week and yesterday’s action looked a little erratic to me. Some stocks sold off harder than normal on a modestly weak day. And that type of action always concerns me. By the time the market closed yesterday, small caps were down less than 1%. But they traded in a wide range.


Over the past week, small cap energy, materials and industrials have all taken a hit in the range of 1.5% to 3%. Small-cap tech has fallen modestly as well.


At this point, I think it makes sense to reduce our exposure just a little more by selling the second half of one winner, LeMaitre Vascular (LMAT), and cutting one loser, Aspen Aerogels (ASPN). This will leave us with 10 open positions, plus one more that I’ll release new coverage on a week from today.

We have another round of earnings results due out next week, starting on Monday. And there could be additional changes to our portfolio in the near term, depending on earnings results. But as always, we’ll evaluate things on a stock-by-stock basis as events unfold. Details below.


Airgain (AIRG) After last week’s better-than-expected earnings reports, a few analysts upgraded their ratings and price targets for Airgain. Even so, the stock has been weak. I believe this is due to insider and early investor sales that are now permissible after the secondary stock offering lock-up expiration date, and possibly do to the exercise of options. I don’t view any of this as having a long-term impact. Airgain delivered the performance it needed to, and indicated that its markets remain strong. There is also growing potential within the enormous connected car market. I suggest adding to existing positions or initiating new positions on the weakness. Roll with the volatility here, and I believe you’ll be rewarded. BUY.

Aspen Aerogels (ASPN) Aspen delivered underwhelming results yesterday that came in lighter than expected, even though expectations were already quite low. Fourth-quarter revenue of $27.6 million missed by $1.5 million while the EPS loss of $0.25 was $0.08 under consensus. Full-year 2016 revenue was $117.7 million, down from $122.5 million in 2015. I expected there would be some positive news that could help drive shares higher in 2017 but management was a little too focused on the 2018–2020 timeframe than I would have liked. Off course, I understand that Aspen’s products are typically used late in the energy infrastructure construction process, but I had still thought there would be concrete positives to drive sales in 2017. No such luck. Management is rightly being conservative when guiding for 2017 revenue of $102 million to $112 million by relying only on core market revenue and not building in much, if anything, from new projects and new markets. But it doesn’t give investors much incentive to own the stock right now.

It sounds like costs are going to go up while revenues come down. Remember that this is manufacturing, so when there is idle capacity, gross margins get hit. Aspen will also be spending a few million dollars in patent enforcements costs in the first half of 2017. Those are non-recurring, but they still take a bite out of profit and cash flow. Management estimates the company will end the year with between $10 million and $14 million in cash, down from the $18.1 million it has right now. That’s a little lean for my liking.

The potential positives remain the same. There is the potential for another big project like the 2015-2016 South China petrochemical project. But that’s impossible to forecast. Aspen is making progress in new markets, like building materials. But it has to invest in sales staff to push on current markets to meet its own guidance, so it doesn’t have the firepower to aggressively reach into new market opportunities (in my opinion). I do think these opportunities will turn into revenue, but again, that’s a 2018–2020 story. The legal battle over patent rights could be done in the second half of this year, but that’s an unknown. And the company won’t start on the second plant until it sees potential to fill excess capacity in its current plant. In other words, this late-cycle recovery story is going to take longer to play out than expected. And in the meantime, my concern is that the stock is dead money. Let’s move on and I’ll keep an eye on Aspen’s recovery so we can move back in when shares have a better chance of moving higher. SELL.

Everbridge (EVBG) The stock has remained in a range that’s roughly between 18 and 19.50 for around two months now. That could change on Monday when earnings come out. I’m expecting revenue growth of 27% in Q4. The stock continues to trade at a discount to its high-growth software peers so, if earnings are good, I expect to see a move back above 20. BUY.

Announced earnings release date: February 27

LeMaitre Vascular (LMAT) I anticipated that shares could rebound a few percentage points after Wednesday’s selloff. But yesterday, they closed only 1% off Wednesday’s close, and at no point did they trade significantly higher than Wednesday’s high. This is a great long-term, steady growth story. But after the first miss in many quarters, there is slightly less incentive to own the stock. I suspect the near-term upside is limited, barring some major new acquisition. But there is potential that over the coming months we could see another buying opportunity at a lower price. Let’s play things a little conservative and take the money that we’ve made. If and when I see another good entry point, we can jump back in. We already know the company well, so it will be easy to pounce on an opportunity. Sell your remaining shares for a roughly 37% gain. SELL REMAINING HALF.

LogMeIn (LOGM) The stock was down this week and broke below 94 yesterday. Earnings are due out on Tuesday and I expect that event will help shares firm up. It’s worth noting that the company has been beating expectations for many quarters. With the stock down over the past month, the stage is set for a rally if LogMeIn can show that it’s growth trajectory is continuing and that it’s making solid progress on the integration of GoTo. Discussion of cross-selling opportunities and competitive threats will be of interest to analysts. Keep holding. HOLD HALF.

Announced earnings release date: February 28

Marrone Bio (MBII) The stock continues to be relatively soft with no major news releases to ignite another rally. Trading volume is also low, which suggests most investors are in a holding pattern until the next earnings release. It’s likely several weeks away, so I don’t expect any big moves in the stock in the very near time. Keeping at Buy. BUY.

Estimated earnings release date: April 1

MindBody (MB) The stock is looking good two weeks after reporting, and closed yesterday just $0.70 off a 52-week high. Management is heading to San Francisco next week to attend a number of conferences. First stop will the Morgan Stanley Technology, Media and Telecom Conference on Monday. Tuesday will bring the JMP Securities Technology Conference. And on Wednesday, they’ll be at the Pacific Crest Emerging Technology Summit. Keeping at Hold. HOLD.

NanoString (NSTG) Shares have been trending sideways for the last two weeks, hovering mostly around the 19-level. The company pre-released preliminary 2016 results on January 10 that came in lower than expected, but management wasn’t yet ready to get into details. We’ll get those details next Wednesday when official results are reported and the earnings conference call will be held. Keeping at Hold through the event. HOLD HALF.

Confirmed earnings release date: March 1

Ooma (OOMA) The stock sold off a little at the beginning of the week but has firmed up over the last two days. No new fundamental news to report after last week’s news that Ooma announced it is the official provider of cloud-based phone services for WeWork, a provider of shared office spaces. I still like it. BUY.

Announced earnings release date: March 7

Primo Water (PRMW) Absolutely nothing happened over the past week as shares closed only $0.11 off last Thursday’s close. Earnings are due out the week after next. Keep holding. HOLD.

Estimated earnings release date: March 8

Q2 Holdings (QTWO) The stock is looking strong after a big post-earnings move from 32 to 36.50. As I stated last week, the bottom line here was another good quarter with a road map toward adjusted EBITDA profitability in 2017, with adjusted EPS profit to follow in 2018. With shares up around 15% over the past three weeks, I’m still keeping at Hold. HOLD.

USA Technologies (USAT) Nothing new to announce. SOLD.

U.S. Concrete (USCR) The stock dropped to its 200-day moving average yesterday amid a week when small-cap industrials, basic materials and energy stocks have been weak. At the moment, I don’t see U.S. Concrete’s drop as anything too concerning. I’ll continue to keep a close eye on it. I’m sticking with my rating of Buy. BUY.

Estimated earnings release date: March 8