If there’s one thing that’s jumped out at me over the past couple of weeks, it’s that the performance gap between desirable and undesirable stocks has become much clearer. With earnings season essentially over, it’s quite easy to look at charts to see which stocks investors want to own, and which ones they don’t. Yes, this is a very simplified view of demand (and possibly, future potential) but it’s a good, fast way to evaluate stocks right now. This assumes, of course, that you have some understanding of stock specific fundamentals, business models, etc. before you buy (or sell).
Accordingly, most of the stocks in our portfolio that are holding up well (and in many cases moving higher) are either rated buy or hold, and those that aren’t have already been sold, or are rated hold, and being watched extremely closely.
Stepping back to look at the S&P 600 Small Cap Index, we see that a double top just formed and we’re back to the 50-day moving average line. Where we go from here is anybody’s guess, but it seems prudent to maintain our conservative outlook, reduce exposure to underperforming stocks, and keep new positions relatively small.
Encouragingly, small caps held up better than large caps in all sectors over the past week, and the small cap index’s loss of 2.1% was half that of the S&P 500.
Our portfolio posted an average gain of 1.2%, mainly because Arena Pharmaceuticals (ARNA) rocketed 25% higher and AxoGen (AXGN) continued to defy gravity (up 7%).
After locking in three profitable positions this year, including a 47% gain on Primo Water (PRMW), an 11% gain on U.S. Concrete (USCR) and a 39% gain on Asure Software (ASUR), we now have 12 open positions posting an average gain of 48%. All but two are outperforming the Russell 2000 Small Cap Index since we added them, which means our average outperformance is 39.7%.
There is only one rating change today:
Materialize (MTLS) moved from HOLD to BUY
Updates
AppFolio (APPF) reported in late-February and shares of the property management software provider haven’t done much since. In fact, it’s now about five months into a consolidation phase that’s found support around $39 and topped out at $46 (right where the stock was heading into the earnings report). The company beat by 6.8% on revenue and $0.03 on EPS, but the market wants to know more about future plans and (I think) is getting a little frustrated that management doesn’t take questions on their conference calls. I’ve had the stock rated hold since there’s enough upside potential to stick with it, and it hasn’t broken below support yet. If it breaks much below $39, we’ll probably take profits. If some catalyst comes along, or management divulges a game plan for the next three years or so, I might move back to buy. For now, hold. HOLD.
Apptio (APTI) is a well-liked stock and that’s showing up in the chart. This past week, management announced its intention to raise cash through a convertible debt offering, a strategy that we’re seeing more and more often out of well-positioned technology companies (Everbridge and Q2 Holdings have done the same). Apptio will raise around $121 million by issuing five-year senior, unsecured convertible notes, which bear an interest rate of 0.875%. The implied conversion price for the notes is $39.30 (about 32% above yesterday’s closing price). The sale is expected to settle today, so the stock could act a little funky for a few days as the offering permeates through the market.
I like this method as a strategy to raise funds since it limits dilution, and the cash will, in my opinion, go to fund an acquisition. The company ended the last quarter with almost $150 million in cash, cash equivalents and marketable securities, and it’s projected to become profitable (barely) this year (estimated EPS is one, big, shiny penny!). In 2016, free cash flow was negative $9.4 million (cash from operations was negative $4 million), but in 2017 free cash flow was positive $5.8 million (cash from operations was positive $9.4 million). In other words, Apptio doesn’t need the cash to fund operations.
After the quarter ended the company did acquire Digital Fuel for $42.5 million, so that put a dent in cash on hand. But if we (very) conservatively assume no cash contribution in Q1 2018, reduce cash to account for Digital Fuel, and add back the $121 million from this convertible note offering, we wind up with almost $230 million in cash. Either Apptio is planning to invest a ton in R&D and/or sales and marketing, or it wants to be prepared to acquire products and/or companies to help it defend and build out its business of software that helps IT departments run their businesses. As I said two weeks ago, the Technology Business Management (TBM) market isn’t one that many people talk about, but it will garner more attention as businesses try to get a better grip on their technology spending, and as cloud software adoption grows (it’s also likely to become more competitive). Right now, I see Apptio as a perfect way to play the trends. Keeping at buy. BUY.
Arena Pharmaceuticals (ARNA) has been up, down and all around over the last couple of weeks. It climbed into earnings, fell sharply afterward, then shot higher after positive etrasimod ulcerative colitis (UC) Phase 2 data was released this week (which I detailed in a Special Bulletin). Management didn’t waste any time and went to market with a secondary stock offering (which, to be fair, was probably planned prior to releasing the UC data). When initially announced, the offering was for 7.5 million shares, with an option to increase by another 1.25 million (implying 16% to 19% dilution). I theorized that a $35 offer price would boost the company’s cash position from around $240 million to about $545 million. Demand must be high because Arena upsized the offering to 8.5 million shares with an option for 1.275 million more, at a price of $41.50. Assuming all shares are sold, and before deducting discounts, expenses, commissions, etc., the offering will bring in around $405 million. In other words, Arena should have well over $600 million to fund pipeline development, including (most likely) getting ralinepag and etrasimod through Phase 3 trials. The stock will probably trade in choppy fashion while these shares hit the market, but at the end of the day I think Arena will move higher into the Q2 data readout for APD371 for pain associated with Crohn’s disease (expected in April – June). Keeping at buy. Just be sure to average in. BUY.
Asure Software (ASUR) was moved to sell following the stock’s dismal reaction to Q4 earnings. We recorded a profit on the trade of around 39%. SOLD.
AxoGen (AXGN) continues to perform incredibly well since reporting better-than-expected Q4 2017 results (revenue was up 49%) and guidance 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 a mastectomy. I moved the stock to hold recently given the jump following the Q4 earnings release. In hindsight, that move might have been a little premature as there is clearly huge demand for this stock. I see shares going much higher over the long-term, but I’d like to see a little pause here to allow a lower-risk entry point for new buyers. That said, if you feel like picking up a few shares (nothing crazy!), I’d be fine with that. With the stock doing as well as it is you’d think management would tap the market with an equity offering. However, it raised $15.6 million in November so we’re probably looking at a couple more months, at least, until it does so again (it ended the quarter with $36.5 million in cash, and $25 million in debt). HOLD.
BioTelemetry (BEAT) isn’t giving me much to write about after reporting earnings on February 22. The stock is just going through the motions now, hovering in its $30 to $36 range, which includes both the 50- and 200- day moving average lines (they’re only $1 apart). I put on hold when the stock failed to break out above the $35 to $36 zone of resistance and am sticking with that rating for now. Nothing too material on the competitive front with iRhythm (IRTC) over the last two weeks, and I’d note that shares of that stock have demonstrated roughly the same unenthusiastic trading pattern as BioTelemetry’s lately. HOLD.
Datawatch (DWCH) is back down at support in the $8.50 to $9 range after two weeks of discouraging trading action. When we got into the stock I knew it could take a little while for shares to gain momentum as news of the company’s progress moving to the cloud and introducing new products percolated through the market. Unfortunately, the stock’s encouraging trend, which was forming when we got into it, has since evaporated. It’s been up and down on takeover rumors and ho-hum earnings. This isn’t a bad company, it’s just not that well known outside of its niche user base. New cloud-based products (Swarm) are expected to grow the customer base, it just won’t happen overnight. Certainly, there’s no guarantee that Datawatch’s sales teams will succeed, but the potential is absolutely there, and the upside is huge if they do. That said, we’re not going to get stuck holding the bag if things don’t work out. We’re on the cusp of walking away now. A decisive break below $8.50 and we’re gone. Conversely, if the stock can get back above $10 to $10.50 we can put back it back on the buy list. For now, just hold. HOLD.
Everbridge (EVBG) was successful in its tender offer for Unified Messaging Systems (UMS) with 93.3% of shares tendered. Now, Everbridge will gobble up any outstanding shares and officially wrap its arms around UMS. Settlement of the deal should close on April 3. The deal will help expand its reach in Europe, and I like it. HOLD
Instructure (INST) has held on to its post earnings report gain, and then some. It’s probably time for a pause in the stock’s advance but given how well it’s held up lately I’ll keep at buy for now. Just take it slow. There’s little risk of a secondary stock offering here for a while since Instructure tapped the equity market in February (at $39.50). BUY.
LogMeIn (LOGM) isn’t as interesting to follow as most of our smaller SaaS stocks since shares have a tendency to rally and dip, rally and dip. It’s actually a little frustrating for me since I’m more accustomed to more exciting stock trading patterns. That said, “exciting” isn’t always good! And as I’ve stated before, I’ve learned not to bet against LogMeIn – which is why we’re still holding on to shares of such a large company (by our standards). The bottom line is the long-term trend is up, so why over think it (check out two-year chart below with weekly candles)? Better just to hold on. HOLD HALF.
Materialise (MTLS) moved just above its 50-day line following the release of Q4 results and has since recovered a little more and is trading around its 200-day line. It hasn’t given a high conviction buy signal yet, but the action is encouraging enough to move back to buy today. There are no new fundamental updates. BUY.
Q2 Holdings (QTWO) is still trading near a 52-week high roughly a month after launching its $200 million convertible debt offering. I’ve had the stock at hold after the recent rally and will likely move back to buy after a consolidation period. There’s no new fundamental news to discuss. Continue to hold. HOLD.
Rapid7 (RPD) was our March addition and has been holding up as well as any stock in the market lately. We received a good indication of how high demand for shares is early last week when existing stockholders offered two million shares up for sale at $26.25 (roughly $1 less than shares were trading for at the time). That offering catalyzed the little dip below $26 and a short-term spike in trading volume, but thing have begun to normalize this week. I believe the increase in the stock’s public float is a net positive.
Recall from my report that Rapid7 sells cloud-based and on-premise cybersecurity software 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 remains a buy. BUY.
