It’s been a good five months for small cap investors after a rough end to 2015 and an extremely tough start to 2016. But since mid-February, the asset class, along with the broader market, has rallied hard. A healthy pullback in the S&P 600 Small Cap Index in early May set the stage for a burst through resistance, and we’re now sitting just 2.7% below the 52-week high (at 744) set in late June 2015.
Forward revenue and earnings estimates continue to go up for nearly all small-cap sectors except utilities and telecommunications (the trends for energy and consumer staples are a little fuzzy too at the moment), which has investors feeling pretty good about diving back into the market, even for stocks that look stretched on valuation metrics. Small cap is crushing large cap year-to-date, only lagging in two sectors (energy and utilities).
How long will this rally last? I think the broad-based move is just about over and we’re entering a “grind it out” phase. There are plenty of potential flies in the ointment. We tend to see some market weakness heading into summer, but we’ve seen the opposite this year. At some point, expect to see some profit taking, but I’m not expecting a major, broad market correction. I think the momentum has just been too strong for that scenario to play out in the near term. A more likely scenario is a period of consolidation right about where we are now. I still like the makeup of our current portfolio for whatever comes next, and I’m excited about six or so stocks that I’m considering for our July Issue. It will be interesting to see what I choose!
None of our companies reported earnings over the past week. I moved one stock from Strong Buy to Buy. Details follow.
Updates
Blackbaud (BLKB) This was the third week in a row that the stock rose by 4%, and it’s now trading just a hair below its 52-week high, set back in late December. A few weeks ago, I stated that I thought management’s roadshow would reinvigorate the stock. Looks like it has. There’s no great mystery about why the stock is doing so well—it’s a best-of-breed name that investors have a high degree of confidence in. And its education offerings represent another area for sustained growth. Provided the market is reasonably stable over the next two weeks, I think BLKB will break out to all-time highs, so I’m keeping the stock at Buy. Management announced opening of a Toronto office (it currently has offices in San Diego, San Francisco, Boston, New York, Washington, Austin, Indianapolis, Minneapolis and Charleston). I like the move; Canada represents a nice growth opportunity for the company. BUY.
Chembio (CEMI) Last week’s new addition was relatively quiet over the past week. I’m pleased to see that there wasn’t a big spike in trading volume following the release of the recommendation. Thank you for following my guidance to get in gradually. I can’t tell you how many examples I see of unscrupulous micro-cap newsletter editors pushing their subscribers to buy thinly traded stocks, which then go up 25%, 50% or more in a week, only to come crashing back down. That’s not our game here at Cabot—we want you to get the best price possible. It was a relatively quiet week in terms of Zika-related news flow, other than the WHO saying that if you live in an active Zika virus zone and are trying to get pregnant, you might want to consider delaying your plans. I’m being a little facetious—I think it’s probably a big deal for people looking to expand their families. The stock is still a Buy; just keep taking it easy given the relatively thin volume. BUY.
eMagin (EMAN) Another dull week for investors, as the stock barely moved and volume was light. This remains a high-potential VR/AR stock, but we’re not buying now given that shares have been weak (though they have appeared to flat-line lately) and potential alone doesn’t pay the bills. You may wonder why I’m being so conservative here. I think this exchange between Richard Shannon, an analyst from Craig-Hallu, and Dr. Fermi Wang, Ambarella’s (AMBA) President CEO, sums it up. The exchange was from Ambarella’s (it’s a semiconductor chip manufacturer) most recent quarterly conference call on June 2.
Richard Shannon:
“...Is VR a category that can be a meaningful one that you call out in some sort of percentage or relative terms here within say the next year…? I mean as example, a year ago drones really seemed to accelerate from nowhere to a meaningful amount, so VRs have the capability of doing the same thing?”
Dr. Fermi Wang:
“Well, I have to say that I believe VR is the more hype than the reality at this point. So, I won’t say that VR camera will give us meaningful revenue as quickly as drone has done for us. But however we do see that that we have chips that built for other application, by changing software, we can really deliver a very good VR camera and we want to be a supplier in that business if the market becomes meaningful for us. So, our approach is -- we start seeing multiple companies using our chip to do 4K or VR camera, but I’ll not say that they will become meaningful revenue for us in a near future.”
Ambarella is a chip manufacturer and just because it doesn’t see near-term meaningful revenue doesn’t mean a display manufacturer such as eMagin won’t. But the exchange highlights to me that until we see concrete evidence of growth from eMagin, I’m not going to shout “Buy” from the rooftop. HOLD.
LeMaitre Vascular (LMAT)
Two weeks ago, I moved the stock to Strong Buy at 14 saying, “I’ll be surprised if there isn’t a quick bounce here, and this is probably a good stock to pick up for a quick trade in anticipation of a move from around 14 to 15 (a 7% move)”. Last week, shares were up 6% to 14.75, and this week they added 2% more to close at 15.09. The stock is now up seven days in a row. If you’re a trader, I think the very easy money has been made here. Now I think the next run is just easy money, probably to about 16 where I recommended it. I can see potential for a cooling off period at that level before another push higher. Moving from Strong Buy to Buy to reflect my slightly less bullish near-term enthusiasm (but only slightly!) BUY.
LogMeIn (LOGM) The stock was flat. On Wednesday, the company announced it has released the LastPass password manager extension for Microsoft Edge web browser for members of the Windows Insider Program (basically windows geeks who like to try stuff out early). I think this is a phenomenal step for LogMeIn. Microsoft has been doing a bang up job with its Office suite and as more customers move to the subscription-based product (like most of us here at Cabot), more people are finding that Edge works pretty well. But if they use it and it doesn’t support LastPass, they’ll never try the password manager. That’s a huge barrier—nobody is going to change his browser to try a new password manager. Now they don’t have to. I think there are a heck of a lot of corporate Office users that LogMeIn can now tempt into trying LastPass. This isn’t a groundbreaking event, but I expect it to add significant growth to the company’s Identity and Access Management revenue over the coming years. Keeping at Buy. BUY.
Mitek Systems (MITK) Shares are flat for the week after the bearish Street Sweeper (garbage) article was published. As I stated last week, the stock was due for a pullback and the article simply provided the fuel. Just sit tight. HOLD HALF.
NanoString Technologies (NSTG) I was expecting some news over the past week given the company’s participation at the Annual Meeting of the American Society of Clinical Oncology (ASCO), but things have been quiet. The stock is off 4% on the week and volume has been relatively light. Keeping at Hold. HOLD.
PFSweb (PFSW) The stock was a dog this week as it fell 6% on light volume. That’s despite the news that it has acquired the U.K.-based ecommerce system integrator, Conexus. Management had said they were shopping for deals that will help build a presence in Europe so this isn’t a surprise. It hit the market with a dull thud, however. Keeping at buy as this 12.00 area has acted as support four times since the beginning of March. I expect some buyers to step in here and drive volume (and the stock) up next week. BUY.
Primo Water (PRMW) The stock was down 4% on no news. Still a Hold. HOLD.
Q2 Holdings (QTWO) The stock earns high honors for posting a third straight week of gains (8%, 12% and now 3%). Two weeks ago, I wrote that, “If we can just get it to push through 25 in convincing fashion I see a quick trip to 28.” We finished last week at 27. Now, we’re 14 cents shy of 28. It looks like its undecided as to whether it wants to draw the attention that goes with a 52-week high (which sits at 30.44). Cloud software vendors are back in favor right now, so the only question is at what point the first round of profit taking will occur. I don’t think it’s time yet. I think we see a 52-week high from Q2 in the month of June. Keeping at Buy. BUY.
USA Technologies (USAT) The stock added another 2% this week (after 13% two weeks ago and 3% last week. Last week I said, “I think the strength of the recent recovery will prompt a push to a 52-week high.” That comes at 4.73 and we’re at 4.53 now. Keeping at Buy in anticipation of that event in June. BUY.
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 June 9, 2016 at 4pm:
| Stock | Date Bought | Price Bought | Closing Price | Profit | Rating |
|---|---|---|---|---|---|
| Blackbaud (BLKB) | 11/6/15 | 62.18 | 66.62 | 7% | Buy |
| Chembio (CEMI) | 6/3/16 | 8.69 | 8.86 | 2% | Buy |
| eMagin (EMAN) | 5/5/14 | 2.69 | 1.87 | -30% | Hold |
| LeMaitre Vascular (LMAT) | 5/6/16 | 15.99 | 15.09 | -6% | Buy |
| LogMeIn (LOGM) | 1/8/16 | 58.13 | 62.97 | 8% | Buy |
| Mitek Systems (MITK) | 2/4/13 | 3.93 | 7.60 | 93% | Hold Half |
| Nanostring Technologies (NSTG) | 8/7/15 | 15.40 | 13.37 | -13% | Hold |
| PFSweb (PFSW) | 12/4/15 | 12.59 | 12.02 | -5% | Buy |
| Primo Water (PRMW | 3/4/16 | 8.72 | 11.14 | 28% | Hold |
| Q2 Holdings (QTWO) | 4/1/16 | 23.81 | 27.86 | 17% | Buy |
| USA Technologies | 2/5/16 | 3.51 | 4.53 | 29% | Buy |