It’s been another week of mixed stock performance and assorted headlines that collectively give me the sense that, while a lot of investors may be shifting money around, there’s no real consensus yet on what will work and what won’t in the near-term.
In this type of environment, I believe the best strategy is to try not to do too much. The gyrations in many stocks, often on no meaningful news, can often lead one to try to connect dots that simply don’t exist. That can mean investors lose focus on the more significant big-picture themes that should drive their stocks higher over time.
Of course, the assumption underpinning this strategy is that one holds stocks in good companies to begin with. I believe we do, though I’m open to the possibility that a couple could falter in the coming months and may need to be cut (hopefully not).
One approaching market catalyst is earnings season. With just one week left in the third quarter (for those companies with fiscal years ending in December) some companies are already planting their Q3 reporting dates on the calendar.
That’s going to start driving some speculative trading. But also, on a more fundamental level, the passing of Q3 will move us one more quarter into the future, when analyst estimates are, generally speaking, more positive.
More specifically, consensus earnings estimates for the S&P 500 in Q4 2020 are 10% higher than in Q3 2020. And moving forward one more quarter, earnings estimates in 2021 are almost 30% higher than 2020.
This rolling forward of the calendar can be meaningful as it has a significant impact on the models that analysts use to come up with price targets and ratings. It also impacts all the valuation metrics based on earnings with the net effect being that valuations will go down if earnings estimates go up and stock prices stay the same.
This can help stocks “grow into” the rich valuations that many have.
In terms of our portfolio, the average change in our positions over the last five sessions is just +1%. And just to put things in perspective, the average change since August 20, which is right before the S&P 500 broke out to new highs on the insane run in tech stocks, is just -5%.
In short, the grind continues. Stay patient.
Changes This Week
None
Updates
Accolade (ACCD) has had a quiet week in terms of material news, though we did get an earnings date of October 14, which could spur some fresh interest. The other thing that jumped out at me was that D.A. Davidson initiated coverage with a buy rating and 45 price target. With the stock near 30 that implies 50% upside. Keep averaging in to a half-sized position while shares are weak. When the trend stabilizes and looks to be improving, we’ll consider filling the other half, if the fundamentals are solid. BUY A HALF
AppFolio (APPF) returned to its support level around 135 this week on no news. No change in my outlook. HOLD
Arena Pharmaceuticals (ARNA) was hinting at a breakout to new highs last week and has followed through so far this week. With the stock looking like it could make a significant run and the timeline to potential catalysts getting shorter, this should be a biotech stock high on the buy list. BUY
Avalara (AVLR) recently found support for the third time around 117 and has enjoyed a number of strong sessions this week (until yesterday). My hunch is that the stock will continue to trade more or less in this range of 115 to 145 (roughly) so we’ll keep at hold for now. HOLD
Cardlytics (CDLX) continues to oscillate around in the 64 to 88 range and just closed its convertible notes offering this week. The conversion price is around 85, which is a nice premium to where the stock is today but well below where it should be in 2025, when the notes mature. Same as last week – while there is some near-term price risk, I believe we can continue to buy. BUY
Everbridge (EVBG) remains at hold as the stock is still trapped in the 119 to 160 trading range. No news. HOLD
EverQuote (EVER) looks to be firming up around the 35 to 40 level and remains at buy. The next quarterly report (not out until early November) will likely dictate the next major move in the stock. BUY
Fiverr (FVRR) continues to run higher and hit new highs this week before pulling back today. The platform for linking up freelance workers with clients is a near-perfect fit for the pandemic economy, and management is trying to seize the opportunity to build a company that thrives in the aftermath too. Keep holding. HOLD
Goosehead Insurance (GSHD) is looking for firm footing around 83 after a swift decline last week that wiped out the stock’s surge following a big quarterly report in late July. The dip was likely caused by insider stock sales, which potentially triggered some additional selling if the weak hands got shaky. We’re holding on. HOLD
Inspire (INSP) is trading right near all-time highs and is looking to break out above the 131 level. Management announced that third-quarter results will be released on November 2. BUY
Karyopharm Therapeutics (KPTI) has been showing signs of coming back to life as shares spent a number of days trading above the 15 level that I want to see in order to move back to buy—at least until yesterday. We’ll remain patient as the stock is still early in what I hope to be an extended recovery. HOLD
Palomar (PLMR) has pulled back to its 50-day line and closed yesterday roughly at the same price as when I wrote last week. No change. BUY
Q2 Holdings (QTWO) is trying to get back above the 94 level that served as resistance in August 2019 and this past February. The stock is just below its 50-day line and about 17% off its high of 106. This looks like another “grind it out” scenario, which simply requires patience. We have that. Keeping at buy. BUY
Repay Holdings (REPY) is up modestly over the last week but essentially unchanged since we jumped into the position in July. All things considered, that’s not bad. This has turned into a wonky market and Repay’s relative stability, even in the face of a stock offering priced at 24, should be interpreted as a victory. BUY
Repligen (RGEN) is down 4% over the last five sessions and is trading near support at 138. No change to the story. Use the weakness to accumulate shares. BUY
Sprout Social (SPT) has worked its way 7% higher this week and is back to our entry point. Shares are acting relatively strong compared to many other software names. Sprout offers cloud-based social media management solutions so clients can handle all the activity occurring across multiple platforms, 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. BUY
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
