Small caps continue to move higher so keep leaning bullish, but be mindful that we’re near a resistance area and that it’s equally likely we will see some softness as it is that we will see more strength.
In other words, a pullback around here would be totally normal. And as the Q4 earnings season winds down investor attention will likely return to big picture themes that are likely to drive market action over the rest of the year, and less on near-term catalysts.
I’ve shown the chart below a number of times in February. As you can see one more week ticking higher means the S&P 600 Small Cap Index is now just above the resistance area of 975 to 980, and threatening to break back above 1,000. That would be a real victory in my book, but I’m still skeptical that the index can move up that high, and hold on to the gain, in the very near-term. Over the next few months? Sure.
Of course, I could easily be wrong and wouldn’t place a big bet on small caps pausing here! The S&P 500, Nasdaq and Dow Jones Industrial Average are pushing higher too and are well within comfortable trading ranges that were established last year. This strength is a broad market phenomenon and not something just showing up in small caps.
As you know by now it’s not wise to make big predictions and act on them regardless of what the market is doing. A better strategy is to listen to what the market is telling us, let that feed into whatever theories and opinions we have, and try to make incremental moves that balance everything out.
In my mind this means stepping off the gas a little right now with stocks that have made big moves off the December bottom. There are still stocks out there we can buy, and we can even add a few shares of really strong names. Just be sure to balance position sizing with what a stock has been doing lately and give yourself the option to add shares at a lower price, if we do get a pullback.
Here’s something for the worriers. What’s the next majorly disruptive issue going to be? Is it the Mueller report that’s expected to drop within the next week?
Will it be a fault in the trade talks between the U.S. and China? It’s hard to really know what to make of what’s going on behind closed doors.
Is it the soaring U.S. debt load that seems to be running free? What happens if and when inflation pops?
Or will it be something altogether different?
I don’t mean to throw cold water on happy days, full of soaring small-cap stocks! But if I didn’t come up with something to worry about, I wouldn’t be doing my job.
The point is, continue to lean bullish. But don’t forget how quickly gains can evaporate.
I’ve been moving our portfolio incrementally toward more holds than buys given the recent strength. Again, that’s not because of a bearish outlook. But more because we’ve come up so fast and so far from the bottom that I think the easy money has been made. This is a time to pick your spots, and your stocks, carefully. Always average in!
Changes this week
None
Updates
AppFolio (APPF) has, as expected, continued to move higher as the February 28 earnings date approaches. I upgraded the stock to buy last week given the rebound in cloud software stocks and more reasonable valuation for AppFolio, as compared to mid-2018. Shares are up around 5% since. The stock will likely move based off of Q4 results and forward guidance, so buckle in if you’re buying shares now. Current consensus is that revenue grew by 32% in 2018 while EPS should have jumped 121% to $0.62. In 2019, analysts see revenue growing by 26% while EPS should go up 58%, to $0.98. This is an efficient company that doesn’t mess around with things that don’t matter much. BUY.
Announced Earnings Date: February 28
Arena Pharmaceuticals (ARNA) ticked up another couple percentage points this week in a nice little move to a new seven-month high. I’m still looking for that move above 50 though, which would mark a new 52-week high. There’s no real fundamental news driving the performance, but with every month that slides past Arena gets closer to getting what should be blockbuster treatments to market (still a couple years off). Be patient. It’s a Hold now just because we’re bumping up against resistance. If we can crack through 50 and hold that level I’ll likely move back to buy. HOLD.
Announced Earnings Date: February 26
Avalara (AVLR) reported fantastic results last week with revenue of $76.9 million up 32.5% (beating by $5.7 million) and an adjusted EPS loss of -$0.28 (as expected). The stock rallied and still looks great. I detailed the results in a Special Bulletin and in the Weekly Update, and there’s no new news this week. The bottom line here is that the Supreme Court’s South Dakota vs. Wayfair decision is driving a lot of activity as states (big states, like California and New York) pass legislation requiring online businesses to collect and remit sales tax. Since that decision roughly 30 states have passed economic nexus laws. Avalara will likely need to invest to build out its content library and sales teams, but those should be good investments given what looks like several years of rapid growth potential. It’s still a Buy. BUY.
Earnings: Done
Bottomline Technologies (EPAY) has already reported (not a great reaction) and remains a Hold as we let the market digest the news. Long-term, I think we’re just fine here. Shorter term, we just need to keep an eye on the stock and be ready to step aside if it heads south (an unlikely scenario, in my opinion). Keep holding and stay patient. HOLD.
Earnings: Done
CareDx (CDNA) wins this week’s award for posting the biggest weekly gain (16%). That would be ultra-sweet if shares were at a new high. But, they’re actually below their November high, and a fraction below their January high, so we’ve been in this trading range several times before. We added the stock in the beginning of January so our 16% gain is still giving us a nice cushion. Earnings are due out on March 6 and given how this stock tends to jump around I expect we’ll see shares react to earnings. Preliminary Q4 and FY 2018 results were already released (Q4 revenue up 85% to 88%, and 2018 revenue up 58%) so the event will be more about forward guidance, and details of how the business is trending. Recall from my report that CareDx makes diagnostic solutions for heart and kidney transplant patients, and AlloSure, its most recent new product introduction, is what’s driving the bulk of growth. Management announced yesterday that AlloSure Lung is now available, adding a third solid organ (in addition to kidney and heart) that the AlloSure noninvasive blood test can help with. BUY.
Announced Earnings Date: March 6
Codexis (CDXS) didn’t have any new news to announce this week. But in recent weeks it announced a multi-year extension/upgrade with Merck (MRK) to provide that company with its CodeEvolver protein technology, a multi-year supply agreement with KYORIN Pharmaceutical for the supply of a proprietary enzyme used in the manufacture of a key ingredient in Beova Tablets (launched in November 2018), and that Nestlé Health Science has exercised its option to obtain an exclusive license for the global development and commercialization of Codexis’ novel, orally delivered enzyme CDX-6114 for the management of phenylketonuria (PKU), an orphan metabolic disorder. I covered all of these announcements in previous Weekly Updates. The next (known) event is Q4 earnings, which are due out next Tuesday, February 26. Analysts see revenue growth of 20% in 2018 and 17% in 2019, with EPS of -$0.23 and -$0.14, respectively. The stock is still a Buy, but be aware we’re trading near resistance just below the December high of 23, so best to buy smaller positions. BUY.
Announced Earnings Date: February 26
Chefs’ Warehouse (CHEF) reported a week ago Wednesday and I detailed the results in a Special Bulletin. The quarter was fine, but shares have traded down since the event. They’ve been in the current trading range for a while so I’ll keep at Buy, provided they don’t dip below 30. BUY.
Earnings: Done
Everbridge (EVBG) is trading at new highs (again) after reporting another solid quarter this week and issuing forward guidance above consensus. I detailed the report in yesterday’s Special Bulletin.
From yesterday: Everbridge reported Q4 2018 results the other night that were better than expected. Revenue was up 43% to $41.8 million while EPS of -$0.09 beat by a penny. For the full-year 2018, revenue was up 41% (versus 35.8% in 2017), while EPS came in at -$0.54. There weren’t a lot of surprises, which is a good thing in this case. Everbridge continues to land deals (new, and expanded) with multiple products, and expansion opportunities in Europe abound (population alerting is now mandated in Europe and creates a roughly $100 million market over just the next few years). Forward guidance also came in ahead of consensus ($185.6 million) at $195.1 million to $196.6 million, implying around 33% growth this year. Everbridge still won’t be profitable on an adjusted earnings basis until 2021. At its current trajectory we should expect 2019 EPS of around -$0.27, 2020 at -$0.06 and 2021 at $0.18. Stock based compensation is likely to jump a bit in 2019 given the strong stock performance. Investors should also be aware that both the CEO and CFO are stepping down this year, though the CFO will remain on as Executive Chairman. We’ve had a heck of a run with Everbridge and are now up around 338% on our remaining position. The stock’s not cheap on an EV/Forward Revenue basis, trading with a multiple of about 10X. But that’s below the peak multiple of 12.1x from last September so we’re not in nosebleed territory (yet). Plus, there is potential for Everbridge to beat its forward guidance so the actual multiple might be lower. I’m keeping the stock at buy. But to balance the near-term risks just buy small blocks of shares. Don’t go in huge at these levels! BUY.
Earnings: Done
Goosehead Insurance (GSHD) management gave a convincing presentation at the Bank of America Merrill Lynch Insurance Conference last week. It went through the company’s business model and why, and how, it expects to disrupt the personal lines insurance industry. You can check it out at the company’s website if you’re interested (scroll down to the events area, click the link then enter your information). It was a good overview that covered much of the content in my research report. The market also liked it, along with management’s comments implying (my translation) that the housing market headwinds mentioned last quarter aren’t having a huge lasting impact. We don’t have a firm earnings date yet. Keep averaging in. BUY.
Estimated Earnings Date: March 13
Q2 Holdings (QTWO) reported a week ago Wednesday and results came in largely as expected, with revenue accelerating by 30% (vs. 20.8% in Q3 2018) and adjusted EPS of $0.08, up from $0.05 in Q4 2017. Management’s initial 2019 guidance was good at $305 million to $309 million but a touch below the most bullish street estimates, while EBITDA guidance was light due to acquisitions. Given the impressive performance in the stock since Christmas, that there is some pressure on profits, and that the stock is pushing up against an all-time high I moved to Hold last week. I’ll consider moving back to buy if we get a break higher, or if the stock corrects a little. For now, just keep holding. HOLD.
Earnings: Done
Rapid7 (RPD) reported two weeks ago and the stock raced off to fresh highs after the event. I moved to hold to let shares digest a big move from 30 to 45 (a 50% gain) year-to-date. Keep Holding. HOLD.
Earnings: Done
Repligen (RGEN) reported yesterday morning (not after the close, as I was expecting, and mentioned in yesterday’s Special Bulletin). The results from Q4 came in just a little better than expected. Revenue was up 25% (all organic) to $51.9 million (beating by $1.7 million) while adjusted EPS of $0.21 was in-line. For the full-year 2018, revenue was up 37% to $194 million (17% organic growth). Management issued 2019 guidance of $218 million to $225 million (up 12.4% to 16%), ahead of $216 million consensus, while EPS of $0.81 to $0.86 was also above consensus of $0.81.
To refresh your memory, Repligen specializes in bioprocessing technologies and develops solutions that increase yield while lowering the cost of manufacturing biologic drugs. The company has been growing by selling more products direct-to-customers (78% of total revenue), and its Filtration and Chromatography solutions have been particularly good sellers. Its Proteins business, where it is very strong, is no longer growing, in part because of lower volumes to GE as that customer decided to in-source a protein.
Repligen isn’t the fastest growing company out there. But it is an exceptionally strong technology company offering investors pure-play exposure to bioprocessing, an expanding market that should deliver reliable growth for years. Organic revenue growth should be in the 10% to 14% range for the next 5-10 years (but expect acquisitions to boost that) while EPS growth should be slightly more, and free cash flow should keep ramping up (from around $20 million in 2018 to well over $100 million by 2025).
The stock didn’t move much after the report (though it traded in a relatively wide range intra-day yesterday) and I see no reason it can’t move back above 60, and make a run near 70 by spring. It’s still a Buy. BUY.
Earnings: Done
