It’s been another mostly constructive week as many of our stocks inch higher and the economic picture continues to improve.
Today’s news that retail sales jumped nearly 10% in March illustrates the combined positive impact of stimulus checks, vaccinations and reopening of the economy. It’s wise to assume other sectors are enjoying a rebound as well. Today’s jobless claims numbers are also incrementally positive, even though they remain historically high.
Turning to the broad market, we see the S&P 500 near all-time highs, the S&P 600 Small Cap Index just 4% off the high from a month ago and the Nasdaq just 2% below its all-time high. A recent rally in mega-cap tech stocks, including Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG), Apple (APPL), etc. has helped tremendously.
As I mentioned last week the relative strength of these larger players establishes something of a pattern that smaller technology stocks can follow (i.e., consolidate, firm up, head higher) and lends support to the thesis that relatively high valuations still make sense in the current (and near-term future) environment.
That all said, despite the progress there is clearly turbulence under the surface of the market. Many growth stocks are off their lows but still well below recent highs. And the news of the pause in J&J’s vaccine rollout gave a boost to some stay-at-home and tech stocks that may only be temporary if investors revert back to more cyclical names.
Still, we’ve begun to see more analysts speaking up in defense of the throngs of growth stocks that have pulled back, and as we head deeper into earnings season and witness M&A activity (like Microsoft’s acquisition of Nuance (NUAN) there are plenty of reasons to feel good about the coming months.
In our portfolio, we are leaning bullish with many names earning BUY recommendations right now. Earnings will pick up for us in the first week of May, and my hunch is that by then we’ll have heard from enough players in various sectors to get a decent read on how stocks are reacting.
In short, I think things are looking pretty good and am moving one more stock onto our buy list today.
Recent Changes
Inspire Medical (INSP) moves from HOLD to BUY
Updates
Accolade (ACCD) is sitting right on its 50-day line after a subdued week of trading. The stock has popped nicely off the lows in the mid-30s and absent new information isn’t likely to do too much before earnings come out in a few weeks. We haven’t crushed it with this stock just yet (we’re up roughly 25%) but an improving economic outlook for large employers (airlines, etc.) and modest excitement around M&A (recall the recent 2nd.MD acquisition) should keep investors interested. BUY
Arena Pharmaceuticals (ARNA) hasn’t done anything remarkable in the last couple of weeks. We can say the same thing about biotech in general (IBB 13% off its highs). There could easily be more consolidation ahead for this stock and the group, but ultimately it’s FDA approval for etrasimod that we’re waiting/hoping for and if that goes through the wait should be well worth it. HOLD
Avalara (AVLR) has popped back up to its 50 and 200-day lines near 148 after a three-week slide that pulled the stock down from an all-time high of 185 to 120. At 20% off the high the chart isn’t going to trigger any endorphin rushes, but truthfully AVLR isn’t an outlier. There are a lot of software stock charts (and other growth stock charts too) that look far worse. Beyond the chart the numbers and story are good so we’re happy to be buyers and/or holders at this level. AVLR should come around just fine. BUY
BioLife Solutions (BLFS) enjoyed a burst to an intra-day all-time high on March 23. That was after the earnings report and announcement of the Sterling acquisition. That strength was short lived and the stock has been generally weak since. As I said back then what we’d like to see next is a high-margin acquisition and no more (at least for a while) capital equipment maker acquisitions as the latter raise the top and bottom lines but, at least in the short term, put pressure on profit margins. Still, all things considered this stock isn’t broken, but these slow periods can erode investor confidence. Stepping back, it’s worth noting the broader Medical Products group has also been uninspiring of late. We’ve been keeping an eye on the 32-33 level as a point at which we’ll get more conservative. We’re (barely) above that level now so keeping at buy. Management just announced the release of a new high-capacity controlled-rate freezer line and has begun shipments to a leading cell therapy developer. BUY
Cardlytics (CDLX) has mostly traded within the same range over the past week as it did the week prior, but a recent acquisition has made the stock volatile over the last two sessions. The target is Bridg, a customer data platform that offers marketers insights on an SKU level (i.e. individual product level). Cardlytics believes that, once integrated, the combination of SKU level data (from Bridg) with retailer level data (from Cardlytics) will allow for powerful products that retailers and advertisers will see as “must have” solutions. The purchase price was $350 million, plus earnout payments that could range from $100 million to $300 million, depending. With this deal, and the Dosh deal (just closed March 9) the next earnings call will be interesting. Still holding. HOLD
Cerence (CRNC) has been moving sideways for the last week, a relative victory given how volatile this (and many) growth stocks have been since mid-February. At 30% off the high now CRNC is acting “normal” for a significant correction. In a year or two this could very well just be a blip on the chart of an otherwise healthy stock. We noticed a press release that the company’s solution will power Dynamic Voice Recognition in Hyundai’s first battery electric vehicle. HOLD
Everbridge (EVBG) has gained a little elevation this week, though clearly the big picture pattern is that the stock is in an extended consolidation phase that dates back to last spring. We’ve been in this stock since shortly after its 2016 IPO and have a gain of roughly 750% on our remaining position, so we’ve been rewarded by our patience. This dry spell reminds me a little of biking through the Atacama desert in Chile, which has the dubious designation as the driest place on earth. OK, maybe that’s being a little dramatic but still … let’s go EVBG! Pull it together man. The U.S. Army just renewed a three-year contract for Everbridge to power JARVISS, the U.S. DoD’s enterprise system for threat visibility. Earnings should be out in the first week of May. BUY
Fiverr (FVRR) is doing what a lot of other “good” small and mid-cap software stocks are doing – taking a breather after coming up nicely following a retest of the early-March lows. There’s no news here, other than an earnings date for May 6. As I said last week Fiverr should enjoy sustained growth due to the increase in business resulting from the pandemic. HOLD HALF
Second Quarter Earnings Date: Thursday, May 6
Goosehead Insurance (GSHD) hasn’t had any news flow to speak of in about a month, which has left investors staring at a horrible looking chart. Granted, had it not been for the quick rally to 175 in February this pullback wouldn’t seem too bad, so perhaps we can blame the current funk on the stock just getting ahead of itself. Stepping back, the big picture growth story is very much intact, so while the recent drawdown is a tad on the large size (even for this stock) we’ll continue to hold our remaining half position, which is still up 230% since we jumped in. HOLD HALF
Inspire Medical Systems (INSP) is off its highs but the stock’s ability to consistently bounce off support near 185-187 and nice move higher this week suggests this is one MedTech stock bigger investors are reluctant to part with (and are likely buying). Obstructive sleep apnea is a huge nuisance, but entirely treatable without a mask with Inspire Therapy. With procedures getting easier to book and a few incremental product upgrades having received FDA approval this story is looking inspiring. Earnings are coming out in a couple weeks and management has a decent track record of beat and raise performance. Upgrading to buy. BUY
Second Quarter Earnings Date: Tuesday, May 4
Kornit Digital (KRNT) is another stock that’s holding up nicely and if not for a quick rally to new highs in February, followed by an equally quick retreat, would look exceptional. We bought during the retreat so are slightly above our entry point. Big picture, the growing market for digital printing solutions should keep the long-term uptrend intact. BUY
Porch Group (PRCH) is off modestly this week but we’re still up around 25% from where we got in back in January. The recent news is that Spruce Point published a short report on the company calling Porch the “everything” spaghetti business model in search. As with a lot of these reports the truth is the publisher is the one throwing spaghetti (lots of accusations) at the wall to see what sticks. While there are tidbits of truth to some of what these reports say, there is often (but not always) no lasting impact. We’ll let the market decide. For now, the evidence shows PRCH is holding up OK. BUY
Q2 Holdings (QTWO) is still down, but not out. The virtual banking solutions stock is 30% off its February all-time high, which puts it squarely in the significant correction territory. As with so many software stocks, this is somewhat normal if looking at a long-term chart. Aside from the pandemic-induced market crash, QTWO experienced similar drawdowns in late-2018 and late-2019. Incidentally, we’ve been in QTWO since April, 2016 (when QTWO was emerging from a 40%+ drawdown) so we’ve felt some pressure here before. It has paid to be patient and to buy on these pullbacks, so that’s what we’re doing now. BUY
Repligen (RGEN) is back to being 10% off its all-time high (it was 22% below the high-water mark in mid-March). We heard from larger competitor Danaher (DHR) this week who pre-announced Q1 results that were nicely ahead of consensus. Part of the strength was due to vaccine/therapeutic bioprocessing demand, which is a tailwind for Repligen as well. This shouldn’t come as a surprise given Repligen’s strong performance last quarter but it’s still reassuring to get another data point. Investors will be interested to learn more about the runway for Covid-related growth as vaccine bioprocessing advances to what could be a high-water mark in Q2 and Q3. BUY
Revolve (RVLV) has responded splendidly to my buy recommendation a couple weeks ago, having promptly rallied by roughly 16%. I’ve heard from a few subscribers that were a little put off by the seemingly high product return rate for Revolve. The deal is that a lot of younger people order a ton of stuff online and return what doesn’t fit and/or what they don’t like. This isn’t a surprise to the retailer – they plan for it and it’s built into Revolve’s business model (the living room is the new changing room!). To many (myself included) it seems a little weird and wasteful to have so much stuff going back and forth through delivery systems but what are you going to do? We’re not here to try to change the world order. Just invest in what works for the times. BUY
Sprout Social (SPT) continues to recover from a double bottom near 50 and is up 8% over the past two weeks. There’s no new news. This software stock stands out to me because it’s relatively young, having been formed in 2010 and come public in 2019, still has a market cap near $3 billion, is delivering consistent growth near 30% and is tracking toward first profits in the 2023 timeframe. That’s a profile that aligns with many of the software stocks we’ve ridden to 200% plus gains. BUY
Second Quarter Earnings Date: Tuesday, May 4
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
