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Small-Cap Confidential
Undiscovered stocks that can make you rich

Cabot Small-Cap Confidential Weekly Update

With rapid adoption of cloud-based technologies, subscription software and online advertising, communication, commerce, etc., it’s apparent that technology companies play an increasingly important role in the global economy.


As is the norm, earnings season has driven renewed interest in the market and significant movement in stocks of reporting companies. We’ve seen shares of so-called bellweather stocks (there is no concrete consensus on the list of these stocks to my knowledge, so take my suggestions with a grain of salt), including Caterpillar (CAT) and 3M (MMM), sell-off on uninspiring forward guidance.

But the recent wave of tech earnings reports from Amazon (AMZN), Facebook (FB) and Microsoft (MSFT) have all been met with jumping stock prices.

This action raies the question: what are the best bellweather stocks for the modern economy?

With rapid adoption of cloud-based technologies, subscription software and online advertising, communication, commerce, etc., it’s apparent that technology companies play an increasingly important role in the global economy. There are pros and cons to be sure. But the bottom line is this: if you show me a company that’s not paying for some cloud storage (public, private or hybrid), and/or cloud-based HR, ERP, CRM, inventory, collaboration, design or any other specialized form of software, I bet we’d be looking at a dying company!

I’m not saying companies that benefit from sales of cloud-based solutions and software subscriptions are the only ones working in this market. They’re not. But there certainly are a lot that are working. And that’s why we continue to feature many in Cabot Small-Cap Confidential.

Next week, we’ll get earnings reports from four of them, as well as one health care stock. This week, we have earnings from just one company, LogMeIn (LOGM), which reported yesterday.

Changes over the past week:

None. But because it’s earnings season, I suggest keeping new purchases small, particularly for those stocks that have yet to report.

Next Week’s Earnings Calendar

Monday, April 30: APPF, APTI, AXGN, INST
Wednesday, May 2: QTWO


AppFolio (APPF) pulled back from a recent high of 50 this week but is still holding at a five-month high. Monday will be very interesting. The stock has taken a nice, long break. Provided results are good enough to keep AppFolio on track for revenue growth of 26% this year, we should see a nice lift in demand—especially if management can give a better idea of the game plan for future investments, whether that be in expanded Value+ services for the current Property Management and Legal verticals, or expansion into a new vertical. BUY.
Announced Earnings Date: Monday, April 30

Apptio (APTI) reports Monday. We’re looking for details on FedRAMP, the new, less expensive software solutions for smaller companies, and updated forward guidance. Current consensus for 2018 revenue growth is 18%. We would also love clues as to what the $230 million from the convertible debt offering will go to, which I suspect is an acquisition. But I bet we’ll get boilerplate commentary on that topic. Shares are still bumping up against resistance around 30. Keeping at Buy. BUY.
Announced Earnings Date: Monday, April 30

Arena Pharmaceuticals (ARNA) is still digesting a volatile couple of months that were highlighted by positive trial results and a big secondary offering. The stock is back above its 50-day line and we’re up marginally since I initiated coverage a number of months ago. As I’ve been saying, we expect to get Phase 2 data on APD371 for abdominal pain associated with Crohn’s disease by the end of June. Given the potential for non-opioid treatments for pain management this could be a big deal. The asset isn’t being assigned much, if any, value. But that could change if trial results are good. And in that scenario, Arena would be marching forward with three very interesting assets. Let’s not hope for a best-case-scenario since that would set expectations a little high given that drug development is notoriously risky. But at the same time, let’s recognize that the more these assets progress through trials the higher the probability of FDA approval becomes, and each time that happens the value of the company goes up considerably. BUY.

AxoGen (AXGN) is kind of like the little engine that could. It’s been trucking for quite some time now and the story gets better and better with each passing quarter. It’s still relatively small (market cap is $1.4 billion), and is growing very briskly (roughly 40%) in its very specialized market of nerve repair. From all the literature I’ve seen, the company is just beginning to tap into the market. Should its products continue to gain favor with surgeons —who aren’t exactly quick to adopt new techniques and materials—there is a lot of upside potential. We’ll get another look at the books on Monday, and possibly 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. BUY.
Announced Earnings Date: Monday, April 30

Everbridge (EVBG) won’t report until a week from Monday and given the stock’s muted action over the past week I don’t expect much movement until after the earnings report. Analysts currently see revenue growth of around 31% this year. As I’ve been saying, those figures will likely change a little as the impact of UMS becomes clearer. This week Everbridge announced a product integration with Cherwell, which sells enterprise service management solutions. Everbridge’s IT Incident Response Automation Solution will augment the capabilities of Cherwell’s IT Service Management Suite. BUY.
Announced Earnings Date: Monday, May 7

Instructure (INST) has been rebasing in the 40 to 43 zone for the past month and we’ll need to get the earnings report before the stock’s next move will be known. Recall that shares gapped up from 37 to 41 after last quarter’s report. Given that they’ve held that line since, it’s fair to assume big investors want to make sure there’s been good traction on the new corporate learning solution, Bridge, before they build on existing positions. Estimated revenue growth is 31% this year. BUY.
Announced Earnings Date: Monday, April 30

LogMeIn (LOGM) is by far our largest holding given its market cap of over $6 billion. We picked up coverage when it was worth about half that and have held on since we don’t have a mandate to cut stocks once they graduate to become mid-caps (or even large caps, if we’re so fortunate!). That said, I’ve had the stock at hold for some time since it’s also not our policy to direct money into stocks of companies that are this large.

Today is likely to be a volatile day for shares given their reaction to yesterday’s quarterly report. Even if shares close down around 10% today, I’m not likely to issue a sell notice right away since, for the most part, the earnings report was solid. There’s likely to be a lot of trading in the stock given that it’s a little big for small cap funds now (who might be selling) and could be being picked up by SMID and pure mid-cap funds. It may be best just to sit tight on it and let things shake out, while keeping an eye on the long-term trend line. But if it really starts to look unsettling, I may opt to sell it next week.

On to the report. LogMeIn delivered revenue growth of 39.4% to $280 million (beating by $2.8 million) and EPS of $1.21 (beating by $0.03). These results were above management’s guidance. Stripping out the acquired GoTo business, organic revenue was up 8%, which was also better than the roughly 5% to 6% organic growth the market expected.

Organic growth by segment: Collaboration was up 5% (54% of total revenue), Identity and Access Management was up 19% (30% of total revenue) and Services was up 1% (16% of total revenue). LastPass, a password management tool, continues to be one of the fastest growing solutions.

For 2018, the company is forecasting revenue of $1.2 to $1.22 billion, adjusted EBITDA of $442 to $450 million and adjusted EPS of $5.20 to $5.31. That revenue guidance is above expectations and implies around 17.6% growth, while EPS is below expectations. The revenue guidance is higher because the core business is doing a little better than expected (management is historically conservative on guidance, so no surprise here), plus we’re now adding in the Jive Communications revenue of around $71 million. The lowered EPS guidance is due to the Jive acquisition, interest on the debt portion of the deal and a higher depreciation level for the year. The lowered EPS guidance is one of the drivers of the stock’s selloff today.

The bottom line here continues to be that LogMeIn is setting the foundation for the next decade of growth with two major deals; first the GoTo acquisition (much of that acquisition work has been done by now) and now the Jive Communications deal, which opens ups a new $25 billion Unified Communications (UCC) market. Management sees the UCC and collaboration markets converging and feels having in-house solutions that cover the spectrum of market needs puts LogMeIn in a strong competitive position relative to competitors who need to rely on partnerships. This process does mean a lot of changes, and I think that’s what investors are now processing. One of them is integrating Jive and doing internal work to push up that business’ margins.

Thus far, the stock has been grinding through the acquisition activity just fine, though it hasn’t made much progress over the last year. Today, it’s not looking so hot. A dip into the 105 to 110 zone isn’t super concerning given we’ve been there within the last year. That said, we may not want to hold on if it closes there, then stays through next week. We could direct the capital into stocks that are doing better. On the other hand, it’s also entirely possible shares could rally back up to where they were prior to the report once a few weak hands are cleared away. We’ll just have to see what happens. For now, continue to Hold. HOLD HALF.
Earnings: DONE

MiX Telematix (MIXT) has been doing what we hired it to do as shares keep ticking higher at a nice, measured pace. Last year’s Q4 conference call was held on May 25 so I suspect we’ll have a similarly-timed report this year. MiX is a 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, and include Baker Hughes, BP, Chevron, Nestle, PepsiCo, Schlumberger and Total. Energy customers makes up over 20% of its revenue base, and the strength in oil is helping this segment of the business. Expected revenue and EPS growth in 2018 is 10% and 50%, respectively. The company also pays a dividend and has been buying back shares. BUY.

Q2 Holdings (QTWO) provides software to banks and credit unions and just jumped out to a fresh all-time high late last week. The company has an attractive business model highlighted by efficient customer acquisition costs and good forward visibility; over 90% of next twelve-month’s revenue is essentially locked in. The company has been actively forming partnerships over the last year, and just recently announced another one, this time with StoneCastle, a provider of insured cash solutions that permits deposits to be stored across a digitally linked network of FDIC-insured community banks. Q2 and StoneCastle have teamed up to offer Cambr to MoneyLion, which is a mobile personal finance and consumer lending platform that was started in 2013. Cambr will allow MoneyLion to offer deposit accounts and debit cards to its customers. In a nutshell, this seems like a fintech collaboration aimed at Millennials, so they can do more banking on their smartphones. Q2 will report next Wednesday. 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. BUY.
Announced Earnings Date: Wednesday, May 2

Rapid7 (RPD) probed a 52-week high last week and is at it again after yesterday’s 3.6% move. I honestly think the chance of a big move higher before earnings are reported a week from Tuesday is quite low, but you never know! Security spending is strong after a slow couple of years in 2016 and 2017, with a combination of refresh activity and new use cases (compliance, security analytics, cloud-based offerings, public cloud adoption, etc.) driving activity. Rapid7 develops security solutions that can be quickly installed and are easy to use. Revenue growth was 28% in 2017, when it crossed the $200 million threshold for the first time.

When it reports a week from Tuesday we’ll be looking for insight into the company’s progress tapping the emerging SecOps market, which brings together security and IT operations, as well as its transition to an easy-to-deploy Software-as-a-Service (SaaS) pricing model. Analysts are expecting 2018 revenue growth of around 15% and EPS loss of around $-0.50, a $0.10 improvement over last year. BUY.
Announced Earnings Date: Tuesday, May 8