Small caps have pulled back ever so slightly from the all-time highs of last week. But that’s not the big news of the week.
The larger event was yesterday’s Fed meeting, during which Chairman Jerome Powell suggested that a start to tapering of asset purchases was still a “ways off” but that this was a “talking about talking about meeting.”
This has markets contemplating the first Fed full price hike sometime in late 2022, even though the Fed’s projections show interest rate increases in 2023. Also on the table are discussions about when to slow down the rate of bond purchases.
In response, stocks initially traded down yesterday afternoon, thought they largely bounced back by the close (futures suggest a slightly weak open today). The Nasdaq closed down 0.2%, the S&P 500 closed down 0.5% and the S&P 600 Small Cap Index closed down just 0.06%.
Notably, small-cap health care rose 0.7%, small-cap financials were up 0.2% and small-cap tech was up 0.2%. The large-cap equivalents of these sector ETFs all closed down, but modestly so.
In my mind the takeaway message here is that the Fed’s stance isn’t surprising. Of course policymakers need to start talking about moving the pendulum back in the other direction. If they didn’t the economy would go nuts. Investors would say the Fed is completely asleep at the wheel (plenty are already saying this).
We want an economy that can support less intervention and higher rates. Yes, there are valid concerns about the impact of rising rates on higher growth stocks but the alternative, a bad economy with no growth that requires extremely accommodative fiscal policy, is worse in my mind.
The bottom line here is that, as in the years coming out of the financial crisis, this is a process and there’s going to be a lot of speculation about how the market will digest the changes. But then, as now, the future looks brighter than the recent past.
Over the last week our portfolio is up slightly, helped by 11% gains in Sprout Social (SPT) and Inspire Medical (INSP), a 9% gain by Avalara (AVLR) and a 6% gain by Q2 Holdings (QTWO).
Detractors from performance were Porch Group (PRCH), down 12%, and Funko (FNKO), down 7%.
We have no ratings changes today; however, given the recent Fed meeting it likely makes sense to keep new purchases on the smaller side of things as the market digests notes from the meeting.
Recent Changes
None
Updates
Accolade (ACCD) has continued to trend higher and is trading at levels last seen before the growth stock retreat in February. As with most names in our portfolio there’s little company-specific news to discuss, which leaves us looking at the chart and pondering where ACCD could go next. The stock’s trend and the current price lead me to believe there’s more upside in the near term, so keeping at buy. Earnings are due out on July 8. BUY
Arena Pharmaceuticals (ARNA) was putting together a nice little rally, but momentum fizzled over the last two sessions. It remains a great way to play potential in the inflammatory bowel disease (IBD) market given the expected success of etrasimod, which is in a Phase 3 trial for ulcerative colitis (UC), with data due out in early 2022. A trial for Crohn’s is in Phase 2. BUY
Avalara (AVLR) remains the best way to play trends in the global tax compliance market, which is worth roughly $15 billion (and growing). The company has a growing product set that’s tough to emulate and it is adding more, including solutions that address needs in highly regulated industries. An example is Avalara Compliance Wallet, a platform that allows those in industries like health care and construction to manage compliance docs through their smartphones. If Avalara can pull it off it could be big. Shares are up over the last week (including yesterday). BUY
Cerence (CRNC) had a strong run that carried the stock from 80 to 120, then things cooled off over the last week. A pause/pullback here should be entirely expected. The only new news is an agreement with SiriusXM to make that company’s products easier to access in vehicles. HOLD
Everbridge (EVBG) sells software that automates and accelerates organizational response to critical events. It introduced some products during the pandemic to capitalize on COVID-19 related demand, but the business really needs a strong global economy with people moving about for sustained demand for its solutions. Given the direction things are heading I think the future looks better than the last year, so we’re keeping at buy. BUY
Funko (FNKO) looked terrific … until right after I added it. On the day FNKO joined our portfolio the stock sold off, and it has been ticking down since. Granted, in the grand scheme of things a retreat of 10% from our entry point isn’t a huge deal. But we have become accustomed to better than that and I don’t love that FNKO seems to have lost its momentum. The numbers on retail spending earlier in the week may have stung a little. That said, it’s too early to toss in the towel here. As I wrote in the June Issue, we’d likely look for a breakdown below 20 before revisiting our buy rating. BUY
Fiverr (FVRR) is flat over the last week. We’re sitting on a gain of over 500% on our remaining stake and while I’d like to see some upward momentum soon I’m also willing to be relatively patient here. HOLD
Inspire Medical Systems (INSP) continues to trade in choppy fashion with no new substantive news. Shares have perked up over the last week after finding support a second time at 160. We’re still in a holding period here. HOLD HALF
Kornit Digital (KRNT) has traded sideways over the last week. This isn’t surprising action given the stock is within 10% of its previous high. As I wrote last week, “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.” No change this week. BUY
Porch Group (PRCH) has pulled back from last week’s rally, which stalled out just above 20. So far, the stock has held above the low from the early-June retreat (16.5). We’d like to see a higher low this time around. As I stated last week I expect PRCH to continue to be volatile, so factor that into any purchases. BUY
Q2 Holdings (QTWO) has finally come to life a little over the last four sessions. It’s not going to win any awards, but after three and a half months below the 50-day line last Friday’s jump above that technical indicator was welcome. There’s no change to the story here. The only news is that the company has launched Q2 Innovation Studio, which has a portfolio of tools that financial institutions and fintech partners can use to design, develop and distribute digital banking products, services and features. We moved to buy a couple weeks ago and will stick with that rating now. BUY
Revolve (RVLV) hit an intra-day all-time high two weeks ago and is 6% off that mark today. Shares were up nearly 4% yesterday. Earlier this week we heard that retail spending was down 1.3% in May. That news dented some retail stocks; however, RVLV brushed it aside quite well, probably because sales at clothing stores were still up 3%. Big picture, retail spending is up huge over 2020 (+28% for May, year over year) and while there will be some variance on a monthly basis retail should be strong for a while. Revolve offers a compelling way to play the trend. BUY
Repligen (RGEN) has recovered from the May low of 162.3 and is trading back near its 50-day line at 190. Late last week I saw notes from JPMorgan on larger bioprocessing peers Danaher (DHR) and Thermo-Fisher (TMO) in which the analyst pulled in forward estimates for COVID-19 testing later this year and into 2022. The analyst remains bullish on both stocks given the health of end markets. I haven’t seen any note specific to Repligen yet but it would stand to reason that the same thesis would apply. There is a lot more to the story than COVID-related business so projected slowdowns in testing revenue shouldn’t be alarming. But it is something to consider in the context of the stock’s action. We’ll keep at buy. BUY
Sprout Social (SPT) has been one of the strongest software stocks out there and just hit a fresh all-time high yesterday. There’s no company-specific news, and to my knowledge no major analyst commentary since KeyBank established coverage earlier this month. I don’t think that coverage is fully responsible for this move (up over 20% in two weeks) as SPT had been relatively resilient this spring as compared to other software stocks. I think it’s more that it’s “young” enough, the growth is there, and the market (social media software) is large and relevant enough that the stock screens well. Had SPT not broken above resistance I may have moved to hold, but for now we’ll respect the strength and keep at buy. BUY
Thunderbird Entertainment (THBRF, TBRD.CA) has been soft over the last week as the stock continues to bounce around in the 4 to 5 range that’s mostly persisted since the end of February. While I don’t love yesterday’s intra-day dip to 4 the overall action isn’t alarming in the context of the stock’s character over the last year or so. 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.