Global markets were all mixed up this week as old world-type stocks moved higher and new world stocks—mostly tech—sold off. Things have normalized a little over the past two sessions however as investors appear to have come to their senses and realized that, while tech might have moved too far too fast, many high-flying technology stocks are doing so well because they’ve been growing at high rates, quarter after quarter, and they look like they’ll continue to do so.
We also have a better-than-expected U.S. jobs number this morning, the much-discussed tax overhaul progressing, a major E.U.-U.K. divorce terms agreement, a two-week spending bill, and a likely interest rate hike next week.
In short, a lot going on. But small caps are still trading above their October trading range …
… and are up 11% year-to-date. With the recent retreat in small-cap tech, that sector has fallen well off the 31% pace posted by large-cap tech stocks this year. But, I suspect small-cap tech can rally into year-end to make up some lost ground.
We’ve taken a few hits over the past couple of weeks. But when you step back, you can see that on average, we’re still outperforming our benchmark with our open positions.
Updates
AppFolio (APPF) was down 4% this week, mainly due to the tech-stock selloff that started last Friday and continued through Monday. Despite the stock’s weakness (it’s 20% off its 52-week high, which it hit two months ago), the reality is that the stock’s fundamentals are better now then they were prior to the release of Q3 results. The short version is that its property management business appears to be gaining market share and more efficient customer acquisition costs (i.e., bigger customers with more units under management) is driving margin expansion and EPS growth above expectations. The company has a very efficient business model, but isn’t being pumped by big brokerage houses because analysts see significant investments on the horizon for AppFolio to make its legal business a bigger contributor, and/or to add a third vertical. This is a valid point, but it’s been the case for some time. And with the recent pullback, the stock looks like a good deal (trading below most analyst price targets). Keeping at Buy. BUY.
Apptio (APTI) is our newest stock and, as is usually the case soon after writing the report, I don’t have a lot of new information. The company specializes in software that helps IT leaders run their businesses more efficiently, and with all signs pointing toward a solid economy, steady IT spending, and software spending grabbing a good portion of that IT spend, it’s rational to think Apptio has a big opportunity in front of it. The stock’s looking as strong as any in this market, which is saying something! It’s up 2% since last Friday, and I’m keeping the stock at Buy. BUY.
Asure Software (ASUR) continues to hold up nicely and is still looking to break back above the 15 level. If it does, our chances of a run at 17 go up. I’ve kept at Buy since, while this is a zone of formidable resistance, the long-term growth potential (this is basically a roll-up acquisition story in the HR management software space) should drive new buyers into the name. BUY.
AxoGen (AXGN) continues to defy gravity and has been unfazed by the recent market volatility or the recent secondary stock offering (details of which I gave in a Special Bulletin a couple of weeks ago). The nerve repair specialist is a Buy until the trend falls apart. BUY.
BioTelemetry (BEAT) looked to have bottomed in early November, then enjoyed a big boost when it announced collaborations with Onduo, to supply remote blood glucose systems and resulting data for Onduo’s diabetes management program, and Apple, to provide cardiac monitoring services for the Apple Heart Study, which just launched. It’s too early to know, but on the surface, these appear to be material events that can contribute significantly to revenue over the long-term. There are hoops to jump through (like approval of Apple Watch for irregular hearth rhythms), but given that BioTelemetry already has an extremely viable business, has just completed a major acquisition which greatly expands its international exposure, has a patch form factor heart monitor hitting the market, and was significantly oversold prior to the announcements of these two deals, I think the stock will head significantly higher. To put things in context, a 35% gain only gets us back to the September 2017 high. Are there enough reasons why the stock shouldn’t be trading well above that level a year from now? Keeping at Buy. BUY.
Datawatch (DWCH) is still trading around support at 9, though shares were as low as 8.5 earlier in the week. Yesterday’s 5% jump on high volume might mark the beginning of a bottoming process, but it’s too early to tell. I moved to Hold last week because of the weakness, and with no new information or positive change in the stock’s trajectory, I’m sticking with that rating this week. HOLD.
Everbridge (EVBG) dipped to 24 earlier in the week but the critical communications software stock roared back to its 50-day line yesterday. The 8% move was one of the biggest one-day jumps among the software stocks that I keep tabs on, and suggests to me that there was some sellers’ remorse going on. On the subject of the company’s capital raise, I think the most probable outcome is that Everbridge will use some of the cash to expand overseas. The potential acquisition list includes Enera (Sweden, Germany and Chicago, IL) and F24 AG, which is Europe’s leading SaaS provider for alerting and crisis management as well as business communications, with 11 European sites and 15 worldwide. F24 grew revenue by over 100% last year, and is profitable, so appears like quite a nice target! F24 trades on the Munich and Frankfurt stock exchanges, and is up 50% over the last year. There is no U.S.-listed ADR. BUY.
LogMeIn (LOGM) is our biggest holding by far, and with a market cap of $6 billion, the collaboration software specialist is squarely in the mid-cap category. But we’re up around 100%, and unlike small-cap funds, we don’t have to sell a stock if and when it gets too big to be considered a small cap! The stock bounced off 112 this week, as it did in November, and for the most part, looks fine. Management will hold its first investor day on Tuesday, December 19. This should be an informative event given that there’s a lot going on in the realm of product development/consolidation following the GoTo acquisition. Keep holding. HOLD HALF.
Materialise (MTLS) is our 3D printing specialist and has the greatest amount of European exposure in our portfolio (roughly 60% of revenue). As such, it’s often influenced by what’s going on overseas. With global markets in disarray this past week, Materialise hasn’t behaved differently than others in our portfolio. However, last night’s breakthrough in Brexit divorce negotiations between the E.U. and U.K. should help lift European stocks, including Materialise, out of the recent funk. Fundamentally, there’s nothing to report since the two partnerships I discussed in recent updates. The stock is trading just below my initiation price. Keeping at Buy. BUY.
Primo Water (PRMW) has been holding up well in this volatile market and is unchanged from last week. As I said last week, there’s some resistance in the 13 to 14 range, so don’t be surprised if shares pause here before making their next move. I’m keeping at Buy since I think they’ll punch through, just keep new buys on the small side. BUY.
Q2 Holdings (QTWO) dipped 3% this week and the banking software specialist is now just below its 50-day line. There’s no new fundamental news. Given that the stock has remained above its 200-day line since June of 2016, the evidence suggests this is a buying opportunity. BUY.
U.S. Concrete (USCR) hit a 52-week high this week on the back of tax overhaul enthusiasm and expectations that Trump will get back to talking about infrastructure in early January. U.S. Concrete’s CEO, Bill Sandbrook, has always been vocal, and is a frequent guest on Cramer’s Mad Money. He made another appearance this week, and he was also on Bloomberg TV. He mentioned that his company has a tax rate of around 40%, so if that goes down into the low 20% range, he’ll reinvest in trucks, equipment, market expansion and other initiatives that will increase EPS. Keeping at Buy. BUY.
