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Small-Cap Confidential
Undiscovered stocks that can make you rich

Cabot Small-Cap Confidential Weekly Update

Small and large cap indices are up around 2.4% from Friday’s close and the portfolio is up almost 5%.


I made a short-term bullish call last Friday based on my feeling that trade war concerns were overblown and that the fall in stock prices, rise in earnings estimates and resulting decrease in stock valuations set the stage for a rebound in the markets.

Fortunately, the market responded! Small and large cap indices are up around 2.4% from Friday’s close and the portfolio is up almost 5%. Lucky? You bet. Can it continue? Probably, but it depends on how earnings season starts out. If earnings come in as expected (or above) that helps to validate the thesis that stock valuations might be too low. On the other hand, if earnings disappoint then a lower market multiple might be warranted. Somewhat complicating matters, interest rates have been going up, but let’s not get sidetracked with that right now!

For now, I think it’s all about revenue and EPS growth meeting (at the minimum) or surpassing (even better) consensus estimate. This is what could lift the S&P 600 Small Cap Index above resistance (around 980) and launch another run higher in many of the stocks in the portfolio.


It will be a couple more weeks before our portfolio stocks begin to report given that we’re mostly invested in technology and health care. In the meantime, there will be plenty of clues from other sectors, including financials, which started reporting this morning.

To put a little context around earnings, I assembled a table of expected revenue and EPS growth rates over the next 12 months for both the S&P 500 and Russell 2000 Small Cap Index. How well overall results come in will help dictate where the market goes, and naturally, that will affect how our stocks perform. To add a little more granularity, I was able to dig up figures for the S&P 500 software and biotech/life sciences sub-sectors (in bold at the bottom). The takeaway message with these sectors, where we have the most exposure, is that both are expected to grow at well-above market average rates.


Changes over the past week:


AppFolio (APPF) shares are finally on the move. After a roughly 10% run this week shares are above both their 50 and 200-day moving average lines and are closing in on resistance in the 45 to 46 zone. Volume isn’t extraordinary, and we’re still not out of a well-established trading range, so it’s a little premature to upgrade from Hold to Buy. But we’re getting closer. HOLD.

Apptio (APTI) develops Technology Business Management (TBM) solutions, which help IT departments manage their software spending. One potential area for growth is with the U.S. Federal Government, which spends over $95 billion on IT each year. The Office of Management and Budget (OMB) has mandated that federal agencies report on their technology spending using parts of the TBM Taxonomy, and while TBM doesn’t always equal Apptio, the mandate helps pave the way for Apptio’s use by various government agencies.

The government wants to be more efficient, and in February, the President’s 2019 budget proposal requested $1.5 million for a TBM Office (which would reside within the General Services Administration, or GSA). This week Apptio announced that it has received certification in the Federal Risk and Authorization Management Program (FedRAMP), Moderate Impact level. FedRAMP is a government-wide program that provides a standardized approach to security assessment, authorization and continuous monitoring for cloud products and services. Apptio was one of seven vendors accepted. And as a result, the company will be releasing product capabilities later this year designed specifically for tracking appropriated funds, federal OMB reporting and budget tracking, all of which are part of an early adopter program that should launch to all agencies later this year.

The bottom line is that Apptio is getting closer to realizing potential with the federal government to help with its IT spending. Nothing is set in stone, and it’s hard to say what the actual opportunity is in terms of revenue. But it’s an interesting development, and one we’re likely to hear more about in the coming months. We also received an earnings release of Monday, April 30. Keeping at Buy. BUY.
Announced Earnings Date: Monday, April 30

Arena Pharmaceuticals (ARNA) hasn’t changed much over the last week, and we have no update on when Phase 2 data for APD371 will be released. But we now know that the company will release more information from the Phase 2 trial for ralinepag for pulmonary arterial hypertension (PAH) this weekend. Topline data was already released, so this is more about the nitty-gritty details. The presentation will take place on Saturday, April 14, at the International Society for Heart and Lung Transplantation (ISHLT) 2018 Annual Meeting in Nice, France. Continue to average in. BUY.

AxoGen (AXGN) specializes in surgical solutions for peripheral nerve injuries. The company will hold its Annual Shareholders Meeting on March 20. One of the interesting items on the agenda is a proposal to double the authorized share count from 50 million to 100 million. Note that there is no proposed or announced issuance of additional shares (yet); they need to be authorized first. As of the end of 2017 there were only 34.4 million shares issued and outstanding.

One the one hand, having more shares authorized makes it easier to complete a secondary offering, which we have to assume is a given at some point. On the other hand, having more shares authorized can also help the company push back hostile takeover attempts because if somebody is in position to acquire too many shares the company can always issue more to reduce that person/group’s ownership percentage. This is something to keep an eye on. But as I said, just plan for a secondary offering at some point. AxoGen is growing above 40% and can use capital to help keep the growth streak alive. While nothing is guaranteed the next time around, the most recent secondary offering didn’t slow the stock down much. I moved to Buy last week and with shares trending higher I’ll stick with that rating for now. Just keep new positions small. BUY.

Everbridge (EVBG) enjoyed a little lift this week which makes me feel good about moving it back to Buy last Friday. That said, we need to get through resistance at 39 before we can think about a bigger leg up. The company announced its Critical Event Management (CEM) platform will be used during this year’s Boston Marathon, which kicks off on Monday. We also have an earnings release date scheduled for May 7. Keeping at Buy, just keep new positions small. BUY.
Announced Earnings Date: Monday, May 7

Instructure (INST) regained its 50-day line yesterday at 42 after a brief dip down near 40 earlier in the week. There’s no new news to report, but the SaaS-based learning management company will deliver Q1 2018 earnings on Monday April 30 after the close. Analysts see 31% revenue growth this year. BUY.
Announced Earnings Date: Monday, April 30

LogMeIn (LOGM) is our pure-play provider of collaboration software and applications that connect people and devices from anywhere in the world via the internet. Shares have perked up this week after retreating to $110 during last week’s volatility. The closing price of 117.55 yesterday puts them above their 200-day line, but below the 50-day line (currently at 120). The long-term uptrend is moving along very slowly, but it’s still there! Keep Holding. HOLD HALF.

MiX Telematix (MIXT) is our newest addition. The company is a South Africa-based global provider of fleet management, driver safety and vehicle tracking solutions that are accessed via a Software-as-a-Service (SaaS) delivery model. The platform uses a network of in-vehicle hardware, cellular networks, GPS systems and cloud-based infrastructure to provide 24-hour access to data, reporting tools and real-time notifications. It has over 664,000 subscribers spread across 120 countries and six continents. Given its roots, South Africa is still MiX’s largest market, and accounted for 56% of 2017 revenue. But with 17 offices globally, including in the U.S., UK, Australia, UAE, Brazil, Thailand, Uganda and Romania, MiX is diversified across the globe.

MiX’s large customers are well-known companies, and include Baker Hughes, Bechtel Corporation, BP, Chevron, DHL, G4S, Halliburton, Nestle, PepsiCo, Praxair, Scania, Schlumberger, Shell, Total and Weatherford. It is doing well now, in part, because of the rebound in energy prices (note the expected growth rates in the large and small cap energy sectors from my intro segment). Energy customers makes up over 20% of its revenue base. Expected revenue and EPS growth in 2018 is 10% and 61%, respectively. The company also pays a dividend and has been buying back shares. It’s a Buy. BUY.

Q2 Holdings (QTWO) was moved back to Buy last Friday and like most other tech stocks it benefited from a stronger market this week. Shares rose around 3% and are within 2 of breaking out to fresh highs (we need a decisive rally above 49). Expected revenue growth in 2018 and 2019 is 21% and 23%, respectively, while expected earnings growth is 367% (EPS of $0.14) and 171% ($0.38). As I stated last week, this type of growth profile in a SaaS stock doesn’t come cheap, but the market will (usually) pay up with a smile for efficient, cloud-based growth stories. And Q2 Holdings fits that description to a tee. Keeping at Buy, just keep new positions small. BUY.

Rapid7 (RPD) is another of our holdings that found support at its 50-day line last week and has seen an increase in demand over the last seven sessions. Shares were up almost 4% this week and will make an all-time high if they can just get above 28.18. As I mentioned last week cybersecurity is at the top of the list of investments companies are committed to making these days (along with cloud computing and digital transformation), which is helping to make SaaS-based providers, including Rapid7, attractive investments. I saw D.A. Davidson initiated with a neutral rating and 28 price target this week, stating that the stock deserves a peer average multiple due to earnings. As always, take analyst ratings with a grain of salt. But keep in mind that a beat on the bottom line will help validate a higher price for shares of Rapid7. The company will report on May 8. In 2018 analysts are expecting revenue growth of around 20% and EPS loss of around $-0.50, a $0.10 improvement over last year. BUY.
Announced Earnings Date: Tuesday, May 8