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Early-Stage Stock Investing

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Breaking Down the 3 Best Cloud Security Stocks

As you’ve undoubtedly seen in the news headlines over the past few years, cyberattacks have surged, as have the prices hackers are asking for.

You can broadly attribute blame to the rise of cryptocurrencies that enable ransomware hackers to demand nearly untraceable and easily laundered funds. Or you can blame the growing digitalization of our lives and economy. You could also lay blame at the feet of state-adjacent international hacking rings and organizations.

Wherever blame falls, companies are more interested than ever in online security and are willing to pay for it.

This has led to strong performance in cloud security stocks, which offer protection against attacks and deployment and management flexibility for clients owing to their cloud-based delivery model.

A quick look at three cloud security stocks provides interesting insight into the dynamics of the “stronger for longer” argument that I’ve been making to my subscribers.

Without further ado, here we go.

Cloud Security Stock #1: Okta (OKTA)
Okta (OKTA) has a market cap of $37 billion and developed the first cloud-based platform for identity and access management solutions, which is a roughly $25 billion dollar market today. The company is moving upmarket from mid-size to larger companies.

Revenue was up 43% in fiscal 2021, which ended in January, and it is tracking toward being up at least 46% in fiscal 2022. That trajectory was confirmed after the company’s Q1 fiscal 2022 report, which showed that revenue grew by 37% and should grow by nearly 50% in Q2 and Q3. Management also updated its guidance for fiscal 2022 to 47% to 48% growth, which is slightly ahead of consensus estimates.

After the report the stock dipped due to the departure of the CFO (who was just named in December) and long-term growth guidance of $4 billion in revenue in fiscal 2026, which implies just 35% average annual growth. Stepping back, that guidance seems very conservative, especially over the next couple of years. With the stock currently trading 15% off its all-time high and with a little confusion on the part of investors (should be temporary) this may be a good time to start a position in what should be a strong-performing stock over the next five years.

This is what the chart looks like.


Cloud Security Stock #2: Zscaler (ZS)
Let’s move on to Zscaler (ZS), which has a market cap of $31 billion. The company is a provider of network security solutions for many of the biggest companies out there. Its software does things like replacing VPN appliances and providing connections that are used to route traffic between an organization’s headquarters and remote locations.

Naturally, these services are in high demand during the pandemic. But Zscaler is one of the few high-growth companies that’s still enjoying accelerating growth, so clearly its products in a roughly $20 billion market are working. It is grabbing more customers and landing bigger deals as customers are now all-in on cloud transformation.

Revenue was up 42% in fiscal 2020 (ended in July). Growth has accelerated through the first three quarters of fiscal 2021 and reached 60% in Q3, which was reported in late May. The quarterly result suggests consensus estimates of around 53% revenue growth for the current year are about right at $660 million.

Impressively, EPS should grow faster as the business keeps scaling up and more money flows to the bottom line. We’re looking for EPS of around $0.47 this year, up 74% over last year.

Put it all together and you get a stock that has recently rallied back within 2% of an all-time high since the quarterly report. Either way you slice it the growth here is impressive.


Cloud Security Stock #3: CrowdStrike (CRWD)
Last up is CrowdStrike (CRWD), which has a market cap of $60 billion. The company provides endpoint security solutions for things like laptops, desktops and IoT devices. CrowdStrike’s platform was born in the cloud so it’s always been there – no messy changes from the on-premise to cloud business model or anything like that here. CrowdStrike is taking market share from legacy players as enterprises are more comfortable turning off their old solutions and moving to the cloud now.

Revenue was up 93% in fiscal 2020 and 82% in fiscal 2021, which ended in January. Current consensus estimates suggest revenue will grow by 56% to $1.36 billion in Fiscal ‘22 and that EPS will grow by 44% to $0.39.

The company reported Q1 fiscal 2022 results at the beginning of June and they beat expectations – a good thing given the stock traded at almost 30 times 2022 estimated revenue at the time. Revenue was up 70% to $303 million and adjusted EPS was $0.10.

Management said the major growth drivers continue to be the shift to the cloud and growing demand for solutions due to cyberattacks. The percentage of customers with multiple products (more than five) increased by 3%, to 50%.

The stock has reached all-time highs since the report. It remains a very expensive stock, but also one that continues to deliver. I like it as a long-term holding but would suggest averaging in, with smaller purchases at this level.


My Favorite Cloud Security Stock
Stepping back, what we see here is evidence of the stronger for longer thesis playing out among cloud-based security software stocks. The transformation that was happening prior to the pandemic has only gained momentum during it and should sustain afterwards.

If you already own these stocks, I think you should continue to hold on. If you don’t, my preference is to buy smaller amounts of CrowdStrike and/or Zscaler, but recognize that these types of super-growth stocks can pull back 30% at any time. The goal is to build a position over time as they are long-term growers, not flash-in-the-pan-type stories.

As always, position sizing matters. After this recent run a smaller amount invested makes more sense. Average in, try to buy on pullbacks, and let the dollar cost averaging strategy pull you into your desired position size over time.

When looking to make additional investments in tech, is cloud security on your watchlist?

This is How You Know it’s Safe to Invest in a Recent IPO

There’s a period of time following a new stock’s IPO when shares have been allocated, orders filled, and the excitement of the first trading days have died down. We’ll refer to it as the “IPO droop.” Most high-profile IPOs suffer this on some level or another, the fervor and noise have died down which leaves investors holding shares without good fundamental data, technical analysis, or institutional buying to hold up the value.

The droop is especially prevalent in the first few weeks or months after a stock comes public, which is why we don’t typically advise buying during the first two or three weeks. Without being able to see it on a chart, we can’t identify the hallmark buying patterns of the Fidelitys and T. Rowe Prices of the world.

Sometimes this droop lasts a couple of months and other times it can last years, it just depends on the stock and market environment. What’s interesting is that, unlike more established stocks, sometimes it takes just two or three weeks to turn the corner—we’re still studying it, but there are some major examples where two or three volume clusters (two or three weeks in a row of big buying volume) have served to turn the tide on what turned out to be huge winners.

3 Previous Post-IPO Bumps
The initial example was Netflix (NFLX), back when it was growing fast as a DVD-by-mail outfit and putting firms like Blockbuster out of business. It came public May 2002, in the midst of the horrid bear market, and proceeded to plunge into the market’s October low. While it’s hard to see on the chart, the two weeks at the start of October brought gigantic upmoves in both price (nearly doubled!) and volume (by far the two largest volume weeks since the IPO). That was pretty much it for the downturn, with the stock enjoying a 10-fold move higher to its peak in 2004 (not shown).


Moving ahead a decade, we have Palo Alto Networks (PANW), which back then was the new-age cybersecurity provider of its day. After the mid-2012 IPO got off to a good start, the name fizzled for more than a year. But in November 2013, something changed—the stock flashed four straight big-volume buying weeks right off the low, kicking off not just a good intermediate-term run (went from 55 to 80 in just a few weeks) but after a correction, a huge longer-term upmove, too (to 200 in mid-2015).


Most recently, look at Shopify (SHOP), which has been one of the largest winners of recent years. The IPO in mid-2015 led to some wild swings before it was cut in half by early 2016. But similar to PANW, Shopify then had four straight above-average volume buying weeks right off the low (three came on very big volume), which was the start of what turned into a ridiculous advance.


One Recent IPO with Increasing Volume
Why write about this now? Because so many of this year’s hot IPOs went splat sometime in the first five months of the year. One that caught our eye: Snowflake (SNOW), which seems to be completely upending the data management space—the firm’s data cloud platform doesn’t just allow firms big and small seamless access to and the power to mine their data, but also offers the ability for safe data sharing inside and outside an organization (setting up powerful network effects). Just about all data types are allowed, there’s no compute limitations, it’s all in a single programming language and—importantly—Snowflake charges based on consumption (not subscription), which (a) makes it cheap enough for small fries and (b) leverages it to greater data usage and sharing among its clients. Analysts think it’s playing in a $75 billion market.


The numbers are impressive to say the least: Revenues have been growing at triple-digit rates for many quarters (up 110% in Q1), and perhaps more eye opening is the firm’s remaining performance obligations (RPOs—basically all money under contract that it’s set to earn going forward). At the end of Q1, it had $1.43 billion of RPOs, more than triple that of the year before. Moreover, while earnings are negative, free cash flow was in the black in Q1.

The trick since SNOW’s IPO last September has been valuation. It’s massive! Even today, sitting well off its prior high, the market cap is north of $70 billion! However, this is clearly a unique growth story that big investors are favoring (852 funds own shares already), and it might be following the pattern of the above-mentioned winners—after being more than cut in half from its peak and hitting lifetime lows in May, SNOW saw a volume cluster of three weeks in a row, which including very nice supporting action after earnings.

Of course, just looking at the chart, it’s hard to conclude it’s completely out of the woods—there’s plenty of overhead to chew through, including a decent amount just above here. But it does look like SNOW has changed character (four weeks up in a row; first time it’s been up more than three in a row since the IPO), and the volume cluster has us intrigued. Officially we want to see more strength, but if you wanted to start with a token position here, we wouldn’t argue with it.

Have you invested in any recent IPOs? How did they turn out?

The Small-Cap Stock Rally is Just Getting Started. Here’s Why

So far in 2021, small-cap stocks are drastically outperforming both mid- and large-cap companies in the U.S. equity markets, with the S&P 600 small-cap index more than doubling the returns of the S&P 500.

The big questions now are these: Why such a big move in small-cap stocks? Is the advance justified? Can it continue? How do I play the strength?

Let’s handle these questions in order.

Why Such a Big Move in Small-Cap Stocks?
The main reasons for the advance is that the small-cap asset class was extremely depressed during the pandemic, and even before that had underperformed large-cap stocks for some time. That’s because of relative underweight exposure to the high-growth sectors that had powered the S&P 500, namely technology, which carries a 27% weight. In contrast, the S&P 600 small-cap index is only 13% exposed to tech.


There was a lot of room for some relative outperformance to close that gap, but small caps needed financials, industrials and consumer discretionary to kick into gear, and for a pause in large-cap tech. That began to happen this year.

Additionally, small caps tend to do especially well during mid-cycle recoveries because of high exposure to cyclical stocks, higher capex spending and the U.S. economy. That reality has not been lost on big investors, who see small-cap stocks as a “no-brainer” way to invest in a re-opening of the U.S. economy this year and possibly booming economy heading into 2022.

This recent note from Bank of America Global Research on March 15 sums it up: “During prior Mid-Cycle phases (excluding the Tech Bubble), our work suggests that small caps have outperformed large caps. … Small caps’ sales growth has been highly correlated with U.S. capex cycles (88% correlation between y/y sales growth and U.S. quarterly y/y capex growth since 1985), more so than large caps’ (76% correlation).”

Is this Advance Justified?
Yes. Small caps represent a levered bet on the U.S. economy due to high domestic exposure. Historical data suggests that when GDP is growing above 2% small caps do very well. There is also evidence that small caps do well in inflationary periods. The Fed’s efforts to get inflation up to around the 2% target (and even more, for a little while), and investor belief that inflation is actually going to run hotter than the Fed expects, supports small-cap performance. Finally, the uptrend in interest rates has buoyed the outlook for financial stocks, which comprise a big part of the small-cap index.

Can the Small-Cap Stock Run Continue?
Yes, but perhaps not at the same pace as we’ve seen so far in 2021.
Small caps continue to trade at a roughly 10% discount to large caps, yet historically the asset class tends to trade at a 3% premium. Even after such a furious rally, data from Bank of America suggests active funds are underweight small caps and still overweight large caps, despite small-cap exposure to a U.S. economic recovery, a reopening of the economy and historical mid-cycle outperformance during periods of rising inflation.

Historical data also suggests that small caps should fare well as we move toward a likely period of rising interest rates. Check out the table below. As you can see, stocks generally do well during periods of rising rates, and small caps (along with the Nasdaq) tend to do better than the broad market.


How Do I Play the Strength?
The evidence is compelling for continued small-cap performance in 2021 and 2022. Even if the advance isn’t as rapid as it’s been so far this year it makes sense for investors to have some exposure.

By far, the easiest way to do that is with an ETF. I prefer the iShares Core S&P 600 Index ETF (IJR) because it tracks a higher-quality index than the iShares Russell Russell 2000 ETF (IWM). But either one will give you the exposure you’re looking for.

If you want to turn up the dial a little, you can go with a levered ETF, such as those offered by Direxion and ProShares. Be sure to read up on these levered options if you buy as there are risks, and they may not make a lot of sense as buy-and-hold investments.

Another option is to buy small-cap sector ETFs to get the precise sector exposure you want. These are offered by Invesco.

The final option is to invest in individual small-cap stocks. This strategy gives you the ability to build a portfolio of stocks for the precise exposure you want, whether that be technology, health care, industrials, energy, whatever.

Do you prefer to invest in small-cap stocks via ETF, mutual fund, or buying individual shares?

3 Micro-Stocks this Bull Market is Still Overlooking

The great thing about investing in micro-cap stocks is there is always something to do no matter the market conditions. Between Canada and the United States, there are about 10,000 public companies.

There also a few good signs right now:

  • The S&P 500 is trading at an all-time high price-to-sales multiple.
  • Short interest is at an all-time low.
  • SPACs (Special Purpose Acquisition Companies) are trading at an average premium to net asset value (NAV) of 26.4% as more investors pile in to take advantage of the “pop” once a deal is announced.

There are two great ways to find micro-caps to invest in, and it’s how I found the three micro-stock below.

  • Google alerts - a great free resource that I use to monitor certain keywords
  • Quarterly letters - following professional managers who share their ideas every quarter

There are three micro-caps I’ve recently added to my portfolio, and below I’ll share what they are and why I’ve added them.

1. Meridian Corp (MRBK)
I found Meridian Corp (MRBK) courtesy of a Google alert. “Special dividend” is one of the terms that I monitor, and the alert notified me that Meridian, a bank, would soon be paying a special dividend.

I’m always interested in companies returning cash to shareholders whether it’s through share buybacks or special dividends.

After a preliminary review, the stock looks interesting.

It was paying a special dividend of $1.00 per share for shareholders of record on March 1. The $1.00 per share dividend works out to a one-time yield of 4.2% – not a crazy large special dividend, but still attractive.

The stock is close to a 52 week high so momentum looks good. Finally, the stock is incredibly cheap trading at a P/E of 5.5, and there has been aggressive insider buying.

2. Stabilis Solutions (SLNG)
I found Stabilis Solutions (SLNG) courtesy of another Google alert keyword term: “pre-announcement.” When a company pre-announces good results, it can be a nice buy signal.

I started to dig into Stabilis, and although I need to do more work, it looks like an interesting situation. The company is focused on providing solutions for liquid natural gas fueling, production, and distribution.

The company pre-announced revenue that is 170% higher than second-quarter 2020 revenue (the low point for the year). On a year-over-year basis, Q4 revenue is expected to be up at least 8%. It’s pretty impressive that an energy company is already back to peak revenue generation.

Meanwhile, the company’s valuation (1.4x revenue) seems reasonable and there has been insider buying right around the current share price.

3. CCUR Holdings (CCUR)
One great way to find new ideas is to follow professional managers who share their ideas in quarterly letters. I found out about CCUR Holdings (CCUR) through Cedar Creek Partners’ latest quarterly letter.

CCUR trades at a huge discount to book value per share of 6.91. Further, the company is sponsoring a SPAC and its founders’ shares could be worth an additional $3 to $4 per share if a successful acquisition is consummated. Finally, the company is doing a reverse stock split to effectively squeeze out small shareholders at less than 50% of book value. This is great for the shareholders who aren’t squeezed out!

Micro-caps stocks like Meridian, Stabilis, and CCUR tend to outperform. From 1927 to 2016, micro caps generated a compound annual return of 17.4%.

Will you invest in micro stocks this year? Why or why not?

Buy this Little-Known, Cheap Pharmaceutical Stock Now

My dad was a large-cap portfolio manager at a Boston based investment management firm. And my mom worked for the global bond powerhouse, PIMCO, as a credit analyst.

As a kid, I was interested in making lots of money, and the stock market seemed like an excellent way to do it.

So I would pester my dad and mom with question after question. My dad took great pleasure in teaching me the investing basics and patiently answering my questions.

He was a value investor. As such, he mainly focused on buying out-of-favor, “cheap” stocks.

He had absolute conviction in the strategy and the data supported him at the time and still supports him to this day (despite the recent 10-year period of underperformance by value stocks).

According to Northern Trust Asset Management and Kenneth French Data Library, value stocks have outperformed the market by 3.1% per year over the long term (1926 to 2020).

As a budding value investor, I was trained to look for situations with “a little hair” on them. A stock that has gone nowhere for a long time. A down-and-out stock that everyone else has ignored.

Wait for the reversion to the mean.

When the company reports better-than-expected results and the stock pops, sell and recycle proceeds into the next cigar butt (as Benjamin Graham would say).

Why Momentum Matters
It took me a long time to recognize the importance of momentum—both in the fundamentals of a company’s business and in the stock price.

Usually, a stock that is down-and-out will stay down-and-out.

A company that is posting disappointing fundamentals will usually continue to do so.

You are much better off looking at stocks with positive momentum.

The below chart was shocking to me.

Over the long term, “buy at all-time-high investors” outperform “buy and hold” investors.

But it reinforced the message that momentum is important.

I focus on micro-cap stocks and it pays to invest in micro-caps with high momentum.

According to O’Shaughnessy Asset Management, investors who buy the highest momentum stocks and short the lowest momentum stocks would generate an annualized excess return of 23.9% in micro-caps.

I prefer to focus on just buying high momentum micro-caps (shorting micro-caps is difficult).

I don’t ignore valuation. But I’m willing to buy a stock at its all-time high as long as its valuation is reasonable.

Buy this Micro-Cap Stock at All-Time Highs
My ideal set-up is a cheap stock with high momentum.

Consider Medexus Pharma (MEDXF), a Canadian specialty pharma company.

Those who bought the stock when I originally recommended it in April 2020, are up 221% … but the stock still looks cheap to me.

It is trading at a price to free cash flow multiple of 12.4x yet it grew revenue 43.9% in the last quarter. Strong growth and free cash flow generation should continue in 2021.

If it traded in line with peers, it would be worth $15. And that is why I have no problem buying the stock at its all-time high of 5.65 today.

My 3 Favorite Security Software Stocks

The “stronger for longer” thesis is currently playing out among cloud-based security software stocks. The transformation that was happening prior to the pandemic has only gained momentum during it, and should sustain afterwards.

The following three security software stocks are top players, and as always, position sizing matters. A smaller amount invested makes more sense. Average in, try to buy on pullbacks, and let the dollar cost averaging strategy pull you into your desired position size over time. Without further ado, here they are:

Okta (OKTA)
Okta has a market cap of $33 billion and developed the first cloud-based platform for identity and access management solutions, which is a roughly $25 billion dollar market today. The company is moving upmarket from mid-size to larger companies, and now has more than 320 accounts worth over $500,000 a year and 35 accounts worth over $1,000,000 a year.

The stock recently reached all-time highs, but OKTA is largely unchanged since the report came out. Stepping back, the report hasn’t changed the trajectory of the stock in a meaningful way.

Zscaler (ZS)
Let’s move on to Zscaler (ZS), which has a market cap of $24 billion. The company is a provider of network security solutions for many of the biggest companies out there. Its software does things like replacing VPN appliances and providing connections that are used to route traffic between an organization’s headquarters and remote locations.

Naturally, these services are in high demand during the pandemic. The company is going after a roughly $20 billion dollar market and it is grabbing more customers and landing bigger deals as customers are now all in on cloud transformation. Even better, EPS should grow faster as the business keeps scaling up and more money flows to the bottom line.

CrowdStrike (CRWD)
Last up is CrowdStrike (CRWD), which has a market cap of $38 billion. The company provides endpoint security solutions for things like laptops, desktops and IoT devices. CrowdStrike’s platform was born in the cloud so it’s always been there – no messy changes from the on-premise to cloud business model or anything like that here. CrowdStrike is taking market share from legacy players as enterprises are more comfortable turning off their old solutions and moving to the cloud now. The stock has recently reached all-time highs and, although it’s given a little back, is still trading comfortably near those prices.

If you already own these stocks, I think you should continue to hold on. If you don’t, my preference is to buy CrowdStrike (CRWD), followed by Zscaler (ZS). The pace of customer growth, as well as number of modules per customer, make total revenue growth for CrowdStrike just too attractive to pass up.

That doesn’t mean you need to chase it right now, however.

Why DoorDash Was the Latest IPO to Flop

For retail investors, few market events gain as much attention as IPOs, which typically leads to unfortunate but predictable results, most notably with high-profile IPOs.

Consider this hypothetical: A well-known company announces an upcoming IPO. In the lead-up to final pricing they raise the share price range once or twice. Retail investors call their brokers, desperate to participate in the offering only to be excluded, or only allocated a fraction of the shares they’d hoped for. Still eager to participate in trading, they place orders on the open market, paying prices far higher than the offering price and rapidly increasing the company’s valuation. Then, more savvy investors, looking to take advantage of the rapid valuation increase, begin selling, driving the share price down and leaving retail investors holding the bag.

And that’s precisely what has happened with the DoorDash IPO, which is down since it began trading, opening trading at 182 on December 9 – nearly 80% above its IPO price.

After several rounds of price increases, DoorDash (DASH) finally priced at 102, and there are many lessons for retail investors in all of this.

Lesson #1: Do Your Research
The pricing process is complicated, but it involves the biggest investment banks doing their best to create a market for a stock that’s never traded before. That means trying to accurately value the company while also trying to maximize share price without pricing it at a level that the market can’t support—nothing looks as bad for an investment bank as a mispriced IPO. So if you’re looking to buy shares in the open market, and see that DASH is going to start trading 80% above its offering price, you need to be able to justify the purchase. DoorDash owns about 50% of the nascent online food-delivery space. You need to be able to support that 80% premium with the belief that DoorDash will either take a bigger piece of that pie, or that the pie itself will grow over time.

Lesson #2: Buy the Stock, Not the Name
This goes hand in hand with lesson #1, but it’s the easiest trap for a retail investor to fall into. The broad familiarity with companies is typically what creates fervor around IPOs, but it’s not necessarily what creates value. Warren Buffett famously bought Dairy Queen because he had a positive experience there in his younger days, but you can rest assured that the Oracle of Omaha did his due diligence before pulling the trigger. It’s all well and good if you use DoorDash every day and your familiarity with the company piques your interest in the IPO. Just remember that what you’re really buying is future earnings potential.

Lesson #3: Don’t Fight the Institutions
The best news an investor can hear is that institutional buyers are starting to take a stake in a stock that they own. The big investors are the ones that really move markets and launch share prices into the stratosphere. With a brand-new IPO, who do you think is selling the shares? The DoorDash IPO, like every other IPO, prioritized allocating shares to larger investors (typically 90% of the offering goes to institutions). If big investors already own 90% of the shares that were offered, it’s tough to find more buying pressure to support the massive jump in share price.

None of this is to say that it’s impossible to find value once an IPO starts trading. The important takeaway is that the big institutions have spent months determining what they’re willing to pay for an offering, and are unlikely to jump in and move the market higher. As a result, buying pressure is coming predominantly from retail investors who are unlikely to support a sustained price increase.

The Pros and Cons of SPAC Investing

“SPACs,” or special purpose acquisition companies, are the rage these days. SPACs are formed and go public for the sole purpose of raising capital used to merge with or acquire another company.

They’re so popular because they are generating big fees for banks, raising substantial capital for entrepreneurs, and in some cases, big returns for investors. The key factor that enables a SPAC to raise significant capital by going public before its management team has even identified a business to acquire is the credibility and track record of the management team.

Through November 2020, over $62.5 billion has been raised by SPAC IPOs this year, 366% more than last year and the highest amount ever.

Renaissance Capital studied 313 SPAC IPOs since the start of 2015. They found:
“93 have completed mergers and taken a company public. Of these, the common shares have delivered an average loss of -9.6% and a median return of -29.1%, compared to the average aftermarket return of 47.1% for traditional IPOs since 2015. Only 29 of the SPACs in this group (31.1%) had positive returns.”

Is this time different?

In other words, has something changed in the market that makes SPAC investing more attractive?

First, let’s explore the positives.

The Pros of SPAC Investing
Many, including famous venture capitalist Bill Gurley of Benchmark Capital, argue that the initial public offering (IPO) process is broken.

Investment banks typically underprice the offering price of companies going public. This results in an IPO pop.

From 1980 to 2019, IPOs were underpriced by an average of 20.7%.


Who does this benefit? The favorite clients of the investment banks involved in the pricing. It keeps those customers coming back again and again.

Even though the IPO pop has historically been celebrated, it’s really a negative for the issuing company, as it shows that the company left money on the table.

If you view the IPO pop as part of the company’s cost of capital, it is exceedingly expensive. IPO fees paid to lawyers and underwriters typically add up to 7%. Add the 20.7% IPO pop and the “cost” of going public is an egregious 27.7% on average.

With that backdrop in mind, going public via a SPAC is an attractive alternative for companies considering an IPO. It’s a lot cheaper than an IPO and significantly faster (two months vs. six months for the typical IPO process).

Now it’s time for the negatives.

The Cons of SPAC Investing
For most SPACs, founders get to keep 20% of the equity so there is considerable dilution for the company that has been acquired.

Also, the SPAC sponsor only gets to keep their 20% if they consummate a deal within two years. Otherwise, they must return the capital. Thus, it’s in their interest to consummate a deal at almost any price.

Plus, there are so many SPACs in the market today that popular private companies have many SPAC suitors.

As a result, popular private companies can set up “SPAC-offs,” where various SPACs pitch their deal, competing mostly on price.

This is all well and good for the company that is being acquired, but it is bad for investors in the SPAC. The higher the acquisition price, the lower the future return SPAC investors can expect.

The below quote from Don Keough, a director at Coca-Cola from 1986 to 1993, speaks to the “animal spirits” that can be unleashed when SPACs compete for deals.

“In the field of mergers and acquisitions, multi-million, even billion-dollar deals get under way, and the momentum builds, the rivalries among the players come to the fore, the game goes ahead, no holds barred. Someone is determined to win! They can taste it! All the cash lying on the table, all the supposedly solid rationale behind the deal, all the people involved—nothing matters except winning! ‘I want my way,’ says the biggest ego in the room! There are dreams of being in the press conference spotlight and big headlines in the Wall Street Journal. It’s all too glamorous, and we convince ourselves that the numbers do add up—even when they are about as sound as astrological predictions. The ‘animal spirits’ that John Maynard Keynes wrote of are more powerful than most business people would like to admit.”

This mentality is why SPACs should be viewed with extreme caution. But they shouldn’t be written off completely.

My sense is SPACs are here to stay and represent a very viable alternative to an IPO.

Further, I think SPAC terms will change with time and become more attractive to investors. For example, SPAC sponsors typically get to keep 20% of the equity in the vehicle if a deal is consummated. However, that percentage is negotiable.

Recently, Bill Ackman of Pershing Square launched a SPAC but his takeaway is 0%. This is incredibly attractive for investors for two reasons. First, it eliminates dilution, and second, it removes the incentive to complete a deal at any price.

I think SPACs are here to stay this time. Just do your research and be extremely choosy when considering investing in one of them.

2 Small-Cap Stocks for the Coming Pandemic Recovery

Experts are currently saying a realistic timeframe for widespread vaccination is spring 2021, and investors are beginning to wonder what their portfolios should look like in a post-pandemic world.

Given the magnitude of the vaccine news it makes sense to make some incremental portfolio changes now. Here are two small-cap growth stocks worth considering:

Cryoport (CYRX)
Cryoport (CYRX) specializes in end-to-end supply chain solutions for the life sciences industry and cell and gene therapy market. Solutions span protection, monitoring, logistics, storage (including cold storage) and chain of compliance.

In short, Cryoport moves and stores everything from stem cells and embryos to vaccines, tissues, and biologics.

If you’re wondering if it will play a role in distributing COVID-19 vaccines, the answer is “maybe.” It depends on how the distribution contracts fall. Management doesn’t yet know details. One thing is for sure, however – COVID-19 vaccine distribution is going to require many companies all over the globe, for an extended period of time. This isn’t a one- or two-company effort. It seems likely that Cryoport will be involved in some way.

Cryoport has primarily served the biopharmaceutical market in the past, and also offers exposure to the IVF and animal health markets. However, on October 1 management announced it had closed on two significant acquisitions – CRYOPDP and MVE Biological Solutions.

CRYOPDP is a France-based supplier of temperature-controlled supply chain solutions, serving clinical research, pharma and cell and gene therapy markets. It helps Cryoport get deeper into both the EMEA and APAC regions, roughly doubles revenue, and is accretive to earnings.

MVE was a part of Chart Industries (GTLS) and specializes in vacuum insulated products and cryogenic freezer systems for the life sciences industry, especially the cell and gene market. With 2019 revenue of $83 million this acquisition roughly doubles Cyroport’s revenue again. It is also accretive to earnings, and comes with a $275 million investment from Blackstone, which helped fund the acquisition.

The net effect of these two acquisitions is that Cryoport is now positioned as a major contender in providing global supply chain solutions for the cell and gene therapy market, which is seen growing by 40% a year through 2025.

While results in the first half of 2020 were impacted by the pandemic, which paused 56 trials that Cryoport supports, only three trials were paused as of the end of Q2. In addition to trials, Cryport continues to support commercial agreements with Gilead’s YESCARTA, Novartis’ KYMRIAH, Bluebird Bio’s ZYNTEGLO and Kite’s TECARTUS.

In Q3, reported on November 5, revenue was up 17% to $11.2 million. Following that report current consensus estimates suggest 2020 revenue will rise 106% to $70 million while 2021 revenue goes up 186%, to $200 million. Adjusted EPS this year is seen near -$0.64, then turning positive to $0.20 in 2021.

The stock has jumped since the vaccine news as investors look to company’s that offer logistics solutions and which could help distribute COVID-19 vaccines. Cryoport, while not having disclosed anything publicly yet, should be right in the mix.

Cardlytics (CDLX)
Cardlytics (CDLX) is a $2.9 billion market cap company that has developed a purchase intelligence platform that is in the early innings of being adopted by financial institutions in North America and the U.K.

The platform pulls in and analyzes trillions of dollars of raw purchase data (debit, credit, ACH, bill pay, etc.) from millions of accounts at thousands of financial institutions. That data is then run through a machine learning technology which spits out a view of where and when consumers are spending their money. Advanced analytics are applied to the anonymized purchase data to turn it into something of value that Cardlytics can sell to marketers.

These marketers, which include brands we’re all familiar with across the retail, restaurant, subscription service, travel, grocery, luxury and e-commerce channels, use the data to identify, reach and influence huge numbers of potential buyers with customized offers.

The distinguishing attribute of the platform, and major source of competitive advantage relative to other marketing platforms, is that Cardlytics reaches consumers directly through their online banking platforms and mobile banking apps. Cardlytics first landed Bank of America, then Chase and Wells Fargo. Most recently U.S. Bank became a customer.

Banks win because they get reliable revenue – roughly 50% of revenue is shared with the banks – and have more active and engaged customers. Customers win because they save on everyday purchases that they would have made anyway and, other than clicking on the offer while logged in to their banking app or website, they don’t need to change their behavior. Marketers win by reaching engaged and receptive audiences, and they can measure the results of their efforts.

Last year Cardlytics’ revenue was up 40% and the stock was on fire, until the pandemic hit. Consumer spending, which accounts for 70% of U.S. GDP, has been especially hard hit in areas like travel and dining. Cardlytics has significant exposure to both.

When management reported Q3 results on November 2 they said revenue fell by 18% to $46 million. That result beat expectations by $7.3 million. Adjusted EPS of -$0.16 also beat, by $0.12. Management said monthly average users are now nearly 162 million as the Wells Fargo launch continues and that average revenue per user was $0.29, roughly $0.05 better than expected.

The business is continuing to benefit from the economic recovery as advertisers come back to the platform and emerging strength in direct-to-consumer and eCommerce helps fill in around the edges. That’s in the U.S. Overseas, the story isn’t as good as the U.K. remains extremely weak (down 52% versus down 15% in the U.S.). Management’s Q4 guidance was light, reflecting the current state of the pandemic.

The stock’s reaction to the report was relatively muted. But it has jumped higher since news of the vaccine breakthrough. Ultimately, I think this stock goes much higher once the economy can open again and consumers are released into the wild to spend as they wish. That will still be a while, but if you want to get positioned now Cardlytics should be on your list.

3 Vaccine Stocks to Buy…and 3 to Avoid

Wondering if you should invest in upcoming vaccine stocks? Moderna’s (MRNA) recent announcement of a Covid-19 vaccine which demonstrates 94.5% efficacy has driven the share price higher while also pressuring Pfizer (PFE) and BioNTech (BNTX), who jumped on similar efficacy rates (90%) the week prior. While those companies may be jockeying for position in what’s sure to be a crowded vaccine market, the most critical consideration appears to be one of delivery more than efficacy, as Moderna’s vaccine can be stored at higher temperatures and for longer than the Pfizer/BioNTech vaccine. Investors that missed the Pfizer/BioNTech rally and/or the Moderna rally are likely looking for ways to introduce Covid vaccine stocks into their portfolios without piling into stocks that have already appreciated on vaccine news.

Fortunately, governments around the world (most notably the U.S.) are putting billions towards vaccine research and distribution, and it’s unlikely that one or two vaccine candidates will be sufficient to meet worldwide needs. That presents the possibility that of the hundreds of Covid-19 vaccine candidates, dozens could potentially be approved and distributed either widely, nationally, or regionally. Which means that not only are there still investments with high upside potential, but there could be multiple such companies. Before we get to the companies with upside potential, let’s start with…

Three Covid Vaccine Stocks You Should Avoid
AstraZeneca (AZN) is obviously a pharmaceutical heavy hitter, with a diverse product line, billions in revenue every year, and even a healthy 2.5% dividend. Which is precisely why it’s best avoided if you’re looking for significant growth potential. Setting aside the fact that AstraZeneca was forced to halt its U.S. trial of a Covid vaccine before resuming it later in the year, even a best-case-scenario is unlikely to significantly move the bottom line. If AstraZeneca faces delayed approval in the U.S. after receiving initial approval in the U.K., which seems likely due to the trial halt, it’s unlikely that minor and gradual revenue increases will significantly affect the share price.

Inovio Pharmaceuticals (INO) rallied approximately 10% on Monday on news that the FDA released a trial hold which had been in place since the end of September. This will allow Inovio to proceed forward with phase 2/3 clinical trial of their Covid vaccine candidate but that’s where the good news ends. Inovio has no track record of receiving FDA approvals throughout its history and is currently embroiled in shareholder lawsuits alleging that it misrepresented its Covid vaccine progress on Fox News and to President Trump. The shareholder suit and SEC investigation even prompted a Citron Research report likening Inovio to the Theranos of Covid-19 vaccine development.

Novavax (NVAX) is another company without a proven record of developing FDA-approved pharmaceuticals and likely another Covid vaccine stock to avoid. Novavax, which is utilizing a nanoparticle protein delivery mechanism, is slated to begin phase 3 trials later this year which means they’ll be delivering results in early 2021 and could be entering an already-crowded market. While Novavax has received over $2 billion in funding as part of Operation Warp Speed and associated development programs, that funding may be all sizzle and no steak, as funding dollars have been free-flowing with little accountability. Given the poor track record and inflated share price, this may be one for the watchlist pending the outcome of phase 3.

Three Covid Vaccine Stocks to Buy
CureVac (CVAC) is a German biopharmaceutical company that, like Moderna, Pfizer, and BioNTech, is pursuing an mRNA-based Covid vaccine and which recently reported positive phase 1 results. Given the efficacy rates of the two prior mRNA vaccines, CureVac could, ideally, report similar efficacy rates early next year. Unexpectedly, CureVac was trading higher Monday on the Moderna news as they’re playing the same game. What makes CureVac more than just another mRNA latecomer is the possibility for vaccine scaling. CureVac has a partnership with Tesla (TSLA) to use their RNA bioreactors to essentially create vaccine microfactories. Even if CureVac encounters potential delivery hurdles like those faced by Pfizer/BioNTech, development of regional or local microfactories could still enable widespread distribution of a potential vaccine.

Dynavax Technologies (DVAX) is another company that’s in early-stage Covid vaccine development, and that just recently received approval to begin phase 1 & 2 trials in India. The intriguing element of Dynavax is not that they’re one of many early-stage Covid vaccines, but rather that they have agreements with other companies for use of their HEPLISAV-B adjuvant, which would be added to a Covid vaccine to boost immune response, minimize the amount of antigen needed, and enhance the efficacy of a vaccine. The storage temperatures required for the adjuvant, which are 36-46 degrees Fahrenheit, also offer positive potential for distribution. Dynavax is currently trading near $4/share with a median analyst price target of $14 and an average target of $16, and it beat earnings estimates in the most recent quarter. The depressed share price may turn off some prospective investors, but the agreements with multiple Covid vaccine companies means you’re getting exposure to more than just one candidate.

Altimmune (ALT) actually has two products in the pre-clinical phase of the approval process right now, AdCOVID and T-COVID. AdCOVID is a single-dose intranasal vaccine which has the potential of triggering mucosal immunity which could be more effective than an injected vaccine and reduce spread as it “shuts the door” on Covid by triggering an immune response that’s active in the nasal passageway and prevents the virus from taking hold of a patient. T-COVID, on the other hand, is an immunomodulator that’s intended to reduce the cytokine storm and immune response of patients that have already contracted the disease. Both products are early in development and obviously require regulatory approval, but the reduced patient resistance to a nasal spray, the cost savings that intranasals offer over injectables, and the potential for widespread distribution make Altimmune one Covid vaccine stock worth watching.

A Specific Formula Says to Buy these 5 Mid-Cap Stocks

The Hennessy Cornerstone Midcap 30 Fund (HFMDX) uses a unique, specific strategy for identifying the best mid-cap stocks on the market.

Hennessy Cornerstone’s stock-picking formula is four-pronged. For a mid-cap stock to pass its screen, it must meet the following qualifications:

  • A price-to-sales ratio below 1.5
  • Annual revenue between $1 billion and $10 billion
  • Earnings must exceed the previous year’s
  • The stock must have appreciated in the last three to six months

The Hennessy fund strictly adheres to these four criteria. And it’s worked well for them, not only now but in the last decade, producing positive returns every year but 2018 (when it lost 22.4%).

So, let’s use Hennessy’s formula to identify the five best mid-cap stocks on the market currently.

Remember: mid-caps are companies with market caps between $2 billion and $10 billion, an attractive mid-point in the growth cycle of company because, as fund CEO Neil Hennessy told the Times, “They’re large enough to withstand an economic tsunami and to acquire smaller companies, but they’re small enough to be acquired themselves.”

One other note: although I used the Hennessy fund’s screening criteria, I did not actually look up what stocks they hold in their portfolio – in part because many of the names in the listing are a quarter old, which these days is a long time.

Let’s get to the stocks.

Williams-Sonoma (WSM)

  • Market cap: $8.2 billion
  • Price-to-sales ratio: 1.38
  • Revenue (trailing twelve month): $6 billion
  • Quarterly earnings growth: 114.8%
  • 3-month stock return: 25.7%
  • 6-month stock return: 104%

Casey’s General Stores (CASY)

  • Market cap: $6.8 billion
  • Price-to-sales ratio: 0.91
  • Revenue: $7.6 billion
  • Quarterly earnings growth: 40.5%
  • 3-month stock return: 13.5%
  • 6-month stock return: 20.3%

Hanesbrands (HBI)

  • Market cap: $6 billion
  • Price-to-sales ratio: 0.94
  • Revenue: $6.7 billion
  • Quarterly earnings growth: 7.8%
  • 3-month stock return: 22.8%
  • 6-month stock return: 96%

Dick’s Sporting Goods (DKS)

  • Market cap: $5.5 billion
  • Price-to-sales ratio: 0.62
  • Revenue: $8.6 billion
  • Quarterly earnings growth: 146%
  • 3-month stock return: 51.8%
  • 6-month stock return: 134%

Flowers Foods (FLO)

  • Market cap: $5.2 billion
  • Price-to-sales ratio: 1.24
  • Revenue: $4.3 billion
  • Quarterly earnings growth: 9.1%
  • 3-month stock return: 12.8%
  • 6-month stock return: 6.2%

Tallying it all up, that’s an average three-month return of 25.3% and an average six-month return of 76.1% among those five mid-cap stocks. That’s some pretty good momentum!

Also, notice the companies: they’re all either food or retail related. Dick’s Sporting Goods and Williams-Sonoma have certainly benefited as American brick-and-mortar retail stores re-opening from Covid-19 lockdowns over the summer, as the earnings growth indicates.

Hanesbrands, which makes Hanes underwear, Champion athletic gear and Playtex women’s undergarments, among other recognizable brands, is getting a similar bump from all the retail re-openings.

Casey’s General Store is a midwestern convenience store chain, with 2,146 stores in 16 states. Convenience stores, along with grocery stores, have been one of the few constants this year.

Finally, Flowers Foods is a Georgia-based producer and distributor of packed bakery foods, whose brands include Nature’s Own bread, Wonder Bread and Tastykake. People certainly didn’t stop eating bread, pastries and snack cakes in the last seven months.

If these five stocks follow the Hennessy fund’s third-quarter pattern, they could be among the best-performing mid-cap stocks in the fourth quarter. Any one of them could make a good addition to your portfolio.

SPACs are all the Rage. Here are 3 New Ones that I Like

“Special Purpose Acquisition Companies” or SPACs, are all the rage on Wall Street right now for a number of reasons: they are generating big fees for banks, raising substantial capital for entrepreneurs, and in some cases, big returns for investors.

Here are some of the most talked-about SPACs this year:

  • Tortoise Acquisition Corp (SHLL)
  • Virgin Galactic (SPCE)
  • DraftKings (DKNG)
  • Nikola Corp. (NKLA)

SPACs are formed and go public for the sole purpose of raising capital used to merge with or acquire another company.

The key factor that enables a SPAC to raise significant capital by going public before its management team has even identified a business to acquire is the credibility and track record of the management team.

After the capital is raised and the SPAC opens trading, normally at $10 a share, the SPAC management team normally retains some of the capital raised to cover the initial underwriting fee and the operating expenses of the SPAC. The remaining capital is placed in an escrow account until a target company is identified and a transaction completed.

In practice, SPACs rarely trade below their trust values because, at the time of a SPAC’s merger, shareholders have the option of redeeming their shares for a proportionate share of the cash. Outside of periods of extreme market stress such as in March, it tends to be the floor for where SPAC shares trade.

Some SPACs from high-profile sponsors do trade quite a bit above their trust values as investors bet that the team will put together an attractive merger with an operating company worth more than the cash in the escrow account.

A Pioneer in SPACs
One high-profile pioneer in SPACs is former Facebook insider Chamath Palihapitiya. Last year, Richard Branson’s Virgin Galactic (SPCE) merged with Palihapitiya’s Social Capital Hedosophia Holdings Corp., raising $800 million.

I recommended this stock at just over 7 per share, and it currently trades at 21.

Palihapitiya has followed up on this success by launching two more SPACs that have already identified the target company they plan to merge with.

Social Capital Hedosophia Holdings Corp. II (IPOB) is set to merge with the real estate tech company OpenDoor in a $4.8 billion deal.

Social Capital Hedosophia Holdings Corp. III (IPOC) is expected to merge with Clover Health in the first quarter of next year.

Recently, three new Palihapitiya-backed SPAC companies raised a total of $2.1 billion in three initial public offerings.

Social Capital Hedosophia Holdings Corp. IV (IPOD) raised $400 million in the offering. Social Capital Hedosophia Holdings Corp. V (IPOE) raised $700 million, while Social Capital Hedosophia Holdings Corp. VI (IPOF) raised $1 billion.

All three special purpose acquisition companies priced each individual unit at $10 and all the companies will focus on a merger partner in technology industries. The shares are now trading on the New York Stock Exchange.

I’m sure some investors will make a small bet on each of these three new SPACs since there is no way of knowing right now which one, if any, might be a winner. Another option is to wait until each has merged with their target company but by then, they may already have made their move.

SPACs will strike many conservative investors as unorthodox, but it looks like they are filling a void in the IPO market and will be with us for some time.

4 Stock Spin-Offs Worth Buying Today

If you choose to invest in stock spin-offs, you will be in good company. Peter Lynch, who famously generated 29.2% annual returns while managing Fidelity’s Magellan Fund, wrote in One Up on Wall Street, “Spin-offs often result in astoundingly lucrative investments.”

While they won’t outperform every year, numerous studies show that over the long term, stock spin-offs do quite well.

For example, Credit Suisse found that U.S. stock spin-offs outperformed the market by 13.4% in the first 12 months of trading.

Today, there are four spin-offs that you should consider buying.

Match Group (MTCH) is the leader in the online dating market and was spun off from IAC/Interactive (IAC) earlier this year.

The company owns and operates several different online dating products and services, including Tinder, Match, Plenty of Fish, okCupid, Hinge, and more.

In recent years, the online dating industry has absolutely exploded. The stigma around meeting romantic partners on the internet has faded and will continue to do so. And the pandemic hasn’t dampened interest in meeting romantic companions online.

As such, I expect the number of people paying for online dating services to continue to grow.

Match Group is the market leader in an industry in secular growth.

While the stock looks expensive at 44x forward earnings, stocks of companies in secular growth never look cheap. I expect Match Group to stay “expensive” for many years to come.

ChampionX Corp (CHX) was formed when its parent company, Ecolab (ECL), decided to spin off its oil and gas chemical business and merge it with another oil and gas company, called Apergy.

While ChampionX is in the energy industry (which is challenged right now), it is relatively well positioned.

ChampionX is focused on providing equipment and chemicals to oil and gas drillers. A key advantage for the company is that 84% of revenue comes from production of wells that have already been drilled and completed. As such, the company is not as dependent on new wells being drilled.

From a valuation perspective, ChampionX is dirt cheap, trading at ~5.0x trailing free cash flow.

The company will stay cash flow positive even in a challenging period like today and could trade multiples higher if (when) energy stocks recover.

Fox Corporation (FOX) is a 2019 spin-off from 21st Century Fox. In a cord cutting world, it is relatively well positioned due to its focus on live news and sports, which continue to draw large, engaged audiences that are appealing to advertisers.

FOX’s live news and sports focused portfolio provides it with leverage in upcoming negotiations with pay TV operators and affiliate stations; this leverage will result in higher affiliate payments, which will drive strong revenue and free cash flow growth for the foreseeable future.

Despite FOX’s enviable position and robust growth outlook, FOX is very cheap, trading at 8.3x trailing free cash flow.

Kontoor Brands (KTB) is a 2019 spin-off of VF Corp (VF).

It is an apparel denim company whose brands, Wrangler and Lee jeans, are highly popular and recognizable.

Prior to the spin-off, VC Corp did not invest in the Wrangler and Lee brands, as focus was on faster growing apparel brands such as North Face, Timberland, and Vans.

Now that Kontoor Brands is an independent company, management has a wonderful opportunity to go after low-hanging fruit.

To provide just one example, the company is extremely under indexed in its t-shirts business. Kontoor Brands sells 500 pairs of jeans for every t-shirt. In contrast, some of its competitors sell five t-shirts for every pair of jeans.

KTB plummeted when the company cut its dividend to preserve liquidity during the depths of the pandemic. However, management is adamant that the dividend could be reinstated as soon as the fourth quarter. This would be a meaningful catalyst as all the dividend income funds that sold the stock will have to buy it back.

From a valuation perspective, Kontoor Brands is cheap, trading at 12.5x forward earnings and 8x normalized earnings.

2 Genetic Sequencing Stocks to Consider

It took 13 years and $2.7 billion to complete the Human Genome Project. In the decade plus since that accomplishment the cost of sequencing a human genome and the time required to do so have been coming down dramatically.

This efficiency has been greatly aided by next-generation sequencing platforms, which have spurred wider adoption in academic, biopharma research and clinical environments. Concurrently, reimbursement in the U.S. has improved, as has the underlying technology, which now allows for less invasive sampling techniques, such as liquid biopsies.

All this is driving tremendous growth in genomic-driven precision medicine across a wide variety of fields.

There are many players in the sequencing market, each of which offers a different twist and exposure for investors.

Among the most intriguing are Illumina (ILMN), 10x Genomics (TXG), NanoString (NSTG), NeoGenomics (NEO), Guardant Health (GH), Adaptive Biotechnologies (ADPT) and Pacific Biosciences (PACB).

Today, we’re taking a closer look at two of these players: 10X Genomics (TXG) and NeoGenomics (NEO).

10x Genomics (TXG)

10x Genomics is a life sciences company developing solutions to advance human health by analyzing biological systems at incredibly high resolution and massive scale. Its products are used by 97 of the top 100 global research institutions and 19 of the top 20 global pharma companies, all of which use 10x Genomics’ solutions to make major discoveries in oncology, immunology and neuroscience.

10x Genomics has a market cap of $12.3 billion, was founded in 2012, and went public in September 2019.

The company’s product portfolio is built around Chromium and Visium instruments, consumables, and software. These genetic testing solutions give researchers the power to measure biology at the highest level of resolution, such as at the single cell level, or at high spatial resolution of tissues and organs.

The bulk of revenue comes from academic markets, but the company also has exposure to government, biopharma and biotech customers. As with many companies in the sequencing market, consumables play a huge role (roughly 83% of revenue) and help smooth out fluctuations in instrument sales.

Analysts are generally positive on 10X Genomics stock and refer to the long runway of growth afforded by the company’s dual focus on affordable single cell (Chromium) and spatial (Visium) biology platforms. Visium is a newer platform that’s enjoyed a strong launch (over 600 labs since November 2019). The significant consumables offerings also drive high profit margins (78% gross margin) relative to competitors.

Growth is at the top of a competitive group of high-growth diagnostic and genetic analysis peers. Revenue soared 106% in 2018 and by 68%, to $246 million, in 2019.

This year is going to be an anomaly due to COVID-19, with just 6% revenue growth expected. But things should bounce back in 2021 when analysts see revenue up 85% to $480 million and a 73% improvement in EPS losses, which are seen at around -$0.28.

TXG went public at 30 on September 12, 2019 and enjoyed a strong start, climbing to 108 by the end of 2020. The February-March market crash was tough on the stock, pulling it down 55%. But TXG enjoyed a steady recovery, making a series of higher highs and higher lows that have continued through today, when the stock trades at around the 123 level. With a strong story, impressive fundamentals, and a constructive chart TXG looks like an attractive stock to own now.

NeoGenomics (NEO)

According to Morgan Stanley, cancer testing is a roughly $6 billion market that’s growing in the high single digits. Tailwinds including people getting older, people living for longer with cancer, and more complex and frequent testing needs to help determine potential treatment options.

There are a lot of players in the market, including 10X Genomics. But in a large market with a lot of wrinkles there are numerous ways to fulfill demand.

NeoGenomics is working to address the underserved community oncologist market. These are businesses owned by physicians and which are not part of a hospital or academic/medical teaching institution. They don’t typically have access to the most advanced diagnostic tools and testing infrastructure, so they’ve been relatively slow adopters of next-gen sequencing (NGS). That’s a bit of a problem because roughly 80% of cancer care occurs in community-based setting.

This is where NeoGenomics comes in.

The cancer diagnostics and pharma services company operates a network of testing facilities in the U.S., Switzerland and Singapore. It offers molecular (including NGS) and non-molecular testing services. It has an extensive selection of advanced tests as well as one of the best turnaround times in the industry, not to mention an option for professional interpretation services.

In essence, NeoGenomics can be a one-stop-shop for community oncologists, who often need a wide range of tests and the ability to control what tests are ordered due to reimbursement dynamics.

NeoGenomics, which has a $3.9 billion market cap and has been around for almost 20 years, fits the bill.

In recent years NeoGenomics has made a major move into value-added service offerings through the combined acquisitions and investments in Clarient (acquired 2015), Genoptic (acquired 2018) and Inivata (2020 collaboration with option to buy).

These, along with investments in the NGS menu, have helped expand the company’s Clinical Services business while other transactions and expansion initiatives have boosted the Pharma Services business. NeoGenomics also has a COVID-19 diagnostic offering.

Stepping back, the big-picture story here is about a cancer diagnostic and pharma services specialist that’s been working on a number of fronts with the goal of driving steady growth in the 15% to 20% range, with the added hook of consistent profitability.

Revenue was up 48% in 2019 and should be up around 10% this year (to $450 million) before re-accelerating to 20% in 2021. Estimated EPS this year is $0.05, which should improve six-fold to $0.38 next year. NEO trades at a discount to peers, making the stock somewhat of a value stock in the sequencing space.

Which is the Better Sequencing Stock to Buy Now?

Like many stocks that get lumped into the same group, 10X Genomics and NeoGenomics are similar, but different. They each offer investors exposure to different areas of the broader sequencing market, and each have their pros and cons.

NeoGenomics has the bigger revenue base right now and is profitable. 10X Genomics is growing much faster, is not profitable, and arguably has larger market potential given the companies’ respective focuses right now (though things can change).

The right choice likely depends on the type of investor you are.

Those looking for more growth should be drawn to 10X Genomics. Those looking for more of a growth-at-a-reasonable-price, or GARP-type stock, should be drawn to NeoGenomics.

Personally, I’m looking for growth when investing in the life sciences space, so 10X Genomics is the clear winner for me.

In Red-Hot Cloud Computing Sector, these 2 Stocks are Top Dogs

If you’re looking to invest for the long term, some people shy away from tech stocks, but cloud computing is one of the hottest segments of the market and not likely to go anywhere, anytime soon. In fact it’s only likely to grow as you move closer to retirement.

Why Cloud Computing Stocks Are Hot

As cloud infrastructure from Microsoft, Amazon and Google becomes the backbone of so many computing environments the margin for error on hosted applications has become razor thin.

If a core solution goes down for even a short spell that could mean disaster—or at the very least, very angry customers.

The rise of cloud computing has led to a surge in demand for cloud infrastructure monitoring to make sure all is working as it should.

Which Stocks Are Worth the Investment?

Investing in Microsoft, Amazon or Google for cloud computing would be incredibly expensive, so if you’re just getting into these stocks, I recommend looking at two of the emerging players in this space: Datadog (DDOG) and Dynatrace (DT)

A Look at Datadog (DDOG)
Datadog, with a market cap of $23 billion, is one of the leaders in the cloud infrastructure monitoring market. It’s particularly strong in public cloud monitoring and is rapidly expanding into the private cloud and on-premise environments as well.

The company’s supernormal growth rate – revenue was up 83% in 2019 – reflects that Datadog is signing customers left and right. Why?

Datadog has what’s arguably the best platform across the three core markets in monitoring. These include infrastructure monitoring (where it is the leader), application program monitoring (APM), and logging.

It hasn’t been as strong in the latter two markets, where Dynatrace, which I’ll discuss in a minute, and Splunk (SPLK) are the respective leaders. That said, Datadog is likely the best positioned to grab customers who want one vendor to cover their needs across all three monitoring markets.

The company went public at 27 last September, got off to a strong start and worked its way to 50 just prior to the pandemic. A sharp pullback of 40% set the stage for a fierce rally that didn’t abate until DDOG hit 99 in early July.

A good portion of that rally was fueled by both current and anticipated demand for monitoring solutions due to the work-from-home (WFH) movement and other factors driving users to cloud-based environments.

Datadog’s stock approached its last earnings report on August 6 having just spent several weeks consolidating in the 80 to 100 range (up roughly 100% from its pre-pandemic high). Suffice to say expectations were elevated.

Management reported a better-than-expected quarter, but maybe not good enough to send the stock to the next level. Shares fell sharply after the report and are now roughly 20% below their recent all-time high.

How was the quarter?
Revenue was up 68% to $140 million, beating by $4.6 million. Adjusted EPS of $0.05 beat by $0.04. Large customers (those spending over $100,000) grew by 419 to 1,015 over the last 12 months, and 68% of customers are now using more than two products, up from 40% in the year-ago quarter.

Looking forward, management’s full-year guidance came in better than expected too. Revenue is now seen up 57% to $570 million (versus $560 million prior consensus) while adjusted EPS should be between $0.11 and $0.13 (versus $0.05 consensus).

The big-picture takeaway is that customers are still spending to monitor their cloud applications but are being a little more cautious than investors would like. That translates to a correction in a rapid growth stock in which expectations were sky high.

Here’s what the chart looks like.


A Look at Dynatrace (DT)
Dynatrace, which has a market cap of $10.3 billion, plays in the same general market as Datadog but comes at it from a different angle. The company is best known for strength in application performance monitoring (APM), an area where a new state-of-the-art platform better meets customer needs across on-premise, private cloud, and public cloud solutions.

Like Datadog, Dynatrace is also branching out into other areas of monitoring, including infrastructure monitoring (Datadog’s strength) and log management (Splunk’s strength).

The company’s historical financial statements are somewhat messy because it was spun out by Thoma Bravo in 2014. Management retooled the business from 2013 to 2016 to take advantage of newer technologies and transition to a subscription business model, which coincided with the release of the aforementioned platform.

This transition is why fiscal 2019 revenue (ended March 31) was only up 8%, but revenue growth in fiscal 2020 was a much more impressive 27%. Adjusted EPS was $0.30.

Dynatrace reported quarterly results for the first quarter of its fiscal 2021 back on July 29 when it beat on both the top and bottom lines.

Revenue was up 27% to $156 million while adjusted EPS of $0.13 beat by $0.03. Management said many customers are beginning to monitor aspects of their IT environment beyond just applications, that customer retention is strong, and that it is winning many bids and selling more solutions to current customers. The number of customers with more than three solutions rose by 44% over the last six months.

One potential weakness is that Dynatrace isn’t adding as many new customers as analysts had hoped. New customer adds in the quarter were roughly half of what many analysts had expected. However, management notes that with the transition to the subscription model largely behind it Dynatrace can now begin to focus on new customer growth. We’ll see.

Like DDOG, DT was doing well before the pandemic then went through a sharp correction before surging to new all-time highs. DT peaked at 45 in July, just 22% above its pre-pandemic high. This translated to a muted reaction after the earnings report and a stock that remained in its consolidation phase, which was (mostly) in the 40 to 45 range.

That said, along with other growth stocks DT has pulled back recently. Shares are now 18% off their recent all-time high.

Looking forward, Dynatrace is expected to grow revenue to around $650 million this fiscal year (up 20%) and by 25% in fiscal 2022. Adjusted EPS should be up around 60% to $0.48 this year, and up 20% to $0.57 next.

Here’s what the chart looks like.


Which Cloud Computing Stock is the Better Buy?
Like many stocks that get lumped into the same group, Datadog and Dynatrace are similar, but different. In their specialized monitoring market they’re each stronger in different areas. Datadog has a market cap that’s roughly twice that of Dynatrace and is growing much faster. But its revenue base is slightly smaller and is not as profitable.

Expectations for both stocks were (and remain) very high and both are trading roughly 20% off their highs.

Both stocks represent ways to play future demand for automating and monitoring cloud-based computing environments.

For investors that want exposure to this market I wouldn’t advocate buying one over the other at this stage. Just like there’s no reason to argue for owning Microsoft (MSFT) over Amazon (AMZN), or Visa (V) over Mastercard (MC), or so many other great companies that play in the same sandbox, both Datadog and Dynatrace are attractive to me.

It’s not out of the realm of possibilities to see a tie-up of these two companies in the future, or see one (or both) be acquired by other large tech firms looking to boost their infrastructure monitoring offerings.

Long-term growth investors could do a lot worse than starting to accumulate a position in both DDOG and DT around these levels, and on deeper pullbacks.

For investors currently in these cloud computing stocks, I think both are good to hold on to given the future growth potential.

Why is There So Much Insider Buying in These Energy Stocks?

Speculative stocks are always a risk. I don’t have to tell you that they offer a chance to watch your investment money disappear faster than a free ice cream cone on a mid-summer day. However, with risk, there’s always the chance of big rewards. Given the right circumstances, and a carefully chosen investment, your speculative investment could be your ticket to a winter home in a tropical paradise.

One time-tested way to find those excess returns is by following insider buying. With that in mind, let’s review the data to see whether insiders are buying their own shares today.

During the depths of the S&P 500’s plunge in March, the insider sell/buy ratio was 0.88, according to data from Insider Arbitrage. This marked the first time in 10 years that there were more insider buys than insider sells.

It proved to be an opportune time to buy as the S&P 500 has surged 42% from its March 23 trough.

More recently, the insider sell/buy ratio was 10.1. In other words, there were 10x more insider sells than buys.

Despite this unfavorable sell/buy ratio, there was one area of the market where insiders were buying hand over fist: Energy.


It makes sense.

Commodities are trading at their deepest discount to the S&P 500 in 50 years….


It’s no wonder energy insiders see clear value.

Two energy stocks in particular have seen strong insider buying.

Insider trading could be your window to future profits

Insider Buying in Continental Resources (CLR)
Continental Resources founder and Executive Chairman, Harold Hamm, recently acquired 2,679,849 shares of Continental Resources (CLR). He paid $17.77 per share for a total purchase price of ~$48 million.

This purchase follows another large purchase (~$73 million) that Hamm made prior to that. Clearly, he sees value in his company.

Counting these purchases, Hamm owns over 80% of shares outstanding of this $6 billion market cap fracking leader. The recent insider buying makes me wonder whether he is planning on taking the company private at some point in the near future.

Let’s take a step back and get familiar with CLR and its outlook.

CLR is an independent crude oil and natural gas company that was formed in 1967. The majority of CLR’s oil and natural gas production, as well as its proved reserves (53% of total), come from the North (the Bakken field of North Dakota and Montana). The balance of oil and gas production and proved reserves (47% of total) comes from the South (mainly Oklahoma).

When evaluating an oil and gas company in the current environment, the first and most important question to ask is, “Is there a bankruptcy risk?”

CLR does have a significant amount of net debt ($5.5 billion), especially in the context of how much cash flow the company generates. Since last summer, the company has generated over $3.0 billion of cash flow from operations. Due to the coronavirus plunge in crude prices, CLR cut its capex plans back and now plans to spend $1.2 billion (down 55% y/y). However, capex could be cut back further if needed.

Further, CLR has no meaningful debt maturities until 2022.

As a result, I’m comfortable that bankruptcy risk for CLR is low.

Now let’s consider the upside. First, the stock’s valuation at 15x forward earnings is not demanding considering the depressed operating environment.

Looking at the long-term chart, one can see CLR traded over 70 per share in 2018. Thus, there would be significant upside if (or when) the energy industry recovers.


When I’m evaluating investment opportunities, I’m looking for asymmetry. What does that mean? Limited downside and many multiples of upside in a positive scenario. With CLR, it looks like we have an asymmetric setup.

Insider Buying in W&T Offshore, Inc. (WTI)
W&T Offshore, Inc. (WTI) is another company with heavy insider buying and an asymmetric risk/reward setup.

Chairman, CEO and President Tracy Krohn recently acquired 632,334 shares at a price of $2.15 per share for a total cost of $1.4 million. In total, Krohn now owns 47,391,459 shares, or 33% of shares outstanding.

Separately, Director Virginia Boulet acquired 18,604 shares at a price of $2.20 per share for a total cost of $40,927. In total, Boulet owns 255,177 shares.

W&T Offshore, Inc. is an oil and gas exploration and production company. The company’s exploration operations are focused in the Gulf of Mexico, where it drills for oil and gas. The company engages in both deep-water drilling and shallow-water shelf drilling. While WTI drills for both crude oil and natural gas, crude accounts for most of the company’s revenue.

WTI’s situation is a little more precarious.

It has ~$520 million of net debt on its balance sheet but doesn’t have any meaningful maturities until 2022. Further, it has $48 million of cash on its balance sheet and a revolving line of credit for $135 million.

In 2016, the last time we saw a plunge in crude prices, WTI generated just $14 million of operating cash flow so we can expect something similar now. The company has cut capex drastically and only expects to spend $23 million over the next few months. As a result, I would expect the company’s near-term cash loss to be manageable given its cash balance.

If the energy markets recover over the next couple of years, WTI should trade considerably higher. In 2018, the share price traded as high as 9.84.


Again, we have an asymmetric opportunity. There is limited risk of bankruptcy in the near term yet, in a positive scenario, the stock would be multiples higher. To be fair, I think the risk of bankruptcy is higher for WTI than it is for CLR.

If you can stomach the volatility and appreciate asymmetric opportunities, WTI and CLR are both worth a speculative investment.

How Secondary Stock Offerings Affect Stock Prices

One of the most memorable and exciting parts of fishing is when you see a big fish follow your lure … and absolutely inhale it.

It’s like you can see the entire aquatic environment around your bait get sucked into the fish’s mouth and disappear, as if it was never there to begin with.

A plastic worm lure doesn’t help a fish at all, but when they inhale wild bait, like crayfish and minnows, they get stronger and have more energy to pursue life-sustaining activities.

The stock market analogy to a big bass inhaling a meal is a well-received secondary stock offering, or a well-received convertible note offering.

In these scenarios, a company announces it will raise capital by issuing new shares to the public (secondary stock offering) or by issuing low interest-bearing notes that can be converted into shares, usually within five to 10 years (convertible note offering).

The company completes the offering at an attractive price and the shares are quickly absorbed by the market.

In fishing terms, the market “inhales” the new shares. And the stock’s trend continues, more or less as it had been prior to the secondary offering. Management pursues growth initiatives with the new capital.

Both traders and longer-term investors view a well-received secondary stock or convertible note offering as a bullish signal.

The well-received secondary stock or convertible note offering is an especially strong buy signal for certain small-cap stocks and early-stage growth stocks. That’s because it signals huge demand for a stock that still has a relatively small public float and/or is growing rapidly.

If the market thinks a company is issuing shares to raise cash for good things, like attractive acquisitions, to fund new product development, to expand a sales team to meet demand, etc., then a stock can easily go up after the announcement.

In this bullish scenario there are many investors that are eager to buy the newly issued shares (or notes). And they get inhaled by the market.

Is a Secondary Stock Offering a Bad Thing?
Too many investors think a secondary stock offering from a growth stock is a bad thing. In some cases, they are.

There are far too many examples of companies that issue shares of stock just to keep the lights on and to meet payroll. These stocks, which are usually bad investments, usually trend down (or at best sideways) before, and after, the offering because management is destroying value.

But don’t assume all secondary offerings are bad just because some are.

There are also many examples of small-cap stocks and early-stage growth stocks that complete secondary stock offerings because it is the most efficient way to raise growth-fueling capital.

Investors would be well served to keep an open mind and watch how the stock handles the secondary.

If the market inhales it, you might want to consider buying too.

This Small-Cap Stock Has Huge Rebound Potential

You can’t say 2020 has been a boring year in the stock market. The market hit all-time highs and it recorded the biggest daily point drop in history. The market sank so quickly that trading was automatically halted several times over the course of a couple of weeks. And then the market’s biggest point gain in history happened.

Gradually, the road evened out, but in the wake of that stock market correction, the Dow Jones Industrial Average has been lumbering along with a slow recovery. While most investors stared at the evening news, watching the rebounds in Procter & Gamble (PG), Home Depot (HD) and other Dow 30 stocks, they failed to notice the more profitable action taking place in the market’s fast lane, the Nasdaq Composite. That’s where smaller, higher-upside plays like Chart Industries stock reside.

The Nasdaq fell far less than the Dow Jones industrial Average during the March downturn, and recovered more quickly. The Dow is still down 15.4% from its February high, while the Nasdaq is down just 4.9%. What’s more, the Nasdaq is still rapidly rising! Let’s make sure you’re positioned to profit from the capital gains offered by these small and nimble companies.

What Is Chart Industries?
Chart Industries (GTLS) is a leading independent global manufacturer of highly engineered equipment serving multiple market applications in energy and industrial gas. The company is actively growing its global presence and revenue with operations in the U.S., Europe, Asia, Australia and Latin America. Chart Industries is focused on business expansion and efficiency, people and safety, cutting wasteful costs and making acquisitions that enhance current operations. Chart has no direct peers, offering turnkey solutions with a much more broad set of product offerings than other industry participants.

More recently, Chart delivered strong first-quarter results. While other companies were racking up earnings misses, and even stunning losses, Chart delivered $0.57 earnings per share (EPS) when the analysts’ consensus estimate was $0.51. That’s a big upside earnings surprise, especially during a dismal earnings season that found many companies wringing their hands, explaining to investors that they’d be taking on more debt in order to survive the business downturn.

In contrast, management at Chart declared, “Debt paydown is our priority for utilization of the cash we generate. Year-to-date, we have taken cost reductions totaling $48.8 million of annualized savings. This is in addition to the $38 million of savings from cost reductions taken in 2019.”

As is typical of successful small companies, Chart’s revenue and profits have been growing aggressively. Revenue has risen from $859 million in 2016 to Wall Street’s projection of $1.4 billion in 2021. During that same time period, EPS has nearly tripled, from $1.17 to a projected $3.23 in 2021, despite the difficult business environment caused by pandemic-related lockdowns.

Chart Industries is thriving in the global business arena because it’s exactly the kind of company that bigger companies love to acquire: a company with consistently rising revenue and profits, and a global presence that can provide an ease of entry for a bigger, acquiring company into foreign markets. The price tag would certainly be low, as well.

Alphabet (GOOGL) is another growing, global company, but they’re never going to receive a takeover offer because they’re too big and expensive. However, many small, medium and large corporations could afford to finance the acquisition of Chart Industries, because it’s a small-cap stock. The company has a tiny $1.5 billion market capitalization. Chart also has significant institutional ownership. That’s important because Wall Street is telling investors that Chart is a company that they expect to make money on.

Chart Industries Stock Is Rebounding Quickly
If Wall Street sees the value in Chart, you can bet that Chart’s competitors and bigger industry players are well aware that Chart Industries is a valuable asset to potentially own, whether the admirers are buying shares of GTLS stock or the entire company.

GTLS had a peak in February 2020 at about 75, prior to the market downturn. Then it cratered, nose-diving to 16 during the coronavirus crash. But the stock’s been climbing since. There’s still 82% upside as Chart Industries stock heads back to its high!

GTLS-052720 (1)

So if you’re looking for a big capital gain opportunity, look past large companies like Netflix (NFLX) that are getting all of the media attention, and seek the gems that make up the small company component of the Nasdaq. To capitalize on the ongoing stock market rebound, my money’s on Chart Industries!

Where To Find Small-Cap Stocks That Will Actually Make Money For You

Small-cap stocks don’t get the attention their mid-cap and large-cap siblings get. They don’t get the media coverage or the pundit love of the big names. And if you look strictly at the small-cap index, I would say there’s a good reason these stocks get overlooked.

As Chief Analyst of Cabot Early Opportunities and Cabot Small-Cap Confidential I love small-cap stocks, and I particularly love trying to find the best small-cap stocks. But I strongly dislike the small-cap index. Investors should completely avoid it and only invest in individual small-cap stocks. That’s where the real money lies.

Why do I feel so strongly?

It starts with performance. Or to be more precise, lack of performance.

The basic pitch for small-cap stocks has been that they tend to do better than large caps over time. But the accuracy of that pitch has completely evaporated.

As the table below shows, over the last one-, three-, and 10-year periods the small-cap index has lagged both the large-cap and the mid-cap index by a substantial margin.


If we dissect what happened during the recent COVID-19-inspired market crash, the data tells a similar story.

Small caps fell 45% from their 52-week high, and moved back up much more slowly than large caps, which “only” fell 35%. To make matters even worse for small caps, the asset class’s all-time high was back in August 2018! It never got back to within 5% of that level. In comparison, large caps hit an all-time high in February 2020 that was 15% above their 2018 high.

Diversification is good - until it isn’t
Investors are told time and time again to diversify, diversify, diversify. But the truth is the benefits of diversification are substantially limited once an investor owns around 30 stocks.

That’s not to say investors shouldn’t own more than 30 stocks. But if they do, they should do so knowing that the incremental diversification benefit of each additional stock goes down after that 30-stock threshold is crossed.

And there’s no need whatsoever to own over 30 stocks in the same asset class.

That’s especially true if you are blindly buying poor-quality stocks, which is what arguably happens when you buy a small-cap index. How else can you explain the dramatic underperformance over time?

There are several reasons I consistently argue that there are too many poor-quality stocks, and not enough high-quality stocks, in the small-cap index.

First is the diversification issue, not just in terms of the number of stocks but also in terms of the industry exposure.

The world, and the stock market, is changing. The emergence of new technologies, like cloud computing, is driving massive change. One of those changes is that the strong are getting stronger as these businesses scale up and retain customers more rapidly and more consistently than the businesses of yesteryear.

The best example to illustrate this dynamic is captured by the biggest tech holdings in the S&P 500. In that index, Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Facebook (FB) and Alphabet (GOOG) have a combined weighting of over 20%.

That’s huge. There’s no similar exposure in the S&P 600 small-cap index, where the two largest cloud stock holdings are Qualys (QLYS) and Stamps.Com (STMP), which have a combined weight of 1.3%. Altogether, the technology weighting in the small-cap index is only 15%. It just can’t compete.

Second, there’s the upward migration issue. Migration happens when small-cap companies get too big for the index and migrate up to the S&P 400 mid-cap index.

Growth investors know that good stocks go up! If all the best small-cap companies are getting bigger and getting booted out of the index, what’s the incentive to own the index?

It would be one thing if the IPO market refreshed the index at the low end with a constant stream of awesome new companies. But from what I’ve seen, IPOs are getting bigger, not smaller.

The S&P 500 doesn’t suffer from this upward migration issue. A great growth stock can keep going up to infinity and that performance won’t lead to its eventual removal from that index.

Think about that for a second because it’s worth repeating. All the best small-cap stocks will eventually leave the small-cap index, but all the best large-cap stocks can stay in the S&P 500 forever.


Skip the index. There’s a better way to invest in small-cap stocks
As one who spends the bulk of his time looking for the next great small-cap stock, I find the dynamics of the small-cap index supremely frustrating.That’s because there are tons of great small-cap stocks that investors should own. The caveat is that they should purchase these stocks directly, not through an index. That’s the only way to get enough exposure to make a positive difference in your portfolio.

My focus is 100% trained on finding small and early-stage growth stocks that will go up over the long term, helping investors buy them at a good entry point, and then keeping them invested for the long term.

One of our long-term holdings is bioprocessing specialist Repligen (RGEN). This company has a market cap of $6.7 billion. It’s not really a small-cap stock anymore, yet we continue to own it because the growth prospects are good. Investors that owned Repligen years ago have seen the weighting of this investment grow in their portfolio as the stock has gone up because they bought shares directly.

Here’s the three-year chart.


Bottom line – the average investor who doesn’t look any deeper than small-cap index performance is missing out on all the great small-cap growth stocks of today, which will likely become the mid-cap stocks of tomorrow.

And they don’t need to.

Still Plenty of Hot IPOs

2019 will have been known for two things: a pretty solid bull market year, and a time when many high-profile IPOs (initial public offerings)—including a couple of future blue-chip stocks—came public. Interestingly, it wasn’t a bonanza for the IPO market in general.

However, 2019’s new issues included some big boys. Personally, I usually don’t get involved in IPOs for at least the first few weeks of their life, if not longer—I’ve found that even the “good” performers tend to do well for a month or two before having a post-IPO droop. The sustained advances usually take a few months to set up (sometimes a few years!).

Of course, there is the occasional time I’ll dive into a recent IPO, but either way, I make it a point to regularly keep an eye on and get to know most well-traded new issues since so many of them end up being new leaders sooner or later.

One example of an IPO worth watching is Beyond Meat (BYND), which is positioned as one of the leaders in the rapidly growing plant-based meat industry. We know many skeptics make fun of it and point to increased competition (which is a fair point), but the big idea here is the size of the market—based on comparisons to the plant-based dairy market (13% of all dairy sales are now plant-based), the plant-based meat industry could be worth north of $125 billion within a decade, driven by direct buying (we like that Beyond is sold in the meat section of most grocery stores) and foodservice (Famous Dave’s PizzaRev, Del Taco, Tim Hortons and others use Beyond’s products). That pie (cow?) will be split many ways, but even so, this company should grow manifold in the years ahead.

Another, CrowdStrike (CRWD), is a “new age” cybersecurity stock that’s been a solid winner. The firm was built from the ground up to help enterprises with endpoint security (i.e., securing all of the devices that connect to their network), using a shared cloud infrastructure that takes advantage of crowdsourced data (hence the name) to constantly improve its platform’s effectiveness against ill-doers. More than 40% of the Fortune 100 are customers, as are many key government agencies.

FInally, Elastic (ESTC) looks like it could be the next big thing in the Big Data field. The company’s software platform looks to be one of the best in helping companies quickly mine data and get value from it, no matter the type or format. Interestingly, Elastic actually powers some well-known consumer apps (it quickly connects drivers with riders for Uber, and finds potential matches for you on Tinder), and it’s also being used in a ton of security and infrastructure monitoring and forecasting applications. It bills itself as a search company, and in a way, it’s looking to be the Google of enterprise/data search with a platform that boosts efficiencies, security and even enables new offerings.

These aren’t necessarily all buyable right this second, but these are the names to keep a close eye on.

These Beer Stocks are Anything But Flat

When investing in beer, pick the packagers.

Every year I play in an annual pond hockey tournament with a group of college friends on Lake Winnipesaukee in New Hampshire.

We have mixed results on the ice. But we always have a fridge full of New England’s best beer. And the boys from Idaho bring an assortment from their part of the country too. Most importantly, we are able to connect every year and share long tales and tasty suds.

Up until two years ago our beer selection was mostly Vermont offerings since that’s where we all went to college. And they were mostly IPAs, specifically double IPAs (DIPAs).

But in the last two years there have been a lot more session and super session IPAs, lagers, pilsners and other varieties. As trends go, what we see happening is that the IPA boom has been winding down and consumers are enjoying 16-ounce cans of beer in the 4.8% to 6.5% alcohol range a little more. Easy to drink, and easier to get up the next morning.

Taking that thought process one step further, I think the implications for the craft brewing industry is that competition is still intense. There are a lot more brands now and there’s a ton of brand variety overlap. Distribution is a huge factor too – in some cases the rarer beers are still intensely sought after. But there’s something to be said for the easy-to-find beer that everyone enjoys, regardless of what state you’re in.

If I had to narrow down the list of the five most popular craft brewers that we enjoyed beers from this past winter, I’d say the two leaders for DIPAs and IPAs remain the Alchemist (Stowe, VT) and Trillium Brewing (Boston, MA).

For other offerings (including a few IPAs too), there were a lot of cans from Tree House Brewing (Charlton, MA), Nightshift (Everett, MA) and Hill Farmstead (Greensboro Bend, VT) leaving the fridge.

The most popular new offers (at least in my book) came from the expanded beer list at Lawson’s Finest Liquids (Waitsfield, VT), which now has a new Taproom in “The Valley.” If you can get your hands on their Scrag Mountain Pils or The Space In Between offerings during the summer months, you’ll be a happy camper.

In terms of investment potential, there are still a few ways to invest in the craft beer industry. But none of the above are publicly traded.

As in previous years, I’m inclined to say packaging is the surest bet as can volume is somewhat insulated from trends in flavors and brewers. Sure, there are trends in can shape and size, but for now this is a good thing (the 16-ounce can has been a huge seller). Ball Corporation (BLL) is a good example.

There are also a few smaller brewers like Boston Beer (SAM) that are publicly traded and offer opportunities. Other examples are Craft Brewers Alliance (BREW) and Waterloo Brewing (WBR.TO). But this is a fickle industry and investors in these companies should pay attention to the trends in the underlying business.

High-growth MedTech Stocks Offer Big Upside

In a volatile market, the big question on the minds of investors is whether or not to take advantage of buying opportunities. I won’t try to convince you one way or the other. But if you’re interested in high-growth, small-cap MedTech stocks, here are three examples that offer insight into the sector.

Invitae (NVTA) is a genetic information company that’s working to bring comprehensive genetic information into mainstream medical practice. The company specializes in genetic diagnostics across all stages of life, including perinatal, prenatal, pediatric and adult. Management has been working to pool genetic tests into a single service that could be offered at a lower price than current alternatives, while delivering faster turnaround time.

Invitae’s growth strategy is relatively simple. By making genetic testing more accessible and affordable it expects to supply a large volume of tests. It’s also building a genome network through partnerships with industry peers and working to share genetic information on a global scale through services that inform healthcare throughout life.

ViewRay (VRAY) makes MRI-guided radiation therapy systems that are used for imaging and treating cancer patients. Its MRIdian solution integrates MRI technology, radiation delivery and proprietary software to simultaneously image and treat cancer patients.

The technology is most interesting because, as compared to traditional radiation therapy systems known as linear accelerators (linacs), MRIdian appears better at targeting tumors while avoiding healthy tissue and can personalize treatment depending on a patient’s anatomy and tumor location/size.

Codexis (CDXS) is a protein engineering company that specializes in the discovery, development and commercialization of novel proteins. These engineered proteins, also known as biocatalysts and/or enzymes, are used in a wide range of industries to make manufacturing processes faster, cleaner and more efficient.

Historically, naturally occurring proteins have been used to produce or add desirable characteristics to many of the products we all use on a daily basis. But in their natural form proteins come up against inherent barriers that limit their commercial potential.

Codexis has developed a proprietary protein engineering technology platform, CodeEvolver, to engineer novel proteins that overcome those inherent limitations. This opens the door to a huge range of uses in customer products, manufacturing processes, and other commercial dimensions.

Its proteins catalysts help customers manufacture products at a lower cost and with lower fixed capital investment. They also reduce the cost of development of complex chemical synthesis processes and can even eliminate entire steps from chemical production. And they allow for the manufacture of purer end-products with lower levels of impurities.

Risk is still present with these stocks, though.

For instance, Invitae is working against fluctuating seasonal demand, and many genetic testing stocks have done poorly. ViewRay is competing against established systems with a large foothold in the medical field, and radiation oncology is not an easy business to break into. And Codexis has to contend with the timing of customer manufacturing schedules and clinical trials that can have a big impact on sales trends.

So while there is potential for growth in these examples, MedTech stocks always come with a healthy amount of risk, and you should always practice caution when investing in this sector.

The Risks and Rewards of IPOs

It pays to be wary of IPOs—at least until the shares have been trading awhile. Of course, unless the shares go directly to the public, it’s often difficult for individual investors to ‘get in’ on an IPO. That’s because brokerage firms generally reserve most of the shares for large institutions and the well-heeled clientele of the underwriting firms.

Your first point of contact is your broker, to see if his company will have any shares to distribute to their clients. Next, call the Investor Relations department of the company going public to find out if it is going to issue any shares directly to the public, and lastly, you can try contacting the underwriters of the stock and ask how they intend to distribute shares.

But even if you can get into the IPO, the real question you should really be asking yourself is, “Should I buy shares right away or wait?”

Sure, you could get really, really lucky and buy shares of an IPO that skyrocket the first day, sell the shares at the end of the day, and walk away with a pocketful of money. It does happen, but not normally to regular investors like you and me. Instead, we need to rely on old-fashioned gumshoe work, viewing the IPO issue as we would any other investment, and asking ourselves, Is this stock worthy of adding to my portfolio?

That means a bit of analysis, starting with the company’s financials.

  • Is it profitable?
  • Does its cash flow cover its outlays?
  • Does it have substantial assets (especially cash) and reasonable debt, in case of a downturn in the economy, its sector, or the company itself?

If the financials look good, the next step is to examine the company’s products or services and determine if they meet a real, ongoing need. You can see that fairly easily by looking at its past growth and future projections, which should be included in the prospectus in the proforma financial statements.

And if the company passes your tests, and you buy the shares, you may want to wait a bit to buy in, even if you could procure shares on the first day of trading, as prices of IPOs often fall precipitously shortly after the stock debuts. And many continue to decline.

On average, IPO (according to Barron’s research) can underperform up to 2 ½ years after their initial pricing.

But as the data shows, there have certainly been plenty of winners in the IPO market. Still, investors must tread carefully. Evaluations for IPOs look a bit lofty to me these days. And there are a slew of highly-touted ones on tap, including high-end exercise equipment maker Peloton, Airbnb, shared office space The We Company, and food delivery business Postmates.

But before you jump into them, remember that the key to successful investing is buying the right stocks at the right price, fundamentally strong companies that have the ability, strategy, and good management to continue growing over the long-term.

Will Economic Life Support Save the Market

In mid-March, the market was in the middle of a historic crash. As if fear of the COVID-19 pandemic wasn’t bad enough, there was fear that our financial systems were toppling. Few people were even talking about crisis number three, the utter and complete implosion in the oil market.

In April, we were in the middle of social and public health experiments that will be debated forever. The scale of stimulus spending is mind-boggling. Public and private organizations and governments around the world are throwing everything they can at this pandemic, and it appears to be working.

With economic life support coming in the form of government stimulus, the market has rebounded 27% from its lows and, for the moment, appears stable. Perhaps even a little overheated in the short-term.

Stepping back from the day to day, it’s a little hard to tell if we’re still on a ventilator, or just in intensive care. However, one thing is clear: we will get checked out, but once we do it’s going to take a while before the economy will get a clean bill of health.

What to Do Now
This is a challenging time to invest because we don’t know the timeline before a significant portion of the economy can open back up.

On the one hand the market could go lower if the situation worsens and the timeline to reopening is extended. In that scenario the collateral damage will be far greater, and we will need more stimulus, which comes at a cost.

On the other hand, if the virus infection curve continues to flatten and then goes down soon (as is expected), and we can begin to incrementally open up the economy (likely with masks, more testing and maintaining social distancing), the collateral damage could be less than feared.

Thinking big picture, what we know is that massive crises require government intervention. This is often the best time to put money to work. Yes, risks and uncertainties are high, but stock prices and valuations are low.

History has shown these opportunities don’t come by all that often, so if you have the cash and a long-term investing plan, you should invest, at least a little.

I find it encouraging that conversations have turned back to fundamentals. The focus isn’t necessarily on Q1, or even Q2, which is sure to be a disaster for many companies. Even Q3 remains somewhat up in the air.

But by focusing more on companies that should get through the next two quarters and be well-positioned in Q4 and into 2021 I think investors can do quite well. At that point the consensus is that we will be exiting a recessionary environment driven by the COVID-19 pandemic, and companies should once again show their true colors.

This isn’t to say it’s time to get super-aggressive. There are still big hurdles to get over. But the trends suggest we could be in the early to middle stages of a market recovery, complete with expected bouts of volatility, and that means continue to average into select opportunities.

Cloud Computing is Holding the Stock Market Together

Roughly 18% of the S&P 500’s weight is allocated to companies that are keeping the world connected through cloud computing.

These companies are Microsoft (MSFT), Amazon (AMZN), Apple (AAPL) and Alphabet (GOOG, GOOGL). If you add in Facebook (FB) you get almost 20% of the S&P 500. And if you move out of the 10 largest allocations in the index that percentage goes up even more.

Collectively, these companies are critical providers of cloud infrastructure, productivity software, streaming entertainment services, mobile devices, computers and online retail and delivery services. I challenge anybody who says they would be able to get through this pandemic without these services.

In many ways (but not all) this group of companies benefits from a pandemic like COVID-19, at least in the short-term. Their services help people work and shop from home, stay connected with friends and loved ones and provide entertainment and education opportunities for out-of-school kids.

Equally, if not more important, they provide the critical infrastructure that allows thousands of other companies to provide similar services to people and organizations around the world.

COVID-19 is a health care crisis and it is scary as all heck. But think about what would happen if the backbone of cloud computing became infected and had to be shut down.

No more streaming entertainment, no more working from home, no more ordering whatever you want online. It is inconceivable what this world would look like without the cloud services provided by these companies.

The S&P 500’s performance through this pandemic illustrates that reality.

As if you need one more data point illustrating just how valuable cloud computing is to the world, consider that three of the companies – Microsoft, Amazon, and Apple – have market caps north of $1 trillion. They are the only ones in the index worth that much money.

If that does not convince you of the strategic importance of cloud computing, nothing will!

Cloud Computing Rules The World
I’ve been covering emerging cloud software stocks for years. The reason is simple: even before COVID-19 cloud software was one of the biggest technology trends ever.

It is reshaping commerce, communications, supply chains, corporate strategies, and even corporate and national security interests around the world.

Just about every company out there, regardless of industry, age, and growth profile, has embraced a cloud strategy, digital strategy, and/or a subscription-based business model of some sort, whether it be for services they provide or those they consume. Those that have not gotten on board yet have dubious futures indeed.

You can play the trend with the big boys in the S&P 500 that I mentioned earlier – Microsoft, Amazon, and Alphabet. Apple, as a provider of services and devices, is in a slightly different category as it does not run its own cloud, instead using AWS (at least for iCloud).

The Best Emerging Cloud Computing Stocks
But those are the established players; they’re big, relatively stable, and well known.

My primary focus is on the huge wave of younger companies that were founded on cloud strategies, software-as-a-service (SaaS) business models and online selling strategies and that have their best days ahead of them.

These are the up-and-comers, the companies that represent the best investment opportunities over the next decade.

They include a lot of younger companies you may have heard of but are not all that familiar with, and which might still seem risky as a result.

Companies like CrowdStrike (CRWD), which has a market cap of $13 billion and provides endpoint security software via its cloud-based Falcon platform.


Or Dynatrace (DT), which has a market cap of $7 billion and provides solutions for monitoring applications that run in the cloud.


Or Smartsheet (SMAR), which has a market cap of $5.9 billion and offers a cloud-based collaboration platform that helps teams organize, manage, automate, and report on their work at a huge scale.


Then there is this surging cloud computing stock that I won’t name because it’s in my Cabot Early Opportunities and which has grown into a specialized online retailer because of reliable cloud infrastructure.


How to Find Small-Cap Stocks

The numbers don’t lie: small-cap stocks are, historically, better performers than large-cap stocks. Entering 2020, the average annual return in the S&P 600 Small-Cap Index over the past 20 years was 10.5%, compared to a 7.9% annual return in the S&P 500 during that time. Whether you were aware of that statistic or not, you’ve probably been tempted to invest in small caps at some point. But one thing has prevented you from doing so: you don’t know how to find small-cap stocks – or at least the right small-cap stocks.

I’m here to steer you in the right direction. Fortunately, small-cap investing happens to be my specialty, and as a chief analyst of my own small-cap investment advisory, I have dedicated my career to helping investors like you learn not only how to find small-cap stocks, but where to find them.

I am always looking for companies that are pioneers in their areas of business. In many cases, these companies are creating whole new micro-industries, providing essential tools for an entire industry’s growth, or doing something better or faster than in the past.

But I don’t like to discount traditional businesses. A lot of very successful small-cap investments come from very basic business models. The corner convenience store, the healthy food manufacturer, the high-volume concrete company … a lot of money can be made by keeping things simple.

The common thread will always be that I see 100% or greater upside with each stock within a two-year time frame.

Because it’s institutional investors who drive up stock prices, I look for the same thing they look for, but because I’m seeking far greater returns, my approach must be different. My forensic research digs significantly deeper into the industry and company to uncover information that gives me a unique advantage over the big boys.

Getting more specific, there are a few steps that I follow to insure that every small-company stock I recommend has the potential to bring strong profits. Here are the five most important steps.

How to Find Small-Cap Stocks in Five Steps

  1. Search for paradigm shifts that are opening up new opportunities.

I search for paradigm shifts in any field of business that requires a unique, new solution that will be provided by a stand-alone company.

I then seek a niche supplier that will become an equal benefactor to that pioneering company. I call these companies “pure plays.”

A good example of such a paradigm shift was the move from the mainframe computer environment to the personal computer environment in the 1990s. All the new personal computers needed to be connected! And Cisco (CSCO) filled the void, supplying the industry with networking tools and its stock increased 70-fold.

Another example was the move from CD to DVD format. Sonic Solutions (SNIC) provided the software for conversion to the new DVD format and its stock took off. In the consumer market, energy drinks burst on the scene in the late 1990s, giving the industry its first truly new product in decades. Hansen Natural (HANS) stepped in to become the leader and its stock, now renamed Monster Beverage (MNST), has been one of the best performers of the post-2002 bull market.

I try to dig deep to uncover the small company suppliers to the transition leaders—just as the top suppliers to Cisco, Sonic Solutions and Hansen became equal beneficiaries of the paradigm shifts, yet remained largely unnoticed by institutional investors until well into their industry transitions.

  1. Invest only when the market opportunity is huge—and quantifiable

This is the Law of Large Numbers: Only invest in small companies that serve large, burgeoning markets because the companies can realize tremendous growth with even small market share. The sheer size of the markets creates the potential for huge gains while helping to reduce your risk profile.

Large medical patient populations and new technology users are examples of vast markets to target. Here’s an example: By the age of 60, half of all men will have an enlarged prostate, a condition known as Benign Prostatic Hyperplasia (BPH).

Research tells us that treatment for this condition will cost upward of $10 billion per year. The opportunity for a small company that captures even a fraction of this market would be enormous.

  1. Invest in companies before the institutions notice them

This strategy is called robbing the train before it arrives at the station. By gaining a research advantage, we can invest in companies before most big investors get on board—including mutual funds, hedge funds and pensions.

In many cases, I’ll invest in companies that have less than 50% institutional ownership. The idea here is that subsequent investments by institutions will drive up the value of the stock.

  1. Invest in stocks that offer both growth and value

Big, growth-oriented ideas are awesome, but it’s also important to consider valuation and buying when valuation as compared to peers is reasonable. A good candidate may be a young company that has demonstrated significant growth in sales, yet is undervalued based on the company’s market potential versus its total market capitalization.

I also want to see a balance sheet with cash and little, if any, debt. Cash is important because it can carry a company through unexpected events. For example, should the much-anticipated launch of a product be delayed, I want the company to have enough cash available to see the product to market.

  1. Avoid big losses

It’s last on my list, but certainly far from my least important rule for how to find small-cap stocks.

Since 1925, small-cap stocks have posted greater gains than any other asset class—2% to 5% a year more than mid caps and large caps. And between September 2011 and September 2015, small caps rallied by 20% more than large caps, posting a total return of 97%.

That long-term outperformance helps to make a strong case for owning small-cap stocks. But investors do need to understand that the larger moves to the upside are typically mirrored on the downside during bear markets and market corrections like we saw in the February and March of this year.

As a general rule, small caps are more volatile than large caps, but less volatile than emerging markets stocks. This isn’t reason to steer clear, it just means that you should expect larger swings in their prices, and you should use stop losses to avoid really big losses.

Many advisors advocate a 10% to 15% stop loss for large caps. For small caps, I like to widen this to 25% to 30%. The reason is that we often see quality small caps drop 20% or so during market corrections. And often, these are the times to buy, not to sell. We don’t want to get chased out of a quality stock because of market volatility.

If a small-cap stock falls 25% from my entry point, I start to watch very, very closely. The critical thing to do at this point is determine if the decline is due to some fundamentally negative event, or trend, that undermines the company’s longer-term potential, or if it is simply the result of market turbulence.

If it is the prior, then the stock is more than likely a candidate to sell. While turnaround stories do happen, the bottom line is that investors need to cut losses short on bad stocks that continue to fall.

If it is the latter, it may make sense to give the stock a little more wiggle room, and see if it hits that 30% stop-loss level. If it does, then at that point it really is a matter of watching extremely closely for a good exit point.

The idea here is to avoid catastrophic losses. A couple of 30% or so losses a year is not a big deal. But allowing those losses to get bigger really does curb the overall profit potential of your portfolio.

Ultimately, you’ll need to decide what stop loss level works for you, and what will make sure you sleep well at night.

Now, let give you a little taste of the types of stocks I look for, in one of my favorite small-cap sectors.

3 Early-Stage Cloud Software Stocks to Buy Now

I cover many cloud software stocks in my advisory.

The reason is simple: cloud software is one of the biggest technology trends since the dawn of the internet. It is reshaping commerce, communications, supply chains, corporate strategies and even corporate and national security interests around the world.

Just about every company out there, regardless of industry, age and growth profile, has embraced a cloud strategy and/or a subscription-based business model of some sort, whether it be for services they provide or those they consumer.

Those that haven’t gotten on board have dubious futures indeed, especially in the new world where COVID-19 is driving digital adoption at a furious pace.

You can play the trend with the big boys, which help to provide the infrastructure that allows cloud software to be delivered around the globe. This includes Microsoft (MSFT), Amazon (AMZN) and Alphabet (GOOG).

But those are established players. Our focus is on the huge wave of young companies that were founded on cloud strategies and software-as-a-service (SaaS) business models—and which have their best days ahead of them.

These are the up and comers, the companies that represent the best investment opportunities over the next decade. You’ve probably never heard of them.

Here are three ideas that I like right now. Note: not all of them remain small-cap stocks (market caps of $3 billion or less); two outgrew that designation only recently. However, all three remain small, and relatively undiscovered.

Coupa Software (COUP)

If you’re an executive that needs help managing the millions of dollars your company spends on procurement, sourcing, expense management, inventory and other areas, you’ve probably heard of Coupa Software. The $12 billion market cap company is to business spend management (BSM) what is to sales. And it’s expanding its solutions to address the roughly $56 billion addressable market right in front of it.

Coupa’s software is becoming a strategic extension to enterprise ERP platforms since it consolidates many back-office activities into one, unified solution. Innovative and simple-to-use applications have won Coupa the admiration of industry analysts; it is a “Leader” in its industry according to Forrester, Gartner and IDC.

The company benefits from powerful network effects resulting from its growing base of customers, suppliers and partners, all of which are funneled into its best-of-breed Coupa Unified Spend Platform. At the end of 2020 this platform is estimated to have over $1 trillion in cumulative spend under management.

The virtuous cycle powering Coupa’s growth is best illustrated by a typical upsell example, which expands the amount of money a customer spends each year. Let’s say a customer initially purchases the company’s core spend management and procurement software. After seeing the value, it commits to the full suite of applications. In this scenario, the customer’s total annual spend increases by a factor of three.

Coupa won’t report next quarterly results until early June. Revenue in fiscal year 2020 (ended January 31) was up 50% to $390 million, and analysts estimate revenues will grow 26% this fiscal year. Coupa also delivered adjusted EPS of $0.52 last year, but that figure is expected to dip to $0.33 in 2021.

This is a good company in a great market; however, demand for spend management may dip as enterprises reduce costs in their systems. Plus, shares are trading near all-time highs. Prior to the next quarterly earnings report I advise that investors only add a small starter position then evaluate based on the next report in June.


BlackLine (BL)

BlackLine (BL) is a Software-as-a-Service (SaaS) company with products for finance and accounting departments. Companies use the software to perform a variety of processes, including account reconciliation, intercompany accounting and the financial close, a recurring process that takes raw financial data and turns it into the audited financials that senior management reviews, that gets submitted to the SEC, and that becomes available for investors like us to view.

Prior to BlackLine much of this work was still done manually, using spreadsheets. That is a cumbersome, inefficient and error-prone way to do it.

BlackLine has come up with a better way. The company’s cloud platform helps automate the process, pulling in data from banks, ERPs (SAP, Oracle, NetSuite, etc.), transactional systems and more, then running it through the appropriate BlackLine products, which can be set up with internal controls.

The idea is to transform a quarterly, recurring process into a continuous one so that accountants, controllers, managers and auditors can have real-time visibility into the state of a company’s books.

BlackLine was founded by Theresa Tucker, who previously worked as Chief Technology Officer for SunGuard Treasury Systems (acquired by FIS in 2015). In the early days the company sold on-premise software, then made the leap to cloud-based software in 2007. That was the year the first iPhone came out and it was good timing; companies wanted to move away from expensive desktop software toward software subscriptions, especially when the recession struck.

Private equity firms took note of BlackLine’s success, jumped in, and the rest is history. Today, BlackLine is going after a big opportunity with over 165,000 global companies that could use its software. It has been working on expanding internationally, where there are many untapped markets, growing a partner network, including with SAP, and developing new products, including an Intercompany Hub Product that helps streamline inter-company accounting.

In Q1 2020, reported on April 30, management reported that global demand remained reasonably strong in the face of COVID-19 and that it added 32 net new customers, bringing total customer count up to 3,056. That translated to 271,975 users and net revenue retention stayed steady at 110%, meaning that current customers continued to increase their spending with Blackline in Q4.

Blackline grew revenue by 29% to $82.6 million and adjusted EPS came in at $0.10. Both results beat expectations. However, management did pull prior full-year guidance, which had been for revenue in a range of $347 million to $352 million, implying just over 20% growth, and adjusted EPS of $0.45 to $0.48, implying growth of around 27%.

As with all stocks right now investors should start slow and look to average in on weakness.


Smartsheet (SMAR)

Smartsheet (SMAR) is a $6.5 billion market cap software company that was founded in 2005, went public in 2018 and is growing at rapid clip today. What’s the scoop behind the success? The company has developed a flexible, cloud-based, low-code collaboration platform that helps teams organize, capture, manage, automate and report on their work at a huge scale. The result is the holy grail of corporate leader aspirations; more efficient processes and better business outcomes.

The market for Smartsheet’s products is mostly business users that just want to get more done, more quickly and with less hassle. This often means a better solution than what was previously handled through email, spreadsheets and whiteboards. That, combined with a user interface that’s familiar (similar to MS Excel and Google Sheets), is why the company’s products have been spreading virally, reaching almost 100,000 customers of all sizes, including over 75% of the Fortune 500.

Smartsheet’s solutions are more than just glorified Microsoft Excel spreadsheets that require another subscription. The platform integrates with a huge variety of other enterprise tools, including those from Microsoft, Slack, Google, Tableau, Facebook, Okta and more. There are over 2,000 use cases covering all the unstructured projects that business users need help streamlining.

The company achieved FedRAMP authorization back in August, which drove federal agencies like the National Oceanic and Atmospheric Administration (NOAA) to become the first customer on All in, analysts see the company targeting a $21 billion market. And Smartsheet has only grabbed about 1% of it.

To keep growth alive and well Smartsheet is expanding overseas, developing more Accelerators (automated smartsheets for specific projects) and building out more integrations, including one with Adobe Creative Cloud. These high value offerings are helping to drive 130% plus net revenue retention (showing existing customers spending more) and revenue growth north of 50%.

In the most recent quarter (Q4 Fiscal 2020) revenue jumped 51% to $78.5 million. Despite COVID-19 analysts see a 47% jump in Q4. While the company is not profitable (adjusted EPS in Q4 was -$0.13) due to investments (which will likely continue for years), investors will likely be fine with that (for now) given the rapid growth profile.


Secrets to Early-Stage Stock Profits

Everybody has their own system for finding great stocks to build wealth. Some are more successful than others. Many systems could work better, if only the people pushing the buttons could stick with them!

Over the years I’ve developed a system that helps me identify early-stage growth stocks that can help investors achieve their long-term investing goals.

This Special Report includes a brief overview of the system I use for both my early opportunity and small-cap advisories.

It isn’t a trading system, but it’s also not for conservative, dividend investors that want to buy and hold stocks forever. It’s for relatively aggressive and engaged growth investors that like finding that young diamond in the rough before the rest of the crowd, and are willing to do at least a little digging now, and in the future, to make sure it’s legit.

Here are 10 of the most important parts of the system I’ve come up with.

Phase 1: Idea Generating Process

The first phase of the system is the Idea Generating process. This is where I go out and look for ideas that fit my investment criteria. This is fun, exploratory work that involves a lot of software screening tools, quick chart analysis, and random-walk research (tracking down creative ideas, following up on thoughts from subscribers like you, etc.).

The end goal of Phase 1 is to narrow down the investable universe of early-stage companies into bite-size chunks that I can do more research on. I go out and find high potential early-stage growth stocks, and share them with you.

Find Big Ideas That are Part of Big Trends

There are a zillion trends out there that seem good. But it’s the really big and durable trends that you need exposure to for building long-term wealth. Current examples include cloud computing and personalized health care. Really big trends are so big there’s many ways to play them. That translates into lots of stocks, M&A potential and flexibility for investors to be right on the trend, but wrong on the occasional stock, and still make money.

Look for Revenue Growth Above 20%

Growth is a must-have for a young company and the more the better. Beyond the obvious that revenue growth shows demand for products and solutions, these types of companies are sure to raise capital through equity raises and convertible debt offerings to fuel their growth. The pace of that growth needs to be great enough to overcome the dilutive impact of such capital raises and keep investor confidence high. If a company is pre-revenue, there should be other metrics available that show concrete progress to a value-creating goal (i.e. favorable trial data for biotech companies, rising recoverable oil estimates for oil exploration companies, etc.).

Look for Earnings Growth Above 20%

It should also go without saying that EPS growth is necessary. Attractive early-stage growth stocks don’t need to be profitable. But they do need to be trending in the right direction, even if there is the occasional quarter or year where EPS ticks down due to investments, acquisitions or other short-term reasons. Earnings growth that’s faster than revenue growth is a plus as it shows the business has leverage to increase profitability as it gets bigger.

A Strong Chart

It seems like an obvious statement to buy and own stocks that have good charts that are going up. But I still get tons of emails from subscribers wondering if an ailing stock is a “deal.” No! Sure, there are always examples of a banged-up stock that pops on an earnings report or takeover. But what are the chances you can identify these opportunities with any regularity? Life doesn’t need to be that difficult.

Buying on a pullback or a dip when the longer-term trendlines are still up is fine, and often a very good idea. But don’t try to be a hero and buy the proverbial falling knife. You’re just too likely to get hurt.

Phase 2: Deep Dive Analysis

Phase 2 involves much deeper and time-consuming analysis than Phase 1. This part of the system involves analysis of SEC filings, financial statements, investor presentations, conference call transcripts and things like that. The idea here is to gain a deeper understanding of each company’s market potential, business model, growth initiatives, risks, management style, etc.

In Cabot Early Opportunities, I do a first pass of Phase 2-type research to qualify the ideas. But this is an idea-generating investment advisory, not a finely tuned portfolio of exhaustively researched

companies. The stocks that I’ve done a full deep-dive analysis on, and written 10-page institutional-quality research reports for, are included in Cabot Small-Cap Confidential.

Look For Companies with Good Business Models

Big Trends and Big Ideas are great. But a company is only going to start gushing cash if management has developed and implemented a rational business model to seize the opportunity. The hard part for investors is that understanding a company’s business model takes time, and not all are willing to roll up their sleeves and get a little dirty. I’ll do a lot of that work for you, but you should still tune in to what I say to make sure you “get it.”

Invest in Durable Business Models

This is part two of the above. A rational business model is essential. But it also has to provide the flexibility to allow for innovation as time and markets change. Otherwise, investors will be in for, at best, a few tough years as management retools the business, or, at worst, left holding a beat-up stock with no hopes of recovering. Thus, we want to own companies with rational business models that can evolve. These are the ones that will truly stand the test of time.

Look for Repeatable Positive Events and Catalysts

Pick any stock and you can figure out at least one potential reason for it to go up. But early-stage growth stocks that deliver long-term gains tackle value-creating initiatives over and over. Examples include new products that resonate with the market and help drive deeper, more profitable relationships with customers. Also important are acquisitions that make sense, are aligned with the business model, are integrated relatively smoothly and are a more efficient way to acquire technology and talent than building from within.

Look for the Scarcity Premium

Value investors are scared of expensive stocks. True growth investors love them. P/E of 3,000? Bring it on! When a company is young, typical valuation metrics are not the right ways to evaluate it. It’s more important to look at trends in revenue and earnings growth, valuation relative to peers, valuation relative to the stock’s history and valuation measures that look far enough into the future, when the Big Idea will be more understood by the crowd (who you can sell to if and when you wish).

Phase 3: Accept Accountability, Now And In The Future

The final phase of research is easy. Just realize that it’s your money, your future, and you who is punching the buy and sell buttons. The final phase closes the loop so that every investor feels accountable for the winners and losers they generate over time.

Have Your Own Opinion AND Seek Help

Investors are responsible for their own actions. You can read research reports from the best numbers guy or strategic thinker out there. But it’s your cash and your future. Be a skeptic, understand that even the best companies in the world are less than perfect. Your opinion of the stock’s potential is what brings the entire stock selection process full circle.

Try Not to Sell Too Early

It’s incredibly hard to hold on to stocks for a long-term. That’s especially true when talking about early-stage growth stocks because a lot of them go through meaningful corrections, then take off again. That’s why it’s so important to focus on everything I’ve just said, from big trends to business model, to durability and scarcity premium.

No single thing defines a great early-stage growth stock; it’s the sum total of many smaller things that matters, and that will give you the confidence to stick with it.