There continues to be a lot of noise out there regarding Donald Trump, his legal team, trade, tariffs and security threats/manipulation on social media platforms in advance of the upcoming mid-term elections. But as we’ve seen time and time again over the last couple of years, stocks are plowing ahead. Small caps, in fact, broke out to another all-time high this week …
… while the S&P 500 is pushing up against the all-time high it set back at the beginning of the year.
The message here is that while we always want to be careful and keep our wits about us, the bull market remains intact for now and most of our stocks are plodding higher. Don’t try to outsmart a bull market. Stay the course.
Changes this week:
IntriCon (IIN) Moved to Buy
Updates
AppFolio (APPF) sells cloud-based software solutions for small- and medium-sized businesses in the property management and legal industries. The stock has been on fire since it reported 32% revenue growth and 163% EPS growth (to $0.21) in Q2. No doubt the market also liked that management issued guidance above consensus, and that AppFolio has no overseas exposure, so there’s no tariff threat here! Since reporting, shares have tacked on almost 15 points and are now trading at an all-time high around 79. We’ve taken partial profits and are up roughly 160% on our remaining position. Continue to Hold. HOLD HALF.
Apptio (APTI) makes software that helps IT leaders analyze, optimize and plan technology investments and benchmark financial and operational performance against peers. The company is still not well known, and with a market cap of just $1.6 billion is flying under the radar of many analysts too. That might be changing. The CEO, Sunny Gupta, appeared on Jim Cramer’s Mad Money show recently to pitch the power of using the cloud to better manage IT spending. I wrote a lot about Mr. Gupta in my report on Apptio and his continued involvement in the company is an asset (in my mind at least) since he’s a serial entrepreneur and has been there from the beginning. This year, he should deliver revenue growth of around 23% and the first profitable year (2018 EPS estimated at $0.05, versus -$0.25 last year). Check out the video of Mr. Gupta and Cramer talking about Apptio’s recent deal with the VA and its acquisition of Digital Fuel here. The stock’s been trading mostly in the 35 to 39 range for a few months now. It’s a Buy. BUY.
Arena Pharmaceuticals (ARNA) is our only biotech stock and the company is still in the development stage as it works to advance two potential blockbuster drug candidates through Phase 3 trials, and one through a Phase 2 trial. This is what’s in the works:
Etrasimod: Next generation, oral, selective sphingosine-1-phosphate (S1P) receptor modulator intended for the potential treatment of multiple immune and inflammatory diseases. Phase 3 planning for ulcerative colitis (UC) is ongoing, as is Phase 2/3 planning for Crohn’s disease (CD). A Phase 2 trial for primary biliary cholangitis (PBC) is also ongoing.
Ralinepag: Next generation, oral, once-daily, selective prostacyclin receptor agonist intended for the potential treatment of pulmonary arterial hypertension (PAH). Arena is initiating three Phase 3 trials with enrollment starting now, in Q4 2018 and in Q1 2019. Open-label extension interim trial results are also expected the second half of 2018.
Olorinab: Peripherally restricted, oral, full agonist of the cannabinoid 2 (CB2) receptor intended for the potential treatment of visceral pain, specifically pain associated with Crohn’s disease. This is a non-opioid drug. The company completed enrollment in a Phase 2 study in June, and the next data readout is expected in late September.
Management is trying to do things as comprehensively as possible to make sure they increase the chances of getting drugs to market without setbacks (assuming the data is good), and they’re trying to do it alone (funding secured!). The bottom line here is we’re in a quiet period because of the timing of the trials and won’t get much information until September (Olorinab results) and October (R&D day). The stock hasn’t performed well lately, but the potential is huge. Remember that this is biotech, so returns tend to be streaky given that trial results have more of a pass/fail outcome, which is a very different type of growth profile than the “steady as she goes” business model of most of our other stocks. Keeping at Buy. BUY.
AxoGen (AXGN) was moved to hold three weeks ago after shares sold off hard following the earnings release revealed that revenue growth was “only” 36% in Q2. This was below management’s pledge to grow by at least 40% in 2018. After listening to the conference call again and thinking it over I moved the stock back to buy two weeks ago. The growth story has been dented a little, but it’s far from broken—for that we’d need at least one more quarter of subpar results, along with reduced forward guidance. If AxoGen hits its numbers in Q3, shares could easily catapult higher. If it issues a press release suggesting the sales teams are on track to hit their numbers before the quarterly report comes out, that would do wonders for the stock too! We expect Q3 results in early November, so we have some time before we’ll know what’s up. With the help of a supportive market shares of AxoGen are starting to gather momentum again. AxoGen sells peripheral nerve repair solutions that help restore feeling and function to areas of the body that aren’t performing as designed because of severed, crushed and otherwise damaged nerves. Keeping at Buy. BUY.
Bottomline Technologies (EPAY) was my August addition to the portfolio and another stock (in addition to Q2 Holdings) that gives us exposure to the digital banking and transactions market. The stock has been kind enough to do what I was hoping it would. Shares are up 15% over the last three weeks, in part because Q4 fiscal 2018 results (released August 9) beat on both the top and bottom lines. Revenue was up 13.9% to $106.5 million while EPS of $0.35 beat by $0.05. Management was very bullish on the company’s growth prospects in its $20 trillion market, and said customers are increasingly competing and differentiating based on technology—Bottomline is a key part of their strategy. The report confirmed that the favorable trends in this business remain intact, and the stock is looking great, so I’m keeping at Buy. BUY.
Chefs’ Warehouse (CHEF) 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. I added the stock in July to give us a little consumer exposure and after an initial pop the stock has come back down to around our entry price. There’s nothing wrong here, shares just look to be consolidating after a big move in May. In Q2 revenue was up 12% and adjusted EPS grew by 71% to $0.24. Management also issued guidance for the full-year, calling for revenue of $1.41 billion to $1.45 billion and adjusted EPS of $0.71 to $0.80. Both metrics straddle consensus expectations. As forward estimates imply, Chefs’ is moving into harvest mode after years of investments in technology, supply chain, e-commerce and acquisitions. BUY.
Everbridge (EVBG) sells critical communications software solutions that help keep people safe and businesses running. The software alerts people in scenarios like active shooter, terrorist and severe weather events, and helps them get to safety and check in so others know if they’re OK, or if they need help. Growth is solid as a rock, and in Q2 revenue expanded by 43% (well above the 37% growth expected) while EPS of -$0.18 beat by $0.04. Full-year guidance also went up to around 38% revenue growth and EPS should be in the range of -$0.56 to -$0.58. Management flagged sales in the core Mass Notification solution as well as accelerating market acceptance of the Critical Event Management (CEM) suite, as well as international sales (helped by the UMS acquisition) as fueling growth.
I’ve kept at buy even though we’re up nicely on the position because in the grand scheme of things it seems like Everbridge has a long way to go. That’s been the right call lately, and over the last two weeks the stock has been particularly kind to us, rising almost 10% each week! We’re now up 287%. Everbridge is definitely a little extended here so I would recommend only adding smaller positions, if you can’t help yourself. It would probably be better to wait for a little dip as I wouldn’t be surprised to see the stock give back 10 points or so. That said, it’s still a long-term Buy. BUY.
Instructure (INST) has a nice little story but shares still haven’t recovered from the drubbing they took following the Q2 earnings report. Two weeks ago I moved to hold since I think the opportunity cost of buying in here is just too great – there are probably many other stocks that will outperform Instructure over the next month or two. However, you never know what will happen tomorrow and I don’t think one quarter of underperformance spells the end for this learning management software company. That’s why we’re holding on until the trend improves, at which point I expect to move back to buy. HOLD.
IntriCon (IIN) makes continuous glucose monitor (CGM) components and hearing aids for many of the big (and small) hearing aid companies out there. It was the only stock I wrote about in last week’s abbreviated update. The only thing that’s changed in the last week is that shares have roared back from their secondary offering-driven retreat and are back near their previous high. The company put out a press release stating that the public offering is done and with the underwriters exercising their option to acquire the additional 225,000 shares IntriCon netted just shy of $89 million, which will go to retire some insider shares, pay down debt, fund capex and other general purposes. The stock is telling us not to be overly conservative. With tremendous strength after the secondary offering, IntriCon is going back on the Buy list. BUY.
Q2 Holdings (QTWO) is our “original” fintech stock as I added it long before adding our second fintech, Bottomline Technologies. The key difference between the two is that Q2 is more of a pure-play digital banking software provider, whereas Bottomline’s specialty is more about business-to-business payments, and it has some digital banking and other solutions thrown in for good measure. In any event, both of the stocks are good, and Q2 Holdings is up around 160% since I added it in March 2016. For the last three months it’s been rangebound, trading mostly between 58 and 64. But with a good story and solid fundamentals I still think the next big move will be up. In the second quarter revenue was up 23% and EPS of -$0.20 was about flat. It also announced the acquisition of Cloud Lending for just over $100 million. This company is a SaaS vendor of lending and leasing software that helps lenders close more loans, close them faster and provide a better experience to borrowers throughout the process. Cloud Lending is reportedly growing faster than Q2, so it should be accretive to revenue. The deal should close in the fourth quarter, at which point we’ll get more details. BUY.
Rapid7 (RPD) broke out above its previous highest closing price on Wednesday. And with almost $194 million more cash in the bank from a convertible note offering the company is on stronger financial ground than it was a few weeks ago. You may recall that I said the security software company is likely to keep investing in the business, including new headquarters, which means operating cash flow would likely decrease (but still be positive) while free cash flow will likely be much lower than analysts had expected. With a much stronger balance sheet Rapid7 now has the firepower to fund the next phase of its expansion plan without the market having to worry about a big, dilutive secondary offering. With a little luck these investments will help drive new-customer growth at a faster clip than last quarter’s 10% growth rate. Keeping at Buy. BUY.
