Small caps (along with the broad market) cracked their intermediate-term uptrend last Friday in a violent, but not high volume, selloff. That one-day decline brought the small-cap index down to its 50-day moving average. And a few days of follow-on weakness this past week brought it a few notches lower. All in, small caps fell 4.3% from the 52-week high before bouncing hard yesterday.
We’re now 3.1% off the high, and down 3% since I wrote last Friday. It feels like I’m splitting hairs here. Looking at the six-month chart below, the recent move lower looks very similar to the late-June Brexit shakeout (which cracked the 50-day moving average line), with one notable exception—we’ve had much lower volume this time. Importantly, buyers have stepped in again to stop anything more than two days of consecutive declines. And compared to June, when the small-cap index kissed its longer-term 200-day moving average line (not shown), this time we’re well above that mark (it’s at 687 right now, 7.3% below yesterday’s close).
This looks like a classic buy-the-dip scenario. Nothing is for certain, but my best guess is we regain the small-cap 50-day moving average line next week, and after a week or two of choppy action, are trading at another 52-week high. Major, visible, disruptive forces are the upcoming election, the Fed’s direction on interest rates and any number of international hot pots that could boil over at any moment. What’s there to worry about?!
The big picture remains projected small-cap EPS growth of 57% this year and 35% next. That’s compelling. And provided that outlook doesn’t get completely obliterated by the aforementioned potential issues, our game plan should remain the same.
I’ve moved a few of our stocks back to Buy this week since shares have come in a little. These aren’t raging Buys. But following the signals provided by the trendlines, it appears as though adding a little to what you have or initiating a smallish new position with these stocks could pay off over the next month. Details below.
Updates
Aerohive (HIVE) After two back-to-back down 4% weeks, shares traded sideways during the past week. There’s no doubt the uptrend that was intact through July has broken. Now we’re simply looking for a few buyers to step in and give us a base to build on. The message is the same as last week: the trend here is murky, keeping at Buy, but watching closely. BUY.
Aspen Aerogels (ASPN) The stock took a 9% hit this week as the broad market fell and oil declined by about $4 a barrel. The stock’s chart remains sloppy, but we knew that going in. This is a recovery play and it’s not going to be a consistent uptrend—momentum might take a while to develop. Still a Buy. BUY.
eMagin (EMAN) Shares traded sideways over the past week as the trading range continues to narrow. This is still a waiting game. One day we should wake up to some of the news management alluded to on the conference call and, hopefully, be able to better assess eMagin’s potential over the next 12 months. Keep holding. HOLD.
LeMaitre Vascular (LMAT) The past week was calm compared to the prior week’s 16% rally. Shares dipped and dove a little with the market’s gyrations, but ultimately held their gain, and even added 1%. The stock’s ascent has been much faster and further than is typical, which prompted me to move the stock to Hold two weeks ago in a Special Bulletin. I even suggested conservative investors consider taking a little off the table. At the moment, I see no reason to change my stance. The stock needs to consolidate and give us more reason to believe it won’t revisit 17 before 2017 arrives. HOLD.
LogMeIn (LOGM) Shares are posting an unexpected sleeper rally on growing volume. Perhaps there’s growing bullishness on the company’s future post-Centrix merger? When you step back and think about what’s happening out there in tech, it’s not difficult to envision LogMeIn growing significantly over the next five to 10 years, or being bought out by one of the many big boys that seem to have ravenous appetites for enterprise cloud-software solutions. I’m talking about Oracle, Microsoft and Google. We shouldn’t rule out Salesforce and IBM either. I don’t have a specific case to argue. But you don’t need to have a very active imagination to see the potential. Let’s keep holding half and see what happens. We’re up 60% on our remaining stake. HOLD HALF.
MindBody (MB) Shares continue to trend sideways, holding support around the 17 level. The trading range is tightening, which I see as a good thing after the summer rally. I’d like to get an update on the partnership with UnderArmour. Overall, I think we’re fine here. The stock isn’t particularly strong or weak, and aside from a mid-August spike, has been mostly trading in the 17 to 18 range for two months. The current pattern isn’t much different from what happened from April through June (roughly), before it went from 14 to 18. It looks like a good buy to me. BUY.
Mitek Systems (MITK) The company released a Mobile Multi-Check Capture Software Developer’s Kit (SDK) this past week, which can be used by banks and app developers to create mobile banking apps. The idea here is that it will speed up adoption rates since banks don’t need to develop the apps themselves. Multi-check capture seems like a no-brainer for banks and businesses that need to process far more than the occasional check that consumers typically process. The market was kind to the stock all week with the exception of Monday. The net result is we’re right where we were a week ago. Still holding. HOLD HALF.
NanoString Technologies (NSTG) I think the stock heard me say my updates were getting repetitive last week. Two days of buying pushed shares out of their September trading range and up 7% to an 11-month high of 17.92. It feels like we’re in for a good autumn, but long-term shareholders know not to get too revved up—NanoString has been responsible for equal bouts of euphoria and frustration over the past year. Management was at the Morgan Stanley Global Healthcare Conference on Wednesday and Thursday when shares rallied, but I haven’t seen any material press releases. I know Morgan Stanley is a fan of the stock and has had a Buy rating on it for a while, but I haven’t seen an upgraded price target lately. Regardless, I’ve held shares at Buy since the last quarterly report and I see no reason to reduce to hold now. That said, don’t bet the farm tomorrow. What we’re looking for here is a multi-day move to a new level, then for the stock to hold and move into a consolidation pattern. My best bullish call is that it could move up near its 52-week high (19.81), but that’s just a guess. I’ll be extremely surprised if it falls below the 16 support zone that has held since August. Bottom line, our healthcare-related stocks are working. BUY.
Primo Water (PRMW) Shares gave up last week’s 3% gain, plus another 1% for good measure. The stock might bump around here in the mid-11 range for a month or so. It’s not what I’d like to see—I preferred the relatively steady uptrend from mid-June through early August—but we have to keep in mind exactly what Primo Water is. It’s a company growing the top-line at around 5% to 10% (in part because it’s forgoing some revenue on dispensers to free up cash, while still making the same amount per unit) and the bottom line at around 20% this year. Earnings should bump up considerably in 2017—consensus estimates suggest nearly 60% EPS growth—as operating efficiencies really kick in. This is a solid and steady growth story, but it’s not “blow you away growth.” So the stock probably won’t blow you away over a month’s time. That’s just fine; we’re doing great (up 30% since March), and it’s reasonable that the stock could be up 50% by the end of the year, market permitting. Given the recent pullback but still good outlook, I’m comfortable putting the stock back on Buy here. I don’t advise backing up the truck. Just tuck a few more shares in the glovebox. BUY.
Q2 Holdings (QTWO) Same as last week: no new fundamental news and the stock is unchanged. The trading range is narrowing, and I think it still looks like a good buy. BUY.
USA Technologies (USAT) I moved the stock back to Buy after the earnings report earlier this week. It could still bounce around here as earnings are digested but I think it’ll be higher in a month. Yesterday after the closing bell, the company announced that FreshBrew Group, a coffee roaster provider and vending machine operator, has signed on to connect over 3,000 ePorts in its business to USA Tech’s cashless payments platform. It also has signed up for the company’s Premium Support Service offerings, which helps to better manage and analyze the vending machine network to maximize refill and marketing efforts. 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 September 15, 2016 at 4pm:
| Stock | Date Bought | Price Bought | Closing Price | Profit | Rating |
|---|---|---|---|---|---|
| Aerohive (HIVE) | 7/1/16 | 6.73 | 6.22 | -8% | Buy |
| Aspen Aerogels (ASPN) | 9/2/16 | 5.14 | 4.55 | -11% | Buy |
| eMagin (EMAN) | 5/5/14 | 2.69 | 2.42 | -10% | Hold |
| LeMaitre Vascular (LMAT) | 5/6/16 | 15.99 | 20.94 | 31% | Hold |
| LogMeIn (LOGM) | 1/8/16 | 58.13 | 92.22 | 59% | Hold Half |
| Mindbody (MB) | 8/5/16 | 18.11 | 16.99 | -6% | Buy |
| Mitek Systems (MITK) | 2/4/13 | 3.93 | 8.27 | 110% | Hold Half |
| Nanostring Technologies (NSTG) | 8/7/15 | 15.40 | 17.92 | 16% | Buy |
| Primo Water (PRMW | 3/4/16 | 3/4/16 | 11.30 | 30% | Buy |
| Q2 Holdings (QTWO) | 4/1/16 | 23.81 | 28.42 | 19% | Buy |
| USA Technologies | 2/5/16 | 3.51 | 4.83 | 38% | Buy |