First off, I just wrapped up my 2019 Small Cap Outlook. This annual Special Report reviews small-cap stock performance in 2018, takes a look at what could drive the asset class in 2019, and delves into a couple of sectors where I see ample opportunities to make money in the year ahead.
We’re currently in the process of posting the report to our website, and you’ll receive a dedicated email later today providing you with a link to access the report.
Now, back to business.
As we close out the fourth week of 2019 small caps are looking good.
The S&P 600 Small Cap Index is back above its 50-day line and at the low end of the 900 to 975 range where the index traded for most of the first half of 2018. I’d like to see the index camp out in this same range for a while as I think it’s a healthy area for small caps to consolidate, and would set us up well for a sustained rally into the back half of the year.
Our portfolio has been grinding its way through 2019, with some stocks, like CareDx (CDNA), Everbridge (EVBG) and Rapid7 (RPD), acting as though nothing happened late last year!
Others, like Goosehead Insurance (GSHD) and Bottomline Technologies (EPAY), remain well off their highs, but still look like attractive stocks to buy right now.
Over the past week the standout performers in our portfolio were CareDx, which rallied 16%, and Everbridge, which rose by 5%. Detractors from performance were Goosehead Insurance, down 5%, and Chefs’ Warehouse (CHEF), down 4%.
I’m still looking at this market as one in which you should be averaging into the stocks you want to own for the long haul. With that in mind, there are no ratings changes today. Pick your spots, try to buy shares on weakness (but not too much weakness—avoid anything that’s collapsing) and remember to diversify across time (by dollar cost averaging) as well as stocks and sectors.
Changes this week
None
Updates
AppFolio (APPF) sells software solutions for the property management and legal industries. The stock isn’t doing a heck of a lot these days, mostly trading in a tight range and inching a little higher. There should be a time when it begins to roar again, it’s just impossible to predict exactly when that will be. Keep Holding. HOLD.
Estimated Earnings Date: February 25
Arena Pharmaceuticals (ARNA) has been acting well and spent the last week trading in the 42 to 45 range. Management announced this week that the previously disclosed deal with United Therapeutics (UNTH) has closed. As part of that deal ralinepag, an oral, selective and potent prostacyclin receptor agonist in development for the treatment of pulmonary arterial hypertension (PAH), was licensed to UNTH in exchange for $800 million upfront, milestone payments of up to $400 million, and low double-digit tiered royalties. That deal helps Arena focus more attention on etrasimod, olorinab and APD418, as well as other compounds it plans to develop in the future. Upside is significant for those that can be patient, while downside should be limited. Keeping at Buy. BUY.
Estimated Earnings Date: March 12
Bottomline Technologies (EPAY) is moving modestly higher and has a chance to regain its 50-day line today. Shares will have some work to do before they’ll break back above 57.5, the high end of their trading range since they dropped following the last quarterly report in November. But management will report next Thursday and that event has the potential to give the stock a boost. Analysts are calling for 9% revenue growth in both fiscal 2019 (ends in June) and 2020, with EPS growth of 13% and 17%, respectively. We recently saw more consolidation in the fintech market, with Fiserv (FISV) snapping up First Data Management (FDC) for $22 billion (a 30% premium). That announcement didn’t move Bottomline on the day it was announced, but M&A activity in the sector is definitely not going to hurt the stock. BUY.
Announced Earnings Date: January 31
CareDx (CDNA) had a nice week, rising by 16% and closing yesterday right back at its December high. The company makes non-invasive diagnostic tests for heart and kidney transplant patients. Its technologies drastically reduce the need for invasive biopsies (tissue samples) and can tell clinicians much earlier if there is risk of organ rejection. We’ve already received preliminary Q4 and FY 2018 results. Revenue is expected to be up 85% to 88%, to around $23.4 million, in Q4, and up 58%, to around $76.4 million in 2018. The company completed a secondary offering and paid off all its debt late last year too, so when actual reports come out we’ll be looking into the trends in patient count and transplant centers, in addition to capital allocation plans. It’s a Buy. BUY.
Estimated Earnings Date: March 22
Chefs’ Warehouse (CHEF) announced preliminary 2019 guidance last week, calling for sales between $1.52 billion and $1.57 billion (up around 8%), and gross profit between $390 million and $400 million. That has analysts looking for EPS of around $1.00 in 2019, or up 28% over 2018 (when EPS should have risen 77%, to $0.78). The announcement didn’t have a big impact on shares, but didn’t hurt them either. The stock is trading right near its 50-day line. BUY.
Estimated Earnings Date: February 18
Codexis (CDXS) is a protein engineering company. With a recent thumbs up from the FDA that Codexis can continue with its clinical trial protocol of CDX-6114 (detailed in my report) and a decision from Nestlé expected before February 17, we’re in the midst of a wait-and-see mode with respect to that asset. Earnings are due out around March 8, so we should know by then. Analysts see revenue growth of 20% in 2018 and 17% in 2019. That said, a deal with Nestlé could impact 2019 expectations. BUY.
Estimated Earnings Date: March 8
Everbridge (EVBG) is acting great after the recent equity offering (detailed last week) and the stock is just 8% off it’s all-time high. Earnings will be out on February 19. It’s a Buy. BUY.
Announced Earnings Date: February 19
Goosehead Insurance (GSHD) is a thinly-traded stock so don’t be surprised when it jumps around a little. It’s also a relatively new company to the public market, so it’s not well known at all. The company sells personal lines insurance (mostly homeowner and/or auto policies) and is disrupting the market by deploying a cloud-based sales and support platform. We’re looking at around 40% revenue growth this year and 30%+ in 2019, with potential for that forward forecast to jump quite a bit. Goosehead is profitable (expected EPS of $0.25 in 2018 and $0.42 in 2019). The stock is trading in a relatively established range and should react to earnings, which could be out as early as late next week. BUY.
Estimated Earnings Date: January 28
Q2 Holdings (QTWO) sells cloud-based virtual banking software to regional and community financial institutions. Earnings are due out on February 13, and over the past few weeks I’ve seen several analyst upgrades (J.P. Morgan and KeyBanc, in particular). The First Data acquisition by Fiserv is also something fintech analysts are keeping in mind when evaluating stocks like Q2. Shares are acting great, and I’m keeping at Buy. BUY
Announced Earnings Date: Wednesday, Feb. 13. Conference call 8:30 a.m. EST, Thursday, Feb. 14
Rapid7 (RPD) didn’t advance at all this week but the stock is acting great (5% off its September high) and has a compelling pitch in one of the more defensible areas of software spending (security). The company has evolved from a provider of vulnerability management (VM), a good, but somewhat limited market, into a provider of a broader portfolio of security operations management (sec ops) solutions, including VM, security incident and event management (SIEM), IT Ops, and incident detection and response. That pushes its addressable market up to around $7 billion. It’s a Buy. BUY
Announced Earnings Date: Thursday, Feb. 7. Conference call to follow at 4:30 p.m. EST
Repligen (RGEN) is recovering from a horrible December during which the stock declined for 15 out of 16 days. It moved back near its 52-week line early in the week, though a modest pullback on Tuesday means it’s still down a couple percentage points from last Thursday’s close. The stock is a buy here. Management has recently said Repligen is on track to meet its long-term revenue goal of $400 million to $500 million by 2023, implying 10% to 15% annual revenue growth (organic). BUY.
Estimated Earnings Date: February 20
