Small caps paused this week after spiking to record highs during intra-day trading last Thursday (744.46) and this Monday (744.19). Compared to last Thursday’s close, small caps were down 0.3% this week, and large caps were up 0.1%.
While there was some action in individual stocks, things were fairly subdued as far as sectors were concerned. No single small cap sector moved by more than 1.5%. Large-cap action was equally mild.
It’s easy to see why stocks took a breather this week. After such a rapid advance, it makes sense to stop, pause, take a look around, and prepare for the next move. I think an apt comparison is the little squirrel that has been trying to break through the net into my blueberry bushes all summer. He just made it in the other day, and once in was so surprised he wasn’t quite sure what to do with his newfound bounty. Excitement in the new environment was balanced by the newness, and concern that maybe he shouldn’t be there. He (or she, I can’t tell) shouldn’t be there as far as I’m concerned. But in the eyes of his/her family, I’m sure there’s no question at all—inside that netting is 100% the place to be! The jury is still out on whether stocks should be where they are, but it certainly seems like the power of this move validates the case for more strength. Earnings results will help balance competing perspectives and be the ultimate judge of where stocks go in Q3. From what I’ve seen so far among the companies I like (Microsoft is a good example), so far, so good.
As I stated last week, small caps appear slightly overvalued given that the index is trading with a forward P/E well over 18. There’s still room for certain sectors to move higher before they reach peak valuation, including information tech, healthcare/biotech and consumer discretionary. So I advise steering clear of small cap index ETFs and focusing on individual stocks where there still appears to be good values, and where the pace of growth is likely to trump concerns over valuation. That pretty much describes every stock in our portfolio rated Buy, so I’ve done most of the work for you!
One thing to note: biotech had a bang up week. And over the last three weeks, the sector has advanced 4.1%, 0.2% and 4.4%, respectively. It is approaching overhead resistance around 286-290 (I’m referring to the iShares Biotech ETF (IBB), but if it can break through that, biotechs could easily move 10% higher. This is one of the few areas of the market where growth stocks are trading way, way below their all-time highs, as the chart of the IBB below shows.
Our current exposure to biotech includes NanoString (NSTG) and Chembio (CEMI), with tangential exposure through LeMaitre Vascular (LMAT), which is technically part of the Medical Equipment and Supplies Industry of the Healthcare sector. Earnings for these stocks will matter more than a broader move in biotech stocks, but if we can get both good earnings and a sector move, there’s a lot of blue sky for these three stocks to fly into.
The bottom line is exactly the same as last week: Steer clear of small-cap index ETFs for now, but look for small cap stocks that should keep delivering earnings and revenue growth. Second-quarter earnings momentum is extremely important. We may look to exit a few positions on strength over the coming weeks/months, but those moves will depend on share price momentum and/or earnings results.
More companies have announced their earnings release dates, and three companies report next week. We have no ratings changes this week. Details below.
Updates
Aerohive (HIVE) Everything still looks good here as we move another week closer to earnings. Shares were up 2% over the past week, and remain well above both their 50- and 200-day moving averages. The stock remains a Buy. BUY.
Confirmed earnings release date: Wednesday, August 3
Blackbaud (BLKB) Shares pulled back modestly this week after reaching a 52-week high last week. The company announced that its K-12 learning management system, onCampus, is now Learning Tools Interoperability (LTI) certified. OnCampus helps parents, students and academic staff keep track of everything from class content and schedules to athletic teams. LTI certification means schools can connect to external tools—such as Microsoft OneNote Class Notebook—to pass information, including content, grading information, etc., through the system in a secure and standardized way. This is another incremental step forward in creating a suite of cloud-based solutions for the education market. The stock is still a Buy for momentum investors; just keep new positions small. BUY.
Confirmed earnings release date: Tuesday, August 2
Chembio (CEMI) Still treading water here. The stock was up 1% this week. Florida is looking into the first potential case of Zika that may have been spread by a mosquito in the continental U.S. (all prior cases occurred in people who traveled to Zika-affected regions). Volume remains low. As I stated last week, I’ll be surprised if we don’t get an update on Chembio’s diagnostic tests for the Brazilian market before the Olympics kick off next month. They start on August 5, and the company should report second-quarter results around the same day. BUY.
Expected earnings: Week of August 8
eMagin (EMAN) Shares are flat on the week, and that’s a victory as far as I’m concerned. We’re finally seeing a little momentum building here. Now management’s job is to back that up with some fundamental improvements in the business. The next day of reckoning will come in mid-August, when quarterly earnings are due out. Continue to hold. HOLD.
Expected earnings: Week of August 15
LeMaitre Vascular (LMAT) Healthcare and biotech both outperformed this week and shares of LeMaitre jumped on the bandwagon. Shares rose 4%. Volume remains light, but action will likely pick up next week given that Q2 earnings will come out on Wednesday. High on the list of things to listen for will be progress on expanding sales of biologics. Keeping at Buy. BUY.
Confirmed earnings release date: Wednesday, July 27.
LogMeIn (LOGM) The stock was down 3% this week but the sideways pattern remains intact. Earnings will be out next Thursday, and I suspect that event will result in another jump higher. Recall that Q1 revenue growth was 30.4% and management raised 2016 guidance, saying that all three product lines (Collaboration, IT Management and Service Cloud) were growing by double-digits. Service Cloud is a big potential catalyst given new product developments in that business. And we’ll be looking for any insights into how Xively (the IoT business) is doing, and if the deal with Salesforce.com (whose sales agents can now sell Xively directly) is helping to move the needle. We still have a good amount of headroom before a 52-week high. BUY.
Confirmed earnings release date: Thursday, July 28
Mitek Systems (MITK) Shares were down 2% this week, even though the company announced that the U.S. Patent and Trademark Office (USPTO) ruled that Rothschild’s patent suit was completely bogus (my words, not theirs). We pretty much knew that, but it’s good to have confirmation. Earnings are due out next Thursday. Continue to hold half. HOLD HALF.
Confirmed earnings release date: Thursday, July 28
NanoString Technologies (NSTG) After two weeks of back-to-back 3% gains, shares paused and traded sideways this week. No new news. We’re waiting on Q2 earnings, which will be released on August 3. Continue to hold. HOLD.
Confirmed earnings release date: Wednesday, August 3
PFSweb (PFSW) The stock bounced 8% last week from oversold levels, and this week it moved sideways. We’re hoping that earnings results will breathe life back into the stock. That event is about three weeks away, so just sit tight for now. HOLD.
Expected earnings: Week of August 8
Primo Water (PRMW) It looks like the stock is setting up for another leg higher, but we’ll need a good Q2 earnings report before anything substantial will happen. We’re hoping for revenue growth, of course, but earnings growth is the bigger story given the strategic decisions being made within the company to focus on profit margin growth and streamline operations. Bottled water is likely to become the number-one beverage by volume in 2017, if not by the end of 2016. And Primo is a great way to play that trend. HOLD.
Confirmed earnings release date: Tuesday, August 3
Q2 Holdings (QTWO) The stock is still consolidating above its 50- and 200-day moving average lines, and continues to look good for new purchases. It was up 3% this week. We’ll get an update on business trends in just under two weeks, when earnings come out. BUY.
Confirmed earnings release date: Wednesday, August 3
USA Technologies (USAT) Things have been very quiet around this stock, which his fine with me—especially since it’s trading near a 52-week high. The stock is a Buy for small positions only. BUY.
Expected earnings: Week of September 5
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 July 21, 2016 at 4pm:
| Stock | Date Bought | Price Bought | Closing Price | Profit | Rating |
|---|---|---|---|---|---|
| Aerohive (HIVE) | 7/1/16 | 6.73 | 7.05 | 5% | Buy |
| Blackbaud (BLKB) | 11/6/15 | 62.18 | 69.41 | 12% | Buy |
| Chembio (CEMI) | 6/3/16 | 8.69 | 8.34 | -4% | Buy |
| eMagin (EMAN) | 5/5/14 | 2.69 | 2.24 | -17% | Hold |
| LeMaitre Vascular (LMAT) | 5/6/16 | 15.99 | 14.35 | -10% | Buy |
| LogMeIn (LOGM) | 1/8/16 | 58.13 | 62.44 | 7% | Buy |
| Mitek Systems (MITK) | 2/4/13 | 3.93 | 7.75 | 97% | Hold Half |
| Nanostring Technologies (NSTG) | 8/7/15 | 15.40 | 13.48 | -12% | Hold |
| PFSweb (PFSW) | 12/4/15 | 12.59 | 9.89 | -21% | Hold |
| Primo Water (PRMW | 3/4/16 | 8.72 | 11.37 | 30% | Hold |
| Q2 Holdings (QTWO) | 4/1/16 | 23.81 | 28.16 | 18% | Buy |
| USA Technologies | 2/5/16 | 3.51 | 4.50 | 28% | Buy |