This feels like one of those markets that you’re not sure you should trust given how volatile it was in February. But the combination of revenue growth, earnings growth and decent charts, especially among growth stocks, suggests it’s best not to try to predict too far into the future.
For now, the evidence in front of us favors the bulls. That could certainly change if protectionist policies out of the White House rattle the global order too much. But, at the moment, stocks are going up.
The S&P 600 Small Cap Index just crossed back above its 50-day moving average line…
… and that’s pushed the index back into positive territory for the year, led by outstanding returns in health care and technology, two sectors where we have significant exposure.
Across our portfolio, our average gain is roughly 46%, and all but two of our current positions are outperforming their benchmark since we added them, meaning our simple average outperformance (an admittedly crude measure) is 35.5%.
I’ve been moving incrementally toward a more defensive stance in recent weeks despite the improvement in the broad market trends. But I’m far from bearish, especially considering the trajectory of our leading stocks. With large gains and a few stocks going vertical, it just seems like it’s time to direct new purchases toward stocks that have less near-term downside risk (like last week’s new addition), but still significant long-term upside potential.
This week, we only had one position report and news flow was light. Next week, earnings season wraps up for us with Asure Software (ASUR) and Arena Pharmaceuticals (ARNA) set to deliver. Updates on the past week are below.
Updates
AppFolio (APPF) hasn’t done much over the last week, though buyers did show up to peck away at the stock and lift it off its 200-day line. As I said last week, the big question is what’s next? Management is tight lipped, and we know they’ve said their business model is to grow into markets where their platform gives them a competitive advantage. But for the time being, they appear to be focused on the property management market. I moved to hold last week since the trend isn’t particularly strong at the moment. Continue to hold. HOLD.
Apptio (APTI) keeps inching higher week by week so we’ll keep at Buy. Presentations at JMP Securities, KeyBanc, and Morgan Stanley were presumably well-received since the stock’s been rock solid. The Technology Business Management (TBM) market isn’t one that many people talk about, but which will likely garner more attention as businesses try to get a better grip on their technology spending, and as cloud software adoption grows. Apptio is a perfect way to play these trends. BUY.
Arena Pharmaceuticals (ARNA) has also been grinding higher, and we now have an earnings release date of March 14 (next Wednesday). As I’ve said it, would make sense to combine the event with the release of etrasimod ulcerative colitis (UC) Phase 2 data, which management has said will come out in Q1. That doesn’t guarantee it will happen of course, but just be ready for a potentially market-moving announcement next Wednesday. Ulcerative colitis (UC) is a promising but competitive market where Celgene’s ozanimod looks to be a major product (despite the hiccup with Celgene’s NDA filing that I reported on last week). Results from etrasimod’s Phase 2 trial will give us valuable insights into the drug’s efficacy and help clarify etrasimod’s potential to expand into pyoderma gangrenosum (PG) and primary biliary cholangitis (PBC). Investors don’t appear to have assigned much value to etrasimod (maybe 15% of Arena’s value?), which suggests favorable efficacy data has the potential to significantly move shares. BUY.
Earnings: March 14
Asure Software (ASUR) is making a run at a six-month high before Q4 earnings come out next Thursday. Over the past week, shares have traded higher every day, for a total gain of about 10%. At just under 16 they’re still a little short of their 52-week high of 17.27 (set back in June), but perhaps a good earnings report will help them breakout! Expect a lot of discussion about integration of acquisitions, and the expected cadence of acquiring more service bureaus. Consensus is calling for revenues to be up by 65% (to $16.06 million) and EPS of around $0.20. Keeping at BUY.
Earnings: March 15
AxoGen (AXGN) surprised the market with a better-than-expected Q4 2017 reports last week and has moved modestly higher over the last five days. Fourth-quarter revenue growth came in at 49%, and management has guided for at least 40% revenue growth in 2018. It also announced its expansion into breast reconstruction (expected, but good to get confirmation) where it is teaching techniques to plastic surgeons to restore sensation to women who are undergoing reconstruction after mastectomy. The company is growing in its core business, expanding into oral, maxillofacial, breast reconstruction neurotization and pain (remember it introduced a nerve cap product in 2017). Given the big run lately—shares are now up 105% since we added them—I moved the stock to Hold last week. HOLD.
BioTelemetry (BEAT) has tons of potential but shares have been stuck in a rut lately. The 4% gain over the past week puts them just below resistance in the 35 to 36 zone, where they have failed twice to break out (in January and February). It feels like there is enough good stuff going on to get the stock moving higher again, but let’s wait to see if we can get through this area of turbulence before moving back to Buy. HOLD.
Datawatch (DWCH) made a little more progress this week (up 1%) after a 5% gain last week. Still, we’re down below the important trendlines here, so we need the stock get back above 10 to 10.5 before we can put it back on the buy list. Continue to hold. HOLD.
Everbridge (EVBG) isn’t being shy about sticking its neck out. The stock broke out to another 52-week high this week and is now up more than 130% since I added it to the portfolio at the end of 2016. No doubt school shootings and extreme weather events are helping raise awareness of how a critical communications platform can help people get through rough situations. And Everbridge’s proposed acquisition of Unified Messaging Systems (the offering just began last week) adds to the company’s international growth profile (assuming it closes). HOLD.
Instructure (INST) is near the top of my list of favorite stocks right now. That’s because when I recommended the education technology software stock in the beginning of January, shares hadn’t done anything for about three and a half months. But it seemed like they were coiled up and ready to spring, and I liked the story and growth profile. Since then, the market has made me look far smarter than I am. Shares of Instructure are up 38% since January 5, and trading right at their all-time high. Keeping at Buy, just take it slow. BUY.
LogMeIn (LOGM) has reliably bounced off its 200-day line over the last year and did so again in the beginning of March. The stock is now just above its 50-day line, and while the trading pattern is a little spikey, the general trend here is still up. With the acquisition of GoTo and Jive, LogMeIn is building itself into a collaboration software powerhouse. Keep holding on. HOLD HALF.
Materialise (MTLS) is looking a little better after a 6% rally this week. Management reported Q4 results earlier in the week that beat on both the top and bottom line, and comments about a strong second half of 2018 seem to be helping revive interest in the stock. Revenue for the quarter was up 42% while EPS of €0.03 beat by €0.01. There is a ton of info in the earnings release and conference call, given the three divisions of the company plus the October 4, 2017 acquisition of ACTech (metal 3D printing, which became part of the manufacturing division). Let’s cut through it all and go with the important stuff, helped along with a few images from the Q4 earnings slide deck.
Organically, revenue for the quarter was up 10.5%, but including ACTech revenue was up 42%. For the full year 2017, organic revenue was up 16%, and including ACTech revenue, was up 25%. By division (I won’t get into organic), Q4 software was up 30% (19% full year), medical was up 18% (13% full year) and manufacturing was up 68% (37% full year).
Those are healthy growth rates, and obviously ACTech is helping push up manufacturing. For 2018, management has guided for revenue growth in the 26% to 30% range, including ACTech. This seems conservative (consensus estimates suggest 33% growth), especially when considering organic growth is forecast at just around 8%. When pressed on the conference call, management basically said since it’s seeing softness in automobile demand for 3D printing (mostly prototyping), and a more heavy-weighted back half of 2018, it just wants to start the year out by erring on the low end.
Other notables from the call include a renewed push to drive partnerships and collaborations (Materialise just announced the launch of the TRUMATCH shoulder planner for surgeons, in collaboration with long-time partner DePuy Synthes), rapid demand growth for its Magics e-Stage for metal solution (which automates support structures for 3D metal printing), and some disruptions from moving manufacturing facilities, which should have less of an impact moving forward.
The bottom line is it sounds like the software and medical segments are growing nicely and organic manufacturing is soft at the moment, though the acquisition of ACTech and expanding solutions for metal printing should revive growth. For the most part, I liked what I heard and continue to think that Materialize is one of the best ways to play the 3D printing market. I’d like to see the stock post a more sustained comeback, so while it’s just above its 50-day line, I’m going to keep at Hold for now. HOLD.
Q2 Holdings (QTWO) is pushing for a fresh 52-week high and shares are now up just shy of 100% since we added the bank software stock 23 months ago. There’s been no new news over the past week. And I’ve become a little more conservative on the name after the recent rally. Continue to hold. HOLD.
Rapid7 (RPD) is our newest addition and was recommended roughly three weeks after Q4 2017 results came out, so there isn’t any new news to share. To refresh your memory, Rapid7 sells cloud-based and on-premise cybersecurity software solutions. These products help its customers better understand, prioritize and address the threats facing their physical, virtual and cloud assets, including threats that arise from the actions of people within their own walls. It has been migrating and launching solutions on its cloud-based Insight platform, and now InsightVM, InsightIDR and InsightAppSec are the three fastest growing solutions. Revenue was up 28% in 2017, and in 2018, we’re expecting revenue growth of around 20% and annualized recurring revenue (ARR) growth of around 30%. This ARR figure represents recurring software sales (annual subscriptions). The stock’s been in a nice uptrend and has tacked on 4% since last Friday. It’s a Buy. BUY.
