The main thing that jumped out at me over the past week was stronger performance across a wide variety of small-cap sectors.
Small-cap discretionary, energy, financials, industrials, technology and materials are all moving higher. That’s a healthy mix, and it’s helped push the S&P 600 Small Cap Index back up near overhead resistance (see chart below).
I think the chances are improving that the small-cap index will punch above the 980 level and break out, then run back up near its 2018 highs, over the next two months. In terms of positive trends and catalysts, we have earnings coming up, we’ve moved through the first quarter of the calendar year, small caps have consolidated their gains, investors should be looking toward the asset class for exposure to the U.S. economy, and the other major indices are already pushing up against their 2018 highs.
For the last two months, small caps (as an asset class) haven’t done much. It’s time to make a move.
If you want to position yourself for a broad-based move higher in small caps, go with the ETFs that track the S&P 600 Index; IJR (core), IJS (value) or IJT (growth).
For individual stocks, which is where most of us are really looking for opportunities, there are still names in our current portfolio rated Buy. This week, news flow has been quiet (which is normal leading up to earnings season), so I’ve included charts for each position to supplement my commentary. I’ve also added estimated earnings release dates.
Changes this week
CareDx (CDNA) moved to Hold
Updates
AppFolio (APPF) was up another 3% this week (after being up 3% last week) and is now just 11% below last September’s high. The stock wasn’t as quick to recover in January as many in its peer group, but the modest pace of its recovery has helped it keep moving higher while many other software stocks have taken a break. As I said last week, valuation is still well below the peak from last year and with the wind at our back I’ll keep at Buy. I think we still have room to run here. BUY.
Estimated Earnings Date: April 30
Arena Pharmaceuticals (ARNA) was flat this week on no news. It’s worth mentioning that Arena’s trend (up and down week to week, but mostly sideways month to month) isn’t too different from that of the broader biotech group recently. Keep being patient—we’re playing the long game here. HOLD.
Estimated Earnings Date: May 8
Avalara (AVLR) was moved to hold last week to give the stock a chance to consolidate some of its recent gains. The only news is a partnership with the Vacation Rental Management Association (VRNA) to give VRNA members tax information to better manage the unique tax requirements in their industry. Avalara’s MyLodgeTax compliance solution is tailor made for this industry group. This isn’t a ground-breaking development but rather just another example of the company’s effort to put its solutions in front of users that could benefit from its breadth of product offerings. HOLD.
Estimated Earnings Date: April 30
Bottomline Technologies (EPAY) was flat again this week on absolutely no news. I think Bottomline’s day will come back around since the broader financial software group is doing quite well. As I said last week, never rule out an acquisition here. Last month Worldpay announced it would be acquired by Fidelity National Information Services. And in January Fiserv decided announced it would buy First Data. Keeping at Buy. BUY.
Estimated Earnings Date: May 3
CareDx (CDNA) went back on the offensive this week, filing a second lawsuit against Natera (NTRA). This one alleges false advertising for a kidney transplant test that Natera compares to AlloSure in its marketing materials. Recall that the first lawsuit, filed a few weeks ago, alleges that Natera is infringing on two patents that CareDx has exclusive use of through a licensing agreement with Stanford. Natera has remained quiet on the suits, with the exception of a boilerplate statement. I should note that Illumina (ILMN) also sued Natera for patent infringement for a non-invasive prenatal test that relies on analysis of cell-free DNA present in maternal blood (that case is moving toward trial). And last year Natera settled a lawsuit with the U.S. government for making false claims to several government health programs (two former Natera employee whistleblowers spoke up). And let’s not forget that Guardant (GH) and Foundation Medicine went at each other over advertising claims, settled, and are now back at it again. And Guardant is going at it with Personal Genome Diagnostics over its cell-free DNA technology.
What this all tells us is that all these companies are fighting tooth and nail to carve out space in their respective markets, and then vigorously defend it. DNA testing is a white-hot market, and there is a lot to be gained. Where the chips will fall between CareDx and Natera is unknown but I want to keep our wagon hitched to CareDx and see where it goes. I recommended taking partial profits (selling a quarter position) a couple weeks ago just to reduce risk a little, and am now moving the stock back to Hold. I expect these lawsuits will cost some money and drag on for a while, and it’s impossible to say how everything will shake out. But we’re still up nicely on the stock (around 27%) so we have wiggle room. HOLD.
Estimated Earnings Date: May 10
Chefs’ Warehouse (CHEF) is making a little run now having put together a few weeks of back-to-back modest gains coming off the 30-price level (up 2% over each of the last three weeks). Notably, it jumped above its 50-day line on Wednesday and closed right at its 200-day line yesterday. Fundamentally, there’s no news here. I’m just watching the chart closely since there’s potential for a 15% to 20% move over the next month just to get back near previous highs. You should look at this period (starting around November) as an extended consolidation phase. BUY.
Estimated Earnings Date: May 9
Codexis (CDXS) was up 5% last week, but down 2% this week. The stock still looks great to me as that pattern of higher highs and higher lows is still holding. The next level to watch for is 22.50; a break above that and we’re likely off to new highs (after which shares would probably retreat back into the 20 area, if the past pattern continues). Keep averaging in on those pullbacks—with this type of stock you must forget about trying to time it perfectly and just build a position based on the chart pattern. The senior VP of R&D, Jim Lalonde, is resigning in May. BUY.
Estimated Earnings Date: May 10
Everbridge (EVBG) will be deployed, again, when the 123rd Boston Marathon kicks off on Monday. The Boston Athletic Association (BAA) will use the company’s Critical Event Management (CEM) platform to communicate with roughly 10,000 volunteers, medical tent personnel, the Boston police and fire departments and the Boston public health commission. Residents can use the mobile app as well. The stock is trading near all-time highs on price and valuation. Keep Holding. HOLD.
Estimated Earnings Date: May 7
Goosehead Insurance (GSHD) Last week I wrote, “One of these days shares will break out.” That didn’t happen this past week, but the stock did jump 6% and back above its 50- and 200-day moving average lines. It seems to be trying to put together a modest string of higher highs and higher lows. The real test is about 12% above where we are now (around the 33 - 34 level). Keep averaging in. This is a relatively thinly traded stock that just went public a year ago (and is up handsomely from its IPO price) so the market is still trying to figure out if Goosehead is the real deal. I think it is. BUY.
Estimated Earnings Date: May 5
Quanterix (QTRX) was last week’s new addition. The company is commercializing a disruptive protein analysis technology that has the potential to detect disease in seemingly healthy, asymptomatic people, with simple blood draws taken as part of routine health screening. The technology can also be used to help develop treatments for people that are showing symptoms, and those receiving treatment. The key asset is its next-generation, ultra-sensitive digital immunoassay platform, which is based on a proprietary Simoa bead-based detection technology. This technology allows customers to reliably detect protein biomarkers in extremely low concentrations in blood, serum and other fluids with sensitivity 1,000 times more powerful than other options on the market.
Quanterix is currently selling into health science research markets, with most applications in neurology and oncology. Applications in infectious disease, cardiology and inflammation exist as well. Quanterix is developing a go-to-market strategy to enter the diagnostics market, which will expose it to FDA approvals and reimbursement risk. This could be a big opportunity but is also a big leap. There’s been a lot of excitement growing around DNA analysis, and proteomics (encompasses both genomic and protein research) is in an earlier stage of development. Expect some volatility in the stock over time and be sure to average in.
I received pushback on this recommendation from a subscriber that feels, based on a lot of experience in the healthcare field, that patients don’t want to know the results of some of the tests that Quanterix’s customers can develop (for the record, I love to hear your opinions, whether they align with my own analysis, theories, beliefs, etc. or not—diversity of opinion/thought/experience is a good thing!).
Suggested examples include Alzheimer’s Disease and some forms of cancer. On the one hand, I can see that. On the other, I have a hard time squaring up this potential concern with the evidence to date. So far, Merck, Eli Lilly, Pfizer and Biogen have all tried, and failed, to develop Alzheimer’s treatments. Many attempts have focused on beta amyloid, a protein that collects in the brain and, when Alzheimer’s is present, clumps into plaques. For reference, look up the below Bloomberg article from March 22.
If these companies are searching for Alzheimer’s treatments (and even if they’re ready to give up), that aligns with what Quanterix is seeing in terms of demand for its platform to research this one disease. But the company isn’t an Alzheimer’s pure play. Customers are working on a plethora of other diseases and injuries, including Parkinson’s disease, dementia, multiple sclerosis, concussion/traumatic brain injury (TBI), chronic traumatic encephalopathy (CTE), multiple forms of cancer and HIV, just for starters.
I see Quanterix’s technology as having a wide variety of applications. If it just stays in the research field, growth should continue, but be somewhat limited. If it can successfully cross the chasm into diagnostics, the potential is huge. Yes, there are risks. I’ll leave it up to you to decide if Quanterix is for you, or not. And how big, or small, your desired position is.
As always, please share your thoughts with me on our stocks, whether you love them, don’t like them or are indifferent! My email address is: tyler@cabotwealth.com. Quanterix is a Buy. BUY.
Estimated Earnings Date: May 9
Q2 Holdings (QTWO) has been under my watchful eye over the past week given the quick drop to 66 last Thursday. Not that a few points is a big deal in the grand scheme of things, but still. This week the stock has looked a lot better and is trading comfortably in the 66 to 72 range. It’s staying at Buy. BUY.
Estimated Earnings Date: May 7
Rapid7 (RPD) popped right back up near all-time highs this week. Last week I forgot to mention that the company acquired a small company that provides end-to-end network traffic visibility and analytics across cloud, virtual and physical networks. The target is NetFort, and it won’t have a big impact on operating results. This week management announced an earnings date; look for Q1 2019 results to be released on May 2. HOLD.
Announced Earnings Date: Thursday, May 2
Repligen (RGEN) hasn’t given us anything to talk about for weeks. The stock is still hanging out in the 55 to 60 range, where it’s been since the beginning of February. Remember, the story here is about one of the last small-cap, pure-play bioprocessing equipment manufacturers out there. Repligen has carved out a leadership position in specialized markets, in part because it’s really good at what it does. And it’s locked into the big trends, like single-use, prepacked columns and exposure to biosimilars. As one of the smaller players, Repligen is also reported to have top-notch customer service (it has more to lose by screwing up, and more to gain by being a high touch company). Acquisition potential is very real here, with big players Danaher (DHR) and Thermo Fisher Scientific (TMO) both on the short list. Keep buying. BUY.
Estimated Earnings Date: May 8
Upland Software (UPLD) continues to roll out solution upgrades and bundled products (i.e. suites). Last week it announced Upland PSA (Professional Services Automation Suite), a bundle of existing products, plus some improvements. This week it announced a major release for its Knowledge management (KM) solution, RightAnswers. The release improves the user experience and includes some artificial intelligence (AI) and machine learning (MI) upgrades/improvements. The stock still looks to be in a consolidation phase. BUY.
Estimated Earnings Date: May 14
