Cabot Small-Cap Confidential Weekly Update
This is one of those periods where it’s impossible to know what’s going to happen next given all the variables. So it’s better to look at the big picture trends and not try to get too cute in the short-term. For us, that means sticking with what we have been doing, since nothing is fundamentally or technically broken.
We’re back in a choppy market with a lot of different things going on. The dollar, commodities and interest rates all seem to be moving higher. And after an initial shock from the release of the Fed’s minutes, stocks look ready to end the week in the green (we’ll see how the day wraps up).
This is one of those periods where it’s impossible to know what’s going to happen next given all the variables. So it’s better to look at the big picture trends and not try to get too cute in the short-term. For us, that means sticking with what we have been doing, since nothing is fundamentally or technically broken. If the market can work its way through this murky period without a significant correction, I think the odds of strong move higher increase.
The S&P 600 Small Cap Index continues to trade in the 660 to 710 range, but small caps have headed toward the lower end over the past week. Much has been made of a likely rate hike in July. But I think most of this retreat is simply due to the fact that stocks have been looking a little expensive on a price-to-forward-earnings ratio lately. And with earnings season coming to an end, there are far fewer near-term catalysts to drive stocks higher. We still need small caps to take out that 710 resistance level to really deliver outsized gains this year. I think it’ll happen—it’s just going to take some grinding.
Provided this retreat doesn’t drift into full-blown correction mode, I welcome it. We need a little reprieve here so small caps don’t get overextended. Yes, it stinks to have some of our stocks trade down. But, given that we’re looking for fairly significant gains, and that those tend to take some time to materialize, a few weeks of lower paper gains isn’t a big deal as far as I’m concerned. The combination of rising forward earnings and falling stocks now has small caps trading with a forward P/E of 17.3. And that’s far better than the forward P/E of over 18 recorded last week. I think that’s a good fundamental backdrop that can allow good stocks to keep rising. The riffraff could easily get pummeled during this period, so steer clear of stocks that haven’t been showing any positive momentum in either their fundamentals or their charts.
With earnings season winding down and the summer about to begin, it’s time for investment conferences. Many of our stocks will be represented at various venues around the country over the next two months. The timing of things also means we’re in the midst of a relatively quiet period in terms of news flow—most material announcements came with earnings, and anything left in the bag will probably be pulled out at a conference. So this week I don’t have much to report on.
Over the past week, eight out of 10 of our stocks fell. That’s not surprising given that eight of nine sectors dropped (health care was the odd ball) and the small cap asset class was down by 1.7%. Updates follow.
Blackbaud (BLKB) The company announced it’s expanding its corporate HQ in South Carolina. Other than that, there’s nothing fundamental to report. Shares dipped a little over the past week but are still holding above 58. Management will speak next Thursday at the B. Riley & Co. 17th Annual Investor Conference, and then at the following three speaking events in June:
• June 1: Bank of America Merrill Lynch Global Technology Conference
• June 8: Robert W. Baird & Co. Global Consumer, Technology & Services Conference
• June 9: Citi Small & Mid Cap Conference
I still like the company and think management’s road show will help reinvigorate the stock. BUY.
eMagin (EMAN) After reporting last week, the stock is relatively unchanged this week. The carrot here remains the VR/AR potential, and management shook it a little on the earnings conference call when it stated that it sees revenue from consumer VR/AR applications in 2016. We’re still hanging on, but not buying. Continue to hold. HOLD.
LeMaitre Vascular (LMAT) It’s been another quiet week for our newest stock, with no new fundamental news to report. Management will be at the Benchmark One-on-One Conference on June 2. The stock has pulled back to 15, a level that looks like a good entry point. It’s still above its 200-day moving average, but just below its 50-day moving average. BUY.
LogMeIn (LOGM) Trading volume eased this week as the stock drifted 3% lower. Management will present on Monday at the J.P. Morgan Global Technology, Media and Telecom Conference. Keeping at Buy. BUY.
Mitek Systems (MITK) Management presented at the Needham Emerging Technology Conference yesterday, and will present at the B. Riley & Company 17th Annual Investor Conference next Wednesday, May 25. The stock was up modestly this week, and management announced that its Mobile ID Verify product was selected by a top-five bank to help in account opening. The stock is on a heck of a run. HOLD HALF.
NanoString Technologies (NSTG) The stock is still weak after the shortfall in instrument sales reported a couple of weeks ago. Until management releases some hard data showing that the sales teams are in the process of making up the shortfall, or there’s another announcement of a new revenue generating initiative, I expect the stock will move in a more-or-less sideways pattern. We need more clarity before moving to Buy. Still holding. HOLD.
PFSweb (PFSW) I’ve been surprised by the weakness in the stock given that PFSweb had a solid quarter, and the few analysts that follow the stock still have a positive view on the future. It could be tied to the broader weakness in retail. Whatever the specific catalysts, shares have fallen from 15.50 to less than 12.50. At this point, the stock is looking oversold and should make a quick trip back to the mid-13 level relatively soon. Management presented at the Needham Emerging Technology conference on Wednesday, and will continue to try and right the ship at these upcoming conferences. BUY.
• May 25: B. Riley & Co. 17th Annual Investor Conference
• June 1: Craig-Hallum 13th Annual Institutional Investor Conference
• June 2: Cowen & Co. 44th Annual Technology, Media & Telecom Conference
Primo Water (PRMW)
The stock has been relatively resilient in the face of this week’s weak market. It’s holding above all of its moving averages, and looks to be consolidating in the 11 to 13 range that I expected. Still a Hold. HOLD.
Q2 Holdings (QTWO) April’s stock returned to the 22 support zone in a somewhat surprising move. I had expected the stock’s earnings-induced rally to hold, and for it to move back toward 28. Nothing’s broken here, the stock just isn’t doing all that much. I think it will, in time. Keeping at Buy, especially now that its approaching oversold levels. BUY.
USA Technologies (USAT) If I’ve made one mistake lately, it was moving USA Technologies back to Buy after it reported. The stock has returned to the 3.80 level, which is where it was in mid-March. It’s still well above its 200-day moving average, but the move lower isn’t what we want to see after earnings. I suspect the market is making more out of the company’s slimmer gross margins on equipment sales than I had expected. Technically, the stock is oversold at this point. Fundamentally, nothing has changed since my post-earnings report. I’m keeping at Buy here, since I think the pullback will spur buyers to step in. BUY.
Please email me at firstname.lastname@example.org 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 May 12, 2016 at 4pm:
|LeMaitre Vascular (LMAT)||5/6/16||15.99||14.89||-7%||Buy|
|Mitek Systems (MITK)||2/4/13||3.93||8.86||125%||Hold Half|
|Nanostring Technologies (NSTG)||8/7/15||15.40||13.36||-13%||Hold|
|Primo Water (PRMW||3/4/16||8.72||11.44||31%||Hold|
|Q2 Holdings (QTWO)||4/1/16||23.81||22.29||-6%||Buy|