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Small-Cap Confidential
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Cabot Small-Cap Confidential Weekly Update

The market has been holding up well, and small caps in particular are looking steadfast as we move into the second half of August.

The market has been holding up well, and small caps in particular are looking steadfast as we move into the second half of August. A pullback can, of course, come at any time, but given the market’s strength the odds seem to suggest that any dip will trigger more buying.


On a valuation basis, small caps are still trading at a premium. Their forward PE ratio is currently 18.5. That’s something to keep an eye on, but isn’t a red flag until it gets closer to 20 (all else being equal). We’ve seen small caps trade at this valuation for extended periods over the last three years. And given that estimates are rising and many of the stocks that we follow are reporting terrific results, there is plenty of room for optimism.

The best thing to do now is cull losers and sit on your winners. The bottom line is that if a stock isn’t working in this environment there’d better be a darn good reason to hold on to it. If there isn’t, best to cut it loose and move the money into something with greater potential. In short, don’t try to outsmart a bull market. Adding a little to what’s working is fine too, just keep new purchases small on stocks that have had big runs.

Earlier this week we sold one stock after it hit my stop loss level. Today, I recommend stepping aside from one more that hasn’t shown any positive momentum after earnings. With those two moves, plus the profit taken in Blackbaud (BLKB) a couple of weeks ago, we move through the middle of Q3 with 10 positions, posting an average gain of 25%. It’s never fun to book losses, but it’s worth noting that even with them our average gain still trumps that of the small cap index.

I’m starting to see positive momentum in a few areas of the market we haven’t delved into just yet. That makes things exciting as I work on the September Issue. Stay tuned! Details on the week that was, below.


Aerohive (HIVE) As expected shares have held steady after a moderate dip following earnings. Hive is trading right on their 50-day moving average line. No fundamental news to report. The stock still looks like a good buy. BUY.

Chembio (CEMI) The stock has been on the ropes lately and took another leg down early this week, triggering a stop loss-related Special Bulletin on Wednesday. The stock is now rated Sell. I suspect there is some upside if/when new assay regulatory approvals are announced. But I don’t wish to hold and hope in light of the stock’s weakness. SOLD.

eMagin (EMAN) The stock has been holding up OK after a two-month, 50% plus rally. Trading volume is so light it’s hard to know where the stock will go minute to minute. But it appears that most investors are heeding management’s advice to “stay tuned” as the company prepares to announce two consumer-oriented VR/AR products in Q4 2017. HOLD.

LeMaitre Vascular (LMAT) The stock has been holding on to the vast majority of its post-earnings report gain, and looks to be in a consolidation stage. It’s essentially flat since the beginning of August. Management presented at the Canaccord Genuity Growth Conference last Thursday, and will present at the Midwest IDEAS Investor Conference on August 30. BUY.

LogMeIn (LOGM) Shares have drifted 5 points lower over the past week from a high near 85. At this stage we’re waiting for more details related to the transformative deal with Citrix’s GoTo business. Everything else takes a back seat, for now. HOLD HALF.

MindBody (MB)

shares have come off a little since I recommended the stock at the beginning of the month but are still well within my buy range. No news yet on the details of the Under Armour (UA) partnership. The stock is a buy. BUY.

Mitek Systems (MITK) Shares seem to be looking for a new normal in the 7.00 to 8.50 range where they’ve meandered since the beginning of June. They remain well above their 200-day moving average, and just above their 50-day moving average. A new patent for the firms mobile ID document classification tech was announced, as was a deal with one of the 10 largest banks in the U.S. for its Mobile Fill product, which, according to the press release, will be used " improve its onboarding process, easily fund accounts and better engage with Millennials. Millennials, and consumers in general, are increasingly using mobile as their primary channel for banking and they expect a superior user experience.” Sounds good to me. Continue to hold. HOLD HALF.

NanoString Technologies (NSTG) In early August, I moved the stock back to buy given the plethora of bullish data released with its quarterly report. I cautioned against buying too much, too quickly, after such a big move, but I remain confident that several months from now shares will be trading higher. So far, they are moving sideways in a relatively tight range between 16 and 17. The story here is great, and given that biotech stocks have recently broken out above their six-month trading range, I think the backdrop for NanoString still looks good. BUY.

PFSweb (PFSW) The stock has drifted lower after reporting and just can’t get moving in the right direction. I don’t think concerns over exposure in the U.K. is a factor, especially since data this week showed U.K. e-commerce sales to be better than expected. The bottom line is that the stock appears undervalued, but isn’t participating in this bull market. That’s worrisome, especially with a fresh round of data from the recent quarterly report. I recommend taking evasive action and selling the position on any strength. There is plenty of room for the stock to recover in time, but on the other hand, I’m concerned that it could fall swiftly on any material market pull-back. Again, I don’t like to hold and hope. Better to direct the capital into a higher confidence position with a more constructive chart. Moving to sell. SELL.

Primo Water (PRMW) The trend here still looks as solid as they come. Shares are moving in their normal trading pattern (grinding higher), and we now have a 40% gain. Keep holding. HOLD.

Q2 Holdings (QTWO) Shares fell in the three days following second quarter results but they firmed up around 26.00 and have risen in five of the last six sessions. If I had to name a top stock for the next week, this would be it. Keeping at buy. BUY.

USA Technologies (USAT) The chart is absolutely beautiful, with shares breaking out in August and moving from around 4.75 to well over 5.00. The company announced that a current customer, Coastal Canteen, is upgrading 1,500 machines to USA Technologies’ cashless platform and telemetry services (ePort Connect). With one-third of the upgrade complete, Coastal Canteen is reporting an average sales increase of 32%. That’s a good customer success story, and I expect to hear about more when the company reports in September. This is our only stock that hasn’t yet reported. Hang on and enjoy the ride. HOLD.
Expected earnings: Week of September 5

Cabot Small-Cap Confidential Stocks and Closing Prices on August 18, 2016 at 4pm:

Aerohive (HIVE)7/1/166.737.05 1%Buy
Chembio (CEMI)6/3/16--5.72--Sold
eMagin (EMAN)5/5/142.692.61-3%Hold
LeMaitre Vascular (LMAT)5/6/1615.9917.34 8%Buy
LogMeIn (LOGM)1/8/1658.1380.4438%Hold Half
Mindbody (MB)8/5/1618.1117.27-5% Buy
Mitek Systems (MITK)2/4/133.937.8399%Hold Half
Nanostring Technologies (NSTG)8/7/1515.4016.497%Buy
PFSweb (PFSW)12/4/1512.599.60-24%Sell
Primo Water (PRMW3/4/168.7212.2741%Hold
Q2 Holdings (QTWO)4/1/1623.8126.8113%Buy
USA Technologies2/5/163.515.2249%Hold