Even though the Dow, S&P 500 and Nasdaq hit all-time highs this week, news flow felt a little more negative, and the small-cap indices all moved slightly lower. Layer in another round of sector rotation (looks like the most notable inflows have been directed toward financials and industrials) and more chatter about the potential for a pullback (I just read a Morgan Stanley note saying a 5% correction in the S&P 500 is increasingly likely, and should be bought), and we have a market that feels a little on edge.
The biggest specific subjects being discussed are tax reform, the end of subsidies paid to healthcare companies (which help to lower copays and deductibles), the next interest rate hike, and who will become the next Fed Chair, if Trump doesn’t stick with Janet Yellen.
These are all meaty subjects. And as has become the norm with this administration, it’s virtually impossible to get a good feel for which way the pendulum will swing on any single issue, let alone several. The best thing to do is take it day by day, keep an eye on those sectors with the potential to be affected, and try to anticipate stock-specific catalysts likely to impact the positions we own (and for me, the stocks on my short list for inclusion in our portfolio).
Despite this week’s choppy action, a quick step back from the day-to-day action in the S&P 600 Index makes it clear that a little wobble here and there is nothing to lose sleep over. We just broke out into a fresh trading range in late-September, and it’s only natural to give a little back after such a big move.
Stepping back even more, it’s abundantly clear that the U.S. stock market rally has morphed into a global stock market rally over the past couple of months. Though stocks are expensive in many areas on a P/E basis (the forward P/E of the S&P 600 is just under 20), there still aren’t enough compelling reasons to significantly reduce equity exposure.
That said, don’t be caught off guard when the market gets volatile again. It will happen, and probably sooner rather than later given that earnings season is firing up. Buckle up, and accept that our stocks are going to be jumping around over the next month. That’s just the reality!
Here’s what’s new over the past week.
Updates
AppFolio (APPF) has finally shown that it can’t go up indefinitely. Shares of the property management software provider are down 3% over the past week. But they’re still well above their 50-day line. These little pullbacks have historically been good times to buy, so I’m keeping my rating unchanged for now. No earnings release date yet. BUY.
Asure Software (ASUR) was doing so nicely after it announced the hiring of the new CFO. But the honeymoon phase appears to be over as shares are down 13% over the past week on no new news. At least, no news from the company. But if you think about the potential for healthcare subsidies to be rolled back, you can connect a few dots. Asure sells payroll solutions as part of its Human Capital Management (HCM) software suite, and for most companies in the market, there is some Affordable Care Act (ACA)-related exposure (healthcare, flexible spending accounts, benefits management, etc. are typically handled by HCM software). As of now, employers still need to send out proof of insurance forms in early 2018, and my understanding is this accounts for a large portion of ACA-related revenue for payroll software vendors, including Asure. If that filing requirement goes away, perhaps there could be a small hit to revenue.
I’ve dug around and found out that ACA-related revenue likely accounts for 2% to 5% of revenue from other vendors, including Ultimate Software (ULTI) and Paycom (PAYC). Asure hasn’t disclosed how much exposure it has, but I suspect it’s probably not too far out of that range. If we step back from just looking at Asure and look at its peers too, we can pick out a little weakness beginning last week after Trump announced his intention to roll back the subsidies. The correlation isn’t perfect, and Asure has been the hardest hit by far, so it’s not like this is a big industry headwind at the moment. But I’ve seen enough coverage to know there are rumblings of uncertainty surrounding ACA-related revenue beyond 2018. And I suspect this is what’s hurting Asure the most, given that it’s a relatively thinly traded stock.
In short, I attribute much of Asure’s weakness to uncertainty around ACA-related revenue. We don’t know where this is going. But it’s not a huge piece of the company’s business, so it shouldn’t be affecting the stock this much. Let’s roll with it, and hang on. Keeping the stock at Buy. BUY.
AxoGen (AXGN) has had a good week (it’s up 5%) and shares were up in 11 of the last 12 sessions. That’s notable given that we know EW Healthcare Partners has filed to sell out of its position (roughly 14.5% of total shares outstanding). The only other significant news is that the company will announce Q3 earnings in two weeks. The stock is bucking the weakness in the small-cap health care sector, and I like it. BUY.
Announced earnings date: Wednesday, November 1
BioTelemetry (BEAT) is down modestly this week (-2%) after a 5% decline last week. No new news. A caller asked Cramer about the stock again on Mad Money and he said he still likes it (for what that’s worth!). I’m a little concerned that upstart iRhythm (IRTC) hasn’t sold off at all, though as we know a lot of BioTelemetry’s recent weakness was due to the short report from Off Wall Street back in early September. With all that’s going on with the stock lately (the short report, ACA subsidy rollback, etc.) I think there’s just not a lot of incentive to get new buyers off the sidelines. With a little luck, management will provide some on the next earnings call (no date yet) when it goes over progress integrating LifeWatch, portfolio rationalization, etc. Keeping at Buy. BUY.
Datawatch (DWCH) hasn’t given me anything new to write about this week, and shares barely moved, so let’s move on! BUY.
Announced earnings date: Wednesday, November 1
Everbridge (EVBG) was quiet again this week as the stock mostly traded in the 26.5 to 27 range. Ideally, we’d like to see it hold above 26.5, which is the critical level if this breakout is to stand up. Earnings are due in three weeks. HOLD HALF.
Announced earnings date: Monday, November 6
LogMeIn (LOGM) looks like it wants to break out, but I suspect shares won’t do too much until after next Thursday’s earnings report. Management is sure to talk about the product portfolio and progress integrating the GoTo business, which will contribute a good deal of the expected 220% revenue growth. EPS is also expected to surge by 100%. If you’re feeling brave, you could buy a few more shares before earnings as there’s the potential for a nice pop if management does what it usually does, namely beat expectations. HOLD HALF.
Announced earnings date: Thursday, October 26
Primo Water (PRMW) is still a Hold after the stock moved slightly below 11 last week. Shares are now trading around their June 2016 level. As I’ve talked about recently, I think the bigger picture shows an extended consolidation period with a little uncertainty mixed in due to the Glacier acquisition (along with some trepidation about all the new debt). On the last conference call, management said the back half of the year will have better cash flow and should help it begin to whittle down the debt load. We’re still holding onto around a 20% gain, and I’d like to get to the earnings release since the right signals could reinvigorate investor interest. HOLD.
Q2 Holdings (QTWO) moved a few points lower this week but is still above its 50-day line. I read a report (I can’t recall where) that there are some financial sector analysts speculating that rising interest rates will be disproportionally good for larger banks and financial institutions because they have much bigger client bases than smaller banks and credit unions. This could lead to some consolidation at the low end of the market-cap curve, which has the potential to hurt revenue for those companies providing software to the smaller clients. I don’t know if I buy it, but the subject has come up on Q2’s past conference calls. Management’s typical response is that when clients combine, it still retains the user base, and sometimes there are opportunities to sell more products into the now larger company. Anyway, I don’t know if this line of thinking has hurt the stock over the past week, but it’s the best explanation I can provide for the modest weakness. We’ll get some good insights into the current state of the company’s market when it reports on November 2. Keep holding. HOLD HALF.
Announced earnings date: Tuesday, November 2
Tactile Systems (TCMD) picked up coverage from Northland Securities and Guggenheim over the past week, the latter of which put a 47 price target on shares (almost 50% above yesterday’s close). Recall that the stock was cranking higher until a Seeking Alpha author wrote a short-thesis piece in mid-September. If you like the story, this is a good time to add shares. We’re just below the 50-day line and earnings are due out in three weeks. BUY.
Announced earnings date: Tuesday, November 7
U.S. Concrete (USCR) is still a Buy after shares firmed up following a slew of acquisition-related news two weeks ago. As I said last week, I’d like to see the stock trade in a tight range, and that’s what’s happened over the past week (shares traded mostly between 76 and 77, and just over the 50-day line). Keeping at Buy. BUY.
Announced earnings date: Friday, November 3
