Talk of trade wars continues to dominate stock market news but investors appear increasingly willing to shrug off related concerns. They do in the U.S. at least, where stocks are faring far better than in both the European Union and emerging markets.
Small-cap stocks also continue to post solid performance, despite a small dip in late June. The S&P 600 index hit another fresh high earlier this week!
In our small-cap portfolio, early analysis suggests limited exposure to tariffs. That also appears to be the case within the broader technology and health care markets (with a few exceptions), which could explain why these two sectors continue to be among the best performing year to date.
We’ve seen many leading stocks begin to recover from their June wobbles, and most of ours are back trading near, or above, their 50-day moving average lines. With the addition of a couple of consumer-oriented stocks—MGP Ingredients (MGPI) in May, Chefs’ Warehouse (CHEF) in July—we are also a little more diversified in the event that software and medical device strength peters out.
For now, the market is telling us to proceed about as we have over the last 12 months. That means keep adding exposure to our strongest-performing positions and take new positions in established leaders and stocks that have recently begun to break out. Chefs’ Warehouse, and the June addition, IntriCon, represent examples of both.
We have also taken a few steps in recent weeks to protect gains and lock in profits. We sold LogMeIn (LOGM) for a 75% gain and took partial profits in AppFolio (APPF) on June 22 to lock in a 108% gain. Now, with 12 remaining positions, our average gain of 75% means we’re handily outperforming the Russell 2000 Small Cap Index. Had you bought the ETF that tracks that index each month, instead of our stocks, you’d only be up an average of 20%!
Changes this week:
Everbridge (EVBG) Moved to Buy
IntriCon (IIN) Moved to Buy
Updates
AppFolio (APPF) was moved to hold in June, then I recommended selling half of your position two weeks ago. The stock hasn’t done much since. Shares topped out at 68 in mid-June and after a little pullback have been consolidating between 60 and 63 (comfortably above their 50-day moving average line) for the past three weeks. The company provides cloud-based software solutions for small- and medium-sized businesses in the property management and legal industries and is expected to grow revenue and EPS by 27% and 46%, respectively, in the upcoming second quarter. APPF is still trading at a healthy premium, which sets up high expectations going into earnings (due out in the second week of August). I like the stock, I just don’t want to go into earnings with a full position given potential for a selloff. If you haven’t yet done so, take partial profits soon, and hold the rest. HOLD HALF.
Apptio (APTI) hit an all-time high of 38.35 three weeks ago, and like a lot of our software stocks, gave back a few points before firming up and trending sideways. The stock remains above its 50-day moving average line and has spent most of the last three weeks chopping around between 35 and 37. Performance from Apptio, which makes software that helps IT leaders analyze, optimize and plan technology investments and benchmark financial and operational performance against peers, has been exceptional this year. Shares are up over 50%! It’s not cheap, and I don’t recommend buying hand over fist, but you can still pick up a few shares. One incremental positive that could help power adoption by public sector agencies is the release of a new machine learning tool that automatically maps tech costs from financial systems to the Apptio TBM Unified Model. This essentially speeds up the time required for agencies to see how they’re spending IT dollars, and, theoretically, will help convert more of them to Apptio customers. BUY.
Announced earnings date: Wednesday, August 1
Arena Pharmaceuticals (ARNA) pulled back to just below its 50-day moving average line in mid-June and is now trading just below that trendline. The stock isn’t the strongest-looking position in our portfolio, but it’s not bad either—especially given that this is biotech, which means it tends to move more before and after major events are announced. That means trial results with Arena, which is developing treatments for a broad range of immune and inflammatory conditions. Ralinepag (APD811) is a potent IP receptor agonist intended to treat pulmonary arterial hypertension (PAH) and is entering three Phase III trials to test exercise capacity, time to clinical events, and differentiation. Etrasimod (APD334) is an optimized activity S1P receptor modulator and is entering two Phase 3 trials for ulcerative colitis (UC) and is also in Phase 2 trials for Crohn’s Disease (CD) and Primary Biliary Cholangitis. Arena is also moving olorinab (APD371), a highly selective Full agonist to CB2 into Phase 2 for the treatment of visceral pain associated with Crohn’s disease. The Arena story is still quite bullish given the positive data on all programs thus far. I recommend taking advantage of the dip and adding shares. Continue to average in. BUY.
AxoGen (AXGN) continues to trend higher with the pattern of higher highs and higher lows intact. There is no major news, but we do have a new member of the Board of Directors that brings some compelling marketing and product commercialization experience with her. Lisa Colleran worked at Baxter Healthcare for 20 years then spent 11 years at LifeCell, a medical device company specializing in regenerative medicine products for plastic and general surgery. LifeCell was acquired by Allergan (AGN) last year for $2.9 billion. I went back to look at the products LifeCell sold and was interested to read that its major devices were ALLODERM®, a human allograft tissue matrix used in breast reconstruction post-masectomy, REVOLVE™, a single use high-volume fat grafting device used in plastic and reconstructive procedures, and STRATTICE™, a porcine based tissue matrix used in complex abdominal wall repair and for the surgical repair of damaged or ruptured soft tissue. AxoGen sells similar solutions so her experience should be a welcome addition. AxoGen hasn’t given us an earnings release date but should reveal quarterly results in the first 10 days of August. BUY.
Chefs’ Warehouse (CHEF) is our newest addition and has traded modestly higher since I added it to the portfolio last Friday. The $890 million market cap company is a specialty food distributor that has been supplying artisan and high-quality food products to chefs across the U.S. for over three decades. It serves around 30,000 menu-driven family-owned and independent restaurants, as well as a few mini-chains (none with over 55 units), across 12 markets in the U.S. and Canada. Many customers are upscale casual and fine dining locations in tourist destinations, such as the Four Seasons, Ritz Carlton and White Elephant.
Chefs’ stocks over 48,000 items, ranging from broadline food products, such as cooking oils, butter, eggs and milk, to distinctive and hard-to-find specialty food products, including cheeses, unique oils and vinegars, truffles, and charcuterie, to center-of-the plate proteins like custom cut beef, hormone-free chicken and fresh seafood. Over the last three years average revenue growth, including acquisitions, has been 16.2%. That’s the fastest in its peer group of publicly traded distributors, which includes US Foods, Sysco, Performance Food Group Company and United Natural Foods, Inc.
Acquisitions are a big part of the historical growth story, although last year Chefs’ benefited from just one acquisition, Fells Point. As a result, revenue growth in 2017 was a relatively modest 9%. Adjusted earnings per share (EPS) was $0.44. In the first quarter of 2018 (reported in early-May) Chefs’ reported revenue growth of 10.7% to $318.6 million and adjusted EPS of $0.03, an improvement from a loss of -$0.05 in the comparable quarter. Growth would have been a little higher if not for such severe weather in California, in the mid-Atlantic, and in the Northeast.
We’ll get another quarterly report on August 1 and see how Chefs’ is tracking toward management’s 2018 guidance of 9.2% revenue growth (to $1.42 billion) and EPS growth of 55% to 75% (to a range of $0.68 to $0.77). We are expecting big EPS growth this year as investments in operating efficiencies kick in! BUY.
Announced earnings date: Wednesday, August 1
Everbridge (EVBG) hit a 52-week high of 53.42 in early June then the stock slid back to its 50-day line at 44 by the end of the month. Shares firmed up right at that trend line and have moved back up toward 50 over the last three weeks. I’ve had the stock at hold given the big run (Everbridge is up 66% year to date), but with the trend improving you can pick up a few shares if you like. Moving back to Buy. BUY.
Announced earnings date: Monday, August 6
Instructure (INST) also topped out in June before dipping to just below its 50-day line later in the month. But shares found support again around 41 and have since migrated back near their 52-week high. It will take a good push to drive shares above resistance at 47 but with a modest pickup in trading volume and an upcoming earnings release date for July 30 I wouldn’t be surprised to see a breakout here. Instructure sells cloud-based learning management and collaboration software solutions to schools (K through higher ed) and corporations. Analysts expect revenue to grow by 30% to $49.5 million in Q2 and for EPS to improve by 22% to a loss of -$0.25. BUY.
Announced earnings date: Monday, July 30
IntriCon (IIN) has been chopping around in a 10-point range between 37.5 and 47.5 for the past four weeks as it digests gains from a spring rally that started at 30 in mid-April. The company enjoys a mix of stable business from large medtech companies, including Medtronic, to whom it mostly sells continuous blood glucose monitoring device parts. And it has potential to disrupt the hearing aid market through sales to other manufacturers, and through its own eCommerce platform, Hearing Health Express (HHE), as growth in the Over-the-Counter OTC hearing aid market evolves. This revenue mix gives investors exposure to a rapid-growth, stable business (diabetes) plus the optionality of the hearing aid business. Medtronic’s diabetes business is going great and is one of the reasons shares of that large-cap stock are trading at a multi-year high in terms of relative valuation as compared to the S&P 500. On the hearing aid front, we’ve also seen exceptionally strong performance from stocks in that space (including William Demant and Sonova), which some market observers believe is due to defensive positioning in a supposedly recession-proof industry. I’m not sure about that! But the punch line for us is that investors want exposure to the end-markets that IntriCon plays in. And given the growth profile here it’s easy to see why shares of IntriCon are in high demand. Revenue is expected to be up around 20% this year and EPS should expand by 37%. I’ve had shares at hold since there were a couple of big-volume down days in June. But with the stock appearing to stabilize in the 37.5 to 47.5 range I’m moving back to Buy. You can start to pick up shares in that price range. BUY.
MGP Ingredients (MGPI) was my May addition and marked our first departure from medical device and software stocks since we sold Primo Water (PRMW) earlier in the year. MGP sells whiskey and food ingredients, and the stocks trend has mostly been one of higher highs and higher lows, with most dips finding support at the stock’s 50-day moving average line. The most recent glaring exception to this trading pattern was that in June the stock failed to rise much above its previous high at 98, so we have a bit of a double-top situation going on. On the other hand, MGPI bounced off its 50-day line again two weeks ago and is back above that trendline now. It’s best to buy on the dips, and the current pullback to 92 (from 95 last week) looks like one such opportunity. We’re up around 8%. BUY.
MiX Telematix (MIXT) provides fleet management, driver safety and vehicle tracking software solutions. Based in South African, MiX represents our greatest exposure to developing economies. The stock is trading right on its 50-day line and about 10% below the 52-week high hit in May. As expected, the recent dip found rock solid support at 17. The emerging pattern in the chart shows shares more or less moving sideways for the past nine weeks. I suspect that action will persist for a little while longer. Will upgrade to buy if it looks like a breakout is coming but keeping at Hold for now. We’re up around 19%. HOLD.
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 pulled back to its 50-day line a couple of weeks ago and I suggested buying shares to take advantage of the dip, especially since the stock consolidated around that 56 price level in May. They’ve moved up to around 61.50 since and look to be making a push toward the all-time high of 63.55. Keeping at Buy. BUY.
Rapid7 (RPD) is our cybersecurity software stock and has been expanding into the emerging SecOps movement and transitioning to an easy-to-deploy Software-as-a-Service (SaaS) pricing model. Like most of our software stocks, Rapid7 has been up and down in recent months, but a recent dip below its 50-day line looked like a buying opportunity. The stock is now back above that trendline and is about 10% below its previous high, which was just below 34. The company recently announced that it has rolled out data centers in Australia and Canada so customers in these regions will be better able to address data governance requirements and keep security data local. Keeping at Buy. BUY.
Announced earnings date: Monday, August 6
