Medicare for All! Pain for Healthcare Investors!
I want to highlight two things quickly before we get to our stocks: small cap versus large cap relative sector performance, and this week’s healthcare/medtech/biotech stock dive.
The chart below shows the year-to-date relative performance of small-cap versus large-cap sectors. It’s self-explanatory, so the only thing I’ll flag is the dismal relative performance of healthcare stocks in both asset classes. Everything else just helps put the current market in perspective and should help give you a sense of why your portfolio is acting as it is, depending on your exposure.
This second chart shows small- versus large-cap sector performance since the election (November 8, 2016). Check out the massive outperformance of small-cap healthcare stocks, which are up 77% versus 22% for large caps.
These charts show how streaky areas of the market can be. And, how when talk of Medicare for All comes into focus it can wreak havoc on an area of the market that’s outperformed, in part because it has done so well over an extended period of time.
I’m going to (mostly) skate right by all the societal and political comments that could be made about the implications of “Medicare for All,” the theoretical government-administered healthcare coverage that would extend to most U.S. citizens and change the business plans for health insurers, medical device manufacturers, drug companies, doctors and so on.
Except to make a couple of quick points.
First, Medicare covers about 60 million Americans. UnitedHealth Group (UNH) covers almost 49 million. When the CEO of that company says (on the quarterly earnings call) that Medicare for All would represent a “… wholesale disruption of America …” and would “… surely have a severe impact on the economy and jobs – all without fundamentally increasing access to care …” the market starts to pay attention.
What are the chances of such a program coming to fruition? I think they’re slim. But you never know. And any uncertainty in a market as big as healthcare is going to cause some volatility. As we roll closer to 2020 this debate is likely going to heat up.
On the one hand that could mean healthcare-related stocks will continue to get knocked around. On the other, the market may become more comfortable with the debate (consider what we’ve become accustomed to over the last two years), which could easily shift as time goes on and Americans learn more about what the puts and takes of any proposals are.
Bottom line: Prepare yourself for more ups and downs in our medtech & biotech stocks if this debate heats up. I’m not planning to step out of the space since I think this will pass and we can still do quite well with these types of stocks.
But if you don’t want to deal with it, that’s fine! Get out (or reduce exposure) and focus your attention on other positions/sectors in the portfolio.
Changes this Week
None
Updates
AppFolio (APPF) was a beacon of light in our portfolio this week. It is one of only two stocks that rose, and it was up 8%! We’re roughly two points below the 52-week high of 91.49 from last September. It’s going to be very interesting to see if the stock can punch through that level. It seems the odds are pretty good so I’m keeping at Buy. That said, be relatively conservative with your buying at these levels since we have enjoyed a 50% move since the beginning of the year. Earnings are due in two weeks. BUY.
Announced Earnings Date: May 2
Arena Pharmaceuticals (ARNA) dropped 9% this week, which brought the stock back to where it was three weeks ago. This wasn’t a stock-specific retreat; the biotech index (IBB) was down almost 7% over the past week and looks worse to me given that it broke below support at 108 (it’s at 104 now). As I’ve said before we’re playing the long game with Arena so keep Holding. HOLD.
Estimated Earnings Date: May 8
Avalara (AVLR) was moved to hold two weeks ago to give the stock a chance to consolidate some of its recent gains. It’s down 2% this week after dropping in four of the last five sessions, but the chart still looks good. AVLR has been consolidating for a month in a tight range and that’s a good thing. Earnings will be out on May 7. This will be a highly anticipated report because AVLR has been public for less than a year and because the Wayfair vs. South Dakota Supreme Court decision has opened the floodgates for many companies that had previously skirted state sales tax collections. One detail I’ll be looking at: in Avalara’s 10K Annual report the company disclosed that it was required to reclassify $170,000 (June quarter), $392,000 (September quarter) and $493,000 (fourth quarter) from “Interest income” into “Subscription and returns revenue.” Where does this revenue come from? It’s the interest Avalara generates on funds that it held between the time of collecting from customers and submitting to the taxing authorities. As the business ramps up this float could be a very nice source of incremental revenue. HOLD.
Announced Earnings Date: May 7
Bottomline Technologies (EPAY) slipped 4% this week on no major news. Management announced a new capability to its Legal Solutions platform (PartnerSelect) that helps law firms and insurance carriers work better together. Recall that Bottomline is focused on helping businesses pay and get paid. It operates in an extremely complex market where business-to-business (B2B) payment networks go all over the place. Bottomline helps customers by offering simple and secure payment paths that leverage the benefits of cloud-based software and infrastructure. BUY.
Estimated Earnings Date: May 3
CareDx (CDNA) was looking better last week after it went on the offensive with a second lawsuit against Natera (NTRA), alleging false advertising. But with the meltdown in healthcare stocks this week there was little incentive for investors to keep bidding up the stock. It’s now back to where it was in mid-February and I’m very glad we took partial profits. I do think this stock will still work out for us, but the current environment isn’t exactly creating a lot of confidence. Expect the battle with Natera to weigh on investor sentiment until some resolution is reached. I’ll keep watching closely. HOLD.
Estimated Earnings Date: May 10
Chefs’ Warehouse (CHEF) is one of those sleeper stocks that can come out of nowhere to make a big move just when your portfolio needs it. We’ve had a couple of those moves but so far none have had any real staying power since the stock has essentially been moving sideways since early September (albeit in a relatively wide range of 10 points, between 29 and 39). It feels like the time is right for the stock to make a move and the tightening trading range over the past two months suggests the spring could be loading up. We’ll see. Keeping at Buy. BUY.
Announced Earnings Date: May 1
Codexis (CDXS) gave up last week’s gain this week, mostly because of Wednesday’s healthcare stock selloff. We’re still above 19 here (barely), which is a level of fairly solid support (the stock traded around this level twice in March). The chart had been showing a pattern of higher highs and higher lows, now it could be settling into a consolidation phase in the 19 to 22 area. A little early to tell. It’s kind of a complicated story to digest so I think investors tend to get excited about the stock when they’ve recently read about it, but then forget what it does.
If you need a refresher, Codexis is an industrial biotechnology company that has developed a proprietary technology platform, CodeEvolver, that uses artificial intelligence and machine learning to create new proteins for use in customer products, manufacturing processes and other commercial dimensions. These engineered novel proteins overcome the inherent limitations of naturally-occurring proteins. When it started in 2002 the company first targeted the pharmaceuticals industry. It has since expanded into food and nutrition, molecular diagnostics, biotherapeutics, agriculture and other industries. Its protein catalysts help customers manufacture products at a lower cost and with lower fixed capital investment. They also reduce the cost of development of complex chemical synthesis processes and can even eliminate entire steps from chemical production. And they allow for the manufacture of purer end-products with lower levels of impurities. Look for 17% revenue growth (to $71 million) and adjusted EPS of -$0.23 in 2019. The senior VP of R&D, Jim Lalonde, is resigning and that is something we want to hear more about when management hosts a conference call in May. BUY.
Estimated Earnings Date: May 10
Everbridge (EVBG) rolled over a little this week, slipping 8% and dropping below its 50-day line for the first time since it crossed back above it around Christmas. This move wasn’t unexpected; I’ve had the stock at hold for a little while now given that it’s trading near all-time highs on price and valuation. Earnings will be out on May 6. HOLD.
Announced Earnings Date: May 6
Goosehead Insurance (GSHD) isn’t giving me a lot to talk about. Shares have been bouncing around for months and while the weekly charts shows the slightest of uptrends you really have to look hard to see it. As I’ve said before, this is a relatively thinly traded stock that just went public a year ago (and is up a lot from its IPO price) so the market is still trying to figure out if Goosehead has staying power. I think it does. Keep averaging in. BUY.
Estimated Earnings Date: May 5
Quanterix (QTRX) was the April addition and has suffered the same fate as other healthcare/biotech stocks over the past week. Still, I’m keeping at Buy. 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 key asset is its next-generation, ultra-sensitive digital immunoassay platform, which is based on a proprietary Simoa bead-based detection technology. Quanterix is currently selling into health science research markets, with most applications in neurology and oncology. It is also developing a go-to-market strategy to enter the diagnostics market, which will expose it to FDA approvals and reimbursement risk. Protein analysis is earlier-stage than DNA analysis, and this company gives you pure-play exposure to the trend. BUY.
Estimated Earnings Date: May 9
Q2 Holdings (QTWO) was, along with AppFolio, our other “winner” this week. Though to be clear a 1% gain isn’t exactly something to brag about. I think what we’re seeing here is that analysts and investors became more excited about the long-term growth potential after management hosted the analyst day back in February (it had been a while since the last one) and that inspired confidence and pushed the stock up to where it is now. Sine then it’s become a wait-and-see story with the market looking for follow-up comments (and performance) on the themes discussed at the analyst day (expansion beyond subscription and services with Q2Open, which connects with not-traditional banks, Cloud Lending ramp, TAM expansion, leverage in the biz model, etc.). That leaves the stock in a bit of a holding pattern until the earnings report, which we’ve just learned is due on May 8. Current consensus is for revenue to be up 28% this year but for EPS to dip (still positive) due to investments. I think you can still pick up shares around this level. BUY.
Announced Earnings Date: May 8
Rapid7 (RPD) slipped from all-time highs last week but the trend is far from broken. Security has been a hot space lately and analysts are going to be watching closely to see if the secular growth drivers (uptick in threat levels, complexity of environments due to cloud, compliance requirements, vendor consolidation, etc.) remain intact. As one of the smaller vendors with both security and visibility Rapid7 appears well-positioned. But there’s no doubt there will be some winners and losers as we move through earnings season and stocks react to the past quarter and forward guidance. Let’s keep holding through earnings then see where we’re at.
HOLD.
Announced Earnings Date: May 2
Repligen (RGEN) hasn’t given us anything to talk about for weeks. The stock dipped below its 55-to-60 trading range but firmed up a little yesterday (closed at 54.76). The stock should have less downside risk since it’s appreciated far less than other stocks in 2019 and has scarcity value (one of few small cap pure plays in the bioprocessing equipment space). Acquisition potential exists with big players Danaher (DHR) and Thermo Fisher Scientific (TMO) both on the short list. BUY.
Estimated Earnings Date: May 8
Upland Software (UPLD) continues to consolidate in the 40-to-43 range after breaking out above 35 in March after a big Q4 beat. No real news and you can still pick up shares around this level. If you’ve forgotten what the company does, Upland provides cloud-based Enterprise Work Management (EWM) software to companies where collaboration and teamwork are critical to their operations. Following last quarter’s report, consensus estimates for revenue growth in 2019 have risen from 27% to 31% (to $197 million), while adjusted EPS estimates have increased from $1.98 to $2.11. BUY.
Estimated Earnings Date: May 14
