The S&P 600 Small Cap Index has pulled back a bit more after trading up near the high end of my expected trading range last week. We’ll continue to watch this range (900 to 1,000) as I expect the index to bounce around within it for several weeks, if not months.
On a stock-specific level, action in our portfolio was mixed this week as many stocks followed the broad market’s trend and pulled back. That said, we did have a few standout performers that rose to new highs after reporting, including last week’s new addition Upland Software (UPLD), which is trading up roughly 15% as of mid-morning today. And there’s some M&A action in the bioprocessing space that’s of interest.
As far as what to do now, don’t change your strategy. Keep averaging in to names that are acting strong and/or which have some room before they reach overhead resistance and/or those holding above key support levels. Keep watching those that are more beaten up and haven’t really established an uptrend. There’s no urgency there. I think that with earnings season coming to an end (our stocks have all reported) there will be far fewer upside catalysts and investors will start to look at macro trends again (which don’t look particularly great). This isn’t the time to be overly aggressive or to make bold moves.
Updated guidance on all stocks below.
Changes this week
None
Updates
AppFolio (APPF) fourth-quarter results (reported last Thursday) were met with a “meh” by the market, and while shares did rebound a good amount on Friday there hasn’t been any carry through. In thinking about this further I suspect that the earnings miss (driven by a ramp-up in spending) combined with a relatively opaque management style that doesn’t give much details on how the business is tracking (no guidance on margins, cash flow, profitability), isn’t a great mix in the current market environment. The share buyback program should help put a floor under the stock. But at the same time I do wonder who the big investor out there may be that would be chomping at the bit to load up on the stock. Keeping at Buy for now, but will be watching closely. BUY.
Arena Pharmaceuticals (ARNA) gave a business update last week that was fine, but shares have retreated (along with the broader biotech sector) on news that FDA leader Scott Gottlieb will resign next month. With no replacement yet named it’s unknown what the future of the agency will look like. That said, it seems unlikely that the FDA would do an about-face and try to slow the pace of drug development. As I said last week, Arena has a few potential blockbuster treatments that could drive meaningful revenue in 2022 and beyond. It also has $1.3 billion in cash so it’s well funded. Things to watch in the coming year include: (1) beginning of a pivotal trial for etrasimod in ulcerative colitis (UC) in mid-2019 (two studies, one 12-week, one 52-week), (2) beginning of phase 2b/3 pivotal trials for etrasimod in Crohn’s disease (management not committing to timeline yet), (3) initiation of a phase 2 study for etrasimod in atopic dermatitis (AD) in 2019, (4) a multi-dose phase 2b trial for olorinab in irritable bowel syndrome (IBS) pain in 2019, and (5) Investigational New Drug (IND) submission for ADP418 for treatment of decompensated heart in second half 2019. In terms of data readouts, first data for etrasimod in UC and Crohn’s are probably 2021 events, while data for etrasimod in AD is likely coming in 2020. I’ve had the stock at hold given the big run and will stick with that rating for now. HOLD.
Avalara (AVLR) is trading right near an all-time high and it’s hard to find fault with how shares are acting. It’s holding on to all the gains from its Q4 report in the second week of February and the fundamental story remains compelling. To recap, the Supreme Court’s South Dakota vs. Wayfair decision is driving a lot of activity as states pass legislation (over 30 since the decision) requiring online businesses to collect and remit sales tax, and that helps feed prospects directly into Avalara’s sales pipeline. BUY.
Bottomline Technologies (EPAY) is our business-to-business payments stock and has been consolidating in the 42 to 52 range for roughly three months now. There’s no change in that trend yet. The stock attempted to break above 52 late last week but was unable to. It’ll have another go in the near future, I suspect. HOLD.
CareDx (CDNA) shot up to a new all-time high yesterday after reporting a big Q4 beat. Revenue was up 88.1% (at the top of prelim earnings, previously released) to $23.5 million ($18.9 million in testing services revenue and $4.6 million in product revenue) while EPS of $0.01 beat by $0.10. As expected, the AlloSure non-invasive blood test continues to be the main growth driver as 100 U.S. transplant centers provided 4,575 AlloSure tests in Q4 to around 3,400 kidney transplant patients. Since launch, AlloSure has provided results to 60K patients, which represent around 3% of the total population living with a kidney transplant. Medicare represented 70% to 80% of AlloSure volume. The Kidney Outcomes AlloSure Registry (K-OAR) continues to enroll with roughly 750 of the projected 1,000 patients enrolled at 47 of 50+ projected study sites. We may get results in the first half of 2020. AlloMap test volume was up 6% with 4,057 patient results. This is likely to remain a slow and steady growth contributor.
CareDx’s product revenue of $4.6 million in Q4 is derived from the October launch of three new AlloSeq next-gen sequencing products that help assess transplant graft health. These solutions pave the way for CareDx to enter the global bone marrow transplantation market.
Management gave 2019 guidance of $105 million to $107 million (up 37% to 40%). That assumes product revenue growth of around 20%, AlloSure revenue up 100%, and AlloMap revenue up mid-single digits. Management will ramp up spending by about $4 million a quarter to fuel growth, which is going to keep a lid on EPS, which may be closer to $0.59 in 2019 than the previously expected $0.73. Management’s guidance doesn’t include any additional contribution from private payers, which may or may not come later in 2019. If it does, that would likely represent upside to guidance. As a practical matter, given the steps necessary to get studies done and a peer reviewed paper in a medical journal, significant reimbursement is likely a 2020 or 2021 catalyst for the business. Keeping at Buy but for smaller positions. BUY.
Chefs’ Warehouse (CHEF) has been a dog lately but is trading right near a support zone at 30 that has held on two previous occasions (last October and last December). This pattern is getting a little old and if shares dip much lower I’ll cut the stock. On the other hand, this had been a reliable place to buy, so in the immediate term I think there’s a greater chance shares will go up than go down. Therefore, I’m keeping at Buy. But be forewarned that I’ll flip the switch quickly if Chefs’ goes much lower. BUY.
Codexis (CDXS) is our protein specialist and reported last week. 2018 revenue was up 50%, to $61 million, and the business is tracking about as expected. There is a lot going on and it’s hard to project revenue given the cadence of deals and various revenue streams, but at a high level Codexis is building a portfolio of assets that should drive meaningful revenue over time. The stock has pulled back from resistance in the 22 to 23 range but has stayed above its 50-day line. It has a tendency to swing up and down, but if you step back and look at the one-year chart you see a pattern of mostly higher highs and higher lows. With the long-term trend still pointing up, Codexis remains a Buy. BUY.
Everbridge (EVBG) is holding near its all-time high two weeks after it reported Q4 results and remains a buy. In 2018 revenue was up 41% while EPS came in at -$0.54. Forward guidance came in ahead of consensus ($185.6 million) at $195.1 million - $196.6 million, implying around 33% growth this year. There is scarcity value here, and the company has done a great job of executing its growth agenda. Just keep new positions small and average in. BUY.
Goosehead Insurance (GSHD) fell back from a multi-month high of 34 over the last two weeks and is under modest pressure today after reporting Q4 results last night. The report was mixed as revenue missed by a hair (up 32.3% to $14.7 million) but EPS of $0.01 missed by $0.03 on higher operating expenses. Management had hinted at this last quarter but analysts misjudged by how much, and without a topline beat there weren’t enough pennies to filter down to the bottom EPS line.
Still, broadly speaking I think the quarter was just fine. The growth story remains intact and Goosehead clearly has business momentum. Customer retention remains steady at 88%. Corporate channel growth was up 25% to $8.5 million while Franchise channel growth was 43% to $6.2 million. Total written premiums were up 50% to $135 million, and these will translate into revenue in the near future.
In terms of full-year 2018 results, revenue was up 41% to $60.1 million (meeting consensus) while adjusted EPS came in at $0.20 ($0.05 shy of consensus due to the Q4 miss). Management gave forward guidance, saying 2019 revenue should grow by 33% to 41% to $80 million to $85 million (consensus was for $80 million, so this is good). No EPS guidance was given so I suspect analysts will hold EPS estimates steady at about $0.64 (up 105%) given that the revenue outlook is higher than expected but operating expenses have also been higher than expected.
Finally, management announced the special dividend that I was expecting. It’s not going to make you rich, but at $0.41 it works out to a yield of roughly 1.5%. The stock doesn’t look great today but it’s important to remember we’re in this one relatively early. It just went public last April and the market’s still trying to figure it out. I like the business model and think huge upside potential remains. Be patient. You can buy a few shares on this dip. If we see a retreat back into the 22 to 24 range I’ll become more concerned, and a dip into the 20 to 22 area would certainly set off some red flags. But I see shares more likely to hold up at 26 and recover over the next few weeks. BUY.
Q2 Holdings (QTWO) was moved back to buy last week following a compelling update from management at its first analyst day in five years. Management estimates the addressable market is now $8 billion, up from around $3.5 billion in 2014, and that its long-term model is to grow at 20%, while delivering gross margins above 40% and adjusted EBITDA margins of between 20% and 25% (versus an estimated 7% in 2019). This implies huge upside potential in terms of streamlining the business. The stock hasn’t been particularly strong this past week but I suspect that after a period of grinding Q2 will head higher again. BUY.
Rapid7 (RPD) is our cybersecurity stock and only fell a couple of percentage points this week. Shares are holding on to all the gains from the post-earnings pop in early February, which is a bullish sign. Keep holding. HOLD.
Repligen (RGEN) has pulled back with the broader MedTech group and is trading right around its 50-day line. We haven’t broken below any key technical levels (keep an eye on 54 as an area of support) and the fundamental story is still good, so keeping at buy. As with the other MedTech and biotech stocks in our portfolio, news on the succession plan at the top of the FDA is probably necessary before shares can resume a reliable trading pattern. On the M&A front it’s noteworthy that Danaher (DHR) has agreed to acquire GE Biopharma from GE Life Sciences for $21.4 billion. This should be a good acquisition for Danaher (far too big for me to cover given the $89 billion market cap), but more importantly speaks to the long-term growth potential in the bioprocessing market. The biological drug market is expected to grow around 9% annually for several years as drugs penetrate deeper into Asia, biosimilars rise to power and cell and gene therapies become more prevalent. With drug production volumes going up, bioprocessing technologies are in high demand. Repligen has existing contracts with GE, which should transfer over to Danaher, and Repligen’s current relationship with Danaher in continuous processing using OPUS pre-packed columns should be unaffected. Of course, things change, so there are no guarantees. I’d be remiss not to point out that Repligen remains one of the few pure-play suppliers in the bioprocessing market and is likely part of any discussion by bigger players when considering acquisition potential. Keeping at Buy. BUY.
Upland Software (UPLD) is our newest stock (just added last Friday) and I opened my report by talking about how nobody really gets excited to talk about enterprise work management (EWM) software, which is what Upland specializes in. I think investors are pretty excited today though!
Shares are trading up around 15% after a big Q4 beat. Revenue was up 62.6% to $45.2 million (beating by $1.74 million) while adjusted EPS of $0.58 beat by $0.09. For the full-year 2019, revenue was up 53% to $149.9 million while adjusted EPS rose 63.5% to $1.70. As discussed in my issue, much of this growth was through acquisitions. But Upland also grew organic revenue by around 10% in Q4, which is just a huge number and shows accelerating growth on this measure (6%, 6%, 7% and 10% over the last four quarters, respectively). That’s great news. In Q4, Upland added 134 new customer relationships (27 major accounts) and expanded 204 existing relationships (28 major expansions). Management also gave 2019 guidance, including revenue of $194.8 million to $198.8 million. That’s well ahead of the prior consensus of $190 million. Adjusted EBITDA margin is projected to be around 37% (as expected).
I talked about a trend of product bundling in my report, and not surprisingly Upland management has rolled out a revised go-to-market strategy. It now has seven new enterprise solution suites that each bundle a bunch of purpose-built cloud solutions (customers can also purchase individual solutions). This strategy makes sense and should help in cross-selling, driving bigger deals and helping sales force productivity.
I found management’s commentary on the big picture opportunity very interesting from the conference call. They said that Upland is the story of three platforms:(1) an M&A platform, (2) a product platform, and (3) an operating platform (UplandOne). And that they’re all helping the company tap into growth from three big tailwinds: (1) demand for automated enterprise solutions, (2) transition to cloud software, and (3) a lot of VC funding chasing the first two trends and creating new companies that become acquisition targets for Upland. I think this is a good way to frame the opportunity represented by the stock.
The bottom line here is a great quarter and a stock that’s going to earn a higher valuation and grow faster than expected. M&A activity is also likely to keep things interesting as Upland is clearly keeping its foot on the gas pedal in that department. Shares are up significantly, but should be able to digest this move and keep moving higher. Keeping at Buy, just be sure to average in. BUY.
