We had a terrific week with the vast majority of our stocks, supported by a 0.8% rise in the S&P 600 Small Cap Index. That’s not a big move, but given the recent break-out to all-time highs, a little follow-on strength across the board suggests the market could be setting up for another run higher. Mike Cintolo, Cabot’s VP of Investments and the Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader, who devotes more attention to the broad market’s big picture trends than I do, has detailed a compelling case why the market should keep heading higher despite many market pundits calling for the opposite. I won’t explain his reasoning here, but if you’re interested you should check out his Cabot Wealth Advisory article from yesterday. You can find it here.
I follow the trends within small caps closely, and within the stocks I cover I try to leave no stone unturned. Occasionally I miss something and we suffer a stubbed toe, but more often than not we’re able to move past those missteps and beat the market.
This week, our portfolio posted a 6.7% gain, even with Chembio’s (CEMI) and Blackbaud’s (BLKB) disappointing performances. LogMeIn’s (LOGM) 37% surge certainly helped tweak the average! But with only two stocks in the red for the week, it’s clear that most of our stocks are working for us. And as the table below shows, our asset class is doing better vs. large-cap stocks almost across the board (energy, health care and utilities are the only exceptions, and we only have exposure to health care). The bottom line is that it’s easy to feel bullish.
With momentum behind us it’s time to consider culling underperforming positions and book some profits. We started this week by taking partial profits in LogMeIn, and I’m assessing which other stocks should go. Chembio (CEMI) and PFSweb (PFSW) are two possibilities. But, when possible, I prefer exiting on strength versus weakness since patience often pays with small caps (look where a little patience has allowed eMagin (EMAN) to move to). We don’t want to wait forever, of course. But we do want to be measured. No positions are cut this week, just know that we could prune more in the days ahead.
The bottom line is exactly the same as for the last two weeks: Steer clear of small cap index ETFs for now, but look for small cap stocks that are likely to deliver earnings and revenue growth. Second quarter earnings momentum is extremely important (so far, so good). We will look to exit a few positions on strength, or weakness, over the coming weeks/months, but those moves will depend on share price momentum and/or earnings results. We want to stick with stocks that keep grinding higher, or that are consolidating for a future run.
Three companies released earnings this week. And we should hear from five more next week. We have three ratings changes this week. Details below.
Updates
Aerohive (HIVE) The company is hitting the marketing trail and will present at the Oppenheimer 19th Annual Technology, Internet & Communications Conference on August 10. It has also been featured as a CRN Network Connectivity Partner in that group’s Program Guide, which highlights infrastructure partners, whose connectivity solutions may be of interest to CRN’s readership. Quarterly results will be out next Wednesday, and among other things, I’m interested to hear how the company sees demand for its wireless-as-a-service offering, AdvantageMSP. The stock remains a buy. BUY.
Confirmed earnings release date: Wednesday, August 3
Blackbaud (BLKB) Shares pulled back 4% this week as Off Wall Street, a short selling firm, published a bearish article on the company. I disclosed this in yesterday’s Special Bulletin, when I also stated that the report will probably cast a shadow over the stock for the remainder of the week. But that Blackbaud’s rebuttal will come on Monday when it reports. I think management will show the company is still worth investing in. Keeping at buy. BUY.
Confirmed earnings release date: Monday, August 2
Chembio (CEMI) Management’s transparency with shareholders regarding preliminary financial results, product development updates, and the recently announced secondary offering has been abysmal. They have broken the basic tenant of communicating with The Street--under promise, and over deliver. Instead, their communications have followed the pattern of incremental releases of material information. Today the pricing of the secondary was announced at 6.00 and the size was increased. Shares are trading modestly lower, but still above the 6.00 mark and above my 30% loss limit. We’re now in wait-and-see mode as we look for the stock to firm up and management to get into hustle-mode to validate the long case here. I’ll be following it closely and updating you as things progress. For now, hold. HOLD.
Expected earnings: Week of August 8
eMagin (EMAN) I’m impressed the stock’s resiliency given its historical weakness. Shares were up another 1% this week and are now well above both their 50 and 200-day moving averages. Management’s job remains to back up that potential with some fundamental improvements in the business, such as locking in a manufacturing partner to help it expand production. That’s when we’ll know there is significant demand growth. We’ll get a major checkpoint in mid-August, when quarterly earnings are due out. Continue to hold. HOLD.
Expected earnings: Week of August 15
LeMaitre Vascular (LMAT) The company announced a great quarter and raised 2016 guidance after the close on Wednesday. I detailed the results in a Special Bulletin on Thursday morning, and predicted shares would rally throughout the day. They did, by 13.4% yesterday--further and faster than I had expected! Management gave the impression that the good times should continue and that LeMaitre should capture market share due to product issues with Baxter Health. That, in turn, has motivated other analysts to increase their price target on shares, including Barrington Research, Brean Capital and Canaccord Genuity, which now have price targets of 20.00, 20.00 and 19.00, respectfully. The 20.00 mark is 20% above yesterday’s close, which should be enough to keep the stock moving higher. I also think there is a bullish move coming in the broader healthcare/biotech sector, and that should help keep interest in LeMaitre high. Keeping at buy. BUY.
Earnings: DONE
LogMeIn (LOGM) The stock has a terrific week, jumping 37% higher on news of the transformative deal with Citrix’s GoTo business. The company also released Q2 results that beat expectations. But the details of those aren’t the focus now. What’s more important is painting a more accurate sum-of-the-parts picture of what LogMeIn will look like when the merger with GoTo is complete. That’s expected in Q1 2017, so there are several months over which the market will care more about the big picture--2017 and on--than near-term results. I’ll update you as that picture becomes clearer. This is a massive development for LogMeIn and the company has a lot of work to do to successfully manage staff, who, understandably, is wondering what their future will be. But, while there will be challenges, I think the company will ultimately succeed and keep growing, and that we’ll make more money on the position. I’ve recommended taking partial profits to lock in a 45%+ gain in just over seven months. Let the remainder of your position ride, and let’s see where LogMeIn takes us. The stock is moved from buy, to sell and hold half. HOLD HALF.
Earnings: DONE
Mitek Systems (MITK) Management reported a great quarter with revenue growth of 41.3% to $9.1 million (beating by $790K) and EPS of $0.07 (beating by $0.03). Cash on hand increased from $1.3 million to $33.2 million. I missed the live conference call and, given what’s been going on elsewhere in our portfolio and the stability in Mitek’s shares, haven’t prioritized listening to the replay yet. I’ll do so, and update you with additional details. I don’t expect to change my rating from hold half, but I do think it’s important to know more than just the headline numbers. HOLD HALF.
Earnings: DONE
NanoString Technologies (NSTG) After two weeks of back-to-back 3% gains, shares added 1% more this week. The stock is firming up headed into earnings, which come out next Wednesday. I’m expecting this to be a critical report for us. Either it’ll be good enough for us to stick with the stock, or it will push us out. To be absolutely clear--I expect a significant move either up or down upon earnings, something in the neighborhood of 10% wouldn’t surprise me at all. The consensus price target is roughly 50% above where the stock is now, so there’s clearly upside potential. But I’m keeping at hold until we know the most recent trends in instrument sales, which were surprisingly weak last quarter. HOLD.
Confirmed earnings release date: Wednesday, August 3
PFSweb (PFSW) No new news this week. The stock was up 2%. We’re hoping that earnings results will breathe life back into the stock. That event will occur a week from Monday. Sit tight for now. HOLD.
Confirmed earnings release date: Monday, August 8
Primo Water (PRMW) Nothing to report this week. The stock was up 2%. Waiting for Tuesday’s earnings report. It’s a hold heading into the event. HOLD.
Confirmed earnings release date: Tuesday, August 3
Q2 Holdings (QTWO) The Fed has announced it will begin supporting same-day ACH transactions (payroll, person-to-person, bill-pay, etc.) on September 23, 2016. Currently, ACH transactions take one day to settle, so this is a significant improvement. There’s a lot of risk to manage, but Q2 has decided to support same-day ACH transactions immediately. It’s an example of how the company is pushing the envelope to differentiate its services from those of competitors, and helping community banks and credit unions deliver on their promise of customer-centric operations. The stock is oh so close to a 52-week high (30.19). I think it’ll break out soon. Keeping at buy. BUY.
Confirmed earnings release date: Wednesday, August 3
USA Technologies (USAT) I’ve been looking for a 52-week high and we got it this week, when the stock hit 4.75. We’re up 35%, and earnings aren’t due out for over a month. The stock’s chart suggests further strength ahead, but my rating stays at hold. The safest action is to do nothing, just sit on your position and enjoy the ride. HOLD.
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.