The S&P 600 Small Cap Index broke out to a fresh all-time high this week and is now officially above the 1,000 level! I suspect that milestone isn’t going to make many headlines, but in our little corner of the world it’s kind of a big deal.
Also noteworthy are the absolute and relative performances of the small-cap index, and small-cap sectors, year-to-date (YTD). As the chart below shows small caps are now up 7% YTD versus a 2% gain in the S&P 500. We are outperforming in most industries, with particularly strong showings in healthcare, energy and information technology.
Most of our exposure is in information tech and healthcare, specifically software, medical devices and biotechnology. Action has been subdued since last Friday since we haven’t had any more companies report quarterly results. But we did see a nice pickup in demand for shares of Arena Pharmaceuticals (ARNA), which rose 10% in the week.
There are no ratings changes today. But same as last week, I suggest keeping new purchases small given the recent surge in many of our stocks.
Updates
AppFolio (APPF) hasn’t done much over the past week but that lack of movement is a victory as far as I’m concerned. Shares blasted off an extended base in early April then continued to climb after first-quarter earnings were reported. In the process, AppFolio blew through its previous all-time high around 52 without skipping a beat. That strength suggests super-high demand for shares. That said, shares are now up 40% since the beginning of April and without a known catalyst on the horizon we could move sideways for a while. Don’t be surprised if the stock dips back near its previous high. What’s most important is that it holds that level (around 52). Technically, I’m keeping at Buy. But I suggest limiting buying to the 52 to 55 range, for now. BUY.
Apptio (APTI) has been a little jumpy lately but found support at its 50-day line early in the week and is making a move back near its 52-week high. A number of analysts increased their price targets after the company reported a Q1 beat. The stock isn’t as extended as some others in our portfolio, so you can pick up a few more shares around this level. BUY.
Arena Pharmaceuticals (ARNA) sent its management team to the Bank of America Merrill Lynch Healthcare Conference in Las Vegas yesterday, and they’ll move on to the UBS Global Healthcare Conference in New York City next Tuesday. Generally speaking, biotech stocks have performed well over the past week, and small-cap healthcare stocks have been on fire (up roughly 20% year-to-date, versus around 1% for large-cap healthcare). I think that tailwind has helped Arena a little, but with shares up 9% over the past week and 30% since mid-April this is more about the stock than the sector. Arena just broke through resistance at 44.
I reviewed the transcript from the Bank of America conference. There were a lot of details, but the meat of the discussion is that Arena’s management team believes both Etrasimod and Ralinepag are best-in-class drug candidates and their trial designs are intended to not only show that the drugs are effective, but that they are better than others currently on the market (and expected to come to market).
In the words of CEO Amit Munshi, “…we’re targeting multiple therapies with over $30 billion worth of market opportunity. We’ve demonstrated important Phase 2 data on both of our lead compounds Ralinepag and Etrasimod. We retained rights in all major markets… We have the Olorinab data coming out in Q3. We’ve got the multiple Phase 3 initiating on Ralinepag in the second half of ’18. We have Etrasimod initiation of Ulcerative colitis... The second half of this year to discuss both Ulcerative colitis and Crohn’s disease. We expect a readout on PBC in this timeframe. And importantly we have an additional cardiovascular Phase 2 compound that will be moving forward a new compound that’s part of our treasure chest of fantastic products and we’ll be discussing that in the fourth quarter of this year. We anticipate doing an Analyst Day in early-October and we look forward to sharing more information, timelines and additional catalysts for the next 18 months at that time.” I like the stock. It’s a Buy. BUY.
AxoGen (AXGN) closed its $132.5 million secondary offering on Monday at $41 a share, which is slightly below where the stock is trading right now. The company said the cash will go towards long-term facility and capacity expansion, as well as general corporate purposes. As I’ve said before, it’s not surprising the company is raising capital here and given the growth profile investors aren’t overly concerned about the dilution. I’m keeping the stock at Buy. BUY.
Everbridge (EVBG) delivered a terrific first-quarter report last Monday and shares have responded by going up, up, up (other than on Monday, but we’ll give it a pass on that day)! Revenue was up 31% to $30.5 million (beating by $900,000) and EPS of -$0.17 beat 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 as I said last week, management left the door open for accelerating growth. I’ve seen a number of price target increases, including several to 46 (the stock is at 44 now). While those targets might imply near-term upside is limited, the stock’s trend suggest any little dips will be bought. So, I suggest buying on the dips. BUY.
Instructure (INST) is one of the few software stocks in our portfolio that’s not trading at a 52-week high, despite another reported beat on the top and bottom a few weeks back. Trading volume is relatively light here and I think there just aren’t that many investors following the story. If/as Instructure’s corporate learning product (Bridge) grows, and the company moves through this year’s academic buying calendar (which should be very good for it), I think this will change. Keeping at Buy. BUY.
LogMeIn (LOGM) has been in a rut since the stock topped out at 134 in mid-February. Since then the pattern has been mostly one of lower highs and lower lows, though, notably, shares found support for the third time at 110 this week (after doing so in early April and early May, too). I’ve talked a lot about the acquisitions of GoTo and Jive and how that leads to a lot of integration and, frankly, a vastly different company than LogMeIn was back when we first stepped into the position. But if you just look at what LogMeIn is right now, you see a collaboration software company with a market cap of $5.8 billion that’s expected to grow revenue by 19% this year and 9% next year, and EPS by 24% this year and 14% next year. The absolute value of expected EPS is big; $5.30 per share this year and $6.05 next year. Plus, LogMeIn now pays a dividend of $1.20, which works out to a yield of 1%. I should point out that LogMeIn has failed to exceed earnings expectations only a couple of times in several years, so, while there are a lot of moving parts with the acquisitions, it’s fair to assume management is issuing conservative guidance. My overall point here is that this is a good company—the stock just isn’t performing all that well (relatively speaking). On the other hand, it isn’t falling apart either. Let’s continue to Hold. HOLD HALF.
MGP Ingredients (MGPI) is our new whiskey and food ingredients stock and was picked up after a big pullback following the release of first-quarter earnings a few weeks ago. Management said the revenue whiff was mostly because of the timing of customer orders in the distillery segment, which seems plausible. That said, one of the topics of discussion in the beer, wine and spirits world is whether or not there is a slowdown going on in U.S. spirits consumption. And any issues on MGP’s topline growth—real or perceived—can easily fuel speculation that the “rumor” is true.
That said, management did a fairly good job to alleviate that concern. Regarding market trends, spirits consumption has been trending along at around 4%. Some recent Neilson data suggests slowing in certain segments, and management from Pernod recently said it sees growth in the 3% to 4% range, implying a modest deceleration. On the other hand, management from Diageo feels good, and says it sees 4% growth continuing. It’s important to note that MGP participates more in the craft whiskey segment, so there’s no direct read-across from the big player’s comments—it just helps to round out the conversation.
I got my hands on a bi-annual proprietary distributor survey from Morgan Stanley, which suggests that over 50% of U.S. distributors feel good about the next six months (about the same proportion as six months ago). Most important for MGP, and according the Morgan Stanley, “The premiumization outlook remains solid, driven by dark spirits, which implies further positive mix…”. According to Morgan Stanley’s survey, just about all their distributors are expecting sales of U.S. Whiskey (bourbon, rye, etc.) to grow (the outlook for vodka isn’t great), and the overall positive outlook skew was the second highest since they started doing their bi-annual survey five years ago.
From what I can tell younger drinkers (millennials) are gulping down spirits, many are switching from craft beer to whiskey (and lots of rye whiskey) because they’re looking for something new, and because you can mix spirits with other beverages to create different drinks there may be legs to the “mixology” trend. The bottom line is that MGP is a great way to play this trend, as well as growth in the value-added wheat protein and fibers market (part of MGP’s Food Ingredients segment). And, MGP is growing its stable of self-branded spirits, including its latest addition to the lineup, Rossville Union, a proprietary rye whiskey named after its Lawrenceburg, Indiana distillery, which was founded in 1847 as Rossville Union. Price point should be around 40 bucks for the 94 proof Straight Rye variety, and 70 for the high test (112.6 proof) Barrel Proof Straight Rye variety. The company will webcast its 2018 Annual Shareholders’ Meeting next Wednesday at 10:00 a.m. (Central Time). 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. The stock jumped after reported fiscal Q4 results late last week. Revenue (in constant currency) 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. 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.
Shares went absolutely nuts in the days after the report came out, spiking as high as 21 before demand subsided. A few down days have followed, which isn’t surprising given the intensity of the rally. The stock’s trend is strong, so I expect a period of consolidation (not a big retreat) before we get another leg up. You can use this period to pick up more shares. BUY.
Q2 Holdings (QTWO) is holding on to its post-earnings report gains and can still be bought, just keep new positions relatively small. The company has the wind at its back with positive forces—including tax reform, rising interest rates and a strengthening technology investment environment for financial institutions—likely to benefit Q2 for several years. BUY.
Rapid7 (RPD) has pulled back modestly from last week’s all-time high, mainly because the company launched an offering from existing shareholders, who are sold 3 million shares at 30.25 (which is right near where the stock is now). This non-dillutive offering will increase liquidity and won’t affect EPS. The stock should work through it just fine. Keeping at Buy. BUY.
