This has been a crazy couple of weeks.
The market is working its way through significant developments on many fronts – U.S. presidential race, raging pandemic, positive vaccine developments – and information overload is causing some intense action in individual stocks.
The pendulum has been swinging wildly as investors have dumped growth and bought value, then somewhat reversed that trend. It should start to settle down and find a rhythm soon. That’s when investors will be able to better assess the emergence of new trends and the stocks that they want to be invested in to play those trends.
To bring it back around to our portfolio and what we do now …
There is a timing conflict with the oversimplified “sell growth buy value” theme.
The reality is the transition from raging pandemic to vaccinated world where everything goes back to normal just isn’t going to happen in the next month or two. It will take time. Longer-term, the world has changed.
One of the reasons so many growth stocks have done well during the pandemic is because they are born with digital strategies and/or have embraced them in their operations and/or bring those strategies to other companies. These businesses can more quickly scale up and down. They can rapidly evolve. They are nimble.
I don’t think those types of qualities are going to be lost on investors as we move toward a post-pandemic world. Especially when the alternative – a lot of beaten up value stocks – still lack them.
That simple reality may curb the ability of many business to adapt to a post-pandemic world that will emerge from Covid-19 a lot slower than it entered it. And it won’t be lost on investors.
I’m not saying there are no good value stocks out there. There certainly are, and there’s going to be a good amount of money to be made in the right ones.
What I am saying is I don’t think the end is nigh for the types of growth stocks that we invest in.
We’re moving on to the next phase of evolution here guys. While that doesn’t mean all of our current stocks are going to shoot to the moon, or that there won’t be painful corrections (there always are), there will continue to be a lot of innovative and exciting companies for us to buy and which can keep us generating outsized returns.
Recent Changes
Sprout Social (SPT) Moves to BUY today, 11/12
Karyopharm Therapeutics (KPTI) Moves to BUY today, 11/12
EverQuote (EVER) Moved to SELL on Tuesday, 11/3
AppFolio (APPF) Moved to SELL on Tuesday, 11/10
Fiverr (FVRR) Moved to SELL A QUARTER HOLD REST on Monday, 11/9
Inspire (INSP) Moved to SELL A QUARTER HOLD REST on Friday, 10/30
Updates
Accolade (ACCD) reported several weeks ago and sold off in the end of October then roared back when it looked like Biden would win the presidency. As is the norm for this stock, it has been a little wild lately. There remains upside potential should airline customers be able to hold on to more employees than previously expected. Also, I’m expecting an acquisition before long. The company recently raised $221 million that it didn’t really need for normal operations. Still waiting to fill our second half position. BUY A HALF
AppFolio (APPF) was added to our portfolio in June of 2017 and we had some ups and downs together over the years. We locked in a 108% partial gain in June 2018 and a 213% partial gain in September 2019. This week, on Tuesday, we decided to fully exit the position locking in a 377% gain on our remaining stake. SOLD
Arena Pharmaceuticals (ARNA) has been taken to the cleaners this week on news that the ADVISE Phase 2b trial evaluating etrasimod in atopic dermatitis (AD) missed its primary endpoint. The wrinkle is that dermatologists at one site took nine patients (19% of the total) off drug dosing between weeks four and eight, which totally screwed up the results. Taking out that patient population the other 71% did meet the primary endpoint. The reason for the dosing interruption may have been an abundance of caution dealing with low lymphocytes, which has happened in etrasimod trials for other indications but which didn’t warrant dose interruption. It didn’t need to here either, as interruption broke trial protocol. Management has decided not to take a cue from the White House – they won’t be contesting the results of this trial. Instead, they’re moving on to Phase 3 trial design. All the other programs are marching ahead. Notably, analysts that follow Arena have not taken down their probability of success assumptions for etrasimod in AD. Risk-tolerant and patient investors, which likely includes everyone that’s invested in Arena, can buy on this rather large correction. BUY
Avalara (AVLR) is down 5% over the last week but up 2% over the last two weeks. Shares rallied to a new all-time high last week after management reported Q3 results, but the stock pulled back with other growth stocks this week after the positive announcement on the Covid-19 vaccine front. The action here – AVLR is 12% off an all-time high – reflects the durability of this business. On the one hand, it’s enjoyed some success from the pandemic because of a boost in ecommerce and the resulting need for businesses to use sales tax compliance software. On the other hand, there are a lot of businesses that would be doing better if not for the pandemic. I think at the end of the day Avalara does better in a post-pandemic world, but it won’t struggle during it either, provided we don’t get into extended lockdowns. One of my favorite stocks in our portfolio. BUY
BioLife Solutions (BLFS) is our newest position and, despite the added risks of adding the stock on the day quarterly results were released, I made the measured call to do just that. I detailed the report on Friday, saying I’m more encouraged about the future of the stock after the report than before it. There are challenges in the business because of the pandemic. For instance, it’s hard to get clearance to go install a specialized freezer system that costs hundreds of thousands of dollars these days. That’s a shame, because having that equipment in more sites right now would likely help with Covid-19 vaccine distribution. However, BioLife’s media business is cranking and they are on the verge of potentially announcing a large customer for their evo shipping solution. The obvious speculation here is that BioLife will be a big beneficiary of vaccine distribution and storage and I think there’s something to that. At the same time, this is a small company, and it can’t supply everything to everyone all at the same time. There are limitations. On balance, I think we’ll hear good news relatively soon and that will help the stock. But longer-term, it’s really about sustained growth in cell and gene therapy markets that should make BioLIfe a big winner. BUY
Cardlytics (CDLX) is a stock that I’ve been calling a pandemic recovery play and this week’s action shows why. On news of Pfizer and BioNTech’s vaccine progress, CDLX broke out to multi-month highs and then rallied to an all-time high yesterday. I think investors might be front running the real recovery here, but big picture, you can see what the stock’s potential is once things get back to normal. However, in the near-term, the picture is getting bleaker by the day as pandemic-related restrictions go into effect in the U.S. and abroad. I’m not convinced that we should be buying it here (CDLX is up 22% over the last week and up 43% over the last two weeks). I’d prefer to see a clearer path to economic recovery before moving to buy. My view may prove to be conservative at the moment, but given that I just moved the stock from buy to hold last Tuesday, and had at buy for several months prior, I think we can afford to be a little conservative now. HOLD
Cerence (CRNC) has been smooth and steady through the election and vaccine news release. Looking at the chart, you’d think nothing was going on in the world. It is the only stock we have that has yet to report. Earnings come out on Monday, November 16. We’re expecting revenue to be down 4% to $79.6 million and adjusted EPS of $0.34. That result would put Cerence on track for 6% revenue growth in fiscal 2020 and adjusted EPS of $1.30. The year-over-year EPS comparisons are meaningless since there were cash distributions that flowed to the bottom line when Cerence was spun out of Nuance in October 2019. We’re going to be interested to hear what management has to say about the state of the automotive market, as well as its initiatives to expand into lower price-point vehicles and into adjacent markets (like two wheel vehicles), as well as new product introductions (Car Life, Car Pay, cabin monitoring, voice clone, and data brokerage and monetization). BUY
Everbridge (EVBG) is up 8% over the last two weeks but roughly flat over the last week. Like many other software stocks, EVBG gained after reporting Q3 results but the strength faded upon news of the vaccine progress. At the end of the day, I think this company does better when the pandemic is over, even though it is making hay with certain products while the pandemic is here. On that note, management reported that in Q3 there were more deals, and larger deals (over $500K), because of Covid-19. Roughly two-thirds of sales over the last twelve months have been from new solutions like Covid-19 Shield, Return to Work/Campus and Contact Tracing. While that’s meaningful, the message to investors should be that this type of company can evolve relatively quickly to meet the needs of customers as critical events unfold. That’s the beauty of a digital business model. Whether it’s a pandemic, hurricane, active shooter situation or whatever, the unfortunate reality is that these types of events will continue to occur around the globe and Everbridge’s software platform helps organizations manage their way through them. I don’t believe that customers will exit en masse once this pandemic is over – more likely they’ll adjust their product mix to suit their evolving needs. Keeping at buy. BUY
EverQuote (EVER) was a position we entered last June, and we sold the first half of our position on January 6 for a gain of 172%. Last week, on November 3, we sold the rest for a gain of 204%. The stock goes back on the watch list for possible inclusion in the future. SOLD
Earnings: Monday, November 2
Fiverr (FVRR) has traded all over the map after reporting two Wednesdays ago. The stock initially rallied to a fresh all-time high then got whacked when the vaccine news dropped. FVRR then rallied yesterday to close just 16% below its recent all-time high. There’s no doubt that stock has been a huge winner in the pandemic and the storyline that some business could evaporate when Covid-19 abates makes sense. The question is, how much? Management has sought to seize the day and build up the business to be better and stronger for longer. And the world’s eyes have been opened to the potential of what evolving working relationships, including with freelancers and work from home, looks like. I decided that with the mixed messages of potential vaccine relief in 2021 but raging pandemic and hugely successful business and stock right now the balanced approach was to sell a quarter position and hold the rest. We did so on Monday, locking in a partial gain of 417% on one quarter of the position. We’ll hold the other half for now. HOLD HALF
Goosehead Insurance (GSHD) reported a great quarter on October 29. Revenue jumped 51% to $32 million, beating by $4.23 million while adjusted EPS of $0.23 jumped 229% and beat by $0.11. the stock rallied to a fresh high in the days afterward but has pulled back with other growth stocks this week. No changes. We’re up around 260%. HOLD
Inspire (INSP) demolished expectations when it reported on November 2 showing that, once again, stock charts only reflect known information and not unknown. This is why technical analysis can only get you so far. Following the report, INSP shot up 32%, then kept walking higher from there. The stock is now up 46% over the last two weeks. I have at hold and suggest sitting back and enjoying the ride. We took partial profits on one quarter of our position, locking in a gain of 104%. Our remaining stake is now up 210%. HOLD
Karyopharm Therapeutics (KPTI) reported on November 2 and I detailed the results in a Special Bulletin. Now, we wait for a ruling out of Europe on Xpovio in late line multiple myeloma. Management is expecting to hear back from CHMP by the end of this year. The really big news is still expected on March 19, 2021 when there is a PDUFA date for Xpovio + Velcade to treat 2L+ multiple myeloma. BUY
Palomar (PLMR) reproted Tuesday after the bell and I detailed the report yesteday, saying, “I think shares can work their way back toward their previous high (122 on September 2) in due course. Given all the sloppiness in the market it wouldn’t surprise me if the stock had to trade in a range – say roughly 90 to 115 – for a while before any breakout … Barring any serious adverse reaction to this report, I’m keeping at buy.” The stock surprised me by faltering yesterday and closing at the low for the day. Analysts are mixed on the stock with some taking down their price targets to just below 100 with others leaving them significantly higher (JP Morgan has it at 130). My best guess is that PLMR bounces around for a while but holds above 81 and, within two weeks, is 10% to 15% higher, which could set up a quick trade for those that are game. As always, I could be wrong, but that’s how I see it now. Will reevaluate if PLMR closes below 81. BUY
Q2 Holdings (QTWO) reported last Wednesday, and I kept the stock at buy. The vaccine development news has led to a surge in financial stocks, which have underperformed lately, and not surprisingly, shares of QTWO have been strong this week too. The thinking is that if banks get stronger due to a winding down of the pandemic then companies that sell software to them will get stronger too. That makes sense – Q2 has had to deal with challenges getting implementations done during this pandemic. I think this is a stock that can still work during the pandemic, even if it doesn’t go materially higher, but will really work once it’s over. The company just announced it will exchange some convertible notes and issued new ones, with the net effect being it should bring in around $132 million. My assumed reason for the transaction is to have capital for acquisitions. Keeping at buy. BUY
Repay Holdings (RPAY) traded at the top end of its recent trading range on Monday then fell back on Tuesday after reporting Q3 results, which I detailed in a Special Bulletin. There was nothing wrong with the report, though areas of the business (like personal loans) aren’t all that strong owing to the pandemic. Digital payments are the future and Repay is helping make that possible during the pandemic, but a broader economic recovery would be a better environment for this stock. It’s not that dissimilar from Q2 Holdings in that way. I think you can buy it now with limited downside risk and be in it when things improve. BUY
Repligen (RGEN) reported last Thursday and the stock surged to a new all-time high soon after. It sold off a little this week after the vaccine news broke. Maybe there is some concern that, since Covid-19 programs generated 14% of quarterly revenue and 55% of revenue growth, when this is all over Repligen could see decelerating growth. There could be something to that, but we’re not there yet. There’s a whole cycle of vaccine manufacturing and distribution that has to happen first, and it’s not going to be a one and done type thing. Also, gene therapy grew by 30% in the quarter and the order book grew by 80%. In other words, it’s a buy. I think you could buy larger peers TMO and DHR on this pullback too, if you’re so inclined. We’re up 229%. BUY
Sprout Social (SPT) reported on Monday and the quarter was solid. I was impressed with the resilience in the stock and, even in the face of a growth stock beatdown, shares of Sprout held firm above 42, which was the low from a couple weeks ago. I moved the stock to hold after the report citing my desire not to be too aggressive with software stocks, however, with the recent relative strength, I’m more comfortable adding shares here. Moving Sprout Social back to 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.
