The market has served up a good deal of volatility lately and for the most part our stocks have handled it well (so far). Given stretched valuations there is certainly cause to be concerned about a larger correction. On the other hand, this pandemic has fundamentally changed the world and unleashed waves of innovation and change that will persist for years to come. Many of our stocks are benefiting and/or driving positive change, and we have a nice mix of exposure that should keep us positioned well for whatever comes next.
As you know, I’m typically inclined to hold on to positions through corrections, even though it can be painful at the time, because I firmly believe we’re investing in good companies on their way to becoming great. Accepting that there will be ups and downs along the way is absolutely critical to long-term success, and I much prefer to use corrections to add to attractive positions rather than exit them (provided there is a rational case for recovery).
Moving forward, I think it makes sense to mentally prepare for a period of slower upside advances and more downside moves in the coming weeks/months (hopefully I’m wrong). If you need to trim some positions a little to sleep well, now’s probably a good time to do so.
To be clear, I’m not saying I anticipate a market crash. I just don’t want investors to get complacent and think that what’s happened in recent months is normal (because it isn’t) and will persist forever (because it won’t).
The key is to continuously aim to strike a balance that works well for you between seeking downside protection and pursuing upside opportunity. Usually, the “am I sleeping well at night?” test is as reliable as any!
Moving on to our portfolio, over the last two weeks our positions are down by an average of 3%. The biggest declines have been in Everbridge (EVBG), AppFolio (APPF) and Cardlytics (CDLX), which are all down 10% or more. On the flip side, we’ve seen advances from Goosehead (GSHD), Karyopharm (KPTI), Fiverr (FVRR), Inspire Medical (INSP) and EverQuote (EVER).
Changes This Week
None
Updates
Accolade (ACCD) is a digital health care company and reported its first public quarterly results in mid-August. Results came in largely as expected and management issued full-year guidance of 20% revenue growth ($158 million to $161 million) that was in line with expectations and which reflected the impact of unemployment, mostly in the airline sector, where Accolade has exposure (22% of fiscal 2020 revenue). Since then American Airlines has announced it will let go of roughly 42,500 employees if it doesn’t get any federal assistance. That number is slightly above what analysts were factoring in for Accolade, though at this stage we still don’t know how many of the employees are actually receiving Accolade benefits (for example, they could be based outside of the U.S.). According to American Airlines the decision date is October 1. Speculation on the slightly higher-than-expected impact to Accolade could be contributing to the stock’s weakness over the last three weeks, thought clearly there are other factors at play (a growth stock correction being the main one). Long story short, we knew there would be some impact from airline workforce reductions going in (management disclosed this at time of IPO) and, along with this being an IPO, have factored that into our decision to start with a half-sized position. No rating change as we’re still averaging in to that first half and looking for a bigger retreat and/or evidence that the company will return to a 25% to 30% growth rate before filling the second half. BUY A HALF
AppFolio (APPF) disclosed this week that it is selling its legal practice and case management software solution, MyCase, to the private equity firm Apax Partners, LLP. The purchase price is approximately $193 million in cash. This sale makes a ton of sense to me. AppFolio purchased MyCase back in 2013 and never advanced the product all that much. Since I’ve been covering the company it’s been an odd marriage. While there are likely some efficiencies from having two software businesses there’s no big-picture strategic rationale, unless AppFolio is/was planning to add more products and become a diversified software provider. Clearly it is now, hence the sale. MyCase accounted for roughly 10% of revenue, which implies around $25 million in 2019. The purchase price implies AppFolio is getting around 7.7 times 2019 revenue. This will have the impact of making the growth numbers look slower for the next 12 months. I suspect they’ll invest the proceeds into further property management product development initiatives and/or related acquisitions. As for the stock, APPF is still trading in the 134 to 178 range, where it’s been since late May. HOLD
Arena Pharmaceuticals (ARNA) has handled the recent market volatility with relative calm. The stock is trading right in the middle of the 60 to 70 trading range where it’s been since the beginning of June. Management has recently announced the company initiated a Phase 2 trial for etrasimod (once daily, oral tablet) in Alopecia areata, or AA. AA is a T-cell-mediated autoimmune skin disorder with unmet medical need that causes non-scarring patchy hair loss, most often on the scalp. Mild disease typically presents as one or more round or oval bald patches on the scalp. The trial includes 24 participants in North America for 36 weeks. The primary endpoint is a percent change in Severity of Alopecia Tool (SALT) score from baseline to week 24. This represents another step into dermatologic conditions for etrasimod. BUY
Avalara (AVLR) has, so far, held firm above support at 114. Recall from the latest quarterly report that both revenue and profit margins were bright spots and that a secondary offering has the company flush with cash and on the hunt for acquisitions. Like other SaaS stocks the main concern here is valuation, which are near record highs (they were at records a week ago). AVLR trades with a forward EV/revenue multiple just above 20, which is above the average. Keeping at hold while it consolidates. HOLD
Cardlytics (CDLX) has been trading in the 56 to 88 range since mid-May, is trading at a 50% discount to peak valuation (pre-COVID) and has handled the market’s recent volatility just fine. A few weeks ago I moved the stock back to buy for risk-tolerant investors as it feels like this is a growthy recovery play that will gradually see improvement if/as consumers come back to spending on travel, restaurants, bricks-and-mortar retail, etc. Plus, management is tweaking the business to go after more online and digital sales. Overall, it seems like the worst is behind Cardlytics, and while there will likely be some bumps on the road, accumulating shares now will pay off in a year or two, provided the economy recovers. BUY
Everbridge (EVBG) was trading just shy of all-time highs early last week and is now at the low end of the trading range that has persisted since Q1 earnings came out in early May. The company recently announced the FCC’s decision to adopt Everbridge’s Mass Notification solution and the addition of satellite imagery to its Visual Command Center. These are incremental positives. EVBG is now trading with an EV/Forward Revenue multiple of 15.6, which is at the low end of the stock’s four-month range. HOLD
EverQuote (EVER) is 30% off its high and the stock is looking like it’s found support at 35 and aiming to head higher. Shares just moved above the 200-day line today (we’ll see if that sticks). I’m keeping at buy. BUY
Fiverr (FVRR) has traded in wide intra-day bands lately, which isn’t something I typically like to see. However, shares popped up to an intra-day all-time high today so any criticism at this stage sounds more like complaining! This is one of those companies for which the pandemic has likely been a complete game changer. HOLD
Goosehead Insurance (GSHD) hasn’t released any news lately and shares have held up very well during the recent bout of market volatility. Sure, they’re 14% off their high but the stock hasn’t yet fallen back to anywhere near where it was before a huge post-earnings announcement move in late July. HOLD
Inspire (INSP) keeps chugging higher and hit an intra-day high today, one day after management spoke at the Wells Fargo Virtual Healthcare Conference. Hard not to be impressed by the stock’s trajectory. BUY
Karyopharm Therapeutics (KPTI) has been in the penalty box for poor performance since I added it, though given that it’s a biotech stock it’s hard to stay angry at it for too long. These stocks often trade in wide ranges, especially when news flow dries up. The main catalyst (near-term) here is a pending label expansion for second line multiple myeloma (combination with Velcade) in the first three months of 2021. We’re also looking for Xpovio to gain approval in Europe. For the stock, I want to see stability above 15 to move back to buy. Keeping at hold. HOLD
Palomar (PLMR) pulled back with the market recently but had a really weird day on Tuesday as shares broke below their 50-day line early before recovering much of the intra-day drop before the close. They’ve been moving higher since. For now I’m not too concerned and think the stock could easily be trading at all-time highs above 120 by the end of the year. BUY
Q2 Holdings (QTWO) toyed with a multi-year breakout but faltered when the market pulled back last week. Still, the story here is unchanged and this is one stock that remains somewhat under the radar, in my view. I see at least 25% near-term (3 to 6 months) upside. Keeping at buy. BUY
Repay Holdings (REPAY) recently launched a stock offering priced at 24 that will mean a full exit for Corsair Capital, a PE firm that bought a controlling interest in Repay in 2016. Corsair took down its ownership to a minority stake when Repay came public via acquisition of the SPAC Thunder Bridge Acquisition. In my view this is a normal part of the life cycle here – Corsair’s role isn’t to stay invested in public companies forever but use the taking-public process as a way to exit and move on to earlier stage investments. Pricing, at 24, is solid given RPAY has been trading between 22 and 24 since mid-May. Keeping at buy. BUY
Repligen (RGEN) has a multi-year pattern of advancing higher, pulling back and pausing for a few months, then advancing higher again. The stock’s recent performance is consistent with this pattern and with the long-term story looking as good as ever I recommend using any weakness to accumulate shares. BUY
Sprout Social (SPT) is our latest addition and fortunately the timing of the stock’s addition was on the tail end of the market’s recent pullback, and not the front end. That said, we’re not anticipating tech stocks to rocket higher from here so continue to average into a new position in SPT. In terms of the story, Sprout offers cloud-based social media management solutions for companies of all sizes. Sprout’s products are powerful and capable of handling complex communications occurring billions of times a day across multiple platforms and formats, including Facebook (FB), Instagram, Pinterest (PINS), Twitter (TWTR), Google (GOOGL) and LinkedIn, among others. Revenue in 2019 grew by 30% and should be up around 27% this year and 30% in 2021. Sprout is not profitable but is headed in the right direction. The stock trades at a discounted valuation compared to other pure-play SaaS stocks, especially given its growth rate. Provided demand for its solutions holds up, Sprout fits the profile of a stock that will multiply many times over within three to five years. BUY
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
