I sent my 2017 Small-Cap Forecast to you earlier this week in advance of the Fed’s most recent meeting and policy statement. (It’s also posted on our website, click here) Yesterday, the Fed spoke, and gave us the following update:
GDP growth is expected to be 2.1% in 2017 and 1.9% in 2018. The 2017 figure is in the 2% to 3% sweet spot for strong equity performance (refer to my logic in my 2017 Forecast), though we would like a little more wiggle room (2.3% would have been better). We would also like to see 2018 GDP growth revised upward as we move through the year to help support high equity valuations in the U.S. (across all market capitalizations).
The Fed raised short-term interest rates by 0.25% to a range of 0.75%–1.0%. It also signaled two more quarter point increases in 2017, and three more in 2018. Recall that that last two quarter-point increases were in late 2015, then again on December 14, 2016. Generally speaking, I think this is good for equities and even better for small caps over the next year, since the last two tightening cycles (1999–2000 and 2004–2006) helped small caps beat large caps. That said, “good” is a matter of timing. Stocks have already soared since this tightening cycle began. And we all know how those last two tightening cycles ended (dot.com bubble and credit crisis). I still expect a correction before the end of July, and still expect that to represent a buying opportunity. In the meantime, be careful chasing soaring stocks.
I also reviewed some interesting data points about what could be helping to drive the current bull market. To summarize, it looks like much of the buying in 2016 was done by corporations buying back their own shares and by individual investors selling out of mutual funds and buying into passive ETFs. I wonder how much of this is driven by employees liquidating old 401ks at previous employers now that many have new jobs (the unemployment rate is 4.5%), and how much is driven by the lower fees associated with ETFs.
What appears clear is that, for the moment, the economy seems healthy, people are heavily invested, the job market looks good, and perceived risks of a global push to the right is lower given Dutch Prime Minister Mark Rutte’s victory.
I don’t think it’s time to go running naked through the streets buying stocks and yelling “Paaaarty!!” at the top of our lungs. But I also don’t think it’s time to sell out and go home. To use a baseball analogy, my best guess is this is the seventh inning stretch of the bull market. Expect some volatility, review what you own and make sure you still like it, and don’t be overly concerned about “missing out” if you’re not 100% invested.
We have 10 stocks, seven of which are doing quite well, one of which is new, and two of which are acting a little weak. Details below.
Updates
Airgain (AIRG) Airgain has been all over the place lately and there is no real trend here. But that’s OK–the plan here was to get in somewhat early and be in the stock when the dust from insider sales settled and the story gets dispersed and proven out through financial performance. Give it a few quarters. I still like it and believe there’s 50%-plus potential in the year ahead. Shares were on fire yesterday as the stock rose 9%, possibly driven by program trading after the 10K was filed. But we’re still down around 18%. I’m not concerned. BUY.
Asure Software (ASUR) Shares of Asure were kind enough to respond to my assertion from last week that they would hold the 10 level. In fact, they hit 9.99 on Monday and haven’t looked back. They’re now up around 7% from where I recommended the stock at the beginning of the month. I think the recent jobs data has helped. And management’s presentation at the ROTH conference on Tuesday seems to have helped spread the word as well. Fourth-quarter results are due out on Monday and the market is looking for 48% revenue growth to $10 million with EPS of $0.10. That implies full-year revenue growth of 35% (to $36.3 million) and EPS of $0.24 (up 240%). As I covered in my report, a lot of that growth is from acquisitions, so the growth rate will moderate. We have a lot of recent new coverage here (Wunderlich, Roth, Lake Street Capital) so I expect the stock to do very well after earnings, provided it meets expectations and gives solid guidance. Analysts on the conference call will be peppering management with questions about cross-selling post Mangrove acquisition and if there is any potential to expand product sales to Apple (even if just to get Apple’s name on the earnings call transcript!). Still a Buy. BUY.
Earnings due: March 20
Everbridge (EVBG) Shares of Everbridge have also been rebounding this week after a bout of weakness following the disclosure that existing shareholders are likely to sell up to $50 million of stock after Everbridge files a public offering in late March. Since we still don’t know the price and exact date, I’m inclined to just sit on this position for now. It looks like the stock should be able to get back into a trading pattern between 18 and 20 to set up for another run higher. But we need all current info to get out into the market before getting too specific with a forward outlook. The company upgraded its platform recently and introduced a neat feature called “Incident Zones.” That feature will alert people who enter an area where there is some sort of critical event taking place. HOLD.
LogMeIn (LOGM) The stock has been battling to regain its 50-day moving average line at 100. It looked ready to break through but faltered yesterday. On the business development front, LogMeIn has integrated join.me (audio, video conferencing, screen sharing) with Google’s G Suite, which is used by a number of small and medium-sized businesses. I think the end game for LogMeIn could easily be a sale to Google, Microsoft, Oracle, etc. someday. Keep holding. HOLD HALF.
Marrone Bio (MBII) The stock is drifting lower without any news flow. I’d like to get an earnings date soon since I think that could drive some speculative buying. This remains our highest risk and highest potential reward position given that it’s a deep turnaround story. BUY.
Estimated earnings release date: April 1
MindBody (MB) The market likes this stock and we have a very nice uptrend going here. Shares haven’t broken their 50-day moving average line since October, and that was a modest break. Keeping at Hold. HOLD.
Ooma (OOMA) My frustration at Ooma’s timing of the insider sales announcement has been tempered somewhat over the past week given that shares bounced off 8.85 on Friday and are back near 9.40 as of yesterday’s close. As I stated last week, the insider sale (Worldview Technology Partners, which owned 19% of shares outstanding) isn’t dilutive, so I’ve kept at Buy. We’ve already seen trading volume rise significantly. It will be interesting to see where it averages out once the insider sales are complete. PCMag named Ooma the best business VoIP service for a fourth consecutive year. Keeping at Buy. BUY.
Primo Water (PRMW) The results are in and I like them. Primo delivered Q4 revenue growth of 28% (to $40.4 million) and EPS of $0.05. Revenue beat by $2.5 million while EPS missed by $0.05, but I wouldn’t get too far into the weeds with the EPS figure given the Glacier acquisition. Full-year revenue came in at $142.5 million with EPS of $0.35. Management gave forward guidance for revenue in the $280–$285 million range, which represents a doubling of sales over 2016. Naturally, a lot of that is due to Glacier, which only contributed 20 days to the Q4 and 2016 full-year results. The company’s water segment sales enjoyed a big boost in Q4 from Glacier (up 33%), but strong same-store sales growth of 9.6% shows this isn’t just a Glacier-driven quarter. Dispenser sales were up 16.7% to $10.6 million, with 135,000 dispensers sold in the quarter. Those dispenser sales are great as they help drive water sales in future quarters.
Primo also nailed down another five-year contract with DS Services (owned by Cott Corporation) for bottling and distribution (yes, I do think Cott is a potential acquirer down the road). Primo now has over 46,000 locations in North America and 5,600 retailers. This year will be largely about integrating Glacier and moving toward a vertically integrated manufacturing model for refill equipment, given that’s the model Glacier has developed. This should improve gross margins over time. I also think Primo will be looking to pay down $186 million in debt and possibly reducing the outstanding $83.1 million of preferred stock it assumed through the Glacier acquisition.
It sounds like management is going to be focused on driving efficiencies from current locations and seeing what incremental tweaks it can make to the combined businesses rather than making any big moves. I like this approach as I suspect there is a ton of work to do just to keep things running smoothly. After the conference call, I saw Barrington and Lake Street up their price targets to 16.50 and 20, respectively. Shares of Primo sold off around 6% on the day. I think this opens a potential short-term window to pick up a few shares around the 50-day moving average line (at 13.83 as of yesterday’s close). There could still be weakness ahead, but long-term, I see the stock doing well. I’m not officially moving to Buy but wouldn’t argue if you added a little more around here. I think the next big leg could come with any news that Primo has begun to pay down debt out of cash flow. This would help reduce any concerns of a secondary offering (which I don’t expect, but you never know). I like this company a lot and plan to stick with Primo. Keep holding. HOLD.
Q2 Holdings (QTWO) After another week, shares continue to look to be establishing support around 35. I think the Fed’s rate hike will help keep interest high in this stock given that banks and credit unions should theoretically have a little more capital on hand to invest in tech. Keeping at Hold. HOLD.
U.S. Concrete (USCR) The stock is making a solid push for 70, which would mean a breakout above previous resistance and a potential run to a 52-week high (needs to get above 71.32). Management is frequently in the media (Jim Cramer, etc.) given all the headlines around Trump’s infrastructure spending plans and “the wall.” I’m with U.S. Concrete’s Bill Sandbrook who has essentially said that the company might benefit from these projects, but isn’t counting on them. Granted, he has to say that or risk driving a lot of speculation and setting himself up to look foolish. But I still think it’s the right stance. Investors should buy the stock based on solid trends in core markets, plus expectations of expansion into one more major metropolitan market in 2017. 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.
