It’s not as if all the dirt in Washington can be swept under the rug indefinitely. At some point, the increasingly bumpy rug makes the working environment too difficult to navigate. And then it’s time to pull back the rug and address the issues.
I don’t know what special counsel Robert Mueller will find. But it’s safe to say—regardless of your party preferences—that this entire saga is a distraction from the agenda that helped push stocks to all-time highs following the election. And it’s only going to continue, probably growing in scope.
So far, the market has had a rock-hard stomach, digesting the constant flow of economic data and political turmoil with barely a touch of indigestion. I don’t know how long that can continue.
Our job as analysts is to try and not get sidetracked by the partisan rhetoric and media theatrics, and do our best to focus on the likely impacts of risks and opportunities, both real and perceived, on the stock market. Right now, I think it’s only logical to think the frequency of volatile trading sessions will go up before they go down. As the five-year chart of the volatility index (the VIX) below shows, volatility has been incredibly low through most of 2017, with the exception of last Wednesday and a few days in early April.
At the beginning of this year in my 2017 Small Cap Forecast (posted on the Cabot Small-Cap Confidential website) I wrote:
“Proposed White House domestic policies seem good for the U.S. economy in aggregate, but foreign policy has been a source of some concern. It’s not necessarily the short-term or the relatively small things, but rather the big picture, long-term implications of U.S. policy around the world that I wonder about.
Only time and Trump’s experience on the job will help to clarify the path forward, both here and abroad … I continue to like small caps, despite their high valuations and the potential for at least one significant correction in 2017. The big-picture theme supporting this call is a favorable policy outlook in the U.S. that should be asymmetrically positive for small caps relative to large caps.
At this point I should mention that we’re all market timers when we buy and sell. Admit it, embrace it, and plan for it. And also admit that it’s impossible to time tops and bottoms. The best strategy is to average in and average out, with the pace and scale of purchases determined by big picture trends.
As we move toward spring 2017, I believe we’re entering the most treacherous time of the year. But ultimately, I see small caps ending 2017 roughly 5% to 10% higher than when they entered. That puts my year-end target in the 885 to 927 range.”
Since I wrote all that, things have played out about as expected. Trump is off to a rocky start. His proposed agenda, including deregulation and tax cuts, has helped keep stock prices high (despite high valuations), but questions about actual policy action is holding stocks from moving higher.
At the same time, earnings have been good for the most part. And forward-looking consensus expectations in early May suggested EPS growth of roughly 10% for small caps this year and 11.4% for large caps. In 2018, expected EPS growth rates are 12% for large caps and almost 20% for small caps. Those are good numbers.
Given the somewhat conflicting outlooks for solid EPS growth but a tumultuous Presidency and policy outlook, and given where stocks are right now and the amount of time since a significant correction, I think it makes sense to ratchet back to a more cautious near-term outlook. If the market deteriorates a little more, we’ll probably average down with a few positions to protect profits. But I’ll give it a few more days.
Right now, small caps are close to the bottom of their 2017 trading range. And we’re looking at 760 as the next stop if we get a big selloff (7.7% lower), and then 700 below that (15% lower). We need a big push above 860 to get to the next upside level.
Today I’m moving two stocks to Hold. Details below.
Updates
Aqua Metals (AQMS) No update. SOLD.
Airgain (AIRG) Shares continue to move sideways in the 13.5–14.5 range. This past week, Airgain joined the LoRa Alliance and began shipping new antennas to a large North American carrier that are designed for IoT applications over Low Power Wide Area (LPWA) networks. These are rugged antennas built to withstand the elements (cold, salt water, heat, etc.). Not major news, but a continuation of the company’s efforts to expand into adjacent markets. BUY.
Asure Software (ASUR) I moved to Hold last week after a massive rally to 15. This week, shares have pulled back to around 13.5. We want to see them hold above the 12.5–13 area that served as resistance in February. No fundamental updates. HOLD.
BioTelemetry (BEAT) The stock has come back to the level of its post-earnings drop (where we stepped in to buy). We’d like it to find support here. The company is in the middle of the 10-day tender offer period for LifeWatch, which closes May 23 (next Tuesday). We’ll get an update early next week, which I expect will be a positive result. BUY.
Everbridge (EVBG) Shares have given very little of their recent gain back, but I’m keeping at Hold, a reflection of my broader concerns about the stock market right now. The company’s solution was selected by Tuscaloosa, Alabama to power a regional emergency notification platform. Keep holding. HOLD.
LogMeIn (LOGM) Shares suffered a 5-point drop during Wednesday’s selloff but firmed up yesterday. No fundamental news to report. The 110-level served as resistance in November and January, so we’d like to see the stock hold above that (it closed at 110 yesterday). HOLD HALF.
Marrone Bio (MBII) Shares of our most speculative position have been trending down since the beginning of the year, despite the company posting robust top-line growth. The main issue continues to be cash flow and concerns over dilution due to ongoing equity offerings. We initiated half a position originally, anticipating that a deep turnaround story such as this might require averaging down at some point. The ideal time to do that is right when the “bleeding” has stopped and shares are about to move higher. However, we need to see some evidence that the stock will stop sliding before wading in even further. Right now, shares are trading around the zone where they paused following their big August 2016 rally. I think this is a significant level, and if the stock can hold here and start to move higher, we can step in to buy more. That said, I’m moving to Hold today since we’re already in the stock and it doesn’t make sense to keep buying in the face of weakness, no matter how cheap the stock looks. I’ll move back to Buy if shares firm up and broader market risk abates a little. HOLD HALF.
MindBody (MB) Following the stock’s post-earnings drop from 28.5 to 25, I moved to Buy. Since then, shares have move up roughly 10%, into the mid-27 range. I think the “easy” money on the bounce has been made, so moving back to Hold now. HOLD.
Ooma (OOMA) We have earnings coming up next Tuesday and there have been no major news announcements so not a lot to say today. The stock is holding onto most of its recent rally despite a slight pull-back from 12.3 to 11.75 on Wednesday. HOLD.
Announced earnings date: May 23
Primo Water (PRMW) The stock’s is still trading near an eight-month low around the 11 zone. It still looks like a good value here. BUY.
Q2 Holdings (QTWO) The stock was one of our most durable through Wednesday’s volatility, and is still holding in the 38–39 zone. Keeping at Buy here in anticipation of a multi-month consolidation period before another leg higher. BUY.
U.S. Concrete (USCR) Shares have been bouncing around in the 58–71 area since the beginning of the year, essentially straddling their 50-day moving average line, which is currently at 65. We’ll need some more fundamental developments to help push the stock through resistance in the 71–72 zone. 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.
