Weekly Update October 14, 2016
This was a challenging week for the market as Tuesday’s selloff sent both the Nasdaq and the S&P 600 Small Cap Index below their 50-day moving averages (the S&P 500 and Dow have been below that technical line for a few weeks). It was a swift move for small caps, though not as harsh as the one that occurred in early September. Small caps recovered from that one-week selloff quickly, but failed to reach a new high as the rally faded in late September. Still, they held above their 50-day line until early this week.
The question now is if this week’s decline marks a major turning point for the market, and for small caps specifically. The wait-and-see approach has paid off in 2016, so I’m inclined to maintain that stance now. That said, I think most investors realize that the upcoming election has very real potential to rock the market given the negative rhetoric and the level of uncertainty about the country’s future direction.
Third-quarter earnings will provide a good status update on how companies are doing regardless of all the noise. And I think the potential for rapid growth among many stocks, including most of ours, remains strong. Earnings season is always an exciting rollercoaster, and over the past year, we’ve had far more pops than drops within our portfolio. I think it’ll be the same this season, so for the most part I intend to stay the course through earnings (assuming we don’t have a major market meltdown).
Most of our stocks got caught up in the market’s decline this week, though most declines are well within the normal range of the respective stocks, save a couple of exceptions (detailed below). We also had one stock rally on news of a major acquisition. That event was perfectly timed as it shows there is still potential for value-adding strategic moves, even when the big board is showing a sea of red.
I move one stock to Hold this week. And I may make a move or two in the coming days depending on intra-day trading action. At the moment, my focus is on Aerohive, which put out an extremely poorly timed press release yesterday detailing updated guidance. Let’s start off there.
Updates
Aerohive (HIVE) Things have gone from bad to worse with Aerohive. This week, the stock cracked its 200-day moving average line, and broke below the consolidation phase that persisted from early April to mid-May, and which preceded a run from 6 to 7.50. Those signals looked to me like confirmation that the trend had turned and that is was time to cut our loss short at about -15%. But management added fuel to the fire by pre-releasing results after the close yesterday. They didn’t have great news. It sounds like E-Rate revenues are running well behind expectations (we suspected as much after the last conference call, but didn’t know for sure), and management has pulled in its guidance accordingly. It now sees Q3 revenue down 6.5% to $40 million versus prior expectations of $46 to $50 million. EPS will come in at -$0.06 to -$0.07 versus a prior range of -$0.01 to -$0.07. I don’t think this is a “broken” company, but this does illustrate the inherent challenge of relying on E-Rate sales to help power growth. The challenge now is that shares were down double digits after hours yesterday, putting us further into the red. But selling at the bottom is painful, and at a certain point, one has to wonder if the M&A team at Dell is sharpening their pencils. There has already been a lot of consolidation in the wireless networking space so we know the conversation is occurring at some level. Will the market hold back from demolishing the stock today as a result? I don’t know. We can’t get out of the way of the opening bell decline so let’s hold into the trading day and see how the stock performs. Futures for most indices show a higher open, so that could help stem the decline in Aerohive and help us get a better exit price. HOLD.
Aspen Aerogels (ASPN) Shares were flat this week, which I think was a good thing. Better to digest the recent move higher than get overheated. And good to see that it didn’t give back a lot of its gain. Keeping at Buy, but keep new purchases small for now. BUY.
Confirmed Earnings Release: November 3
eMagin (EMAN) Shares gave back most of last week’s gain. Still waiting for an update on new products. Keep holding. HOLD.
LeMaitre Vascular (LMAT)
The stock continues to look solid in its current consolidation pattern. It was down 1% this week, which should be considered a victory. HOLD.
LogMeIn (LOGM) Shares were relatively stable this week, falling by 4% but staying above their 50-day moving average and well within their recent trading range. The company announced that its join.me product launched an integration partner program that works with a number of other collaboration platforms, including Atlassian’s HipChat, Trello, Google Calendar, Microsoft Outlook and Office365. It seems like a good expansion opportunity. Keep holding half. HOLD HALF.
Confirmed Earnings Release: October 27
MindBody (MB) The stock was doing great until this week. Exacerbating the broader market’s volatility was a bearish article posted on Seeking Alpha asserting that MB was, essentially, way overpriced. The article was posted under a pseudonym “The Friendly Bear” which lacks any personal profile details. It’s a pathetic example of analytical writing. The arguments lack substance and the reasoning is deeply flawed. Still, kudos to the short seller for his/her/their timing—one can’t argue with the execution of their intended strategy (to drive the share price down). I think the only way this article will have any lasting impact is if the general market environment for cloud software stocks deteriorates. Otherwise, I see this is a buying opportunity once shares stabilize. Keeping at Buy. BUY.
Confirmed Earnings Release: October 26
Mitek Systems (MITK) The stock remains within its four-month trading range but eight days of consecutive declines has brought it down close to its August low around 7. Shares closed at 7.20 yesterday. Let’s keep a close eye on it, but keep holding for now. Earnings is roughly three weeks away. HOLD HALF.
NanoString Technologies (NSTG) Shares were doing great until Tuesday of this week. At that point, the rally turned abruptly, and here we are down 6% from last week at this time. All things considered, that’s not bad. The stock has been acting great and higher trading volume suggests the stock is being accumulated. I think this week’s action is indicative of the broad market weakness and a truly horrible week for biotech, not that we should head for the exit. Keep holding. HOLD.
Confirmed Earnings Release: November 2
Ooma (OOMA) It was a quiet week for last Friday’s new addition. It’s trading right around where I recommended it. It’s still a Buy. BUY.
Primo Water (PRMW) Billy Prim and his investors had a good week as shares of his company jumped 14% on news it would acquire its most significant competitor in the self-service water refill business. Primo Water will buy Glacial Water Services (trades as GWSV on the pink sheets) for $263 million ($50 million in cash, $36 million in common stock, two million five-year warrants with an exercise price of $11.88, and $177 million in new debt). Primo said Glacier’s executive team will stay on to manage the combined refill business. From what we know now, I like the deal (and obviously the market does to). Revenue, operating income and adjusted EBITDA will more than double. Retail locations will jump to 46,000 and importantly, new retail partners that work with Glacial will come under the Primo umbrella. This will eliminate some competition when the company tries to expand locations. I’m not surprised by this move. We’ve seen Primo work to become a more efficient company by focusing on operating improvements such as outsourcing dispenser manufacturing. Freeing up capital almost certainly helped arrange financing for this deal, which is likely to offer far more value creation than manufacturing low-margin water dispensers. The business we care about is water refill and exchange, and that’s where Primo is growing. We’ll get more details when the company holds an analyst call after closing the transaction, which should happen by the end of the year. I’ve had the stock rated Buy, thinking there was upside from the 11 to 12 range that it had been trading in. After this jump, I think it’s wise to move back to Hold. Let’s let the stock digest this move and go from there. We’re up 57%. HOLD.
Q2 Holdings (QTWO) Shares had a few down days this week but are looking relatively strong in this market. The company released a new fraud protection module, Centrix Dispute Tracking System, to help small banks and credit unions better assess the potential damage of debit card security breaches. It still looks like a good buy to me. BUY.
USA Technologies (USAT) The stock pulled back 5% this week and is now trading right on its 50-day moving average. Keep holding. HOLD.