Small caps were basically flat over the past week. Since the beginning of May, the S&P 600 Small-Cap Index has made a strong move above prior resistance in the 980 to 990 range. And even with a little dip on Wednesday, the index is sitting right near an all-time high.
The small-cap index probably would have eked out a slightly larger gain this week if not for the significant retreat in small-cap energy stocks, which were down 4.6% and which lagged large-cap energy stocks by a wide margin (see chart of small cap versus large cap performance by sector below).
We had another great week as our positions were up an average of 7%, led by an intense 26% rally in new position IntriCon (IIN) …
… which brings our average gain up to around 85%.
I’ll be the first to tell you that there’s a fair amount of luck involved in attaining these types of returns! But obviously, to capture them you first need to get into the right areas of the market, and then find good companies to ride the wave. With a heavy weighting of cloud software stocks and medical device stocks, two areas of the market I’ve talked about at all the Cabot Wealth Summits I’ve attended (and which you should come to this August!), we’re absolutely in the right places. And that’s no mistake. We’ll continue to ride this wave for as long as we can.
One note on cloud software stocks. You likely heard that Microsoft (MSFT) recently acquired GitHub, a privately-held company that’s built a coding collaboration site with around 28 million users. We don’t know GitHub’s revenue or profits, but Microsoft is paying $7.5 billion, which makes GitHub its fourth-largest acquisition. This is another endorsement for cloud-based applications and infrastructure. And I believe it’s helping push stocks with cloud exposure higher.
As I’ve been saying for a few weeks now, I’m keeping most stocks at buy since this rally could still have legs. But please take smaller positions and realize that these streaks do eventually peter out. And when the inevitable pullback comes, we want to have some capital available to pick up shares. I’m not going to try and predict when that will be. But it will come at some point.
Average in!
Updates
AppFolio (APPF) is a provider of cloud-based software solutions for small- and medium-sized businesses in the property management (AppFolio Property Manager product) and legal industries (Mycase product). It is an efficient business with relatively low customer acquisition costs and high returns. I moved the stock to hold a few weeks back given that the last time it traded at its current valuation shares made a significant retreat. However, this time around the stock has answered by going over 20% higher! We’re now up around 110% and I’m still keeping at Hold. Enjoy the ride. HOLD.
Apptio (APTI) was an early mover in the Technology Business Management (TBM) software category and sells a cloud-based suite of solutions that help IT leaders analyze, optimize and plan technology investments and benchmark financial and operational performance against peers. Popular use cases include helping companies navigate their transition to the cloud and targeting IT investments/resources to drive digital change and innovation. That’s a mouthful!
You could also just say Apptio makes software that helps companies manage their technology spending and make better decisions. Which is why the U.S. government has recently pre-approved the company to sell its SaaS solutions to federal agencies. Management spoke at both the Bank of America Merrill Lunch Global Tech Conference and the Nasdaq Investor Conference (in London) this past Tuesday, then presented at the TBM Council’s annual European TBM Summit in London on Thursday. I haven’t had time to listen to any of these presentations yet. I plan to keep the stock at Buy until the uptrend breaks. We’re up around 60% after the stock recently broke out to fresh highs. BUY.
Arena Pharmaceuticals (ARNA) is our sole biotech stock and is developing treatments for a broad range of immune and inflammatory conditions. The two most advanced assets are ralinepag and etrasimod, which are entering Phase 3 programs. Ralinepag (APD811) is intended to treat pulmonary arterial hypertension (PAH) and etrasimod (APD334) is a candidate to treat both ulcerative colitis (UC) and, in the future, will enter a program in Crohn’s Disease (CD). The company is also moving olorinab (APD371) into Phase 2 for the treatment of visceral pain associated with Crohn’s disease. Shares are up modestly this week but aren’t likely to make a major move until we get more data on the pipeline. Arena has multiple shots on goal, and both ralinepag and etrasimod could easily be best in class, if ultimately approved. Keeping at Buy. BUY.
AxoGen (AXGN) makes implantable products for peripheral nerve injuries. These injuries can range from something that happened at home, like a cut sustained while cooking, or something more dramatic like a car injury or battlefield wound. Surgeons and patients also turn to AxoGen for post-surgery nerve repairs. The company has been growing revenue by more than 40% (2017 revenue was up 47%) and management thinks it can keep up that pace for at bit longer, with the help of expansion into new markets, including breast reconstruction neurotization and neuroma. It has no debt, and $136 million in cash. The stock has been racing higher and we have a roughly 205% gain going. Management spoke at the William Blair Growth Stock Conference yesterday morning and will move on to the JMP Securities Life Sciences Conference on June 20. I caught part of the William Blair presentation, and it helped to reinforce my conviction in the durability of the company’s growth. One of the impressive things about AxoGen’s solutions is that they are literally off-the-shelf implants. That means (and I’m simplifying a little here) that a surgeon who is an AxoGen customer can go to the fridge and pull out a nerve repair solution and put it right in the patient’s body, without having to cut into their heel (or other area) to harvest nerve repair material. Yes, this means the patient might have a bit of pig (porcine) or cadaver nerve material in them (donated nerve material goes through a patented cleaning process). But that’s a far better solution than hobbling around for months recovering from an additional surgery, while risking loss of nerve sensation elsewhere. BUY.
Everbridge (EVBG) sells cloud-based critical communications software that help keep people safe and businesses running. 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 Stifel 2018 Cross Sector Insight Conference on Monday, and the William Blair Annual Growth Stock Conference on Tuesday. I listened to one of these and it was a good reminder about what the company did. The assets acquired in the UMS purchase (a company based in Norway in the same space) are something I’m looking forward to hearing more about as Everbridge integrates these onto its platform and seeks out growth opportunities overseas. The trend is strong: we’re up around 235% after a better-than 10% rally this past week. Shares look extended to me right now, but it’s so difficult to call short-term tops that I’m keeping at Buy, just suggesting smaller positions and averaging in so you have cash to buy more shares if we get a pullback. BUY.
Instructure (INST) sells a variety of cloud-based learning management and collaboration software solutions to schools (K through higher ed) and corporations. The stock had been consolidating in the 40 to 44 range for a few months but jumped off its 50-day line (at 42) on Tuesday and yesterday moved slightly above the high end of this trading range. With so many cloud software stocks rallying right now I suspect “overlooked”, rapid-growth names, including Instructure, are beginning to attract dollars. We need to get through 46.50 to get a real breakout here, but I think the chances of that scenario in the near term have improved given this move above 44. Keeping at Buy. BUY.
IntriCon (IIN) is my June recommendation and has gone vertical over the last couple of weeks. Clearly, momentum is on its side and the mix of stable business from Medtronic (selling continuous blood glucose monitoring device parts) and the potential to disrupt the hearing aid market is resonating with investors. IntriCon provides hearing aids to many online sellers and has its own eCommerce platform, Hearing Health Express (HHE). The market is evolving quickly and IntriCon should soon debut its self-fitting hearing aid software, which is expected to be integrated into the HHE website later this year. Given the intensity of the stock’s rally I’d advise taking smaller positions now, though that said, I’m likely to keep at Buy until we get a couple of really big down days on high volume. Please be aware stocks like this can be as streaky to the downside as they are to the upside, so don’t feel like you need to rush in to avoid missing a rally. Just average in and be methodical about your buying. BUY.
LogMeIn (LOGM) continues to trade near the low end of its recent range and there’s no new news to report. We’re still holding on, but at a certain point, if the stock doesn’t get moving higher again, I’ll likely cut it loose to make room in our portfolio for other positions and help me retain focus on faster-growing companies. That said, for long-term investors I think you could do a lot worse than tucking shares of LOGM away and checking back in a decade or so! HOLD HALF.
MGP Ingredients (MGPI) is our whiskey-and-food ingredients stock and continues to climb at a slow and steady pace. I listened to the rest of the analyst day webcast and while there was nothing new it was a good reminder of what MGP does, its rich history, and where it’s going. Of course, you can get all that information in my report! But if you like to listen to somebody from the company speak, check out the presentation on MGP’s Investor Relations website. BUY.
MiX Telematix (MIXT) is our South African-based provider of fleet management, driver safety and vehicle tracking software solutions. Fleet managers typically pay for the software to help reduce operating costs, increase driver safety and protect assets. Shares have been a little more volatile than normal lately, with a couple of high-volume down days jumping off my screen. I listened to management’s presentation at the William Blair Annual Growth Stock Conference from Tuesday, and I think the most likely catalyst for the stock’s drop is the recent fall in the price of oil (MiX generates around 20% of revenue from companies in the oil and gas industry). That said, shares roared back yesterday and are now unchanged from last Thursday’s close. Bottom line—the stock remains a Buy provided it stays above its 50-day moving average line (currently near 18). If it falls below that, or if shares continue to be super volatile, I could move to hold. 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. The stock just broke out to a fresh high and is now up over 150% since I added it in April 2016. BUY.
Rapid7 (RPD) sells cybersecurity software. With a broader set of solutions to sell as part of its entry into the emerging SecOps movement, which brings together security and IT operations, and a transition to an easy-to-deploy Software-as-a-Service (SaaS) pricing model, Rapid7 is landing larger deals, more multi-product deals, and more customers. Management has set a goal to grow annual recurring revenue by around 30%, which should help it attain roughly 20% revenue growth. Shares were up 6% this week and roughly 29% since I added the stock in the beginning of March. It’s a Buy. BUY.
