This was another busy week in which quarterly earnings results overshadowed almost everything else in the market, aside from some snippets about Trump’s overseas trip and the back and forth on tax reform between the House and Senate.
Broadly speaking, the market has been sketchy. Small caps have been trending down since early October, and the pace of the decline accelerated over the past week. In the grand scheme of things, this isn’t surprising. The September advance was incredibly strong, and a pull-back to the small cap index’s 50-day line isn’t remotely alarming.
The downside is that we’ve been rowing against the tide. And as was the case last earnings season, companies need to meet or, more likely, exceed already high expectations to pop after earnings. We’ve had our share of pops and drops, and the bottom line is that, on average, our portfolio is almost perfectly flat (i.e., zero return) over the past two weeks.
As far as sector trends, the following chart shows what’s happened in each of the small and large cap sectors over the past week. The message here is just that there’s no real trend; stocks are pretty much just mixed across the board and, as in our portfolio, there’s no real significant movement once you step back from individual names.
It’s a bit of a challenging time. And in such times, I prefer to try and maintain an even keel. Our goal is to stick with what’s working, jump on opportunities where new entry points are emerging, and step aside from stocks that will go down significantly over the next couple of months.
That’s easier said than done! But keep it in mind as you read through the following updates. Note rating changes: PrimoWater (PRMW) and Q2 Holdings (QTWO) move from Hold to Buy.
Updates
AppFolio (APPF) reported earlier this week and shares fell afterward, despite the beat and raise results. As I said in my earnings review, this looks to me like a position-size reduction by one or more institutional investors, and I don’t expect it to last too much longer. I also see potential for price target hikes once analysts run the numbers. In particular, I get the sense Morgan Stanley is reconsidering its long-standing “hold” rating on shares. They’ve been behind the curve on AppFolio, and might be ready to jump on the bandwagon given the sustained growth and margin improvement. I’m sticking with my Buy rating. BUY.
Earnings: Done
Asure Software (ASUR) will report on Monday, and I’ll send a Special Bulletin detailing my thoughts after the event. Overall, the labor market appears strong, and I expect Asure to report a decent quarter. There will likely be some impact from the weather in Florida, but I believe that the short-term impact will be overshadowed by the long-term growth-through-acquisition potential. Keeping at Buy. BUY.
Announced earnings date: Monday, November 13
AxoGen (AXGN) reported a very good quarter last week and shares traded up after the result (they were up 13% last week). They added another 9% this week, bringing our total return to just over 50%. This standout performance flies in the face of what I see as a broader weakening in a lot of healthcare-related stocks. Enjoy it! I’ve had the stock at Buy (on the dips) and I’ll keep it there until the trend weakens. BUY.
Earnings: Done
BioTelemetry (BEAT) reported earlier in the week and the results were perfectly acceptable, but nothing to write home about. This is one of those trying times as an investor because a big acquisition was recently closed, and you want to see all the anticipated benefits overnight. But it’s not like you can just mash the two companies together and be off and running, especially in the healthcare industry. I think BioTelemetry will pay off for us, we just need to be patient. I moved the stock to Hold after the report due to the stock’s weakness, but I anticipate moving back to Buy, provided shares firm up. At that point, investors that purchased at significantly higher prices should be able to average down, and claw back to breakeven (and then to positive gains!) more rapidly. As an aside, shares of the most notable competitor, iRhythm (IRTC), have also recently begun to weaken. I find this telling given that iRhythm reported a good quarter and several analysts raised price targets (Morgan Stanley went from $50 to $65). However, shares of IRTC have fallen over 10% since and just broke below their 50-day line. I also had a chance to look over Medtronic’s (MDT) preliminary Q2 results. That company also has heart monitoring services, and is a decent bellweather stock for the medical device field. Medtronic reported slightly better-than-expected results, and its initial estimate for Hurricane Maria impact (a massive $250 million) came in much lower (roughly $60 million). There’s potential that this news could provide some relief to the broader medical device group. We’ll just have to wait and see. For now, continue to Hold BioTelemetry. HOLD.
Earnings: Done
Datawatch (DWCH) fell after reporting earnings last week and shares haven’t done much since. As I wrote in my earnings review, I think our investment thesis still holds, investors just wanted to hear more about progress selling the new enterprise data solution, Monarch Swarm. Management said this product will have a longer sales cycle than other products since it requires more senior decisionmakers’ approval. Datawatch announced this week that Swarm has been integrated with a data visualization tool from Slemma, a privately-held company providing data analytics solutions for small and medium-sized businesses. I don’t think this will really move the needle, but it’s an incremental positive. Datawatch is a tiny company and investors need to realize that, while it has an established user base for its main products, the company’s transition to the cloud will be gradual, and its effort to expand its market with new product introductions isn’t a sure thing. I believe there’s a good chance the company will sell itself within a couple of years and is trying to gain some revenue and earnings growth momentum and complete the business model switch (from on-premise to cloud), so it can get a price that the majority of shareholders will approve. Keeping at Buy. BUY.
Earnings: Done
Everbridge (EVBG) reported a great quarter earlier this week and shares jumped afterward. They settled down quickly, however, and haven’t moved a whole lot since. I’ve kept at Buy since I think it is one of the more attractive names in small-cap software, and I’ll keep that rating for now. BUY
Earnings: Done
LogMeIn (LOGM) has pulled-back this week along with the broader market. But the most recent earnings report and stock’s reaction showed that there’s still adequate demand to get shares moving north again. We’re up just over 100%, and I suggest holding on. HOLD HALF.
Earnings: Done
Materialise (MTLS) reported a quarter that fell short of expectations, particularly on earnings. Shares dropped post-conference call, and while I wouldn’t say it was a great quarter, it was far from awful. We didn’t go into this name expecting full-throttle growth. The 3D industry is in transition and many 3D printer stocks aren’t doing so hot (mainly DDD and SSYS) as demand for their printers is stagnant at best. Recall that this market is being disrupted by the introduction of Hewlett-Packard’s (HPQ) new Multi Jet Fusion 3D printer, and as that product rolls out (just released last quarter), there is naturally going to be some softness elsewhere.
How does this affect Materialise? Part of the company’s business model is to generate software sales when its software is packaged with new 3D printers. This is called its “OEM” software business. In the most recent quarter, revenue from OEMs was basically flat, and is looking a little soft for the next quarter too. Direct software sales are looking fine, and were up around 19% in the quarter. To me, softness in the OEM business isn’t a huge deal. I would have loved to hear that any decline in the OEM business was more than offset by ramping sales of HP’s printer (Materialise has partnered with HP too!), but that wasn’t the case. Ultimately, I think HP will be a major player however, and, along with Materialise’s partnership with Siemens, will drive considerable OEM software growth. Just be patient.
Back to the numbers. Revenue (in euros) was up 12.4%, consisting of 10.4% growth in Software, 9.3% growth in Medical, and 16.3% growth in Manufacturing. Adjusted EBITDA (a measure of profits) was up in both the Software and Medical segments, but fell in the Manufacturing segment as it invested in eyewear scanners to support the new HOYA partnership (custom 3D printed glasses). High-end Danish brand Orgreen has joined the new eyewear-printing platform (with 12 models). This business sounds like it has the potential to be meaningful, though it’s a little abstract to us here in the U.S. since we don’t have any domestic partners (at the moment).
The end result in terms of EPS in the quarter was a loss of €0.03, versus expectations of around breakeven.
Management did increase guidance a little to reflect the addition of the ACTech business, which adds a hugely important metal competency to the Manufacturing segment. This should also translate into improvements in the software platform for metal 3D printing, over time. Total printers on hand increased to 167, including a total of seven of HP’s new printers.
The Medical segment will be breaking in to the U.S. market with a recently approved 3D printed maxillofacial implant to be sold through the DePuy Synthes collaboration.
The bottom line here is Materialise still looks good, and I’m keeping at Buy. Direct software sales are good, even while OEM is a little soft (with potential to ramp as HP gets its machines out). The Medical segment is solid, with new devices hitting the market in the U.S. And the Manufacturing segment is ramping up a number of different activities, hitting profitability but setting the stage for significant royalty streams down the road and the all-important addition of metal 3D printing.
This is an under-followed European company that’s, to my knowledge, the only way to get broad-based 3D printer industry exposure in a small cap. Management will be attending a few conferences over the coming months and I’ll talk about interesting initiatives in more detail as we go. BUY.
Earnings: Done
Primo Water (PRMW) reported a good quarter and the smoke from the Glacier acquisition appears to be clearing. The stock isn’t out of the woods yet, but it’s moving north, back around 12.5, and is on the brink of breaking back above its 200-day line. After the report, we got a price target increase from Barrington (from 17 to 19) and a buy rating from B. Riley (price target 17.5). I think there’s enough good news to go on for the stock to keep moving higher. I’ve had at Hold, but am moving back to Buy. We’re up around 44%. BUY.
Earnings: Done
Q2 Holdings (QTWO) reported a better-than-expected quarter two weeks ago and shares have been about as steady as you could hope for. I thought there was some potential for the stock to dip given management’s commentary about banking/credit union consolidation at the small end of the size curve leading to modest customer count contraction. But that hasn’t happened, most likely because big investors understand that the long-term benefits of bigger client wins mean more users (i.e., banking clients, like you and me) on the platform. And that pushes revenue, EPS and cash flow higher over time. I noticed a number of analyst price-target upgrades (in the neighborhood of 10%). The stock has held above its 50-day line, which is a big accomplishment in this market. I’ve had the stock at Hold (we sold half our position months ago), but given the stock’s resiliency and what I perceive to be significant market demand for shares, I’m putting it back at Buy. BUY.
Earning: Done
Tactile Systems (TCMD) was moved to Sell after shares declined after quarterly results. While top-line growth is solid, there is the potential that the sales team is hving to grow in ranks just to maintain constant growth (i.e., roughly 20% growth in sales reps equals roughly 20% revenue growth). More important than the still-unclear sales team productivity is our need to limit losses, however. And that was the main reason for the ratings change. As is the norm, I’ll keep an eye on Tactile and consider adding it back to our portfolio if I like what I see. SOLD.
Earnings: Done
U.S. Concrete (USCR) has been steady after reporting last week and added 3% this week. While there was some impact from the storms, the future growth potential is just too strong to drive investors away. Management is growing the company into new geographic areas (Philadelphia, expanding in California), and acquiring more aggregate facilities to help become more vertically integrated (i.e., providing aggregate for its own concrete, instead of buying from a third-party provider). The stock looks good and we’re up almost 30%. Keeping at Buy. BUY.
Earnings: Done
