Another week of modest gains has investors moving back into stocks, and the major indices are around breakeven for the year. Over the last week small cap energy added almost 10% and all other sectors, save healthcare, jumped between 1% and 4%. The market feels much more stable and while I don’t advise jumping back in with both feet, I continue to think incremental buying in the stocks you want to hold for the long-term is a good move.
Small caps are still trailing their larger companions in many sectors, but the gap is closing fast. The one big area we haven’t seen any improvement in is biotech (both large and small caps). I think if this market is really going to rise, we’ll need to get some participation there. But I’m not holding my breath--I don’t think investors risk appetite is quite ravenous enough to feast on biotech bargains just yet.
This week we wound up our earnings season after hearing from two stocks, PFSweb (PFSW) and eMagin (EMAN). On average, our portfolio moved 3.4% higher on the week, led by an 18% gain in EMAN and a 6% gain in Blackbaud (BLKB). Details below.
Updates
Blackbaud (BLKB) BLKB was a standout performer this week, rallying 6% and jumping above both its 50-DMA and 200-DMA. Management released a report to assist charitable organizations in their fundraising efforts during an election year. I haven’t read the report, but the summary suggests that giving isn’t affected by the fact that donors are also shelling out cash to support candidates. More important is that nonprofits continue to communicate their cause and cultivate existing donors. BUY.
eMagin (EMAN) EMAN is holding on to the 18% gain it enjoyed over the last week. That’s a victory. The bottom line here is that the tone is more positive than it’s been, and I expect new investors might start to take a look at EMAN because of all the hype (a lot of it real) around VR/AR. We don’t have anything new and concrete to stand on, but it sounds like there is a lot in the works. Management is doing a decent job of selling the story, and backing it up with reasonable statements, and I think that should help stabilize shares. There’s not enough new news for me to pound the table and change EMAN to Buy, but there is certainly enough to maintain at Hold for now. And I think long-term investors will have a chance to make a profit here over the next couple of years (hopefully sooner).
Details: It sounds like things are improving. Q4 revenue was basically flat at $6.7 million, but beat the estimates of the two analysts following the stock by $1.06 million (that’s an 18.8% beat). The bulk of revenue continues to come from product sales ($5.7 million in Q4) as compared to R&D revenue ($1 million in Q4). You may recall EMAN took an inventory write-down in 2015 due to a cancelled order at the end of 2014. That event meant gross margin fell from 23% to 14% in Q4. However, it has been selling more new designs with better margin profiles, so backing out the write-down means gross margins in Q4 would have gone up to 31% from 23%. Net loss was $0.08 per share, versus $0.07 last year. And EMAN has $9.3 million in the bank, versus $6 million last year, mainly because of the December 2015 equity raise. Management did not provide guidance for 2016, but did say it is looking to get back to profitability thanks to stable revenue from existing products (i.e. military), while making progress on its consumer-oriented initiatives.
EMAN continues to be primarily a military-related story, with the potential to break into consumer-oriented VR/AR markets. On the military front, funding for new programs has been on the back burner for the DoD for a few years, but it sounds like that is changing. Management said, “We’re now seeing encouraging signs of new programs moving forward. And this is also evidenced by the increase in the Department of Defense budget for both 2016 and the proposal for 2017. So, we’re excited about this.” In Q4 EMAN booked orders for 25 new projects, including a new project with an unnamed European customer for $800,000 worth of displays. It has also shipped out samples of its new displays to seven customers. It believes it’s well positioned to grab a good portion of subcontracts that will require over 112,700 displays over five years, though nothing is set in stone at the moment.
On the VR front, EMAN is working to develop displays that will work for both military and consumer uses. These are focused on 2K x 2K full color microdisplays. It said a U.S. government program is set to begin in Q1 2016, and this technology is a potential fit. The government is funding the R&D effort for this. As we already know it signed a $1 million strategic licensing deal in December 2015 for headset IP (this will be recognized in 2016 and wasn’t included in Q4 results). Note that this agreement ONLY covers headset IP, and not display IP. The customer is using the IP to design the headset, and EMAN is working on a new 2K x 2K display that it plans to have ready by the time the customer has the headset design done. The timeframe for samples is by the end of 2016. EMAN has also spoken with 7 additional companies and is supplying displays for testing. Different companies are asking for different displays, and as the VR/AR market grows there will be ongoing display improvements. On the supply side, it is working with a number of companies to try and determine how to manufacture displays at scale. Any concrete news on this front would be a big deal as it would suggest both the partner and EMAN see volumes on the horizon. Shares are basically flat today after an 18% rally since last Thursday’s close. Continue to hold. HOLD.
LogMeIn (LOGM) Shares were flat this week and still trade just below the 50-DMA. Management announced that its LastPass password management product is now offering a free Authenticator app that offers multifactor authentication. The app is available through Google Play, iTunes App Store and the Microsoft App Store. Customers will need to be LastPass subscribers. Maintaining at buy. BUY.
Mitek Systems (MITK) Shares are down 1% in the week after I advised taking partial profits on MITK. There is no new news to report, and I continue to recommend holding the other half. HOLD HALF.
NanoString Technologies (NSTG) Shares have held onto much of their post-earnings rally from two weeks ago and even tacked on 4% this week on no news. They continue to trade above the 50-DMA and 200-DMA. Maintaining at buy. BUY.
PFSweb (PFSW) Management reported a solid Q4 this week and I sent out a detailed Special Bulletin on Monday. I wrote, “The company is accelerating its push to become a leader in the global eCommerce marketplace. Acquisitions have helped it become platform-agnostic, and at this point it’s mainly about ramping up the sales team and marketing budget to grow the size of the funnel. Additional acquisitions should be expected. PFSW believes that its suite of services, and the websites/engagements it has already done, will convince potential clients that it is the go-to company for website design, creation and integration, digital agency and marketing, order management, customer care and professional consulting. I agree.” Shares rose on the report then danced around for the rest of the week. Maintaining at buy. BUY.
Primo Water (PRMW) After last week’s quarterly report, news flow has been relatively quiet. This week I saw a USA Today Network report that identified 2,000 water systems across the U.S., serving six million people, that show excessive lead levels. The study was completed over the last four years. It’s just another reason why people are turning to bottled water from providers like PRMW. After last week’s 8% rise, shares were down 1% this week. Maintaining at buy below 10.00. BUY.
USA Technologies (USAT) Very little is new this week in the world of connected vending machines. Shares of USAT dropped a modest 3%, and remain well above both the 50-DMA and 200-DMA. HOLD.
Please email me at tyler@cabot.net with any questions or comments about any of our stocks, or anything else on your mind.
Cabot Small-Cap Confidential Stocks and Closing Prices on March 17, 2016:
| Stock | Date Bought | Price Bought | Closing Price | Profit | Rating |
|---|---|---|---|---|---|
| Blackbaud (BLKB) | 11/6/15 | 62.18 | 60.95 | -2% | Buy |
| eMagin (EMAN) | 5/5/14 | 2.69 | 2.00 | -26% | Hold |
| LogMeIn (LOGM) | 11/8/16 | 58.13 | 50.75 | -13% | Buy |
| Mitek Systems (MITK) | 2/4/13 | 3.93 | 5.94 | 51% | Hold Half |
| Nanostring Technologies (NSTG) | 8/7/15 | 15.40 | 15.98 | 4% | Buy |
| PFSweb (PFSW) | 12/4/15 | 12.59 | 12.78 | 2% | Buy |
| Primo Water (PRMW | 3/4/16 | 8.72 | 9.42 | 8% | Buy |
| USA Technologies | 2/5/16 | 3.51 | 3.90 | 11% | Hold |