“The intensity of man’s emotions is a greater driving force and more decisive than the sum total of his education, his money, plus the size of his brain!”—From Dr. Bronner’s soap bottle
It’s still dicey out there with the market now searching for “appropriate” valuations for stocks. That’s a process that will take some time to work out as major questions about the health of both the U.S. and global economies loom large. Sectors are being taken out to the wood shed one by one. First it was biotech. Then oil. Then tech. And now banks. There are few places to hide and completely avoid the pain—perhaps aside from utilities. But that’s not exactly the place for a small-cap growth advisory to focus!
Gold has been another outperformer of late. My watch list of junior gold miners is on fire. The challenge there is that they’ve rallied hard several times over the past four years, but each time it’s been a head fake—the long-term trend is still down. If a number of these companies can get off their backs and stand strong for a few weeks, I’ll consider adding one to our portfolio (most on my watch list now trade well below 1.00). But to be perfectly honest, my preference is to focus on companies that are developing valuable products, not digging for gold.
This updated chart of sector performance for both large and small caps so far this year should put a little more context around the discussion. I think it speaks for itself.
We’ve been through this before, most recently in 2011 and, of course, in 2008-2009. While many of the details that are driving stocks now are different, my game plan remains much the same: focus on emerging pure-play small caps with significant exposure to major global and/or regional growth and recovery trends.
Good candidates need to have great business models. They need to have excellent products now, and show evidence that more excellent products are coming in the future. And they have to show solid fundamentals, including revenue and earnings growth. Even if they’re not profitable now, the earnings trend needs to be up. There also has to be at least a few upcoming milestones and events that can energize shares and build long-term shareholder interest.
The window of opportunity to buy these companies at great prices often comes during market corrections such as this. The challenge is that only in hindsight does it become obvious when the right time to buy (or sell) was. We will take some hits as the market searches, and eventually finds, a bottom. Stick to stop-loss levels (I use 30%, you should use what feels appropriate for you), average into positions (this is up to you since I record prices on the day a stock is recommended) and don’t do anything too drastic. When the market turns, we will participate in the upside.
This week we had three of our stocks report, and we become incrementally more defensive. Two stocks are moved to Sell. Two more are moved to Hold. Details below.Updates
Apigee (APIC)
The stock was moved to Sell on Tuesday after it broke below my 30% loss limit level. No further updates. SELL.Estimated Earnings Release Date: 2/29/16
Blackbaud (BLKB)
Management reported a solid Q4 Tuesday after the bell, and I sent out a Special Bulletin on Wednesday detailing the results. When asked how it sees the choppy global landscape, management had this to say, “What’s interesting for us is because the customer base in our entire market is non-profits and foundations, they don’t necessarily likely mirror the for-profit world. Just going back in history, right, the sector pretty much from a giving standpoint has tracked with U.S. GDP for 40 some odd years ... It’s a very large market and it’s pretty healthy and growing. And it’s in its early days of switching to online, the online percentage in the U.S. is less than 10%, and a lot of our opportunity is to drive that transition, which is sort of needed in the industry. And our share of the market is pretty small. So it’s a pretty resilient marketplace.” The stock is holding up much better than many in this market, even though the February 5 software stock crash took it below its 200-day moving average. Maintaining at buy.
BUY.
Earnings Release: Done
eMagin (EMAN)
The stock has held on to the majority of last week’s 30% rally. We’re still a month away from the next earnings date, so I don’t expect any significant news before then. There will likely be a lot of discussion on the conference call about the licensing deal with the unnamed company, who will use EMAN’s 4-megapixel OLED microdisplays in their VR/AR headsets. Continue to hold.HOLD.
Estimated Earnings Release Date: 3/10/16
Imprivata (IMPR)
Last week’s rally faded and the stock is now just below 11. I don’t expect any big moves before next Tuesday’s earnings release, the results of which could easily determine whether we stay or go. Remember that in early January IMPR announced that Q4 results should come in ahead of management’s prior guidance of $32 to $34 million. It also said that new product sales were strong and that, while small hospital and non-healthcare markets remain soft, it added a record number of healthcare customers in 2015. The market needs additional detail and a return to 12 to believe in the story.HOLD.
Confirmed Earnings Release Date: 2/16/16
LogMeIn (LOGM)
The results are in and, once again, LOGM did better than expected. The bar for Q4 was set at 27% revenue growth (to $74.5 million), and it delivered $76.1 million. Adjusted EPS came in four cents ahead of expectations at $0.51. Adjusted EBITDA margin (earnings before interest, taxes, depreciation and amortization) was up from 24.9% to 27.5%, meaning the company is more profitable in this year’s Q4 than last year’s. For the full year, revenue growth was 22% to $271.6 million, adjusted EPS was up 40.6% to $1.66, and EBITDA margin was up to 24.9% from 22.3%.Management also raised forward guidance for 2016, stating that it now expects revenue of $322 million to $326 million (up from $322 million at the midpoint), implying 19% to 20% growth. It also guided for adjusted EPS of $1.70 to $1.77, just shy of the consensus estimate of $1.78. Unfortunately, earnings this year is expected to be dented by increases in hiring, R&D and stock-based compensation, but that was already known. And there should be plenty of room to do better than expected, which LogMeIn typically does. A share buyback program should help move EPS higher (as more shares are removed from the market).
BoldChat and join.me continue to grow faster than the company as larger deals move the needle. Management thinks BoldChat is taking market share from LivePerson (LPSN), a stock that was down 18% yesterday after a disappointing Q4 report (LPSN grew only 2%, expects a contraction in 2016 and is way behind LogMeIn in mobile). Xively continues to catch on. Management highlighted Lutron as a company that has moved from beta phase to full implementation. On a product line basis, Q4 collaboration cloud revenue grew 40%, IT management cloud revenue grew 35%, and service cloud revenue grew 9%. Renewal rates averaged 80% across all products.
Management stated their goal to double revenue within the next three years. That implies average annual revenue growth of 27%. The market isn’t on board however. In early trading today, shares are down around 10%. This is an emerging pattern with software stocks that don’t knock the cover off the ball. While the growth story looks intact, I have to move the stock to Hold due to the share price reaction. If it closes below 40.27 today, I may move to Sell on Monday.HOLD.
Earnings Release: DONE
Mitek Systems (MITK)
The stock remains relatively resilient in this tough market. Shares fell back over the last week, but have held above 4. With its quarterly report now two weeks old, MITK has to keep the story fresh. It did so this week by putting out a press release announcing a partnership with VC-backed IdentityMind Global, who will use Mitek’s Mobile Verify as part of its Fraud Prevention and Risk Management platform. IdentityMind’s platform provides identity-based payments, risk management, fraud prevention and anti-money laundering services for banks, payment processors, digital currency exchanges (including Bitcoin) and other financial institutions. IdentityMind Global is in an exciting market and has a clear need for reliable identification solutions. Looks like a good partnership.HOLD.
Confirmed Earnings Release Date: DONE
Nanostring Technologies (NSTG)
Shares had another challenging week as they returned to their January 2016 low. That was despite a couple of news items, the first of which is that the American Society of Clinical Oncology (ASCO) has recommended Prosigna to guide therapy-related decisions for women with early-stage invasive breast cancer with known hormone receptor and HER2 status. This is the sixth major breast cancer treatment guideline that has included Prosigna over the last 12 months. It should help expand the product’s market and increase reimbursements. The second piece of news is that the company presented proof-of-concept data for its novel massively parallel single molecule sequencing chemistry at the Advances in Genome Biology and Technology (AGBT) Meeting in Orlando, Florida. The chemistry showed low intrinsic error rate, and the ability to provide high consensus accuracy at low coverage by non-destructively sequencing the same native DNA multiple times. The data was collected from a modified nCounter SPRINT Profiler, and while commercialization is a few years out, it’s another example of the many applications for Nanostring’s optical bar-coding technology. We should get additional details in two weeks when the company reports. There are a lot of positives for NSTG, but biotech is incredibly weak. It makes sense to become incrementally more defensive here and move the stock to Hold.HOLD.
Confirmed Earnings Release Date: 2/29/16
PFSweb (PFSW)
Shares have been following the broad market down. Earnings are still about a month away, so I don’t expect any major news in the near future. Keeping at Buy.BUY.
Estimated Earnings Release Date: 3/3/16
Resverlogix (RVXCF, RVX.TO)
The Toronto-listed shares (RVX.TO) had held above 1.50 since September 2015, but this week that level was taken out (shares closed at 1.42 yesterday). The stock has a good story, but it will be several years before we get conclusive results from the BETonMACE trial. With the stock looking weak, biotech in the dumps and the broad market telling us to be defensive, I think it’s wise to step aside. I expect some investors will wish to hold on indefinitely, and I certainly don’t wish to try and talk you out of that—patience could easily be rewarded at some point down the road. But my personal choice is to move toward stocks that don’t face such binary outcomes (i.e., either a “win” or “lose” scenario), given the current market environment.SELL.
USA Technologies (USAT)
Last week’s new addition reported official results this morning that came in better than its pre-announced results from January 28. Q4 revenue growth was 44% to $18.5 million (management had estimated $18 million) and adjusted EPS of $0.02 was a penny ahead of expectations. USAT added 20,000 net new connections (versus 12,000 in the year-ago quarter), bringing the total up to 369,000, an increase of 28%. It now has 10,625 customers, a year-over-year increase of 26%. Transaction volume was up 49%, the dollar value of transactions was up 55%, and 89% of new connections came from existing customers. License and transaction revenues was up 30% to $13,674 and equipment sales were up 106% to $4.83 million, largely due to the QuickStart program that I detailed in the report.Management highlighted that the VendScreen acquisition is much more than just a fancy user interface with product information (though that is important!). It’s also a platform that allows for advertising, couponing, loyalty and other customer interaction services. It said there will be some one-time costs, but that the acquisition will be accretive in 2016. We’ll get more details on those costs in the next quarter.
Looking forward, management is guiding for fiscal year 2016 revenue growth of 20% to $69 million to $71 million, 75,000 new connections (for a fiscal year-end target of 400,000) and improvement in adjusted EPS. This is the same guidance that I outlined in my report. I also stated that I would take a stab at an EPS target—I’m going with $0.05 to $0.07 this year (I fully admit that’s basically a guess).
It’s notable that USA Tech is already at $35.1 million in sales this year—that’s around 50% of its sales target for the year. Seasonally, the second half of the year has historically been much stronger (last year at this point, USA Tech was at only around 25% of the full-year result). The implication is that USA Tech is more than on target to exceed its guidance. This begs the question, why didn’t management raise guidance? It was asked on the call. The response was that it’s off to a great start to the year, and is “… not prepared to move the number at this part,” though it’s “… very, very encouraged by the results in the first half.” That’s all the info that could be dragged out, which means we’ll have to wait until Q3 results to get another data point. Given the big improvement in device sales due to the QuickStart program, I suspect management is reluctant to say that trend will continue indefinitely. That said, if the company doesn’t beat that conservative guidance, it will be a major disappointment. A quick calculation suggests 2016 revenue could be closer to $80 million. So far so good here. Maintaining at Buy. BUY.
Remember to email me at tyler@cabot.net with any questions or comments about any of our stocks, Cabot Small-Cap Confidential, or anything else on your mind.
Cabot Small-Cap Confidential Stocks and Closing Prices on February 11, 2016:
| Stock | Date Bought | Price Bought | Closing Price | Profit | Rating |
|---|---|---|---|---|---|
| Apigee (APIC) | 10/2/15 | 9.05 | 5.52 | -39% | Sell |
| Blackbaud (BLKB) | 11/6/15 | 62.18 | 51.94 | -16% | Buy |
| eMagin (EMAN) | 5/5/14 | 2.69 | 1.81 | -33% | Hold |
| Imprivata (IMPR) | 9/4/15 | 19.33 | 10.93 | -43% | Hold |
| LogMeIn (LOGM) | 11/8/16 | 58.13 | 43.41 | -25% | Hold |
| Mitek Systems (MITK) | 2/4/13 | 3.93 | 4.27 | 9% | Hold |
| Nanostring Technologies (NSTG) | 8/7/15 | 15.40 | 11.89 | -23% | Hold |
| PFSweb (PFSW) | 12/4/15 | 12.59 | 10.88 | -14% | Buy |
| Resverlogix (RVXCP) | 5/1/15 | 2.25 | 1.10 | -51% | Sell |
| USA Technologies | 2/5/16 | 3.51 | 3.22 | -8% | Buy |