The consensus opinion right now is that the market is strong because it’s looking favorably on the prospects of a clear-cut winner in the upcoming presidential election and that the likelihood of another round of stimulus is going up.
However, if we’ve learned anything over the years, it’s to expect the unexpected!
Still, taking it all in, I’m inclined to lean more bullish than bearish because, regardless of what happens in the presidential race, we remain in an economy where accommodative fiscal policy and stimulus spending are likely, and historically that’s good for stocks.
Beyond that, we have earnings season coming right up and that will move us one more quarter away from the biggest economic contraction in modern history (Q2 2020 GDP plummeted by 33%) and closer (hopefully) toward a stronger and healthier economy.
We’ve just crossed another threshold – as of yesterday’s close all of our positions recommended before April (11 in total) that are still in the portfolio have gone up 100% or more from our entry point!
Performance drops off with our more recent positions, though we do have a nice gain going with Sprout Social (SPT), which is up 22% since being added on September 3. Cerence (CRNC), last week’s addition, has moved higher over the last week as well.
In terms of earnings season, we kick things off next week when Accolade (ACCD) reports. Then things really heat up heading into the end of October and beginning of November.
For now, there are no big-picture changes in terms of our strategy. Continue to lean bullish and try not to overthink this market.
Changes This Week
Avalara (AVLR) Moves to BUY
Updates
Accolade (ACCD) has come back to life over the last two weeks, rallying from a low of 29.5 on September 21 to a high of 41 yesterday. The most likely catalyst has been speculation around financial aid to the airlines, which would help reduce layoffs that are largely already baked into analyst estimates for Accolade. At the same time, the stock’s roughly 30% decline from its post-IPO high set up the stock for a recovery. As with other IPOs, there is no pattern here yet. I like the story and think the company, which offers personalized health and benefits solutions to large organizations, most of which are self-insured, has a lot of growth ahead of it and will see the growth rate accelerate in the coming years. Earnings are coming out next Wednesday. BUY A HALF
Earnings Date: Wednesday, October 14
AppFolio (APPF) is trading in the middle of its recent trading range and looks like it’s heading higher in the near-term. There’s no new news. Earnings should be out around the end of the month. HOLD
Arena Pharmaceuticals (ARNA) is now running wild and free above prior resistance. This has been a stock that has required patience (we’ve been in ARNA for 32 months), and while the big news (eventual drug approvals) hasn’t yet come (we remain confident, but caution things can always go sideways in late-stage trials), seeing the stock jump above the 100% paper gain threshold is some vindication that our thesis was/is correct. I still like it. BUY
Avalara (AVLR) peaked at 144 just after the 4th of July holiday then spent the next three months oscillating between 114 and 142. Over the past three weeks shares have run to the high end of that range. Suffice to say a breakout here would be nice. For that to happen we likely need to hear details on a recent and significant acquisition. This week management announced it acquired Transaction Tax Resources (TTR) for around $377 million in cash. TTR serves large and complex enterprise customers and their internal tax teams with solutions covering U.S. sales and use tax rates, laws, software, and customer support. This was a pricey acquisition for a company that is estimated to be tracking toward $20 million in revenue this year (i.e. AVLR paid about 19 times sales). Notably, TTD serves customers (around 1,400 of them, including 30% of the Fortune 500) that are significantly larger than those Avalara has historically targeted. The acquisition is a clear message from management that it sees opportunity to address this market at this time, and TTR’s products and services will be huge in addressing the opportunity sooner rather than later. TTR brings customers in healthcare, telecom, financial services, auto dealership and construction industries. Needless to say, the potential to cross-sell TTD’s solutions to Avalara’s customer base, and vice versa, is going to be the matter of significant discussion on the upcoming quarterly conference call, which is scheduled for November 5. I think this news is bullish for the long-term growth prospects of the company and therefore am moving back to buy. The one caveat is that AVLR is trading at the high end of its recent range so we could easily see a retreat based purely on the technical pattern. BUY
Earnings Announced: Thursday, November 5
Cardlytics (CDLX) continues to trade in the 63 to 88 range and isn’t likely to do much until we hear more about the trajectory of the business. That update should come around the second week of November. No news. BUY
Cerence (CRNC) is our newest stock and a recent spin-out (from NUAN) focused on developing AI-powered digital assistants for connected and autonomous vehicles. The overall goal is to create an “Apple-like” user experience for drivers so that their use of infotainment systems in cars is as slick and enjoyable as that of an iPhone. The company has a lot going on. Two recent updates discuss a European automaker’s selection of Cerence Swype for its vehicles (the largest deal of this type in company history) as well as NIO’s (NIO) selection of Cerence as its partner for delivering voice technologies in its vehicles. If you want to see more on exactly what Cerence does, take a look at this promotional webpage for the Mercedes MBUX. Cerence is the technology that powers the company’s new user experience platform. BUY
Everbridge (EVBG) is trading at the low end of its five-month trading range and right on its 200-day moving average line. Beyond a press release disclosing that Banner Health has selected Everbridge’s Digital Wayfinding indoor navigation solution, there is no news. Earnings are expected in about a month. HOLD
EverQuote (EVER) has been trading in a very tight range for the last two months and will likely remain there until Q3 earnings come out and investors can assess whether or not the factors that led to a sharp correction in the stock after the Q2 report were more transitory or permanent. I’m inclined to lean toward the transitory end of the spectrum so have kept at buy. Earnings are expected around November 4. EverQuote operates an online marketplace for insurance comparison and shopping. BUY
Fiverr’s (FVRR) series of higher highs hasn’t yet been dented by news of a $400 million convertible note offering, due in 2025. That’s likely because this form of capital raise has worked well for other growth-oriented technology companies and with Fiverr’s growth profile the assumption is that management can create significant value with the cash. The company, which operates a platform for linking up freelance workers with clients, is set to report Q3 results on October 28. HOLD
Earnings Date: Wednesday, October 28
Goosehead Insurance (GSHD) suffered a swift correction in the first half of September, but shares found firm footing just below 80 and look to be recovering now (the stock is near 89). We’ll keep at hold for now. Goosehead provides personal lines insurance services through a hybrid corporate and franchise channel business model. HOLD
Inspire’s (INSP) pattern of higher highs and higher lows remains intact. There’s no new news from the MedTech company, which sells minimally invasive solutions for patients with obstructive sleep apnea (OSA). Management announced that Q3 earnings will be released on November 2. BUY
Earnings Date: Monday, November 2
Karyopharm Therapeutics (KPTI) was showing signs of coming back to life a couple weeks ago but shares haven’t made any meaningful progress climbing off their base around 14. Management will present at a virtual conference on influenza in the coming days, but that’s not expected to be much of a headline-making event. The real hook here is label expansion for Xpovio (in combination with Velcade) moving the treatment closer to the front line for multiple myeloma. The PDUFA date is March 19, 2021. HOLD
Palomar (PLMR) remains in the penalty box after disclosing Q3 estimated pre-tax catastrophe losses of $34 million to $38 million, net of reinsurance, from the four hurricanes Hanna, Isaias, Laura and Sally. No new information has been disclosed since, and with Hurricane Delta heading toward Texas and Louisiana and raising concerns of further losses there isn’t a lot of incentive to buy the stock right now. As I wrote in a Special Bulletin earlier this week (in which I moved PLMR to HOLD), I don’t think these losses change the big-picture story but they do raise questions about the company’s risk management and expansion strategies. Chief among them is the question: was this avoidable or just an extremely rare occurrence?
The more time that goes by without further discussion, the more those unanswered questions will grind on investor confidence. With the stock modestly above our entry point but looking badly wounded there’s no reason to do anything right now. If it moves much below our entry point I’ll likely pull the plug. However, the story here could evolve into one of pricing power on the back of what are almost guaranteed to be price increases by insurers (Palomar isn’t the only one that’s taking a hit). I think back to when I called our homeowners insurance company in the wake of Hurricane Irene (we sustained no damage) to ask about the big price hike in the new policy and was told, essentially, “Well, rates are going up in the Northeast to cover all the losses from the event.” Since then I’ve been inclined to embrace the “if you can’t beat them join them” mentality when it comes to insurance companies. HOLD
Q2 Holdings (QTWO) broke back above its 50-day line this week and is now trading just 7% off its previous high of 106, from August 6. Recall the stock was weak following the release of Q2 earnings but the big-picture story remains solid, despite the challenging environment (low interest rates) for financial institutions. Q2 Holdings provides cloud-based virtual banking software to the industry. Earnings should be out in about a month. BUY
Repay Holdings (RPAY) has been a total nothing-burger since I added it in early July. That’s not necessarily bad – the broad market hasn’t done much either. This looks to me like an extended consolidation phase for the stock after a run to new highs this past spring. The company, which provides electronic transaction processing services for merchants, just announced an integration with Ellie Mae, the leading cloud-based loan origination platform for the mortgage industry, to receive electronic loan payments via ACH or card across multiple channels. This sounds like exactly the kind of higher value, recurring transaction processing business that we want to hear about. BUY
Repligen (RGEN) peaked at 160 on August 3 then spent the next two months (roughly) regrouping in the 138 to 145 range. Monday was a huge day as the stock jumped 7% to hit its previous high. It has since moved a few points higher and trades near an all-time high today. It’s a great story for a number of reasons, not the least of which is that Repligen’s bioprocessing technologies help bring both drug treatments and vaccines to market more quickly. A recently announced partnership with Navigo Proteins to scale up manufacturing of a ligand that’s used in the purification of COVID-19 vaccines adds another element of intrigue. We’re up around 180% since I added the stock just under two years ago and I still like it. BUY
Sprout Social (SPT) was in the midst of a three-day correction when I added it to the portfolio just over a month ago. Ultimately, shares fell 25% from their high but firmed up near 31 and have since run to a fresh all-time high. The company, which offers cloud-based social media management solutions for monitoring activity across multiple platforms, is expected to report around October 28. BUY
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
