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Small-Cap Confidential
Undiscovered stocks that can make you rich

February 25, 2021

The big picture for the market is that the uptrend is intact but under the surface we’re continuing to see pockets of turbulence. While the S&P 500 is just 2% off its high from last week and the S&P 600 Small Cap Index hit a fresh all-time high yesterday, the Nasdaq is 6% off its high and trading right on its 50-day line.

Clear

The big picture for the market is that the uptrend is intact but under the surface we’re continuing to see pockets of turbulence. While the S&P 500 is just 2% off its high from last week and the S&P 600 Small Cap Index hit a fresh all-time high yesterday, the Nasdaq is 6% off its high and trading right on its 50-day line.

The action in our stocks hasn’t been great and has generally mirrored the broader weakness in many growth stocks in the technology and MedTech areas. While we’ve enjoyed some pops here and there upon earnings, on average our portfolio is down 5% over the past week and down 8% over the past two.

If we want to point the finger of blame at something specific the easy targets are risk of inflation and an uptick in yields.

To be clear, we want some level of inflation and higher interest rates than what we’ve had. But timing, velocity and scale matter.

Until lately, investors have been more focused on the eventuality of a return to normal brought on by vaccine development and distribution. What we are experiencing right now is likely the first wave of recovery reality as the market tries to wrap its mind around the messy process of getting from full-blown pandemic to a more normal state.

It’s not likely to be a clean transition. There are a lot of moving parts, and interest rates and inflation, as well as employment and stimulus, are big ones.

That said, given all the factors this turbulence is a somewhat rational market reaction to the recent increase in yields and the huge run-up in growth stocks since the market bottomed last winter. We’ve been on easy street for a while and have known the relative ease with which we’ve been making money isn’t the norm.

We will probably have to work harder for our gains in the coming months. If that makes you feel a little queasy there’s no shame in taking a little money off the table. If you do, I suggest partial sales since, as I said before, the big picture is that the market uptrend remains intact, just dented a little.

We are only making a few incremental changes today, moving one stock to hold and two to buy. We also took partial gains in Goosehead Insurance (GSHD) yesterday following a weak reaction to earnings.

Recent Changes

Accolade (ACCD) moves to BUY
Personalis (PSNL) moves to HOLD
Porch Group (PRCH) moves to BUY

Updates

Accolade (ACCD). Trading roughly 30% off its all-time high and with recent reports (commissioned by Accolade) illustrating the positive ROI of its solutions, there’s a lot to like about this stock now. Yes, the pandemic has hurt employment so there is some risk there, especially with airline customers, but as employment ramps back up and employers look to control health care costs the opportunity seems large for Accolade. We’re anxiously awaiting closure of the 2nd.MD deal (should close by end of February), which will increase the customer base from 100 to around 400 and open significant cross-selling opportunities (it may take a while to gain traction as management needs to ensure high retention first). I moved from buy to hold in mid-December, right when ACCD hit its all-time high. Moving back to buy today. The next earnings report should be in late March. BUY

Arena Pharmaceuticals (ARNA) announced earnings Tuesday and I detailed them in yesterday’s Special Bulletin. Keeping at buy. BUY
Earnings: Done

Avalara (AVLR) reported two weeks ago and I liked the report enough to keep at buy, but then moved to hold the next day as the stock’s reaction wasn’t strong enough to give me confidence AVLR would move to fresh highs. I theorized that AVLR could be in a group of stocks that needed more time in established trading ranges before they could break out, and if accurate then we’d be better off looking to add near the low end of the range than the high end. So far that theory has played out; AVLR is now 14% off its high and, trading just below 160, is roughly in the middle of its recent 138 to 185 trading range. Barring new information or a rally in software stocks I think AVLR will camp out in this range for a while. Look to buy closer to 150 if you can. Otherwise, just sit pat. HOLD
Earnings: Done

BioLife Solutions (BLFS) continues to move sideways in its established trading range. Earnings are due out around March 11. Keeping at buy. BUY

Cardlytics (CDLX) has pulled back by 15% after hitting an all-time high early last week. Management reports Q4 2020 results on Monday. Analysts are looking for a moderating rate of revenue contraction (Q4 revenue down 12% to $60.9 million after declining 42% and 18% over the last two quarters) and full year-revenue of $180 million (down 14%). Quarterly EPS loss is seen around -$0.39 while full-year EPS loss is seen around -$2.14. More important than the past quarter (provided results are in the ballpark) will be guidance for 2021. The Street is looking for 2021 revenue guidance of $260 million (up 44%) and adjusted EPS guidance of -$1.44 (a 33% improvement over 2020). This is an interesting setup. The stock is trading 15% off its highs and the business is clearly a recovery play as it should benefit from increased travel, tourism and spending at restaurants and live entertainment venues. Also, there has been some tweaking of the sales mix to bring in marketing offers in more digital-oriented channels. On the product development front we should be getting more images and video-based offers at some point in 2021 too. I think analysts want to be more bullish but are being a little conservative until after the report. If you’re a gambler you could add shares ahead of earnings; however, the more conservative play is to sit pat and see what the report says. We’ll continue to hold. HOLD
Confirmed Earnings Date: March 1

Cerence (CRNC) reported on February 8 and was doing fine until growth stocks sold off. At roughly 20% off its high this is a “normal” pullback for this stock. With the exception of a 58% decline during the market crash last winter CRNC’s pullbacks have all been in the 16% to 26% range. It looks like a good time to buy, down to around 100. If the stock goes below that we will re-evaluate. BUY
Earnings: Done

Everbridge (EVBG) reported last Thursday and the stock exploded higher and has held around the 160 level since. I’d like to see more follow-through but given that growth stocks have been very week while EVBG has stood tall suggests new money is flowing in. Keeping at buy. BUY
Earnings: Done

Fiverr (FVRR) reported last week and did well then got pulled down by the growth stock retreat. Still holding half. HOLD HALF
Earnings: Done

Goosehead Insurance (GSHD) reported Tuesday and I detailed the report in yesterday’s Special Bulletin. I also suggested selling another quarter as forward guidance seemed a little light, though I acknowledged that management is likely leaving ample room to surpass expectations. Keep holding the remaining half. HOLD HALF
Earnings: Done

Inspire Medical Systems (INSP) reported a great quarter Tuesday and I detailed the results in yesterday’s Special Bulletin. The stock recovered nicely from the rout on Tuesday but hasn’t made any net progress to the upside over the last week. We’re looking for a better entry point for new purchases. Keep holding. HOLD
Earnings: Done

Personalis (PSNL) pre-announced Q4 results several weeks ago then tapped the market with a secondary offering priced at 38. The official results come out this afternoon. Current consensus, which should factor in the pre-announcement, is for Q4 revenue of $20 million (up 10%) and adjusted EPS of -$0.29. That should mean 2020 revenue growth of 23% to $80 million and adjusted EPS of -$1.13. With the stock well off its high (almost 40%) this report and subsequent stock reaction will likely determine if we stick with PSNL or cut bait. We got into the stock in December and even with the retreat still have a roughly 17% gain. So while the retreat stinks, we’re still in the black. Notably, PSNL isn’t the only sequencing stock to be enduring a pullback. Given that we’ve had at buy since the pre-release I don’t think the risk vs. reward potential warrants new buys right now. Moving to hold. HOLD
Confirmed Earnings Date: February 25

Profound Medical (PROF) was added three weeks ago and initially moved higher but has been weak lately. The current pullback isn’t out of the norm yet so we’ll stick with a buy rating. Earnings come out Tuesday. On January 5 management announced preliminary Q4 2020 results. Revenue is anticipated to be up 32% to $2.8 million in the quarter, bringing full-year 2020 revenue up 76% to $7.4 million.
Looking out into 2021 there are a lot of variables with Covid-19 and the ongoing commercial launch of TULSA-PRO in the U.S. as well as the ongoing push to commercialize TULSA-PRO and Sonalleve globally. Taking it all in a fair estimate of the 2021 revenue growth rate is somewhere in the 80% to 100% range. The high end implies 2021 revenue of $15 million. BUY
Confirmed Earnings Date: March 2

Q2 Holdings (QTWO) reported Q4 results last week that exceeded expectations but I moved to hold since it wasn’t a clean beat and raise. The stock has since pulled back and is now trading roughly 16% off its high. It’s still a hold but we may look to move back to buy soon. HOLD
Earnings: Done

Porch Group (PRCH) has continued to pull back with the market and is now trading roughly 22% off its all-time high. Earnings aren’t due out until later in March, but recall we received preliminary results in mid-January when management announced a slew of acquisitions. Given the scale of the current retreat the stock is now looking more attractive, so moving to buy. BUY

Repligen (RGEN) reported yesterday morning and I detailed the results in a Special Bulletin. The stock has been relatively stable and we’re keeping at buy. BUY
Earnings Done

Sprout Social (SPT) reported Tuesday afternoon and I detailed the results in a Special Bulletin. The stock has been a little wobbly this week—not surprising given the uptick in growth stock volatility. We’re sticking with a hold rating for now. HOLD
Earnings Done

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

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