Well, it’s about time some buyers showed up. While we can’t yet characterize the move in higher growth small- and mid-cap stocks as a rally per se, it’s not premature to say that sentiment has turned up when it comes to these types of stocks.
Looking at the broad market indices, the S&P 500 has recovered from a 4% dip to trade near all-time highs, the Dow is just 2% off its high and the Nasdaq is two weeks into a recovery from a 9% drawdown and now sits 3% off its previous high.
The S&P 600 Small Cap Index, which peaked at 1,400 in mid-March, was down 6% from its high at the worst point in May, but is now just 2% below its high-water mark.
Granted, these indices all include a wide variety of stocks. But if we turn to some more pure growth ideas, such as ARK Innovation ETF (ARKK), we see a similar big-picture story (up over the last two weeks). The same general story is being told by the iShares Software ETF (IGV).
Turning to our portfolio, our stocks are up an average of 4% from last Thursday’s close and up an average of 14% over the past two weeks. The leaders have been Accolade (ACCD), Porch Group (PRCH), Sprout Social (SPT), Kornit Digital (KRNT), and Fiverr (FVRR), all of which are up 20% or more over the last 10 sessions.
There are a lot of ways we can interpret this action. Maybe some level of comfort with a little inflation is creeping into the market. But just in general, it seems that the relative attraction of growthier names has finally pulled in some buyers. I don’t think we’ll race back to previous highs in all these stocks, but as I said last week we don’t need that to make money. We just need the trends to get better than they’ve been.
This recent action has also been helpful for identifying new candidates, a few of which have risen to the top of my potential buy list. Stay tuned for that as we have a new Issue coming out next week.
This morning we received quarterly earnings from our newest addition, Thunderbird Entertainment (TBRD.CA, THBRF), and there will be a conference call at 2 p.m. ET today. I have a quick review of the numbers today, and will follow up tomorrow morning on thoughts from this afternoon’s call.
Recent Changes
Q2 Holdings (QTWO) Moves to BUY
Updates
Accolade’s (ACCD) time to shine may be now. The stock is up 7% over the past week and 26% over the past two. It’s not yet near its previous high (technically 65 but eliminating an intra-day spike a breakout over 60 would be equally meaningful) but the recent action is encouraging and if ACCD can just punch through the 50-51 zone we could be off and running. I read an interesting note on high-growth health care IT stocks from Bank Of America, which reviewed the huge variance in year-to-date performance (ACCD is about average). Short version is that, assuming a discounted valuation to the high-growth telehealth firms, ACCD could still trade up to its previous highs and not be “expensive” given that it has an estimated five-year (2021 – 2026) cumulative average growth rate near 34%. Now granted, some of that growth rate is due to acquisitions but when investors are out shopping for names (according to BofA) this stock seemed to rise to the top of the pack. Let’s go! BUY
Arena Pharmaceuticals (ARNA) continues the sideways march, though as we move into the middle of the year the catalyst calendar starts to look enticing. Most immediately, Bristol Myers Squibb (BMY) has a May 30 FDA action date for ozanimod, its S1P modulator for ulcerative colitis (UC). Given Arena’s etrasimod (in Phase 3, a few years behind BMY) is also an S1P modulator there is a clear connection between these two drug candidates. Analysts that follow BMY expect ozanimod to be approved. We will see. Even if approved, details will matter as there’s always potential for the dreaded “black box warning,” which in this situation could be something like heart rate monitoring or infections. That’s not expected either since this generation of S1P modulators are much more targeted than the first gen batch, but expectations and reality don’t always align. I expect ARNA to move on the BMY news. BUY
Avalara (AVLR) was moved back to buy last Thursday and has responded by rising every day since. The stock is up 5% over the past week and 10% over the last two weeks. While the trend here is much better than in early May the stock remains 28% below its previous high of 185 (from February 10) and a couple points below the 50-day line. I’d like to see AVLR get back above the 140-143 range and hold that line for a few weeks. Still, given the exceptionally choppy market lately this recent move is welcome. Avalara remains one of the best ways to play the new normal of highly distributed purchasing patterns (online, bricks-and-mortar, marketplaces, etc.) as its transaction tax solutions (sales tax, use tax, exemption certificates, returns, VAT, cross-border, etc.) help automate these transactions. Management is hosting an analyst day today. BUY
BioLife Solutions (BLFS) was sold two weeks ago and there’s been no news since. I’m continuing to monitor the stock to see if the trend changes and if BioLife can earn its way back into our portfolio. SOLD
Cardlytics (CDLX) was sold a few weeks ago as we exited our remaining half position for a gain of 143%. No news. SOLD
Cerence (CRNC) is up 8% since last Thursday and up 12% from two weeks ago. It’s now trading near 93. There’s no news, and the stock has just today moved above its 50-day moving average line. Encouragingly, CRNC held at around 80 during the May selloff, which is where it previously held during two retreats in March. The next zone of overhead resistance is at 100. We’ll give the stock a little more time before moving back to buy. HOLD
Everbridge (EVBG) hasn’t done much over both the past one- and two-week periods, and there’s no news to speak of. We’ll stick with our buy rating. BUY
Fiverr (FVRR) has bounced back nicely, rising 6% over the past week and 22% over the past two. There’s been more press on the company (along with other software stocks) lately as sentiment seems to have turned for the better in this space. It has likely helped that management has been bullish at investor conferences. At the JPMorgan Chase conference the CEO and CFO discussed the strength in new organizations that came in during the pandemic, older ones that continue to do business with Fiverr, and the new crop of larger organizations that have come in as part of management’s strategy to move up market. The bottom line is that management is saying that the growth and customer retention from the pandemic will lead to sustainable strength in the business. This is key as the main argument against FVRR stock is, at the core, “Hey, yeah you crushed it during the pandemic but now that people are going back to the normal way of doing things what’s your pitch?” It will take several quarters to really understand the trends, but the company continues to invest in innovation (Fiverr Business, etc.) and sales and marketing. We’re holding a quarter position and will stick with that for now. HOLD
Goosehead Insurance (GSHD). We sold our remaining stake in Goosehead a few weeks ago as we took profits on our remaining quarter position. Our gain on that sale was 201%. SOLD
Inspire Medical Systems (INSP) has clawed back some lost ground and is up 7% from last Thursday and 14% over the last two weeks. A positive coverage policy was issued by Anthem late last week. We recently took another quarter of our position off the table, but if INSP can hold above the 180-185 level the chance of adding back goes up. For now, it is still a hold but I’m watching INSP closely. HOLD HALF
Kornit Digital (KRNT) has bounced back nicely from a mid-May low of 84.2 and over the last two weeks is up 20%. Management is on a speaking tour, having given a virtual investor presentation on May 18 and spoken at the Barclays conference on May 19. They are moving on to the William Blair conference (June 1) and Stifel conference (June 10) next. KRNT remains above its 50-day line and is still a buy. BUY
Porch Group (PRCH) has been the standout performer in our portfolio lately. Shares are up 6% over the past week and up 36% over the past two. Earnings was a catalyst, though it should be noted that PRCH’s report came on the tail end of growth stock reporting season and by that time most of the damage in this universe of stocks had already been done. There’s no major news to report. We’ve seen a little softness in the stock over the last couple of sessions so keeping an eye on that, but overall looking to see if PRCH can stabilize somewhere here in the mid-teens and build a base off which to climb more. Keeping at buy for now. BUY
Q2 Holdings (QTWO) is ticking higher, slowly. The recent bounce here is modest – 2% over the past week and 6% over the past two weeks, but that’s not out of character with QTWO, which is less likely to post the big, multi-day rallies of other stocks. Management recently presented at the JPMorgan conference and spoke to the potential for a three to five-year technology “refresh cycle” coming out of the pandemic. This is due to the relative shortcomings of banks and credit unions to adequately serve customers during the pandemic when clients weren’t able to move about freely. Digital banking was a weakness, and these institutions need to step it up. Q2’s solutions help them do just that. I said last week I’d upgrade to buy if QTWO got back to 100. I’m moving on this one a little early (stock at 96) given the relatively supportive market lately, but will turn more conservative again if this rally turns out to be a head fake. Upgrading to buy. BUY
Revolve’s (RVLV) 12% rally over the last five sessions put the stock on top of our portfolio’s leader board over that period, and in third place when looking at the last two weeks. It also puts RVLV just 10% below its previous high and, depending on how you read the tea leaves, potentially mulling a breakout above 60. The outlook for spending on categories where Revolve is very strong – think active, beauty, dresses – is quite good, assuming reopening trends continue. With a large following among Millennial and Gen Z consumers, and massive opportunities to drive sales through marketing events, many of which were put on hold during the pandemic, Revolve sits in the sweet spot among fashion retailers. Keep buying. BUY
Repligen (RGEN) has followed the trend and is up 5% over the past two weeks (but flat over the last week). No news here, and while there is some noise out there about opening up IP for vaccine manufacturing there’s been no specific chatter that’s bearish toward the bioprocessing players, which include Repligen, as well as Avantor (AVTR), Danaher (DHR) and Thermo-Fisher (TMO). BUY
Sprout Social (SPT) continues to perform well and shares are up 8% over the past week. Management has recently presented at the Barclays conference and will move on to William Blair (June 2), Stifel (June 8), Baird (June 9) and BofA (June 10) over the coming weeks. No major news announcements. Keeping at buy but noting the stock will have to punch through the 70-72 level to make a higher high. The next level above that is the all-time high of 82.5 from February 16. BUY
Thunderbird Entertainment (THBRF, TBRD.V) reported Q3 results this morning and a conference call is on tap for 2 p.m. Eastern today. I’ll listen to that and follow up tomorrow morning with additional thoughts. In terms of the results, Q3 revenue was up 27% to $37.7 million. That brings total revenue through the first three quarters to $85.4 million, up 42%. Adjusted EBITDA in Q3 was up 8% to $500K, and up 39% to $4.8 million through the first nine months of the fiscal year.
Breaking revenue down, production services revenue in Q3 was up 52% to $19.4 million (up 53% fiscal YTD) due mainly to growth in animation production services, while licensing and distribution revenue was up 9% to $18.3 million (up 27% fiscal YTD) due mainly to delivery of content in the quarter. Such delivery included three episodes of The Last Kids on Earth, 13 episodes of Kim’s Convenience Season 5, and 40 episodes of three factual series (Heavy Rescue: 401 Season 5, Mud Mountain Haulers Season 1, and $ave My Reno Season 4).
In Q3 the company had 21 programs in various stages of production (10 owned or partner-managed), with content being aired on Netflix, Peacock, Nickelodeon, AppleTV+, Hulu, PBS, Bell Media’s Discovery, Disney+, Corus Entertainment and the CBC, among others.
In terms of trading action today, shares of the stock are a little soft, trading down 5% (give or take). It’s tough to gauge where revenue will come in for the entire fiscal year without commentary from management, but we should get that on this afternoon’s call. Until then, I’ll keep at buy as this result seems well within the acceptable range of results and there were no major surprises, either good or bad. BUY
Earnings: Reported today, conference call at 2 p.m. ET.
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
