Thursday marked the first day of somewhat significant turbulence in our portfolio in what seems like forever, but indications are that Friday will be back to business as usual, at least for the first part of the day. Generally speaking, the market appears calm, if not a little complacent, despite all the trade war sparring going on between the White House and pretty much every other leader out there.
The trend in small caps looks terrific, with the S&P 600 Index moving higher over the past week and sitting at an all-time high.
With another weekly gain the index is now up almost 11% year-to-date, led by gains in health care, technology and energy. Interestingly, large-cap technology has roared back and is now leading small caps in that sector.
Same as in recent weeks, I’m keeping most stocks at buy, but recommend averaging in with smaller position sizes at current levels. Pullbacks are likely to come during the summer months. But we don’t want to try to predict a market retreat given that revenue and earnings growth look good and GDP growth is starting to look even better than expected (last Friday the Atlanta Fed’s GDPNow model boosted Q2 2018 real GDP to 4.8% from 4.7%).
Bottom line – let’s continue to go with the market but manage risk by not going in too hard and fast with new positions. Average in!
Updates
AppFolio (APPF) is a provider of cloud software solutions for the property management and legal industries and is one of the more efficient businesses out there when it comes to keeping customer acquisition costs down and generating decent returns on each subscriber over time. While I like the business, the stock has been on tear since early-April, so I moved it to hold a couple of weeks ago. Shares dipped yesterday but it was just a one day move and not the consolidation phase that I want to see before I move back to buy. We’re up around 95%. Keep holding. HOLD.
Apptio (APTI) specializes in Technology Business Management (TBM) software, a category it essentially created. TBM software helps large organizations manage their technology spending, and the fact that many clients pay Apptio over $400,000 a year is testament to the value they receive. As the technology plays an increasingly important role in organizations Apptio becomes a strategic partner, and given the trends (cloud, digitization, Internet of Things, etc.) I believe the company has a very bright future. Management spoke at the Bank of America Merrill Lynch Global Tech Conference on Tuesday and will speak again at the Nasdaq 38th Investor Conference in London (June 12), followed by a presentation at the TBM Council’s annual European TBM Summit in London on June 14. It’s still a Buy. BUY.
Arena Pharmaceuticals (ARNA) was essentially flat this week as management takes a break from the conferences it had been attending in prior weeks. There’s nothing new to report, and the stock’s pause is well-deserved. We’re up around 23%, and shares are up nicely over the past two months, trading near a 52-week high; a break is warranted. Over the coming months we’ll be hearing more about the initiation of Phase 3 trials for both Etrasimod and Ralinepag, cardiopulmonary pipeline expansion, and an early data readout from the Phase 2 trial for olorinab. Keeping at Buy. BUY.
AxoGen (AXGN) makes implantable nerve repair solutions that help restore feeling and function for patients that have been injured, are recovering from surgery, or have damaged nerves for myriad other reasons. The company has been growing revenue by more than 40% and management thinks it can keep up that pace for at least a little while longer, especially as it enters new markets (including breast reconstruction neurotization). This is part of why we’re up 190%—growth is still going strong! AxoGen has also loaded up its bank account and paid off debt by completing a secondary offering a few weeks ago. Shares were a little extended after a big move late last week but have come back in over the last two days. The trend is strong here so I expect to keep at Buy, just be sure to average into a position to spread out your cost basis. Management will give a business update during presentations at the William Blair Annual Growth Stock Conference on June 14, and the JMP Securities Life Sciences Conference on June 20. BUY.
Everbridge (EVBG) sells cloud-based critical communications software that is used by businesses, municipalities, states and countries to keep people safe and businesses running during critical events, such as natural disasters, severe weather, active shooter situations and terrorist attacks. The company also has a growing cybersecurity product in its IT Alerting solution. It recently acquired Unified Messaging Systems (UMS), which extends its alerting businesses reach throughout Europe. While the underlying need for the software is unfortunate, the demand for what Everbridge does is undeniable, and the company has been executing well. There appears to be a long runway for growth, and revenue should be up around 34% this year and 26% in 2019. Management presented at the Bank of America Merrill Lynch conference on June 6, now heads to the Stifel 2018 Cross Sector Insight Conference on June 11, and the William Blair Annual Growth Stock Conference on June 12. The trend is strong and keeping at Buy. We’re up around 200%. BUY.
Instructure (INST) sells a variety of learning management and collaboration software solutions to schools (K through higher ed) and businesses. Revenue growth should be around 31% this year and 26% next, but the stock isn’t all that well-known and I believe the market is waiting for the new corporate learning solution, Bridge, to show more traction, and for a better sense of how this year’s education buying season goes, before assigning a greater premium to shares. The stock has been consolidating in the 40 to 44 range for several months. As I’ve been saying, this is a good range within which to be accumulating shares. Keeping at Buy. BUY.
IntriCon (IIN) is our newest addition and is in the process of trying to disrupt the hearing aid market as deregulation is likely to open up the over-the-counter (OTC) category of hearing aids. This, along with other industry trends, is likely to make it far easier for consumers to buy hearing aids online, and IntriCon is not only a provider of hearing aids to many online sellers, it also has its own eCommerce platform, Hearing Health Express (HHE), which it recently acquired. The hearing aid market is evolving quickly and IntriCon could be on the cusp of a major breakthrough given its foray into self-fitting hearing aid software, which is expected to be integrated into the HHE website later this year. Also, IntriCon is a major provider of components for Medtronic’s (MDT) continuous glucose monitors (CGM), and that business is absolutely booming for Medtronic. So much so that IntriCon is expanding its manufacturing footprint so it can handle the growth in business from Medtronic (and other, smaller customers), as well as pursue new growth opportunities. It’s an interesting business that’s profitable now. You should be sure to read my full issue on IntriCon, if you haven’t yet. IntriCon is a Buy. BUY.
LogMeIn (LOGM) is still trading near the low end of its recent range as the stock looks to be consolidating around the 108 level. We’ve held the stock for a better-than 80% gain, and with the market cap now too big to move back to buy the ultimate question here is: Do we keep holding through this extended pause (ultimately, I see shares of LogMeIn heading much higher), or do we move on and put the capital to work elsewhere? I think the shareholder base is changing given the size of the company and that the significance of recent acquisitions (GoTo and Jive Communications) has led to some of the lackluster performance in recent months. This is a talented management team and these big acquisitions will likely pay off, it’s just a matter of when that begins to show up in the stock’s price. For now, I’m content to Hold. HOLD HALF.
MGP Ingredients (MGPI) is our whiskey-and-food ingredients stock and shares continue to march higher more or less in lockstep with their 50-day moving average line. Management hosted an analyst day yesterday at its Lawrenceburg, Indiana facility. The webcast replay, along with a bunch of videos featuring its branded spirits offerings (Till Vodka, Rossville Union Rye Whiskey, etc.) is available for viewing on its Investor Relations website. The presentation is about 1 hour 15 minutes long, and I haven’t made it through all of it yet. The stock remains a Buy. BUY.
MiX Telematix (MIXT) is our South African-based provider of fleet management, driver safety and vehicle tracking software solutions. The stock looks like it’s consolidating, but in fact shares have been grinding slowly higher, making higher highs and lower lows, after a nice rally in May. Management will present at the William Blair Annual Growth Stock Conference on June 12. The company announced that it has released MiX Integrate, a new and improved API platform that allows customers to integrate third-party software solutions with MiX’s core solutions. These API’s allow customers to extract data, such as payroll, transport management systems, etc., from the MiX platform and integrate that data into their own business systems. It’s an incremental positive. As I’ve been saying, the stock’s trend is powerful so I’m likely to keep at Buy until we get a significant break below the 50-day line. BUY.
Q2 Holdings (QTWO) sells cloud-based virtual banking software solutions and is well positioned to keep growing as deregulation, rising interest rates and positive industry growth spur financial institutions to increase spending on technology. Shares have been working their way higher, albeit slowly, largely because 20% plus annual growth looks to continue for several years. Current consensus estimates suggest revenue growth could accelerate in 2019. Keeping at Buy. BUY.
Rapid7 (RPD) sells cybersecurity software and is in the final innings of transitioning to an all-subscription pricing model. The stock looked ready to break out to a fresh all-time high this week but pulled back at the last minute yesterday as the broad market fell. Still, the uptrend remains intact so keeping at Buy. Rapid7’s transition to subscriptions, along with the release of new cloud-based solutions and an expanded portfolio of products, suggests good things for the future. BUY.
