Hey, did you know that we’ve moved the line for what’s considered a small-cap stock up to a market cap of $33 billion?!
Yup, that’s where GameStop’s (GME) market cap peaked (stock price was 483) this week, which briefly made it the largest stock in the Russell 2000 Index (side note: Plug Power (PLUG) is the other huge “small cap”).
If that’s not insane, I don’t know what is.
For some time I’ve felt that we should be bumping up the upper end of our market cap range since the market’s evolution, and rising share prices, has made for somewhat slim pickings for high growth names in the under $3 billion market cap range. That is the rough upper end that I’ve been holding to for many years.
Now, I feel like Mr. Burns (Simpsons reference), tenting my fingers in anticipation of all the companies that we can now add to Cabot Small-Cap Confidential since the goalpost has been picked up and tossed over the horizon.
I am only partially joking. There are still companies under $3 billion market cap that are extremely attractive, and the influx of new names through IPOs and SPAC IPOs is helping. But still, moving forward we’re going to modernize our approach just a little. That means considering a few stocks up to the (roughly) $5 billion market cap range (at time of recommendation) if they have the same upside potential as smaller candidates (i.e. 100% upside potential within 12-24 months) and are relatively fresh to the public markets.
I don’t have any specific names or plans at the moment, and we may not do this much, if at all. But it’s been on my mind for some time as I’ve seen the average market cap of high growth technology and medical technology stocks in the small-cap asset class creep up.
Back to the market …
This week has been a challenging one during which to stay focused because of all the intraday moves and market inefficiencies brought on by the short-selling/short-squeeze battles. Our stocks have been largely unaffected (none have gone up 100%, or crashed) though most have moved down some.
Today (Thursday) it appears that corrective steps are being pursued to try to limit systematic risk. I think that’s a good thing, though there is certainly an outstanding debate to be had about what the rules should be surrounding individual investors banding together to “take on” hedge funds. That’s a conversation for a different day.
Big picture, I’ve been incredibly impressed by the numbers out of Microsoft (MSFT) and Apple (AAPL), two stocks I look to for insights into trends that affect many of our software stocks. Even during a somewhat volatile week I’ve found the action in those stocks to be encouraging. Barring any major market shocks I think our relatively conservative positioning is the right stance for the coming weeks.
That said, we do have one stock moving back to buy today. That change, and notes on all of our stocks, are below.
Recent Changes
Avalara (AVLR) Moves to BUY
Updates
Accolade (ACCD) has pulled back to its 50-day line this week – not a surprising move at all given the chaos in the market. No big-picture changes to the stock, story, or our investment thesis and as stated over last two weeks I’m a fan of the 2nd.MD acquisition. A major question on the next earnings conference call will be what’s the cross-selling potential and how soon can sales teams dig into the client list and start working on that front. The stock can be volatile so continue to look to buy on weakness. HOLD
Arena Pharmaceuticals (ARNA) has been quite steady this week and is only off a few percentage points. No change. BUY
Avalara (AVLR) fell below the low end of its trading range yesterday and is now 20% off its high. I think this is a buyable dip and if you’re concerned about a larger drop the 200-day line at 145 is a good mental stop. Moving back to buy. BUY
Confirmed Earnings Date: February 10
BioLife Solutions (BLFS) fell below its 50-day line yesterday. This stock could easily be affected by hedge fund/institutional selling. At this point I don’t see the dip as anything but that as I think the business is well positioned to grow given exposure to drug/vaccine transport and storage. BUY
Cardlytics (CDLX) has been completely unfazed by this week’s market turbulence, though it did sell off the week before last. I think the risk versus reward is attractive here, though it’s going to be all about earnings, which aren’t likely to come out until early March (roughly). HOLD
Cerence (CRNC) has also been solid in the face of an intense week. Management has taken a breather from the onslaught of press releases and I still like the stock’s action. BUY
Everbridge (EVBG) has pulled back again and is now trading right on its intersecting (roughly) 50- and 200-day moving average lines. As I’ve been saying I think the work management has been doing to build out the international business and add new features/products to its platform will pay dividends. The latest is a module for vaccine appointment management, which we recently heard has been deployed in areas of Florida and West Virginia. I think you can buy it here. BUY
Confirmed Earnings Date: February 18
Fiverr (FVRR) is one of those stocks about which people have strong feelings – either it’s wildly overvalued and set to tank or it’s still a good buy because of the transformational opportunity brought on by the pandemic, which management has shown an ability to take advantage of. We’ve already locked in partial profits and I think it’s a hold now. I like the story and have seen too many “expensive” stocks run for years (albeit with plenty of 30%-ish pullbacks along the way). FVRR is 23% off its high. HOLD HALF
Confirmed Earnings Date: February 18
Goosehead Insurance (GSHD) pulled back from a recent high to hit the 50-day line near 125.5 yesterday. No news. While reading up on insurance stocks lately I came across the term “insurtech,” used to describe the wave of insurance stocks that are using cloud-based software, AI and other technologies to grow rapidly. I like that term and think it’s notable that this trend has become significant enough to warrant its very own nickname! HOLD
Inspire Medical Systems (INSP), like many of our stocks, pulled back to its 50-day line yesterday and is bouncing back a little today. Big picture the performance here has been nothing less than outstanding. The pandemic has had a negative impact but recent evidence indicates that the business should reaccelerate meaningfully in 2021. HOLD
Confirmed Earnings Date: February 13
Karyopharm Therapeutics (KPTI) has been sold. No update. SOLD
Personalis (PSNL) pre-announced Q4 results two weeks ago then this week came out with a secondary offering to raise around $162 million to help fund R&D, infrastructure expansion and a new wave of hiring. This is all good news, though the pricing of the offering at 38 was a material discount from the stock’s recent closing all-time high of 51. Still, accounting for peaks and valleys in the stock price 38 isn’t an unreasonable price (it’s a little above the 50-day line). The stock isn’t cheap and can swing around as actively managed funds move money around, but I think the longer-term uptrend will continue. Keeping at buy. BUY
Q2 Holdings (QTWO) has been walking higher and while it took a little hit this week I’m not expecting a more significant decline. Big picture we’re still expecting new bookings will be on the light side in the first half of 2021 but that there’s enough business in renewals and cross selling to keep bigger investors intrigued, and that the long-term growth story is intact. BUY
Confirmed Earnings Date: February 17
Porch Group (PRCH) is trading almost 20% off its all-time high from early last week, which was likely spurred by the acquisitions announced two Fridays ago. There’s no news this week. Also, no earnings date. I believe this is a buyable retreat. BUY
Repligen (RGEN) sold off significantly this week but it wasn’t the only one in its space to do so. Just to highlight two examples, Danaher (DHR) and Thermo Fisher (TMO) showed the same general pattern. At 14% off its high I think the stock is quite attractive here. BUY
Sprout Social (SPT) has been impressively resilient this week and shares never broke much below 60. There’s no news and earnings aren’t out until February 23. If the last 12 months have taught us anything it’s that social media is playing a bigger and bigger role in the world. I have to believe that’s good for a company like Sprout, which operates a platform that businesses use to manage their social media engagement, publishing and analytics. Looking for a bigger pullback to move to buy. HOLD
Confirmed Earnings Date: February 23
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
