It’s hard to succinctly articulate how I feel about this market.
On the one hand we seem to be moving toward a world in which we can go back to some semblance of normal life, but we have this huge canyon to get over first.
We also have the supportive fiscal policy and supposed stimulus bill that are normalish parts of a dramatic recession and which should be good for the market.
But then we have this dynamic between growth stocks that have gone bananas, and value stocks that have been moping around for years, but which are finally starting to brighten up. Importantly, we’re also getting pretty much across-the-board bullish calls from most of the big investment banks on cyclical-type stocks, and some words of caution on certain areas of growth.
But then we also have this stronger-for-longer argument for many areas of growth due to the acceleration of adoption of many technologies (cloud, ecommerce, digital payment, etc.) due to the pandemic, which sped up what was inevitable but wasn’t expected to be quite so big just yet.
And then you have valuations on many growth stocks that are insane, plus the hugely bullish and quite speculative-seeming IPO market.
To land the plane here... it all makes for a fascinating market to watch and participate in. But it’s certainly not without risks.
As I said a couple weeks ago, I continue to think that, for the most part, the trends and the stocks that we’re invested in are durable enough to power through the shifting dynamics in 2021. But I am getting a little concerned about what feels like the gamification of stock trading/investing.
I don’t have a takeaway message on that today. Rather, I just wanted to pose the question – at what point do the benefits of engaged retail investors and easy-to-use and free trading apps give way to the drawbacks?
Just something to think about.
As we move into the final weeks of 2020, I’m inclined to become a little more cautious with our buy ratings because, well, stocks have been en fuego! On that note, several stocks move from buy to hold today. We also sell one stock, Repay Holdings (RPAY), that has done nothing since we entered the position this summer.
Bigger picture, I’m not going to try and call a top to this market since I think we’ll see a strong market in 2021. But I do think it makes sense to mentally prepare for more volatility and some downside moves in the coming months as we cycle through strength and weakness in different types of stocks.
In short, to repeat another statement from a couple weeks ago, the best we can do is watch, listen, and learn as we move into the next phase of this pandemic and try to translate our observations into more great investments.
For my part, I’ll just try to keep finding underfollowed stocks to add to our portfolio, get us into them when they’re not going too crazy, and try to give us enough of a paper profit so that when we do get corrections we can handle them with relative comfort.
Recent Changes
Accolade (ACCD) moves to HOLD
Avalara (AVLR) moves to HOLD
Repay Holdings (RPAY) moves to SELL
Updates
Accolade (ACCD) hit an intra-day all-time high of 60.7 yesterday, a seemingly impossible event a month ago when the stock was trading near 40. If we could point to specifics behind the move it would likely be potential for some help for airline customers (which could help reduce layoffs), the completed secondary offering (I suspect for acquisitions), coverage initiation by Cannacord Genuity (59 price target) and general risk-on mood of the market over the last month. With our position up roughly 35% since we jumped in, it’s time to throttle back. Moving ACCD to hold. HOLD
Arena Pharmaceuticals (ARNA) found firm footing in the mid-60s after the ADVISE Phase 2b trial snafu about a month ago and the stock has since advanced back to 70. As I’ve been saying the biggest carrot here is etrasimod in ulcerative colitis (UC). On that note, management just announced it has reached its target enrollment goal of 372 participants in the ELEVATE UC 12/52 trials and topline data is expected in Q1 2022 (52 weeks, plus some time to analyze the data). Stay patient. BUY
Avalara (AVLR) was looking great until yesterday. Beyond the down move for the broad market, JP Morgan also put out what amounts to an “it’s time to let things cool off” note for a number of high growth software stocks, including AVLR (and CRWD, NET, and some more). While some of the stocks the firm mentioned have been the high-flyers of late it seems to be a preemptive strike against Avalara as the stock hasn’t done all that much for the last two months, and the analyst maintained a 195 price target (roughly 20% above where AVLR closed yesterday). In any event, I concur with JP Morgan’s position that things are starting to get a little frothy out there. I still like Avalara though. To balance things out, let’s heed the market’s action this week and move to hold. HOLD
BioLife Solutions (BLFS) has continued on its upward trajectory since we jumped in on November 5. We’re up around 20% since. It remains one of those stocks where we could wake up any day to an announcement that its solutions have been selected by xyz company to distribute a vaccine. However, as I’ve stated, this company is small and doesn’t have the reach of larger competitors. Plus, management has indicated installing freezer equipment has been challenging during the pandemic, even though demand has been through the roof. Our near-term thesis is that BioLife will enjoy some success from Covid-19 related factors but that this pandemic is just part of the longer-term demand trend for storage and biopreservation media for the cell and gene therapy markets. BUY
Cardlytics (CDLX) has broken out to fresh all-time highs despite the bleak price target ratings of many analysts (I’ve seen 31 to 85 lately). There’s nothing new to report on the fundamental front. We’re holding on because the stock looks strong. We’re up around 250%. HOLD
Cerence (CRNC) is up around 70% since we jumped in just over two months ago. There’s nothing new to report. We’re seeing increased attention being given to auto-related stocks and CRNC is right in that mix. I think there’s more room for the stock to run. BUY
Everbridge (EVBG) hasn’t done much at all for many months but we’re still up over 700% on our position and I think there’s gas left in the tank here. I think we’ll see the stock perform better when the pandemic starts to ease. We just may be in for a few more months of lackluster action. Let’s wait it out and continue to buy on weakness. BUY
Fiverr (FVRR) has been taking a well-deserved break for the past couple of weeks. There’s no new news, but I’m looking forward to hearing more about international expansion when Q4 results come out in 2021. For now, keep holding. HOLD HALF
Goosehead Insurance (GSHD) looks to be consolidating in the 120 to 130 range. While there are plenty of DTC insurance companies for various types of policies out there (LMND, EVER, SLQT, EHTH, etc.), Goosehead stands out because it is an independent agency with a hybrid corporate/franchise business model, the latter of which is the main growth driver. Franchise partners are supported by a customer-focused suite of cloud-based software solutions. The real estate market has been hot, and this has helped the company as it leads with homeowners insurance, then attempts to sell additional personal lines policies (auto, etc.). Keep holding on. HOLD
Inspire (INSP) traded over 200 briefly this week. Had you asked me in October, when we sold a quarter position, if this would be possible in December, I would have said it would be pretty darn unlikely. But here we are. The Q3 earnings report, which was the catalyst that launched INSP from 120 to 160 overnight, suggested more implanting centers, better reimbursement (up $450 from a range of $600 to $800) and potential for better productivity post pandemic. The point here is that sometimes you can be “wrong,” but still “right,” if you don’t make all-or-nothing sell decisions. I do think INSP has gotten a tad ahead of itself so will keep at hold. We have some leeway here given that we’re up 225% since we entered the position 14 months ago. HOLD
Karyopharm Therapeutics (KPTI) is the ultimate nothingburger stock. Vaccine announcement? Unchanged. Stimulus potential? Nothing. Earnings report? Nada. I’m being a little sarcastic but you get the picture. KPTI was trading at this same price in early-August and since then hasn’t don’t anything of note. The main reason is that, while management has been presenting data that supports potential for Xpovio to treat diffuse large B-cell lymphoma (DLBCL) and acute myeloid leukemia (AML), the real interest, and upside potential in the stock, comes in the form of the March 19, 2021 PDUFA date and anticipated approval for Xpovio + Velcade to treat 2L+ multiple myeloma. Until we get closer to that date I don’t expect a lot of movement in the stock. But it could be a big winner if we get an approval. BUY
Personalis (PSNL) was last Thursday’s new addition and the stock has come out of the gate with impressive performance. PSNL is up 30% already. Of course, that could change quickly, but it’s always nice to put a little distance between us and our entry point in the early days. The backstory is that Personalis is a cancer genomics company offering next-generation sequencing (NGS) solutions and data analysis services to support personalized cancer vaccine and cancer immunotherapy development. It also provides sequencing and data analysis to support population sequencing initiatives. The company, which was spun out of Stanford by a team of NGS specialists in 2011, is going after a roughly $40 billion market, based on test prices that range from $2,840 to $4,000 a pop. Its main markets are in the U.S., Europe, and as of this year, China. It became the sole whole genome sequencing provider to the Department of Veterans Affairs Million Veterans Program (VA MVP) in 2012, and management just announced this week that it has delivered the 100,000th whole human genome sequence dataset to the VA MVP. Personalis is introducing new solutions, including liquid biopsies, which should propel growth for the foreseeable future. It’s still a buy, but given the recent rally try to place numerous limit orders for smaller purchases at different prices, including some that are a good deal lower than the current price, to average up to a full position over time. BUY
Q2 Holdings (QTWO) worked its way to a new high a few weeks ago and has been hanging out near the 115 level since. I continue to think this is one of those software stocks that will do well as the pandemic eases since the operating environment will be better for its customers (banks and credit unions) and implementations will be a heck of a lot easier. Keeping at buy. BUY
Repay Holdings (RPAY) has been with us since July but has done absolutely nothing since we’ve owned it, besides bounce between 21 and 28. Two earnings reports have done nothing either, in terms of increasing interest and awareness of the name. I may just be getting impatient, but with relatively lackluster performance and a portfolio of 16 positions, which isn’t small for us, I’m going to let Repay go today. There’s nothing particularly wrong with the stock so I won’t argue with those that want to stick with it. But there’s nothing particular right with it either, so my feeling is the capital could be better allocated elsewhere or just kept in cash should we see a market pullback (which wouldn’t be remotely surprising). Moving to sell. SELL
Repligen (RGEN) is trading around 15% off its all-time high and just below the offer price for its recently announced secondary offering, which should net over $272 million including the underwriters’ option to purchase additional shares. There’s no change to the story here. Keeping at buy. BUY
Sprout Social (SPT) is trading near where it was when it reported Q3 results a month ago. That’s fine. We’re up around 32% and the social media software specialist has been one of those “good but not crazy good” stocks since we got in. I like that Sprout is still a sub $3 billion market cap software company growing at around 30%, with upside potential as the pandemic eases, and with profitability still a few years out, meaning there is room for management to unleash a surprise improvement in the profit profile (not saying this will happen, but I like the carrot hanging out there). Taken all together I think this means more upside for SPT. 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.
