This was another big week for our portfolio as four stocks reported quarterly results. Fortunately, the wind was at our backs as the broad market is on track for its best weekly gain since March! The main reason circulating the wires is that soft U.S. inflation numbers helped ease concerns that interest rates would go up more in the near term. However, we have also seen encouraging earnings reports (though I haven’t reviewed market-wide, aggregated results), which I suspect has played heavily in the market’s advance.
The bottom line is that all sectors across both the small- and large-cap asset classes were up over the past week, except for large-cap utilities (where we will probably never have exposure!).
In our portfolio, all but one of our stocks has risen since last Thursday’s close. Coincidentally, this was the exact same scenario that played out last week when LogMeIn (LOGM) declined by 6%. This week it was Apptio (APTI) sitting on the bench (it was down 3%). For the record, LogMeIn came back into the game to jump 5% this week.
All other positions went up, led by a 12% gain in Everbridge (EVBG), an 11% gain in MiX Telematics (MIXT), a 9% gain in Rapid7 (RPD), an 8% gain in AppFolio (APPF) and a 7% gain in AxoGen (AXGN).
All in, our average gain over the past week was 6%.
With that push, we now have several stocks posting gains of better than 100%, with an average gain of 73%.
As I said last week, let’s celebrate this performance, but not go too crazy patting our own backs. The market has been kind to us lately but will knock us down again at some point. That said, I’ve been reviewing a lot of earnings calls from stocks on my watch list. And I’m seeing plenty of exciting opportunities, coupled with a lot of raised guidance for 2018. To me, this suggests plenty of room for more profitable ideas in the coming months.
I still like all our stocks, so there are no changes this week. That said, with the recent run in many positions we could easily see some profit-taking and/or consolidation periods in the near term. It’s probably a good idea to keep new positions on the small side.
Updates
AppFolio (APPF) broke out to fresh highs after reporting last week and with the surge we’re now up over 87% on the property management software stock. As the chart below shows, we held on through a pretty solid pullback and consolidation period. But with AppFolio never really breaking below its long-term moving average lines it seemed appropriate to maintain the position. I’m glad we did. First-quarter earnings were highlighted by new Value+ services and high value subs driving 32% revenue growth and an EPS beat of $0.07 (reported EPS was $0.12). At some point management will reveal its next vertical expansion (in addition to Property Management and Legal), but for now, it appears investors are happy to buy into the existing story since it’s delivering growth. Notably, competitor RealPage (RP) also reported a good quarter and shares of that $5 billion market cap company are on the rise. It’s another stock to consider if you want more exposure to the Property Management/Rental software market. Keeping AppFolio at Buy, but suggest smaller purchases given the recent run. BUY.
Apptio (APTI) was our only position to pull back this week but I’m fine with a modest 3% retreat after shares have walked 40% higher in five months! The company beat expectations last week when it reported revenue growth of 23% and EPS of $0.00 (which beat by $0.06). The results were driven by seasonally strong large strategic deals, strong enterprise deal flow, renewals and upsells, and initial contribution from the Digital Fuel acquisition (closed in February). Management is also encouraged by Apptio’s FedRAMP certification, but noted that will put them in the conversation, not guarantee they win deals. Expect to hear more about deals with the federal government over the next year. Keeping at Buy. BUY.
Arena Pharmaceuticals (ARNA) reported this week and it was pretty much a non-event, as was expected. We learned a little more about trial design, and that management pushed back the Phase 2 data readout for APD371 (now olorinab) for abdominal pain associated with Crohn’s disease given that it’s prioritizing internal resources on the other two Phase 3 programs (etrasimod and ralinepag). The next big event is an R&D day in October when Arena’s management plans to give a more in-depth review of trials, which should be going strong at that point. In the meantime, we should get incremental updates at a few investor conferences, including the Bank of America Merrill Lynch Healthcare Conference in Las Vegas on Thursday, May 17, and the UBS Global Healthcare Conference in New York on Tuesday, May 22. This type of stock is likely to be volatile in between catalysts so don’t be surprised if shares bounce around for a few months. We’re looking for stair-step increases in value upon positive trial results. There should be little risk of another equity raise for a while given that Arena recently completed one and has roughly $630 million in the bank. BUY.
AxoGen (AXGN) delivered in-line Q1 results last week and pledged better than 40% revenue growth for the year, with upside potential. The big-picture story here is an expanding portfolio of nerve repair products and an expanding market which now includes oral and maxillofacial and breast reconstruction neurotization. AxoGen is also adding to its sales team. The big news this week is that AxoGen launched a secondary offering (initially announced at two million shares, but increased to three million), priced at $41. Demand for shares appears to be huge! Not only was the offering increased, but the price was only a modest discount to where shares were trading when announced. The stock has since gone up on higher-than-average trading volume. It appears to me that investors will take all the shares they can get their hands on. We’re up 170%. Keeping at Buy. BUY.
Everbridge (EVBG) reported on Monday and shares of the critical communications software provider have climbed following the better-than-expected report. Revenue was up 31% to $30.5 million (beating by $900,000) and EPS of -$0.17 beating by $0.03. The quarter was highlighted by 49% of revenue coming from new products (other than the core Mass Notification solution), 100 new customers (up to 3,811), more multi-product deals, and 19 six-figure, or larger, deals. Guidance for 2018 implies 30% revenue growth but based on the conference call management left the door open for accelerating growth.
This story appears to be getting better and better and, as I’ve stated before, I won’t be surprised if we see more states jumping on board with Everbridge for state-wide deployments. As the company grows in scale the sales pitch likely gets easier given the benefits to users who can rely on one platform across city, state and even country borders. The stock’s chart looks great with the post-earnings run carrying EVBG to a new all-time high. We’re up 175%. Keeping at Buy, but expect a period of consolidation in the near future. BUY.
Instructure (INST) reported another beat on the top and bottom line last week and the results have given the stock a little lift. As you can see in the chart below, Instructure had pulled back prior to earnings, but is now trading just above its 50-day line. With revenue growth of around 30% and a new corporate learning product (Bridge) moving towards 15% to 20% of total revenue the company has a very attractive profile – I just think it’s still not all that well-known. That will change. Instructure is a Buy. BUY.
LogMeIn (LOGM) was kicked down the stairs after reporting Q1 results a couple weeks ago but has been climbing back over the last nine sessions. Shares are on the verge of breaking above their 50- and 200-day moving average lines. That said, for the last three month the pattern has been one of lower highs and lower lows, which is discouraging. The ultimate question is this: do we hold on to LogMeIn, or sell it and put the capital to work in a younger company with faster growth? This is one of those questions that doesn’t have a “right” answer in the present. You’ll only know in a decade or more after giving management the chance to build the company. I’ve been impressed with the management team in the past and find the addition of the GoTo and Jive Communications compelling. For now, keeping at Hold. HOLD HALF.
MGP Ingredients (MGPI) is our new whiskey and food ingredients stock and was recommended last Friday, just a couple days after a big post-earnings report selloff. In Q1 2018 results came in lower than expected due to the timing of customer orders in the distillery segment. Revenue growth of 1% to $88 million missed by $4.8 million, while EPS of $0.52 missed by a penny, despite the benefit of a lower tax rate. By segment, sales of distillery products were up 0.6% while sales of food ingredients were up 2.7% (a strong showing). Distillery segment gross profit dipped to 21.3% from 22.5%, while food ingredient gross profit margin surged to 22.7% from 18.4% (a huge result) as demand for value-added wheat proteins and fibers jumped. The company ended the quarter with almost $68 million in aged whiskey in inventory (at cost).
Despite the Q1 miss, management reiterated its prior guidance, which calls for 2018 revenue growth in the high single digits and operating income growth of 10% to 15%. In 2019, management still sees 15% to 20% operating income growth, driven in large part by sales of more valuable aged whiskey.
MGP is doing a little do-si-do here, where it’s making a bunch of whiskey to age and sell later at a higher profit margin, while also trying to sell some that’s relatively young to capture revenue now, but at a lower profit margin. For understandable competitive reasons, management isn’t going to disclose exactly which whiskey it’s selling and in what quantities—we just have to look at the gross margin trends and, to a certain degree, trust in guidance. The company has been doing well for many years and appears to be at or near an inflection point in profit growth, implying management’s strategy to sell higher margin products is working.
I think the pullback in shares is a buying opportunity. So far, that looks to be the right call. Shares of MGP Ingredients are up 4% since I added it to the portfolio and have rebounded well above their 50-day line. BUY.
MiX Telematix (MIXT) is our South African-based provider of fleet management, driver safety and vehicle tracking software solutions. The company’s 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.
In some markets—such as South Africa where vehicle theft rates are high—MiX serves many consumers and small fleet operators. These customers typically purchase relatively simple and inexpensive subscriptions focused on vehicle monitoring, safety, security and driver performance. Larger customers typically purchase subscriptions to premium, enterprise fleet management solutions that can be scaled up or down depending on the individual customers’ needs.
I recommended the company at the beginning of April and we received results for the company’s fiscal Q4 2018 yesterday morning. This is one of those stocks where it takes some effort to get through the earnings results since it reports in African Rand as well as U.S. dollars. Once you get over the fact that you need to do a little extra work however you realize it’s worth it. Shares surged 7% yesterday, are indicated higher today, and are now up over 20% in five weeks!
On a constant currency basis, using U.S. dollars, revenue was up 18.7% to $38.4 million, propelled by 14.6% growth in hardware sales (to $6.8 million) and 19.4% growth in subscription revenue (to $31.6 million). Average revenue per user was up, and adjusted EPS per American Depositary Shares (ADS) was $0.20, up from $0.11 a year ago. Subscription growth in Africa was 13% and in the U.S. was an impressive 74%. Growth in Europe was a little slower than expected. Management said the rebound in the price of oil is helping.
Management also gave us guidance for fiscal 2019. In constant currency, MiX is calling for subscription revenue growth of 13.5% to 15%, revenue growth of 9.1% to 10.9%, and adjusted EPS per ADS of $0.59 to $0.63. This guidance is better than expected.
I listened to the conference call but haven’t yet had time to review the transcript to make sure the additional details I disclose are accurate. I will do that and fill you in next week. The bottom line here is the story is intact and MiX is a buy, buy, buy! BUY.
Q2 Holdings (QTWO) surged after reporting last week and has gone on to rally well above previous highs. As I stated last week, there was an interesting disclosure on the conference call as part of Q2’s shift to the new ASC 606 accounting method. This was the disclosed backlog of around $750 million, of which over $700 million is subscription backlog. I believe this look behind the curtain made a lot of analysts sit up and take notice, and when combined with tax reform, rising interest rates and a general sense that financial institutions are investing in technology to help secure their competitive positioning, the future looks good for Q2. This week the company announced the launch of Biller Direct, a modern bill pay service that is intended to help clients get customers to use their bill pay service instead of paying directly through billers’ websites. Bringing those payments back in-house generates revenue for the bank. The product is built on Q2 Open. It’s a positive. Shares have been on a nice run here so be careful, but you can pick away at a few more shares, preferably on pullbacks. BUY.
Rapid7 (RPD) has been on the move higher after Q1 results were reported earlier in the week. Despite the annoying complexity of comparing results based on ASC 606/ASC 605 accounting standards, the report and conference call were both good. Analysts were legitimately impressed with the results, and especially 38% annualized recurring revenue (ARR growth). It appears clear that Rapid7’s move to a cloud-based subscription model, coupled with the release of updated products, including InsightVM, InsightIDR and InsightAppSec are driving sustained growth.
These solutions are all based on the company’s quickly evolving cloud-based Insights Platform, which launched in 2015. This platform combines vulnerability management, user behavior analytics-powered SIEM, IT log analytics and applications security data, and is designed to support large customers all over the world. The company has over 80 integration partners, including IBM, Splunk, HP, ServiceNow, Amazon, Microsoft, BMC and Slack.
Management guided for 2018 ARR growth of 33% (up from 30%), which means revenue of $231 to $236.7 million. That’s ahead of analyst expectations, which explains the strength in shares. Free cash flow will take a hit as Rapid7 ramps up investments in its salesforce, but that short-term headwind should pay off as Rapid7 lands more, bigger, clients. The story remains intact, so keeping at Buy. Shares are up 9% this week, and 22% since I recommended it two months ago. BUY.
