Spring may have officially arrived ten days ago, but it feels like the thaw has just begun as rain and warmer temperatures track across the northeast. As we watch for shoots of growth to appear it’s natural to expect encouraging signs out of the market too, especially since earning growth estimates have been infused with TCJA (Tax Cut and Jobs Act) fertilizer!
From enactment of the TCJA through the end of last week, 2018 earnings estimates for the S&P 500 and S&P 600 have gone up by 7.9% and 11.6%, respectively. The latest figures show analysts expect 2018 earnings growth of 19.6% (S&P 500) and 23.6% (S&P 600). Current forward revenue estimates also keep tracking higher, and now suggest 8% and 14.5% revenue growth for the S&P 500 and S&P 600, respectively.
Along with robust earnings growth, stock buybacks continue at elevated levels and M&A activity is poised for another record year. Deals over $5 billion are already up 200% in Q1 2018 over Q1 2017. In our portfolio, I don’t think it’s a stretch to say every single company is a potential acquisition target, especially our SaaS stocks.
The punchline here is that, despite the weekly gyrations in stock prices, the backdrop for future share price gains remains constructive. That’s not to say we should pile in with reckless abandon (in fact, we’ve been pulling back for the last couple of weeks). But it does suggest that we should keep our eyes open for fresh opportunities.
Over the past few weeks I’ve been advocating keeping new positions small and trim the fat. We did just that this week as we sold three underperforming positions. As we move forward we’ll look to focus capital on companies with both solid growth profiles and encouraging price charts. One without the other hasn’t been working (and in fact many of these stocks are trending down), so there’s not much incentive to hold underperformers and hope for a quick turnaround.
One of the primary reasons for our caution is that, should the market retreat further, we want to have ample capital to snatch up shares of high quality companies. I have no shortage of names that I’d like to buy!
It wasn’t a great week for the market as performance was mixed across the board in most sector ETFs I track (I use closing prices each Thursday). Notably, tech was a big underperformer this week which drove many of our best-performing stocks down near their 50-day lines.
With three sells from our portfolio we have nine remaining positions. Stock-specific news flow was light ahead of the market’s long weekend. But with the first quarter closing out, I expect action will pick up as we walk toward another earnings season and potential catalysts, such as a data readout from Arena Pharmaceuticals’ APD371 program, march into view.
Changes over the past week:
BioTelemetry (BEAT) moved to SELL
Datawatch (DWCH) moved to SELL
Materialize (MTLS) moved to SELL
Updates
AppFolio (APPF) spent the week doing exactly what it’s been doing all year; bouncing around between $39 and $42. We’ve been in a holding pattern with the stock given the lack of a clear trend in the chart. In terms of growth, AppFolio is expected to grow revenue by around 26% this year and deliver EPS of around $0.52, which would mark a 16% improvement over 2017. Continue to Hold. HOLD.
Apptio (APTI) came in a little this week but firmed up yesterday just above its 50-day line. Recall that the company closed a convertible debt offering last week that raised around $122 million after deducting all costs. As I stated last week 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. Apptio is now cash flow positive and should have well over $230 million in the bank. I don’t expect an announcement right away but would be surprised if a significant acquisition isn’t announced in 2018. For 2018, analysts expect Apptio to grow revenue by 18.3% and for EPS to improve from a loss of $0.24 in 2017 to a gain of a penny. Keeping at Buy. BUY.
Arena Pharmaceuticals (ARNA) has been a hot stock lately after delivering positive etrasimod ulcerative colitis (UC) Phase 2 data then closing a fully subscribed secondary offering at $41.50 that brought in gross proceeds of almost $406 million. That implies Arena now has around $600 million in cash to fund pipeline development. With the Q2 data readout for APD371 for pain associated with Crohn’s disease (expected in April – June) on deck, and more details about Phase 3 trial designs coming our way, interest should remain high. I expect we’ll get a wave of analyst price target increases once the stock comes off their restricted lists (a lot of investment banks participated in the equity offering). Continue to average in. BUY.
Asure Software (ASUR) was moved to sell a couple of weeks ago to lock in a 39% gain. SOLD.
AxoGen (AXGN) showed it’s not immune to market volatility on Wednesday when shares dropped nearly four points in one session to close right around 36. That dip wipes out the gains from the past two weeks, which in the grand scheme of things isn’t a big deal. I’ll be watching closely to see how shares react. On the one hand the stock is a little overbought (which is why I moved to hold a few weeks ago), but on the other, given the growth profile, it’s not surprising investors are trying to pick up shares where they can. AxoGen is expected to grow revenue by 40% this year and cut its EPS loss by around $0.04, to $-0.27. HOLD.
BioTelemetry (BEAT) was moved to sell in a Special Bulletin on March 28 since the stock seems to have lost its sense of direction. Shares found support around $30, so slightly higher prices might be ahead. But the stock hasn’t been able to break above resistance on the last two attempts, so we decided to take a modest gain of around 7% and move on. SOLD.
Datawatch (DWCH) was also cut loose in Wednesday’s Special Bulletin since the stock dipped below the $8.50 threshold that we’ve been monitoring. Datawatch will go back on the watch list for possible future purchases. For now, it’s a Sell. SOLD.
Everbridge (EVBG) held fast above its 50-day line during Wednesday’s decline and recovered most of the lost ground yesterday. It’s just a few points off its all-time high and remains one of our most stable stocks. The UMS acquisition will be interesting to hear more about on upcoming conference calls. I expect we’ll also hear about more big wins in the coming months as Everbridge’s platform gains acceptance by more states and cities. Analysts see revenue growth of around 35% this year and EPS of around $-0.24 (up $0.06 from 2017). HOLD.
Instructure (INST) also held up well during this week’s turbulence. Shares found support right around 44, which is also the level they gapped up to following the most recent quarterly report. That price level happens to be right above the 50-day line, which is currently trending at roughly 40.6. As I said last week, there’s little risk of a secondary stock offering here for a while since Instructure tapped the equity market in February (at $39.50). I like the stock and it’s still a buy. Analysts see 31% revenue growth this year. BUY.
LogMeIn (LOGM) retreated to $112 this week where it found support in November and December (twice). This dip has taken the stock just below its 200-day line, which isn’t a great sign. But shares recovered to that technical level yesterday, so we’ll chalk the move up to market volatility, for now. With another acquisition just completed (LogMeIn announced it would buy unified communications provider Jive Communications a couple of months ago) this company is becoming a formidable presence in the collaboration software space. It would be an attractive target for many potential acquirers. Keep Holding. HOLD HALF.
Materialise (MTLS) was moved to sell in Wednesday’s Special Bulletin after shares broke below their 50-day moving average line. Along with BioTelmetry and Datawatch, Materialise will go back on my watch list. SOLD.
Q2 Holdings (QTWO) held up relatively well this week and like our other strong performers, is still trading above its 50-day line. It’s a good, efficient business with stable revenue streams and good forward visibility. I think it will continue to do well on its own, and could be an attractive acquisition target as well. HOLD.
Rapid7 (RPD) is about where it was when I picked up coverage in March. For the most part, security stocks are doing well and, along with Qualys (QLYS), Rapid7 is among the more attractive names out there. Shares came in a few points this week but given the broad market action that move was to be expected. It’s still a buy. 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). BUY.
