The big thing on most investors’ minds is whether or not this market can go higher.
It’s a good and valid question. And of course, nobody knows the answer. What we do know is that there are a lot of forces pushing this market higher and, from my perspective, broader participation from more sectors is helping drive the move.
Looking at the small-cap index we see the S&P 600 broke out of its range in December and has been ticking higher since. This is really good news for the market in my view as it shows a resurgence in confidence in the U.S. economy. While the S&P 500 index has made many new highs lately the small-cap index is still below its 2018 peak. I think we’re going to see it break out in 2020 and if I had to guess it would be in the first half of the year (don’t quote me on that!).
The practical challenge is that this type of market makes us all look like really, really, good investors. Let’s not let that go to our heads. At some point, we’ll be dealt another blow and its better to expect that in some form now so when it comes nobody freaks out.
I do think we’re in many of the best small-cap names out there in Cabot Small-Cap Confidential, so even if we do get a pullback soon the long-term prospects of our stocks are incredibly strong. Another encouraging thing is that many of our biggest gainers, stocks like Everbridge (EVBG), Q2 Holdings (QTWO), Avalara (AVLR), aren’t even trading at all-time highs!
These stocks peaked last summer and corrected 30% or so and are just now getting back into the same range as to where they were then. That’s why I’ve had them at buy and keep them there now.
On the flip side, some of our stocks that have exploded higher are still at hold given that less favorable risk vs. reward profile in the short-term. These include EverQuote (EVER), Inspire (INSP), and Cardlytics (CDLX).
Then we have some old favorites that have been sneaking higher and are still at buy, including Repligen (RGEN) and AppFolio (APPF).
In other words, while it’s important to be in tune with the broad market we’re more concerned with what individual stocks are doing and trying to be in tune with the ebbs and flows of their share prices. Therefore, keep an eye on your portfolio and try to stick with incremental moves (averaging in and out) rather than all-or-nothing type moves.
We don’t have any changes this week.
Updates
AppFolio (APPF) broke out above 110 in late-November and I moved to buy soon after. It’s now trading at all-time highs above 120, up 10% year-to-date, and up over 300% since we added it to the portfolio. There’s no new news. As I stated last week history shows APPF going on extended and sustained runs, and we may easily be in the early innings of the next one (I hope). It remains a buy for the time being. Competitor RealPage (RP) just announced two senior management changes due to a product mix that seems to have lost momentum in the market, a problem AppFolio seems to have capitalized on. BUY
Arena Pharmaceuticals (ARNA) has been a dead money investment for a while now and even worse if you bought last summer. But this is development stage biotech and as such you have to succumb to the reality that this type of stock will blow around in the breeze until there’s something material to stick to. That’s expected to come later this year and into 2020 in the form of eight (yes eight!) Phase 2 and Phase 3 trial data readouts on its potential blockbuster drug candidate (UC, Crohn’s, atopic dermatitis). Management has also recently stated that etrasimod will be moving into new studies for eosinophilic esophagitis (EoE) and alopecia areata (AA). The company is also working on the early-stage pipeline, and just received FDA Fast Track designation for APD418 for treatment of decompensated heart failure (DHF). In short, a lot going on, but long development timelines. I’m OK sounding like a broken record. Stay patient. BUY
Avalara (AVLR) keeps marching higher and is now 9% below its August high of 94.31. We’re up 114% on the stock, which is up 17% year-to-date. Keep in mind AVLR went through a 32% correction that spanned roughly four months so the current rally could easily have legs. Also, it’s good to recognize that these types of corrections (roughly 30%) are entirely normal for high growth small- and mid-cap stocks (even large caps too). While painful to endure, if you want to have long term success you will have to do so over, and over, and over and over and … you get it. It’s just part of it. BUY
Cardlytics (CDLX) exploded 23% higher this week after a big Q4 earnings pre-release. I issued a Special Bulletin with some details and reasoning why I’m keeping the stock at hold, where it remains now. With that move, Cardlytics becomes our seventh “double” in the current portfolio. The company uses purchase data from financial institutions to roll out a marketing platform that helps brands reach consumers directly in native banking channels, is up 33% so far in 2020. HOLD
Construction Partners (ROAD) is still moving sideways on no new news but remains at Hold. HOLD
Domo (DOMO) has been in rough shape for a while but the stock has just moved up to multi-month highs near 25 and is trying to break through resistance. We’ll see! It’s a big idea but the company has been bleeding cash and tweaking its go-to-market strategy. At this point, investors just want to see steady progress and follow-through on management’s pledge to get to cash flow breakeven with the capital it has available now. Keep holding. HOLD
Everbridge (EVBG) has come back up to multi-month highs too, and a break above 90 could easily send shares back above 100. I’ve had the stock at buy and will keep there, though I wouldn’t be surprised if there was a pause around this level. BUY
EverQuote (EVER) is moving sideways near 31, which is a relative victory given the insane run from 4.05 in December 2018 to 38 in December 2019. There’s no new news from the company, which runs an online insurance comparison/brokerage website. Quarterly results are due out around February 18 and you can be sure the market will be paying close attention. HOLD HALF
Goosehead Insurance (GSHD) is another insurance stock and one which continues to consolidate. That pattern has been holding since early-summer and while it’s made for a boring stock for some time it also increases the odds of a significant move sooner rather than later. Keeping at buy in anticipation of that. BUY
Health Catalyst (HCAT) specializes in data and analytics solutions for healthcare organizations and, like a lot of recent IPOs, is trading somewhat all over the place. Lockup expiration is next Tuesday and that could spark something of a relief rally. Keeping at buy. BUY
Inspire (INSP) keeps ripping higher and is now up 40% since we jumped on the stock in October. I moved the stock back to hold last week just because it’s getting a little overheated in the short term. Long term, I love it. Inspire specializes in solutions for Obstructive Sleep Apnea (OSA) and is seen growing revenue by nearly 60% in 2019. HOLD
ModelN (MODN) pulled back from an all-time high near 36 to about 34 where it’s found support and looks just fine. This type of action is nothing to be concerned about—totally normal given the stock’s profile. ModelN specializes in revenue management software solutions for the life sciences and technology industries and helps customers maximize their revenue, find growth opportunities and cut compliance risk. Management has guided for FY 2020 revenue of $153.5 (at the midpoint), which implies 9% growth, with adjusted EPS guided for a range of $0.22 to $0.31 (flat to up 41%). Looking to FY 2021, analysts see revenue up around 12%, to $170 million. Results should be out around February 4. BUY
Quanterix (QTRX) is bounding around on no major news. We sold our remaining stake last week. SOLD
Q2 Holdings (QTWO) is our digital banking stock and shares just jumped up to multi-month highs above 86. That’s not a surprising move and why I’ve had the stock at buy, where it remains. BUY
Rapid7 (RPD) is approaching its all-time high near 66, where I suspect it will pause. That said, it could easily crack through and run higher still so while I wouldn’t go in huge here with a new position, it’s perfectly fine to add shares. Rapid7 is a security software stock that’s enjoyed faster growth after moving from an on-premise to a SaaS business model. BUY
Repligen (RGEN) just broke out to new all-time highs above 100 and looks fantastic. The pure-play supplier of bioprocessing products for the life sciences market should grow near 40% in 2019 (to $270 million) and deliver EPS growth near 50% (to $1.03). Results are due out around February 20. That will represent a phenomenal year and at the JP Morgan Healthcare conference management reeled in expectations for 2020, in which it said organic growth should be in the normal range of 10% to 15%. However, they also added $100 million to the 2023 long-term revenue forecast (bringing it up into the $500 million to $600 million range) which should keep the bull thesis well intact. Especially given new product ramps, strong competitive positioning and likelihood for more acquisitions. BUY
Veracyte (VCYT) was sold last week and continues to trade in the same range it’s been in since July. No new news. SOLD
