Small caps trended sideways over the past week as they digested the fallout from the Brexit vote and the Fed’s decisions to sit tight on interest rates for the time being. Small-cap growth stocks (down 0.1%) did slightly better than value stocks (down 0.8%). The blended average meant a decline of 0.4% for the S&P 600 Index, which was just slightly worse than the 0.1% advance from large caps.
All things considered, sideways is pretty good—small caps remain above both their 50- and 200-day moving averages, and 3.6% below their 52-week high. The support zone around 670 held, and the index trades at around 17.8-times 2017 expected earnings—a premium but not nosebleed territory, especially considering that there aren’t many attractive alternatives to stocks at the moment.
Both small and large caps are back in the black for the year. And almost all sectors in both, with the exceptions of Financials in large caps (the fall in the 10-year Treasury yield and solemn forecast for Fed rate hikes in 2016/17 have both hurt) and Healthcare in small caps, are registering year-to-date gains.
In the Cabot Small-Cap Confidential portfolio, we’ve steered clear of financials, instead playing any spending in the sector by going with must-have financial software. I have increased our exposure to healthcare and biotech, and while those stocks have yet to begin delivering gains, I think patience will pay off. As the two-year chart of the Biotech subsector below shows (there isn’t a great proxy for small cap-specific biotech), Biotech has been working to form a base after a sharp correction that began in July 2015. It hasn’t quite climbed off its knees just yet, but it’s getting stronger. Investors have a neutral outlook on the sector, but once M&A activity picks up and biotech starts ripping again, sentiment will pick up quickly.
I continue to think that investors are a tad jumpy given the market’s volatility. Global bonds are on a race to the bottom. Global growth is there, but very slow. The Brexit vote is a sign of significant unrest in the E.U. Could there be more countries to follow? Quitaly? I think the greatest current risk to stocks is the death by a million paper cuts scenario—it won’t be one big thing that derails us, but the accumulation of a lot of relatively small things. We avoided a painful cut today when the nonfarm payroll report signaled a jump of 287K, versus consensus of 175K. That should send the market up heading into the weekend. And, by the way, leaving people questioning whether or not the Fed overanalyzed the weaker-than-expected 38K rise in May, which was largely credited for its decision to keep interest rates where they are.
Bottom line: there are plenty of small-cap stocks delivering earnings and revenue growth. That’s what matters most. And the reality is that stocks are where it’s at, given the lack of yield in fixed-income investments. Stock-specific news flow is still relatively light, but we’re marching toward the beginning of the second-quarter earnings season. A few of our companies have already announced their earnings release dates. We have no ratings changes this week, meaning there are still plenty of stocks rated Buy. Details below.
Updates
Aerohive (HIVE) Last week’s new addition is essentially unchanged over the past week, and there’s no new fundamental news to report on. From my report: “Aerohive is on a mission to simplify the complexity of wireless networking for mobile devices. The company sells enterprise-scale wi-fi and networking solutions that help organizations provide a more user-friendly, reliable and secure network to their customers, employees and students. It offers all the hardware necessary to create a mobile-first edge network, including access points (APs), routers and switches. It also sells a cloud-based software solution that permits centralized management, data collection and analysis of network activity.” The stock remains a Buy. BUY.
Blackbaud (BLKB) Shares are flat over the past week and are still within spitting distance of a 52-week high. The same advice as the last two weeks: buy, but keep new positions small. BUY.
Chembio (CEMI) No new news over the past week. Shares are up 1% and are trading right at their 50-day moving average. The market is waiting for a pertinent press release. The most likely near-term news will let us know whether Chembio’s Zika diagnostic test for Brazil has gained approval. Keeping at Buy. BUY.
eMagin (EMAN) The stock’s modest uptrend remains intact despite a dearth of stock-specific news. The company’s President and CEO, Andrew Sculley, just signed a contract extension to stay on through 2018. Shares were up 4% over the past week, right to where they closed two Thursdays ago. Continue to hold. HOLD.
LeMaitre Vascular (LMAT) No new company-specific news. The broader biotech sector has bounced back from a Brexit-inspired drop, but is still well within its six-month trading range. If it can continue to move higher, LMAT shares should get a bump too. Earnings will come out around the end of July, which could serve as a much-needed catalyst. After a run that brought the stock almost back to 15, it’s now retreated to 13.56. Keeping at Buy. BUY.
LogMeIn (LOGM) The stock was down 3% this week but is still trading in an attractive buy range. It has held its earnings-related rally from the end of April, which is a good sign. It’s a good time to just sit and hold, or add to an existing position. The company announced that it will release Q2 2016 earnings after the close on July 28. BUY.
Mitek Systems (MITK) Shares are up 1% over the past week. The stock was recently included in the Russell 2000 Index, which could be helping it mount a recovery from the early June drop. Continue to hold half. HOLD HALF.
NanoString Technologies (NSTG) Shares were up 3% over the past week and the stock enjoyed four out of five up days. Morgan Stanley released a note suggesting that the company is well positioned for market share gains in genomic sequencing, while at the same time the firm lowered its outlook for large-cap sequencing firm Illumina. Still keeping at Hold until we learn more about the trend in equipment sales (they were down 22% last quarter). If management doesn’t pre-release earnings, we’ll get details on August 3 when Q2 2016 earnings are set to be released. HOLD.
PFSweb (PFSW) The stock is looking for a bottom after a two-month slide. It was down 3% over the past week, but recent trading action suggests a bottom is in, or at least close. One of the company’s goals has been to expand in Europe, so it’s possible that the Brexit vote has added to the slide. U.K. retail sales fell by an estimated 3.6% in June, the worst fall in a decade. This is definitely not a positive for PFSweb. However, revenue from Europe was only 14.7% in 2015, and the company doesn’t break out the U.K. specifically, so it’s hard to draw a direct line between estimated U.K. sales declines and the stock’s trajectory. I think the stock is just volatile, and volume has been comparatively low over the past couple of months. Earnings should be around a month away, and that event could easily spur some buying activity. Keeping at Hold given the proximity to my 30% loss limit. HOLD.
Primo Water (PRMW) After an 8% rally the prior week, shares cooled off 5% last week. The stock was recently added to the Russell Global and Russell 3000 indexes, and remains a Hold. HOLD.
Q2 Holdings (QTWO) The stock was down 2% over the past week, but is still trading within striking distance of a 52-week high. No new fundamental news to report. BUY.
USA Technologies (USAT) The stock was flat over the past week. Keeping at Buy, but I suggest that you keep new positions small. BUY.
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 7, 2016 at 4pm:
| Stock | Date Bought | Price Bought | Closing Price | Profit | Rating |
|---|---|---|---|---|---|
| Aerohive (HIVE) | 7/1/16 | 6.73 | 6.80 | 1% | Buy |
| Blackbaud (BLKB) | 11/6/15 | 62.18 | 67.69 | 9% | Buy |
| Chembio (CEMI) | 6/3/16 | 8.69 | 8.30 | -4% | Buy |
| eMagin (EMAN) | 5/5/14 | 2.69 | 2.00 | -26% | Hold |
| LeMaitre Vascular (LMAT) | 5/6/16 | 15.99 | 13.56 | -15% | Buy |
| LogMeIn (LOGM) | 1/8/16 | 58.13 | 61.34 | 6% | Buy |
| Mitek Systems (MITK) | 2/4/13 | 3.93 | 7.18 | 83% | Hold Half |
| Nanostring Technologies (NSTG) | 8/7/15 | 15.40 | 12.99 | -16% | Hold |
| PFSweb (PFSW) | 12/4/15 | 12.59 | 9.26 | -26% | Hold |
| Primo Water (PRMW | 3/4/16 | 8.72 | 11.27 | 29% | Hold |
| Q2 Holdings (QTWO) | 4/1/16 | 23.81 | 27.44 | 15% | Buy |
| USA Technologies | 2/5/16 | 3.51 | 4.25 | 21% | Buy |