We’re going to be laser focused on earnings for the next three weeks given that 11 of our positions will report within that time frame. We might even hear from a couple more given that two companies haven’t announced their respective earnings dates yet.
If you’re wondering how small cap stocks can keep moving higher despite all the distractions out there, the following chart of projected S&P 600 Small Cap earnings pretty much sums it up (the following two images are courtesy of Yardeni Research). The blue line below is a time series of projected forward earnings over the next twelve months, and the red squiggly lines are time series of estimated earnings for the respective years.
The main message of the chart: Not only does earnings growth look terrific for 2019, estimates keep going up!
Back in January, the 2019 consensus EPS estimate for the S&P 600 was around $55. In Late-May it was around $61.90. On June 14 it was $62.06. And now it’s up another 1.6% to $63.07!
With both estimates and small-cap stocks going up, the forward PE for small caps is still just below 18, where it’s been for most of 2018. This ratio is just the price of the index divided by the estimated earnings. So when both the numerator and denominator go up, the result is the ratio doesn’t change much. That means small-cap stocks aren’t any more expensive then they were at the beginning of the year, even though they’re up over 13%.
By the way, the chart of expected revenue for small caps looks about the same, as is shown below.
I went through the following pricing exercise early in the year, and again about a month ago. But I’ll do it again today given the numbers have changed slightly. If we place a forward-year Price-to-Earnings ratio (PE) of 19 and 20 on the current earnings figures, then six months from now you have an implied S&P 600 index value of 1200 and 1260, respectively.
Those targets imply 13.5% to 19% more upside over the next six months!
I’m not saying either of those scenarios are sure to play out; actually, they seem quite optimistic. But, this simple exercise does display the potential. And I think with U.S. stocks clearly showing that they are the place to be, the case for around a 5% gain by year-end is quite strong.
I’ll come back to this topic after Q2 earnings season winds down since upcoming results will factor heavily into 2019 forecasts.
Before we move on to stock updates, I want to share one more chart with you. The following plots the return of each of our stocks relative to the Russell 2000 Small Cap index over the exact same holding period as each respective position. For example, I added IntriCon (IIN) on June 1, 2018. The stock is up 49% since then, versus a 3.2% gain for the Russell 2000.
The point of this chart isn’t just to show how well we’re doing! More importantly, it’s to drive home the point that the first step to outperforming the market is to measure your performance relative to the market.
If you don’t keep score, you don’t know how you’re doing, right?
We’re not beating our benchmark with each position. MiX Telematics (MIXT) is trailing by 2%. And MGP Ingredients (MGPI) is basically flat. But the rest of our positions are opening up nice leads.
Changes this week:
None
Updates
AppFolio (APPF) was up around 5% this week and will report a week from Monday. We’ve taken partial profits and remain in a holding pattern, even though the stock is acting terrifically. AppFolio is expected to grow revenue and EPS by 27% and 46%, respectively, in the upcoming second quarter, and by 27% and 67%, respectively, in 2018. The company provides cloud-based software solutions for small and medium-sized businesses in the property management and legal industries. HOLD HALF.
Announced earnings date: Monday, July 30
Apptio (APTI) has a chart that’s almost a mirror image of AppFolio’s. But the stock trades at a much lower valuation and that’s part of why I’m maintaining at Buy. Management will report on August 1, and the market is looking for revenue growth of 23% and EPS “growth” of 88% (to a loss of -$0.01). A profit in the quarter would probably do tremendous things for the stock! Even with a modest loss, we’re still looking for a profitable year, with 2018 EPS of $0.04 (up from a loss of -$0.24 in 2017) and revenue growth of 21%. Apptio makes software that helps IT leaders analyze, optimize and plan technology investments and benchmark financial and operational performance against peers. BUY.
Announced earnings date: Wednesday, August 1
Arena Pharmaceuticals (ARNA) has literally given us nothing new over the past week. The stock hasn’t even changed in value! We’re still in wait-and-see mode since this is a catalyst-driven biotech stock, and that means trial results. 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. Continue to average in. BUY.
AxoGen (AXGN) continues to make fresh highs after rising 7% this week. The stock has one of the more beautiful charts in the market. We don’t yet have an earnings date, but when it comes we’ll be looking for revenue growth to hold steady at around 40%. BUY.
Chefs’ Warehouse (CHEF) is our newest addition and will report on August 1. Chefs’ 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. The company stocks over 48,000 items, ranging from broadline food products (cooking oils, butter, eggs and milk) to distinctive and hard-to-find specialty food products (cheeses, unique oils and vinegars, truffles and charcuterie) to center-of-the plate proteins (custom cut beef, hormone-free chicken and fresh seafood). Over the last three years, average revenue growth has been 16.2%. Management’s 2018 guidance calls for 9.2% revenue growth (to $1.42 billion) and EPS growth of 55% to 75% (to a range of $0.68 to $0.77). That EPS growth rates reflects prior investments in operating efficiencies that are starting to kick in now and driving profit margins higher. In the upcoming quarter, analysts are looking for 9.1% revenue growth and EPS growth of 57%, to $0.22. BUY.
Announced earnings date: Wednesday, August 1
Everbridge (EVBG) is up 2% since I moved the stock back to buy last week. Earnings won’t be out for a few more weeks, but when they come the market will be expecting quarterly revenue growth of 37% and EPS of -$0.22. Everbridge makes critical communication software that’s used by businesses, states and countries to keep people safe and businesses running. The company announced that Alison Dean, the current CFO of iRobot (IRBT) has been added to the Board of Directors. The stock is a Buy. BUY.
Announced earnings date: Monday, August 6
Instructure (INST) has been an active stock lately, in part because Citigroup recently picked up coverage with a buy rating. The company has also announced a partnership with Magic Software, a technology and content services company serving the education market. Magic’s MagicBox flagship product, which has over two million active users and includes learning apps aimed at both corporate and education markets, will be available in the Canvas library of platforms. Earnings will be out in a couple weeks and analysts expect revenue to grow by 30% to $49.5 million and for EPS to improve by 22% to a loss of -$0.25. Shares hit a fresh high this week but haven’t yet broken out in earnest. BUY.
Announced earnings date: Monday, July 30
IntriCon (IIN) was moved back to buy last week and is up over 10% since. The stock just broke out to a fresh high on Wednesday after trading in a 10-point range between 37.5 and 47.5 for almost a month. Generally speaking, analysts are bullish on sales of both Medtronic’s continuous blood glucose monitors, for which IntriCon provides parts, and the potential for IntriCon to disrupt the hearing aid market as growth in the Over-the-Counter hearing aid market evolves. Earnings will be out next Wednesday. I expect shares will be active following the event, and given all that’s going on in the business, including a refresh of the Hearing Health Express website, we’ll have a lot to talk about. Revenue is expected to be up around 20% this year and EPS should expand by 37%. You can buy going into earnings but keep new positions small. BUY.
Announced earnings date: Wednesday, July 25
MGP Ingredients (MGPI) is still trading around its 50-day line. The company, which sells whiskey and food ingredients, will report earnings in early-August. Analysts are expecting revenue growth of 8% and EPS of 32%, to $0.49. BUY.
Announced earnings date: Thursday, August 2
MiX Telematix (MIXT) provides fleet management, driver safety and vehicle tracking software solutions. The stock has the greatest amount of exposure to developing economies in our portfolio and, coupled with a strengthening dollar, that could account for some of the stock’s lackluster performance lately. We’re up 12% with MiX, but it’s down 6% over the past week and is trailing the Russell 2000 Index by 2% since I added the stock in April. I moved to Hold a few weeks ago and will stick with that rating for now. HOLD.
Announced earnings date: Thursday, August 2
Q2 Holdings (QTWO) has risen back to near its June all-time high and will report earnings on August 7. Analysts are expecting revenue growth of 22% and EPS of $0.01. For the full-year, revenue growth should be around 23% and EPS should be up 267% to $0.11. Q2 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. Keeping at Buy. BUY.
Announced earnings date: Tuesday, August 7
Rapid7 (RPD) is our cybersecurity software stock and it’s expanding into the emerging SecOps movement and transitioning to an easy-to-deploy Software-as-a-Service (SaaS) pricing model. Earnings will be out on August 6 and we’re expecting revenue growth of 16% and EPS growth of 40%, to -$0.19. Shares rose 5% over the past week. Keeping at Buy. BUY.
Announced earnings date: Monday, August 6
