Small caps and growth stocks continue to look better for the third consecutive week. This is a welcome trend given that the beginning of May was pretty tough.
On Monday, the S&P 600 Small Cap Index closed at an all-time high and throughout the week the index has traded up to intra-day highs near 1417. If we compare small cap value (using the IJT ETF) versus small cap growth (IJR) we see that, while value was clearly more resilient this spring, both are near all-time highs now. Growth may have more work to do to punch above resistance.
This is against the backdrop of the S&P 500 pulling back a little in May but also strengthening and pushing up against its April all-time high now.
The catalyst for the strength is, of course, the retreat of the pandemic and the economic reopening, which continues to gain momentum. In the U.S., around 64% of those over 18 have received at least one dose. Consumers are starting to spend more on movies, travel, restaurants, etc. While there is some offset from weaker spending in other categories, the service-based economy is finally starting to get into gear.
At the moment, the positives have outweighed the potential negatives/concerns. However, inflation is still a concern (consumer prices up 5% in May, a 13-year increase record), as are tax increases. Biden’s administration has proposed the most new taxes in half a decade, around $3.3 trillion.
Bank of America analysts think these tax proposals have the potential to trim 7% in S&P 500 EPS, much of which would come from technology and health care. Regardless of your political affiliation and view on taxes this should be a concern for investors, especially when we look at the performance of many tech and MedTech stocks, which have lost some of their luster.
In our portfolio, we still have sizeable gains in our software and MedTech stocks, but as I’m sure you’ve noticed, we’ve made a concerted effort to diversify into other arenas. We now have exposure to reopening themes and other areas of secular strength outside of software and MedTech.
Examples include Kornit Digital (KRNT), added in March, Revolve (RVLV), added in April, Thunderbird Entertainment (TBRD.CA, THBRF), added in May and Funko (FNKO), added in June.
Stepping back, we see no reason to make any major changes in our strategy this week. Our portfolio is up 3% from last Wednesday’s close, led by Porch Group (PRCH), Cerence (CRNC) and Sprout Social (SPT), all of which posted double-digit gains.
Recent Changes
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Updates
Accolade (ACCD) continues to act well. After taking a break two weeks ago ACCD has risen 4% over the last five sessions, lending credence to the theory from Bank of America (published about three weeks ago) that the stock is drawing in fresh money from investors that see it as a relative bargain among high-growth health care IT stocks. The PlushCare acquisition just closed. BUY
Arena Pharmaceuticals (ARNA) is still moving sideways. I was surprised that the stock didn’t have much of a reaction to the approval of Bristol Myers Squibb’s (BMY) ozanimod, an S1P modulator for ulcerative colitis (UC). This week management announced the first patient has been dosed in a Phase 2 trial evaluating temanegrol in coronary microvascular obstruction (cMVO), which has been granted FDA Fast Track designation (there are no treatments for cMVO). We also learned that etrasimod has received Orphan Drug Designation for the treatment of eosinophilic esophagitis (EoE). The compound is currently in a Phase 2B trial for this condition. As you know, we’ve really been waiting for the Phase 3 data on etrasimod in ulcerative colitis (UC), which is due out in the first quarter of 2022. BUY
Avalara (AVLR) is flat over the last two weeks and trying to make a run back above the 50-day line. Patience here should pay. Management held an analyst day a couple weeks ago that didn’t change the narrative but reinforced the multi-year game plan to build the best tax compliance platform and continue to focus on partnerships (like with Shopify (SHOP) and geographic expansion. BUY
Cerence (CRNC) has just strung together three terrific weeks that have lifted shares from 80 to around 115. Management recently announced a partnership with Pioneer, which makes audio and other equipment for cars, to jointly develop an integrated hardware and software product. The intent is to keep making the digital world within the car easier, more intuitive and safer for drivers to use. HOLD
Everbridge (EVBG) announced it will work with WizNucleus, which provides cyber and physical security solutions to nuclear and electric grid customers, to bring the CEM platform to large nuclear, electric and other utility companies. With the recent strength in energy prices this could be a good time to focus on the energy sector, which has begun to face cyberattacks that can be crippling for affected regions/customers. The stock hasn’t done much over the last three weeks. BUY
Funko (FNKO) was added last Thursday, in the midst of the biggest one-day decline in some time. At the moment, I look at this as a gift as the stock is now trading near the 50-day line, which has been a terrific place to buy over the last eight months. Naturally, we’ll keep a close eye on it given this retreat.
Recall from last week’s issue that Funko is a pop culture consumer products company that makes figures and other products that give people a chance to showcase their fandom for their favorite TV shows, movies, video games, musicians and sports teams. The majority of sales – 80% in the most recent quarter – come from sales of figures, while bags, wallets, apparel, accessories, board games, plush, homewares and other products make up the remaining 20%. The company has a market cap of $1.3 billion.
Current consensus estimates suggest 2021 revenue will grow 35% to $880 million while EPS should expand nearly 200% to $1.10. This seems low to me. In the Q1 earnings release management raised full-year growth guidance to a range of 33% to 38%. Given how early it is in the year they would be fools not to be somewhat conservative, so I’m expecting growth could surpass 40% this year. BUY
Fiverr’s (FVRR) recovery has stalled out near the 50-day line, which isn’t all that unusual in the high-growth software stock universe right now. There’s no new news, and we’re content to sit on our existing quarter position given the stock’s recent action and likelihood that some time is needed to “heal.” HOLD
Inspire Medical Systems (INSP) remains at hold given the stock hasn’t looked all that great lately. Shares were on track for a swift recovery from 160 to 200 in May, but lost momentum last week and over the course of three sessions fell back to 160. For now, I’m content to sit on our remaining position and watch INSP. HOLD HALF
Kornit Digital (KRNT) has continued to bounce back from its mid-May low of 84.2. The stock has run up 6% over the last week and up 13% over the last two. It now sits near 116.5, just 7% off the February high. I suspect the stock may have a tough time breaking through the 120-125 zone, but the recent action – tight trading just under 120 – does have me continuing to lean bullish. BUY
Porch Group (PRCH) was an absolute disaster from February through April, but the stock has been acting much better since the beginning of May and we’re back to a roughly 50% paper gain on our position. Management recently announced that Homeowners of America (HOA), which Porch acquired, has launched in Illinois, making that the seventh state in which it offers homeowners insurance. Expect the rollout to continue across the country. Given how volatile this stock is, that it was a SPAC IPO (lots of debate around these) and that PRCH is back to within 16% of its previous all-time high, it’s time to begin being a little more conservative here. I think the insurance business is a significant addition to this business. We’ll keep at buy, but take note that I fully expect PRCH to continue to be volatile. BUY
Q2 Holdings (QTWO) has been slow to recover since a 30% drawdown from February’s high. Two weeks ago, I mentioned that management had presented at the JP Morgan 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. We moved QTWO back to buy around 96 and it’s still trading near that level today. BUY
Revolve (RVLV) briefly hit an intra-day all-time high just above 60 last Thursday, then pulled back to 53.5 on Monday. The stock closed near 55 yesterday. All things considered the stock looks great, despite a tendency to trade in a wide range over the last four months. As far as reopening retail stocks go, RVLV looks about as good as any. We are up 23%. BUY
Repligen (RGEN) has begun to shape up a little and after a little pullback last week has added 5% over the last five sessions. There’s no new news to report. The stock is still a buy. BUY
Sprout Social (SPT) is still doing its job and was able to punch through some resistance near 72 this week. Shares may have enjoyed a boost from KeyBank picking up coverage at the beginning of the month with an 82 price target. Beyond that there’s no news to speak of, beyond a product update that Messenger API support for Instagram has begun to roll out. SPT is up around 10% over the last week and up 11% over the last two weeks. BUY
Thunderbird Entertainment (THBRF, TBRD.V) reported Q3 results two weeks ago and hasn’t done much since. The stock is trading near support at 4.44/3.65 (Canadian/US). No new news. BUY
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
