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Small-Cap Confidential
Undiscovered stocks that can make you rich

Cabot Small-Cap Confidential Weekly Update

Small caps have recovered nicely over the last three weeks and the S&P 600 Small Cap Index is bumping up against resistance at 980 for the third time in 2018.


Small caps have recovered nicely over the last three weeks and the S&P 600 Small Cap Index is bumping up against resistance at 980 for the third time in 2018.


So far this year, small caps (up 3.5%) are outperforming large caps (up 0.7%). Notably, the performance is being led by health care (up 18.6%) and IT (up 4.3%), where we have the most exposure.

small cap vs large cap

Our portfolio is benefiting from the rebound in the market, with several of our stocks either bumping up against resistance near previous 52-week highs or jumping out to fresh highs over the past week. Nine of our 10 open positions are rated Buy, and we have an average gain of 65%.

Changes over the past week:

AppFolio (APPF) upgraded to Buy


AppFolio (APPF) made a monster move this week, rallying from $44 to $50 and blowing through resistance around $46 in the process. It’s going to take some work to get through $52, and we could easily see a pullback and some sideways action before anything major happens to the upside. But with earnings coming out a week from Monday, and renewed buyer interest after five months of very little movement, shares of AppFolio are back on the buy list. The property management software vendor should grow revenue and EPS by 26% and 16%, respectively, this year. BUY.
Announced Earnings Date: Monday, April 30

Apptio (APTI) will also report earnings a week from Monday. We’ll likely know more about the company’s recent certification in FedRAMP, a government-wide program that provides a standardized approach to security assessment, authorization and continuous monitoring for cloud products and services. Apptio has also been introducing less expensive software solutions for smaller companies, so expect commentary around this initiative, which is helping drive estimated 2018 revenue growth of 18%. Then there’s the convertible debt offering of around $230 million, which suggests an acquisition is in the relatively near future, though I suspect management will not say much on this topic. Shares are bumping up against resistance around $30. Keeping at Buy. BUY.
Announced Earnings Date: Monday, April 30

Arena Pharmaceuticals (ARNA) rebounded nicely off $34 this week. The CEO made a brief appearance on CNBC to talk about the two main pipeline drugs, ralinepag and etrasimod. He also touched on APD371, a (hopefully) non-addictive, non-opioid drug being studied for abdominal pain associated with Crohn’s disease. Management has said there are currently no non-opioid drugs developed for visceral pain (inflammatory bowel disease (IBD), pancreatitis, etc.), and that the high selectivity of APD371 might both decrease off-target activity and treat visceral pain. Very little value has been assigned to APD371, but that could change depending on Phase 2 data, which is expected by the end of June. BUY.

AxoGen (AXGN) is another one of our stocks that’s bumping right up against resistance. We’ll have a much better idea of where it’s going next after it reports a week from Monday. We might get some commentary about capital needs as AxoGen expands its product lineup. Management has said revenue should grow by at least 40% this year, while the EPS loss should decrease by around $0.04, to $-0.27. I’m sticking with Buy, just keep new positions small. BUY.
Announced Earnings Date: Monday, April 30

Everbridge (EVBG) has come right up against resistance at $39 and, like many of our other stocks, I suspect the stock won’t do too much until earnings come out. We have just over two weeks to wait so keep new positions small. Analysts currently see revenue growth of around 35% this year and EPS of around $-0.24 (up $0.06 from 2017). As I’ve been saying, those figures will likely change a little as the impact of UMS becomes clearer. BUY.
Announced Earnings Date: Monday, May 7

Instructure (INST) is still trading around its 50-day line after an uneventful week. Again, it’s going to be all about earnings here (estimated revenue growth is 31% in 2018), though Instructure has roughly 10% upside before it comes up against resistance, so there could be a little more movement over the next week. The company announced that it won the Cool Tool Award in the Testing & Assessment Solution category from EdTech Digest, an online educational publication. This is the fourth time Instructure has won the award over the last five years. BUY.
Announced Earnings Date: Monday, April 30

LogMeIn (LOGM) is having a good week after crossing back above its 50-day line for the first time in three weeks. The stock’s been range-bound in the $110 to $129 zone since mid-October but with earnings coming out next Thursday there’s potential for that to change soon. We’re going to hear a bunch about the Jive Communications integration as well as the broader growth strategy, and analysts will be paying close attention to management’s comments regarding its target growth rate now that it has exposure to the Unified Communications-as-a-Service market, which should mean average revenue per user will go up. With a significant user base to cross-sell into there’s considerable upside for LogMeIn, and a few analysts have upgraded the stock in recent weeks with price targets around the $145 mark. Keep Holding. HOLD HALF.
Announced Earnings Date: Thursday, April 26

MiX Telematix (MIXT) 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. Customers are well-known companies including Baker Hughes, BP, Chevron, DHL, Halliburton, Nestle, PepsiCo, Schlumberger, Shell and Total. Energy customers makes up over 20% of its revenue base, and the strength in oil is helping this segment of the business, though MiX appears to be doing well almost across the board.

In my report on MiX Telematics, I was light on details regarding South Africa, where the company is based. MiX derives 56% of revenue from Africa. Today, I want to give a little more color on that subject.

Analysts are generally positive on the South African economy and asset prices over the next year or two. This perspective is largely due to a changing political cycle now that Jacob Zuma has resigned from the Presidency (amid scandals) and Cyril Ramaphosa has been confirmed (in February).

While there remain structural challenges—such as high unemployment, a poor education system and inefficient labor markets—which need addressing before the South African economy can grow at a reliably strong rate, analysts see a higher probability that positive long-term reforms can now begin to take place.

It appears that at this point in the cycle, investment is going up, as are GDP forecasts (just increased to 1.7% growth from 1.4% by central bank policymakers, though some analysts see closer to 2.3% growth). While the aforementioned structural reforms are needed to set the long-term course, in the shorter term, analysts see disposable income going up, along with consumer and business confidence.

The South African Reserve Bank (SARB), which oddly enough is privately owned, has been cutting rates (latest cut was in late-March, to 6.5%), and recently extended the horizon over which it plans to raise rates. That means a higher likelihood of more cuts, or at least standing pat, which could help drive investment.

At the top of the list of concerns is turmoil at the state-owned utility Eskom, which supplies around 95% of South Africa’s electricity. Most of this power comes from burning coal, which is apparently in short supply. This comes as the utility is trying to recover from a financial and leadership crisis, and word on the street is another taxpayer funded capital injection will be necessary later this year. While confidence in new leadership at Eskom is strong, debt levels remain high, and revenue is regulated. This problem is likely to persist for some time. I’ve also heard that the South African Revenue Service (our version of the IRS), South African Airways (SAA) and the Cabinet of South Africa could all be reformed. That would be a good thing.

Then there’s the African National Congress’ (ANC) adoption of a resolution calling for land expropriation without compensation in an effort to redress lingering racial disparities in land ownership two decades after the end of apartheid. Roughly 20 million acres of land have been transferred to black owners since apartheid ended, but that’s only a third of the 30% target set by the ANC in 2014. This is a complicated matter, but the analyst commentary I’ve read suggests it could be quite disruptive. It is something to keep an eye on.

mixt chart

These are big challenges for South Africa, to be sure. But so far, analysts have seen positive signs in the few months since Ramaphosa took over. Often, “bad to better” or “less bad to slightly better” stories (depending on your perspective) are the opening chapter of “good-to-great” stories. And if South Africa is on a path to good-to-great that should be good for MiX Telematics, albeit somewhat indirectly.

Remember, MiX sells software solutions to help keep assets safe and protected. In some ways it benefits when there are higher risks for fleet managers. But it’s not just a South African story, or even just an Africa story (see breakdown of revenue above). Expected revenue and EPS growth in 2018 are 10% and 61%, respectively. The company also pays a dividend and has been buying back shares. Shares are in an extended uptrend and recently jumped up to a 52-week high. It’s a Buy. BUY.

Q2 Holdings (QTWO) was moved back to buy a couple of weeks ago and has reacted by breaking out to a fresh 52-week high! We now have an earnings date of May 2. 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). Keeping at Buy, just keep new positions small. BUY.
Announced Earnings Date: Wednesday, May 2

Rapid7 (RPD) traded just above its 52-week high on Wednesday and is now trying to figure out where to go from here. Security stocks have done relatively well lately (I also like Qualys (QLYS), which just broke out to a 52-week high), owing to the mission-critical nature of protecting digital assets. 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