Pokemon GO.
I don’t play it, and I don’t plan to. But I’m fascinated by it, for one specific reason—it shows, once again, why stocks are the place to be. Because every now and then, a company does something that is completely unexpected that totally blows your mind. And usually, the stock explodes higher. In this case, this little mobile game has added almost 70% to Nintendo’s stock price. That’s $12 billion in market value over just a couple of weeks. You read that correctly: $12 billion!!
That is insane, especially given that the game is free. And it obviously has investors feeling pretty good about Nintendo’s stock. But I think it’s also helping investors feel positive about stocks in general. Because Nintendo’s overnight success is symbolic of what can happen on any given day, for any given stock—provided that management is working hard behind the scenes to push the envelope.
We don’t own Nintendo, but similar gains can occur with any of our stocks, on any given day. I’ve had it happen in the past—with Africa Oil (AOI.TO) when it shot up over 500% in a few months after discovering the first oil in Kenya. And when Ambarella (AMBA) doubled over a few short months in the middle of 2015. And, most recently, when current holding Mitek (MITK) shot from 3.50, to 5.50, to 9.50 and then 11.50—a 170% rally over seven months. You’ll take some lumps along the way. But if you stick with stocks and are diligent and consistent, you will capture these types of gains—and many, many, more modest returns as well—over the years.
One particular area of the market is being pulled higher by Pokemon GO, and that’s virtual reality and augmented reality stocks. In Cabot Small-Cap Confidential, eMagin (EMAN) has blasted 17% higher over the past two weeks (the company was also granted a new patent, which has helped. Details below).
Almost everything is up over the past week. The S&P 600 small cap index jumped 4.8% higher to hit 738. It is now up 10% in 2016, sits just four points below its 2015 high, and is officially above my year-end target of 730. None of our stocks were down over the past week.
At this level, the index appears slightly overvalued given that it is trading with a forward P/E of 18.6. That said, breaking down the sectors, the most expensive ones (on a forward P/E basis) are utilities, energy (somewhat wonky valuations given volatility in sector) and telecom, all of which are at or near 10-year peaks. The sectors we care most about—information tech, healthcare/biotech and consumer discretionary—all have room to run before they reach peak valuation. And as I’ve stated many times over the past six months, if earnings (the denominator) continue to rise (as they should throughout 2016) then that will help keep a lid on valuations, even if share prices (the numerator) stay elevated.
So where does this leave us? With small caps above my year-end target in mid-July, is it time to run for the hills? Not quite. My forecast is a marker in the sand, not an official high water mark. And I based it off of a reasonably high valuation for the small-cap index (around 18, so we’re a little over that). I don’t advocate buying the index right now (and might even suggest selling a little if you own index ETFs), but there’s a lot of room to run in individual stocks. And with earnings season coming up, we have another opportunity for upward revenue and earnings revisions, which is what ultimately drives share prices.
Bottom line: Steer clear of small-cap index ETFs for now, but look for small-cap stocks that should keep delivering earnings and revenue growth. Second-quarter earnings momentum is extremely important. We may look to exit a few positions on strength over the coming weeks/months, but those moves will depend on share price momentum and/or earnings results. More companies have announced their earnings release dates, and action will pick up heading into the end of July and beginning of August. We have no ratings changes this week, meaning there are plenty of stocks rated Buy. Details below.
Updates
Aerohive (HIVE) The upward trend remains intact as the stock added 3% over the past week. Tech & Learning—a publication that helps technology professionals working in education make technology-related decisions—awarded Aerohive’s HiveSchool learning app it’s “Best in Show” award in June’s ISTE 2016. HiveSchool is a connected learning app that helps teachers use classroom technologies to provide engaging, collaborative and effective learning experiences for students. The product will be featured in Tech & Learning’s August issue. The stock is a Buy. BUY.
Confirmed earnings release date: Wednesday, August 3
Blackbaud (BLKB) I’ve been calling for a 52-week high for several weeks and we got it over the past week, when shares jumped 5% higher. Blackbaud has also acquired Attentiv.ly, a social marketing platform that will help Blackbaud listen in on what its community of users are doing and thus help it drive marketing campaigns to better attract their attention. At the core, it’s social media for philanthropic organizations. The company has been a strategic partner for a while so I see very little integration risk. Terms were not disclosed. The company’s co-founder and 10 employees will join Blackbaud immediately. The stock is still a Buy for momentum investors, just keep new positions small. BUY.
Expected earnings: Week of August 8
Chembio (CEMI) We’re still moving sideways and awaiting news on product development and regulatory approvals. Congress is skipping off to the beach with no resolution on Zika funding. Even so, the stock is a Buy. I’ll be surprised if we don’t get an update on Chembio’s diagnostic tests for the Brazilian market before the Olympics kicks off next month. They start on August 5, and the company should report second-quarter results around the same day. BUY.
Expected earnings: Week of August 8
eMagin (EMAN) Shares have been moving higher as anything and everything related to Pokemon GO is enjoying a lift. eMagin’s connection is its budding exposure to VR/AR markets. One fundamental positive development is the granting of a patent for a switchable VR/AR microdisplay headset. From the press release: “The patent covers the integration of microdisplays and optical elements to design an ergonomically appealing immersive headset. The design offers flip up/flip down functionality that allows users to quickly move the display in and out of their line of sight. The flip display also incorporates a switchable Virtual Reality/Augmented Reality feature that enables the user to switch easily between VR and AR modes.” The stock is up 12% over the past week and 17% over the past two weeks. Volume has been above average. Continue to hold. HOLD.
Expected earnings: Week of August 15
LeMaitre Vascular (LMAT) Shares were doing nicely over the past week until mid-day yesterday when they began to drop, eventually ending the session down 3%. The net result was a 2% gain over the past week. I received a note from one subscriber who was wondering about the afternoon move, and after taking a closer look at the stock and others in the space, it appears to me that the weakness was mirrored in several stocks operating in similar end markets. The S&P 600 small cap index also fell in the afternoon hours. So the bottom line is that I don’t see anything specifically wrong with LMAT—just a generally weak showing yesterday (and for the past month, for that matter). Volume has been below average. We should get earnings by the end of the month and I expect good things, especially on the biologics front. Keeping at Buy. BUY.
Expected earnings: Week of July 25
LogMeIn (LOGM) The stock was up 4% this week on no new news, so now’s the time to just sit and hold or add a little to an existing position. We still have a good amount of headroom before a 52-week high. BUY.
Confirmed earnings release date: Thursday, July 28
Mitek Systems (MITK) Shares got their mojo back this week as they rallied 10%. An upgrade from Needham to “Buy,” with a price target of 9.50 (15% above yesterday’s close) didn’t hurt. At this level, we’re back to a 100% gain on the remaining position. Continue to hold half. HOLD HALF.
Expected earnings: Week of July 25
NanoString Technologies (NSTG) Shares were up 3% over the past week, and would have done a lot better were it not for the same bug that afflicted LMAT in yesterday’s session. Nevertheless, the modest upward trend is encouraging. But we need the stock to make a convincing move above 15 to break out of its Q1 earnings release-induced funk. Q2 earnings are on deck for August 3. This will be a big one since it should let us know the most recent trend of equipment sales. Continuing to hold until we know. HOLD.
Confirmed earnings release date: Wednesday, August 3
PFSweb (PFSW) The stock is finally making a move from oversold levels and gained 8% over the past week. It might have been helped by Amazon’s (AMZN) statement that the Brexit vote hasn’t hurt that company’s U.K.-based sales. In fact, Amazon said it’s moving ahead with plans to hire 1,000 employees in the U.K. by the end of the year. This is all tangential to PFSweb, which provides eCommerce solutions (web design, software, fulfillment services, etc.) to retailers (including Asics, Columbia and LEGO). But hopefully it provides a much-needed bit of positivity for the stock. Let’s give the stock a little more room to show positive momentum before moving back to Buy. HOLD.
Expected earnings: Week of August 8
Primo Water (PRMW) Things are still quiet in Billy Prim’s water world as investors prepare for the next checkpoint. It’s coming on August 2 when Q2 results will be released. HOLD.
Confirmed earnings release date: Tuesday, August 3
Q2 Holdings (QTWO) Nothing to report from the past week. The stock is still consolidating and looks good for new purchases. BUY.
Expected earnings: Week of August 1
USA Technologies (USAT) The stock moved 6% higher over the past week and is creeping back toward a 52-week high (at 4.73, $0.22 above where it is now). Earnings aren’t due out until September, so we’ll likely be waiting for updated news on business trends. You may recall that in the last quarter management increased it’s 2016 revenue growth projection from 20% to 33%, but stated that it was making some price concessions on equipment sales to help drive more connections, which pay off longer term since they generate recurring revenue. That note about price concessions is really the only fly in the ointment here. Until we know more (probably not until September), the stock is a Buy for small positions only. BUY.
Expected earnings: Week of September 5
Please email me at tyler@cabot.net with any questions or comments about any of our stocks, or anything else on your mind.
Cabot Small-Cap Confidential Stocks and Closing Prices on July 14, 2016 at 4pm:
| Stock | Date Bought | Price Bought | Closing Price | Profit | Rating |
|---|---|---|---|---|---|
| Aerohive (HIVE) | 7/1/16 | 6.73 | 6.92 | 3% | Buy |
| Blackbaud (BLKB) | 11/6/15 | 62.18 | 70.89 | 14% | Buy |
| Chembio (CEMI) | 6/3/16 | 8.69 | 8.30 | -4% | Buy |
| eMagin (EMAN) | 5/5/14 | 2.69 | 2.22 | -17% | Hold |
| LeMaitre Vascular (LMAT) | 5/6/16 | 15.99 | 13.83 | -14% | Buy |
| LogMeIn (LOGM) | 1/8/16 | 58.13 | 64.07 | 10% | Buy |
| Mitek Systems (MITK) | 2/4/13 | 3.93 | 7.87 | 100% | Hold Half |
| Nanostring Technologies (NSTG) | 8/7/15 | 15.40 | 13.44 | -13% | Hold |
| PFSweb (PFSW) | 12/4/15 | 12.59 | 10.02 | -20% | Hold |
| Primo Water (PRMW | 3/4/16 | 8.72 | 11.27 | 29% | Hold |
| Q2 Holdings (QTWO) | 4/1/16 | 23.81 | 27.35 | 15% | Buy |
| USA Technologies | 2/5/16 | 3.51 | 4.51 | 28% | Buy |