We’re going to reel in a few profits during this post-election stock market surge in the event the honeymoon is short-lived. Along those lines, today I recommend you sell your remaining stake in Mitek (MITK), as well as sell half your position in LeMaitre Vascular (LMAT) and NanoString (NSTG). Details are included in the Update section below. These three sells will net profits of around 60%, 45% and 47%, if your cost basis was close to the price at which I first recommended these stocks.
After the three sells, we have 11 remaining positions and an average gain of around 23%.
Now let’s talk politics, unless you’ve reached the point of post-election commentary fatigue! In that case, skip right to the Updates section below. But if you want my view on things, read on.
It’s worth mentioning here that whether you like Trump or not, what we need to consider first and foremost is how his Presidency will affect the stock market. The fact is the next four years are likely to be very different from the last four, and there could be dramatic changes in the relative performance of certain sectors. I think much of the market’s recent rally relates to Wall Street breathing a collective sigh of relief at Trump’s conciliatory tone during his acceptance speech (how long he can keep that up is anybody’s guess), and the potential for a concerted effort to juice domestic growth through stimulus spending and tax cuts. At the same time, my gut tells me that there are many investors just waiting for that first inflammatory statement to motivate them to hit the sell button. The world is watching closely to try and gauge his real temperament. And the bottom line is that the impression he puts out there matters.
If you own a basket of diversified mutual funds, you likely don’t need to do much with those. But if you own a basket of individual stocks, each of which is a play on a specific theme, it’s in your best interest to consider how each could be influenced by Trump’s proposed policies. Many stocks shouldn’t be affected at all. But others most definitely will. I don’t pretend to know how all of this will work out, but I’ll be working to stay abreast of potential impacts on small caps and relay my thoughts to you so you can act accordingly. I’ll get into more details in the future. But today, this is my quick take on a few policies and a few stocks. Please note that all stock mentions are informal, and I’m not endorsing these ideas today. I’m simply pointing out what I see happening, and giving you a few extra ideas to consider.
First and foremost, if you haven’t already, you should read about Trump’s proposed policies on the Trump-Pence website, available here. To the extent a roadmap to investing in Trump’s vision of the U.S. exists, this is it. We’ll see how much he can get done over time. But for now, the markets are in the process of reacting to these policy proposals.
Biotech is on fire. Look at the iShares Biotech ETF (IBB). Why? Trump wants to clear the FDA’s pipeline of drugs awaiting approval. Bank stocks have also been beneficiaries due to speculation about lighter regulations and higher interest rates. You can play small-cap financials through the PowerShares Financials ETF (PSCF), which is up almost 10% this week. Infrastructure and certain building materials are rallying. US Concrete (USCR) is a small-cap concrete pure-play that I’ve owned and liked in the past. It was retreating until Trump won—now it’s hot. Advanced Drainage (WMS) is a water pipe manufacturer and small cap that was also retreating prior to Trump’s victory. It’s had accounting issues in the recent past, largely due to inventory valuation and something related to its Mexico-based business. I don’t know the details, but it’s a water infrastructure play that’s going up now. Certain oil and gas infrastructure/technology stocks have done well. Willbros (WG) is a specialty energy infrastructure contractor with a market cap of $130 million. It’s cranking.
Reactions in the technology space have been mixed. Cable network operators like Comcast (CMCSA) have done well. There are major potential implications on internet-related tech stocks should there be major changes in net neutrality regulations and the associated internet privacy protections. These are beyond the scope of today’s discussion, but I’ll come back to this topic later. For now, just look at shares of Facebook (FB), Microsoft (MSFT), Amazon (AMZN), etc. and you’ll see what I mean. They’re not doing so well.
Updates
Aspen Aerogels (ASPN) Shares have staged a very modest recovery after their big drop last week. The trading action hasn’t been much different from that of oil’s, which showed a modest increase this week. Aspen could be viewed as a beneficiary of infrastructure spending, but it is somewhat down the food chain, coming in near the end of energy infrastructure projects. At this stage, it’s too early to tell if Trump will help energy infrastructure stocks like this. The bottom line is that Aspen remains a stock in recovery mode that’s looking to expand into the building materials industry. We entered the position expecting we’d have to be patient and give the recovery some time to play out. That recovery story was damaged enough to move the stock to Hold last week, but not so badly that it’s time to walk away. Continue to hold until we can better assess the stock’s next trajectory. HOLD.
Earnings: DONE
eMagin (EMAN) The company reported results this morning and revealed the two consumer-oriented products we’ve been waiting for. I’m on the conference call now and working on a Special Bulletin with all the details, which I’ll send your way this morning. HOLD.
Confirmed Earnings Release: November 11
LeMaitre Vascular (LMAT) LeMaitre was one of many medical device stocks to surge this week and I advise taking advantage of the rally to lock in a partial profit. We’ve only held this stock for six months, so I know selling now will result in a higher capital gains tax rate for many investors. But the stock is up around 45% since I established coverage, and the recent surge suggests limited near-term upside. I still like the stock as a long-term holding, which is why I advise only selling half and holding the rest. If I’m wrong on the near-term trend, we’ll still be holding half a position and will participate in any advance (just to a lesser degree). The company also just announced the $14 million acquisition of Restore Flow Allografts, which processes and cryopreserves peripheral vascular veins and arteries. It had trailing 12-month revenue of $3.7 million (all within the U.S.), meaning LeMaitre paid 3.8-times trailing revenue. This is another portfolio expansion of biologic products, and should increase this year’s revenue by $550K (to $89.6 million) while reducing operating income by $200K (to $16.9 million). The acquisition looks good, and it appears to be well within LeMaitre’s previous acquisition-based growth strategy. SELL HALF.
Earnings: DONE
LogMeIn (LOGM) This has been one of the stronger looking tech stocks in the market this week. Shares are up more than 10 points, to 103, over the past five trading days. No reason to do anything here right now. HOLD HALF.
Earnings: DONE
Marrone Bio (MBII) Last Friday’s new addition has been moving higher. So much so, in fact, that I felt compelled to advise caution about establish a big position at the current market price. As I said in my Special Bulletin on Wednesday, “I also want to remind you that this is a relatively thinly traded stock. Don’t chase it! In the report, I advised building a half position over several days or weeks. While the stock is still incredibly cheap, the recent rise in share price raises the risk of a selloff if next Monday’s earnings report doesn’t impress. That scenario is possible, so please exercise caution. And if you’re buying at this level, buy less than you normally would, and place limit orders well below the current price to try and pick up shares on a spike down.” We’ll get the next update on Monday after the closing bell when Marrone reports Q3 results. Given that the stock is up well over 20% since I recommended it last Friday, it’s best to be a little cautious here and move the stock to Hold through the earnings release. HOLD.
Confirmed Earnings Release: November 14
MindBody (MB) The stock continues to look strong. There was massive trading volume on Tuesday when over 2.5 million shares of Mindbody traded hands. That’s more than five-times normal trading volume. Imperial capital raised their price target from 22 to 25. Continue to buy on the dips. BUY.
Earnings: DONE
Mitek (MITK) Shares have lost their mojo and our gain looks in jeopardy. I recommend selling the second half of your Mitek (MITK) position. The company reported a perfectly fine Q4 with 23% revenue growth. And management guided for roughly 26% revenue growth in 2017. However, higher spending on R&D and SG&A, as well as stock-based compensation, has limited earnings growth. On the one hand, a company can’t grow without investing in its future. But on the other hand, when revenues grow by 76% over a two-year period (from $25 million in 2015 to a projected $44 million in 2017), but EPS growth is only 8% over the same time frame, investors are right to wonder where the payoff is. Most importantly, shares of Mitek topped out six months ago. And the trend since doesn’t inspire a lot of confidence. Shares were making a choppy run higher in August and September, but then faltered in October, fell after reporting Q4 results and are still below their 200-day moving average. Our current gain of 60% feels fragile and very susceptible to any broad market selloff. Let’s step aside, take the gain, and look to deploy the capital into the next opportunity. SELL.
Earnings: DONE
NanoString (NSTG) The company reported a very solid Q3 last week, and Trump’s victory inspired investors to back the truck up to the biotech stock loading dock. We’ve stuck with NanoString for a while, but I recommend selling half your position today. Shares are up almost 25% over the last seven trading days, and are up 67% since early August. There’s nothing wrong with the stock, and in fact it’s technology helps speed up the drug discovery process, which should make it a winner in the years ahead. But this is a longer-term holding which we held through a dramatic selloff, and one which I moved temporarily back to Buy in early August (at around 17.50). In other words, with shares now trading north of 22 we’ve played it well. It’s time to be partially rewarded. Selling half a position now will lock in a profit of around 47%. And we’ll still have exposure should shares move higher in the months ahead. SELL HALF.
Earnings: DONE
Ooma (OOMA) Newsflow around Ooma has been nonexistent and the stock has barely moved since I first recommended it in the beginning of October. We’re looking toward earnings on November 29 for an update on management’s initiative to increase focus on the small business segment. BUY.
Confirmed Earnings Release: November 29
Primo Water (PRMW) The stock is relatively unchanged after last week’s earnings and is bounding around between its 50-day moving average and 200-day moving average. I still think it’s odd that shares gave back their acquisition-related surge. But at the same time, this hasn’t exactly been the most predictable week. HOLD.
Earnings: DONE
Q2 Holdings (QTWO) The company reported last week and I stated that I felt analysts had enough evidence to raise their price targets. That happened, and the bullishness is showing up in the stock’s performance. The company could be a beneficiary of a stronger market for financial companies given that it provides software to small banks and credit unions. Shares have rallied since reporting, and are making a move to break out above their two-month trading range. It’s still a Buy. BUY.
Earnings: DONE
USA Technologies (USAT) The company reported earnings and I sent out a Special Bulletin on Wednesday detailing the results. Shares have been volatile over the last couple of days and it’s difficult to get a good sense of how investors feel about the stock. It looks like it can make a move to regain its 200-day moving average around 4.50, but I’m not yet confident enough in that potential to move it back to buy. The best bet is to simply hold for now and let’s give shares a few more days to digest all that’s happened. HOLD.
Earnings: DONE
Please email me at tyler@cabot.net with any questions or comments about any of our stocks, or anything else on your mind.
