The market’s attention has been squarely focused on jobs this week as updates on that front are likely to influence the Fed’s upcoming decision on interest rates next week. If it hikes (which is likely), it will mark just the third increase since the financial crisis.
We’ve had 17 consecutive months of unemployment below 5%, and trailing three-month average payroll growth of 183,000. Today’s nonfarm payroll report was expected to show an increase of 197,000 last month. It showed 235,000. Over the last three months, monthly average job growth has been 209,000. It’s safe to say no movement on interest rates would come as quite a surprise to the market. Futures now price in a 93% chance of a hike.
Also this week, E.U. Central Bank head Mario Draghi suggested ultra-loose monetary policy in Europe is increasingly unnecessary to prop up the market. The potential fly in the ointment in Europe continues to be uncertainty around France’s election and Brexit.
Earnings growth here in the U.S. looks good, even though forward estimates for small caps came in a little over the past week. The small cap index’s valuation is still very elevated on a forward earnings basis (forward P/E of 20), but not too bad on a forward price-to-sales basis (forward P/Sales of 1.07 won’t get crazy until it gets up to 1.2).
My biggest concern now is that we’re overdue for a correction. I’m not going to get into forecasting details today, but I’m assembling some backward-looking research that I’ll share with you next week. My conclusion isn’t going to be that we should get out of the market or do anything overly dramatic. But I do think lightening up a little is a good idea, and we’ve taken steps to do that over the past month.
We have 10 positions in our portfolio today. And one of them reported this past week. We’ll hear from Primo Water next week (I had estimated it would report this week, but I was overly anxious). Details below.
Updates
Airgain (AIRG) Airgain rebounded some this week as Cowen and Company came out in defense of the stock and reiterated its 22 price target. That’s 70% above yesterday’s closing price. I don’t expect the stock to make up that gap overnight. But given that the company recently reported earnings and many analysts upped their price targets, it seems plausible that the only reason the stock isn’t doing well is because of insider sales post lock-up expiration. That will pass. It’s a Buy. BUY.
Asure Software (ASUR) Last week’s new addition is one way to play a strong employment market, with the added kick from a micro-cap that is growing through consolidation in the Human Capital Management (HCM) and workplace management industries. On Wednesday, ADP reported that private payrolls rose by 298,000 across the U.S. in February. That was 100,000 better than expected. This should all portend good things for Asure. When I recommended it, the stock was in a pullback that was just nearing its 50-day moving average line. It’s continued to retreat since, and is now approaching the 10 level, which I expect to hold. BUY.
Everbridge (EVBG) As I thought, shares of Everbridge have been weak after the disclosure that existing shareholders are likely to sell up to $50 million of stock after Everbridge files a public offering in late March. A Seeking Alpha author also came out with an article talking about shorting the stock due to lock-up expiration. It will pass, but it’s probably going to continue to be a little rocky here until we at least get pricing on the offering. Just hold. HOLD.
LogMeIn (LOGM) The stock rallied after earnings came out then pulled back a little. It’s looking terrific now. I actually think this stock can be bought in small increments here for those who want a mid-cap software growth stock. Don’t go crazy or anything, but it seems to me that the stock could easily get to 120 within the next two to three months. It will need to get through resistance at 110, which could be formidable. But as I’ve said before, it hasn’t paid to bet against LogMeIn. For those that aren’t aggressive investors, keep holding. HOLD HALF.
Marrone Bio (MBII) This stock looks to me like a coiled spring ready to explode. The catalyst to make that happen will be earnings, which we still don’t have a date for. And naturally we’ll need a good result for this thing to pop higher. I’ll go over what we should expect once we have an earnings date. Keeping at Buy. BUY.
Estimated earnings release date: April 1
MindBody (MB) The stock still looks great even after a modest pullback to 26 this week. Management will go to Dana Point, California next week to present at the ROTH Conference. Keeping at Hold. HOLD.
Ooma (OOMA) This is a little frustrating. Ooma reported a good quarter (which I’ll get to in a second) this week and the stock was acting well post earnings. Analysts reiterated Buy ratings and Credit Suisse upped its price target by 33% to 16. Then yesterday, news hits that Worldview Technology Partners, which owned 19% of shares outstanding, will sell over 80% of its position by unloading 2.86 million shares at 8.85, with Credit Suisse and JMP Securities acting as joint book-running managers. Well played guys. Shares sold off 8% before trading closed and will likely open a little lower today too given they closed yesterday at 9. This isn’t a dilutive offering so it’s not necessarily a bad thing. It’s more that all the shares hitting the market at that price has driven down demand for the stock. Long-term, it’s still good. It will just take a few weeks to work through this. I’m keeping at Buy but advise being patient and opportunistic.
Now onto Q4 earnings. Ooma reported 13.5% revenue growth to $27.6 million (beating by $400K) and EPS of -$0.01 (which beat by $0.02). It also guided for this year’s revenue to grow by 15.8%–18.6% to $121–$124 million and for EPS to come in at -$0.08 to -$0.13, well below expectations of $0.08.
The main reason for the bump in revenue and drop in earnings is due to investments to support a global rollout with WeWork. This subject dominated the conference call. The rollout will require investments in hosting, datacenter, etc., (around $2 million this year, with some sustaining capital required afterward), but that investment will extend to customers in those regions in addition to WeWork. WeWork sounds like a significant opportunity long-term. Ooma has hundreds of customers from WeWork right now, and there should be a more significant jump in 2018. Profit margins on these customers should be slightly lower than non-WeWork clients, but that makes sense given the large number expected. WeWork has over 90,000 members worldwide across 125 locations in 38 cities in 10 countries. It expects to double the number of locations this year. We’ll follow this as things develop.
The company gave a brief update on add-on products internet security and home monitoring (Remote 911). It expects hardware revenue to get a bump as it begins selling sensors ($24.99 to $34.99) in 2017. The first sensor is monitored for free with basic phone service (free, aside from taxes, fees), and for no charge for premier subscribers ($9.99 per month). We’re in wait-and-see mode here since the products haven’t really hit the market yet.
We were interested in small business sales trends. Small business grew by 60% in Q4. That’s terrific news, and small business users are now 17% of core users. There’s a lot of room to grow here and I think the WeWork deal is an example of what Ooma can accomplish with even bigger clients. One analyst asked how hard it would be to integrate Ooma phone service directly into Amazon Echo, Google Home, etc. Management said it would be easy, depending on how those manufacturers evolve on the API front. It didn’t get into more detail. But I think the punchline is that Ooma has a solid platform here that can extend into many IoT applications. I like the stock (despite the recent sale by Worldview). Buy on weakness. BUY.
Primo Water (PRMW) Shares of Primo are looking steady in the 14 to 15 range ahead of earnings, which we now know will come out next Wednesday after the market close. There was a great little article in The Wall Street Journal this week about how bottled water has surpassed soda in the U.S. I grabbed the below image from that article. Keep holding. HOLD.
Earnings release date: March 15
Q2 Holdings (QTWO) The stock is essentially unchanged over the past week. It looks to be establishing support around 35. It’s been a little up and down in the past so while I love it long-term, I’m playing it a little cautious after the post-earnings jump from 32 to 36. Keeping at Hold. HOLD.
U.S. Concrete (USCR) The market likes this stock and it doesn’t hurt that headlines related to Trump’s $1 trillion infrastructure spending dream keep popping up. It’ll be interesting to see what actually happens. Either way, I like U.S. Concrete’s core business and think the real carrot here is expansion into a new market, which management is working to do in 2017 (so it says). If there is a big infrastructure spending bill or a wall on the U.S.-Mexico border and U.S. Concrete gets a piece of the action, that would be gravy. Keeping at Buy. BUY.
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
