I’m looking forward to the last presidential debate tonight. I’m not sure how to dress and what drinks to prepare, though. Is it going to be a beer and jersey night, like watching an NFL playoff game, or more of a cocktail and button down night, like watching a horse race?
Anyway, the market doesn’t seem to be fazed by all the incredible things going on in the world these days. Stepping back, that makes some sense. As we’ve been saying, we are emerging (we think) from a massive recession and learning to live through a pandemic while massive amounts of stimulus (more to come…we think) and very accommodative fiscal policy (with no end in sight) are shoring up many, but not all, weaknesses in the system. And technology is helping us all be productive!
What’s not productive is investing in the small-cap index. As you know, I love small-cap stocks but believe the index is an archaic beast designed to deliver subpar returns while failing to live up to the “small stocks do better” mantra that’s persisted for too long.
If one is going to take on the risk of investing in small companies, just own them outright! Obviously, you know this since you’re a subscriber to this newsletter. But still, to help make my point, I just crunched the numbers in our portfolio.
I started with our closed positions, which are a mix of losers that we’ve dropped, nice gains on stocks we thought ran far enough, and partial gains on stocks that we still own. If we look at just those numbers, we’ve locked in an average gain of 9% on closed positions in 2020, and an average gain of 20% on positions closed in both 2019 and 2020.
That’s fine, which is all it’s intended to be – we try to hold stocks as long as possible since that’s how you generate the biggest gains. This isn’t meant to be a trading portfolio.
Moving on to our current portfolio, the average gain of our current positions is 182%. Had you invested in the iShares Russell 2000 ETF (IWM) instead of each of our current stocks, and held it for just as long, your average gain would be … 10.6%.
Obviously, we’ve been doing well. But that difference in performance is also reflective of the total lack of gains in the small-cap index. At this very minute, the IWM is trading at the exact same level it was three years ago, in October 2017.
As always, one can slice and dice performance numbers to try to prove a point. But the real world takeaway here should be crystal clear – the small-cap asset class is full of opportunities, but you can’t take advantage of them by buying the index.
I rest my case.
Changes This Week
None
Earnings Calendar
Wednesday, October 28: FVRR
Monday, November 2: CDLX, EVER, INSP
Wednesday, November 4, QTWO
Thursday, November 5: AVLR, EVBG, RGEN
Monday, November 9: SPT
Updates
Accolade (ACCD) reported last week and beat on both the top and bottom lines. Still, the stock fell afterward. This week we heard that the company will launch a stock offering to boost its cash position for the typical boilerplate reasons – working capital, strategic investments, acquisitions, etc. We just found out last night that the offering will be completed at 38.5, a relatively strong price, all things considered. Recall that Accolade just went public in July at 22, so this offering is being completed at a 75% premium to that price. The recent quarterly report showed that employers are increasingly looking for employee medical benefits solutions, and Accolade has compelling offerings. There’s no change in my rating. Keeping at buy a half. BUY A HALF
Earnings: DONE
AppFolio (APPF) management continues its multi-year streak of providing little information for investors and the media to grasp on to and speculate on. No surprise there. Earnings should be out next week or the week after. The stock is trading 13% off its recent high and roughly in the middle of its five-month trading range (between 134 and 180). HOLD
Arena Pharmaceuticals (ARNA) has pulled back 10% from its recent run to 86.5. No news. BUY
Avalara (AVLR) was moved to buy two weeks ago after I evaluated the Transaction Tax Resources (TTR) acquisition. The stock is essentially unchanged this week. We have earnings coming up in two weeks and the acquisition will certainly be front and center. Analysts see revenue up 18% in Q3 and tracking toward up 23% in 2020, when adjusted EPS is seen near -$0.17. BUY
Earnings: Thursday, November 5
Cardlytics (CDLX) is down modestly over the last week but there’s no change in the trend or the story. The big question here remains just how tied the business is to the hardest hit markets, like travel, restaurants, etc. It feels like people are continuing to shop their way through the pandemic and that the longer this goes on the more time Cardlytics has to adapt. Marketers are always looking for ways to reach an audience and Cardlytics helps them do just that. I believe in the longer-term potential here, and so do analysts. Consensus estimates suggest a brutal 2020 in which revenue will fall by almost 20% and adjusted EPS will plummet to -$2.18 (from -$0.09 in 2019). But then in 2021 revenue estimates jump nearly 50% and EPS loss estimates are cut by 40%. We’ll get another look inside the business on November 2. BUY
Earnings: Monday, November 2
Cerence (CRNC) continues to push out press releases announcing new deals. The latest is an announcement that Cerence solutions will power voice interaction for XPeng’s (XPEV) smart electric vehicles, including a SUV and a sports sedan. XPeng is a China-based auto manufacturer that just went public a couple months ago. Overall, the story continues to roll out here about as expected and I’m looking for CRNC to break out of the trading range that’s persisted since the last quarterly report in early August. BUY
Everbridge (EVBG) continues to trade in its five-month trading range and there has been no news over the last week, other than we now have an earnings release date of November 5. Analysts are looking for revenue to be up 30% to $68.4 million and be on pace for 34% growth in 2020. Should Everbridge beat Q3 expectations on the bottom line (currently expected to come in at -$0.11) it would have a shot at turning profitable this year. Current 2020 EPS estimate is for $-0.10. HOLD
Earnings: Thursday, November 5
EverQuote (EVER) will report a week from Monday. The stock is essentially flat over the last week but remains about 40% below its 2020 high. The majority of the drop came following the Q2 earnings report, but since then the stock has been trading sideways in a tight range. Recall that last quarter EverQuote missed expectations and announced the acquisition of a DTC health insurance agency that should help build out the health insurance business that EverQuote started in 2016. Overall, there were some crosscurrents in Q2 (pandemic, social unrest, acquisition) but nothing that really suggested underlying issues in the business. In fact, on the conference call management spoke with confidence about how things are going. Given all these factors I’m expecting a significant move in the stock after earnings, one way or the other. I’m leaning toward the upside. BUY
Earnings: Monday, November 2
Fiverr’s (FVRR) had been chugging along since last week’s update but shares were down almost 10% yesterday on no news. It could be that some of the concern that popped up from Netflix’s (NFLX) so-so report and the destruction in Fastly (FSLY) is just giving investors reason to re-consider their bullish perspective on other high-flying software stocks. We’ve been enjoying this ride for months and Fiverr has gone far higher far more quickly than I expected. The game plan in these situations is to try and sit back and enjoy the ride without overthinking it. Even if FVRR suffers a correction, we’d still likely be up huge. Keep holding. HOLD
Earning: Wednesday, October 28
Goosehead Insurance (GSHD) had a rough September, but October has been brilliant. The stock revisited its previous all-time high Monday. Shares are down around 10% since but the overall move has helped restore confidence in the stock. No earnings date yet. HOLD
Inspire (INSP) continued to pull back this week and closed below its 50-day line yesterday. The rise in coronavirus cases around the country is likely to blame as the trend could begin to put a damper on procedures. I moved the stock to hold last week after Anthem’s surprise coverage decision (classified the Inspire System as investigational, and not medically necessary) and we’ll keep it there through earnings, which are due out on November 2. Big picture, 2020 should be an aberration as revenue is on pace to grow just 10%. That compares to 62% in 2019 and expectations of 67% in 2021. HOLD
Earning Date: Monday, November 2
Karyopharm Therapeutics (KPTI) has been showing signs of life lately (I think) so I moved the stock back to buy last week. Part of my reasoning is that 14 has become an area of solid support and we’re moving closer toward potential catalysts. The first two should come by the end of this year, including Phase 3 data for Xpovio in liposarcoma and potential approval of Xpovio in Europe for late line multiple myeloma. But the real attraction is slated for March 19, 2021 when we’re hoping to hear that Xpovio, in combination with Velcade, is approved for 2L+ multiple myeloma. That should drive meaningful upside in the stock, while a negative outcome would likely mean we need to reevaluate our position. Keeping at buy. BUY
Palomar (PLMR) was initially left out of last week’s update due to an internal error when we posted the update on our website. We corrected the error as soon as we learned of it thanks to the astute reading of a subscriber (thanks, Tom!). If you read the update early and missed the writeup, you likely still noticed that I moved the stock back to BUY as that part was posted in the “Changes This Week” segment.
This is what I wrote last week, “Palomar took a big hit after announcing estimated pretax catastrophe losses but has firmed up and begun to bounce back. I don’t think this changes the story and would like to hear more about the specifics, but in the meantime the stock looks like it wants to head higher so I’m moving back to buy for risk-tolerant investors.”
Over the last week PLMR has traded about as expected as it looks like the initial bounce is over and investors are now waiting for more details on the overall state of the business. That will come with the Q3 earnings report, which I expect in the first week of November. BUY
Q2 Holdings (QTWO) continues to trade in an established trading range. We have an earnings report date of November 4. Analysts are looking for Q3 revenue to be up 30% and full-year 2020 revenue to be up 27%. Perhaps most important will be details around the state of the pipeline and the timeline for getting implementations done once deals are signed. The stock hasn’t broken out yet as the overall climate for financial stocks isn’t terrific but the big-picture trend toward virtual banking remains intact. BUY
Earnings: Wednesday, November 4
Repay Holdings (RPAY) hasn’t provided any updates since the announced integration with Ellie Mae two weeks ago. We don’t yet have an earnings date either. Nothing new to report. BUY
Repligen (RGEN) will release its Q3 report on November 5. I think it will be a good report and am keeping the stock at buy. Larger bioprocessing player Thermo Fisher (TMO), which is much more diversified than Repligen, reported a solid quarter yesterday. Analysts see Repligen’s Q3 revenue up 23% and full-year revenue up 26%. The stock is trading near all-time highs. BUY
Earnings: Thursday, November 5
Sprout Social (SPT) is still trading near all-time highs but we won’t get an earnings report for three weeks. The only recent news is an integration with Glassdoor, a website where employees can anonymously post reviews of companies and users can research salaries, job descriptions, etc. Sprout is still a small company that’s not well known and which won’t be profitable for a few years. BUY
Earnings: Monday, November 9
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
