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Small-Cap Confidential
Undiscovered stocks that can make you rich

Cabot Small Cap Confidential 224

This month’s candidate is another software stock—but not a high flyer. Rather, this company is still scooting just below the radar, and trades at a big discount to most of its peers. When you value it based on growth, it’s downright cheap—but valuation isn’t why we’re buying it.

Cabot Small Cap Confidential 224

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THE BIG IDEA
As the world moves toward knowledge-driven economies, continuous learning is critical. It’s not an option to just sit on your rear end if you want to get into a great college, land a terrific job, move up the corporate ladder or win five super bowls.

You’ve got to keep up, keep improving and keep moving the chains to succeed.

It used to be that learners, whether in the schoolroom or the office, carried books around and took paper-based tests. That’s not exactly how it’s done these days, when the average eight-year old knows how to use a computer.

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Many students never even set foot in the classroom, meet a teacher or fellow student face-to-face, pull out a textbook or even sharpen a pencil.

A lot of learning is done using digital resources. Then people go out into the “real” world and kick some butt!

In the digital world, teachers and learners use software platforms that manage student registration and online course administration, deliver coursework, power video and online interactions with teachers and superiors, handle grading and performance tracking, and act as a conduit through which to upload and download educational materials.

This software has become quite sophisticated. And it has a name. It’s called a Learning Management System (LMS). If you, your kids, or your grandkids have attended school within the last two decades, they’ve probably used one.

LMSs are also used in the corporate world for training, performance management, recruiting and compensation management. They’re used to try to stop the estimated 25% of employees that leave a company because of a dearth of learning and training opportunities.

LMS burst into the education scene in the mid-1990s. And their popularity grew quickly, primarily in the higher education market, with industry innovator Blackboard grabbing most of the installs for the next decade.

As this chart of LMS market share from 1997 through 2010 shows, Blackboard’s growth was strong to begin with, then slowed and the company mostly grew through acquisition. As Blackboard treaded water, Desire2Learn (D2L), Moodle and Sakai, though each much smaller than Blackboard, grew.

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Growth then tapered off as large, on-premise solutions became cumbersome to use. But LMS solutions, especially cloud-based ones, were evolving in the enterprise space. Companies recognized talent as a valuable asset, and developing it in-house as essential to their long-term success.

The market has always valued constant learning. And this became true for software platforms that eased the burden of compliance and workforce training, recruiting and all the other aspect of managing the employment life cycle.

Cornerstone OnDemand (CSOD), which was founded as CyberU in 1999, was an early entrant in the enterprise LMS market. By the time it went public in 2011, the company offered a relatively robust set of cloud-based learning and talent management software solutions for small businesses. Revenues were growing at a better-than 50% clip.

It’s since been joined by Paycom (PAYC), which has a broad set of Human Capital Management (HCM) solutions for corporate customers, including payroll, HR and talent management software.

These are good-sized markets. Industry analysts say the global academic LMS market is now worth roughly $3.2 billion. The global corporate LMS market is worth about $2 billion, and should grow by 27% a year through 2021, to $6.6 billion.

All in, the global LMS market should grow by a blended average growth rate of around 25% to almost $16 billion by 2021.

It’s a competitive market. And let’s be honest—everyone knows that all online platforms aren’t created equal. There are reasons why Facebook succeeded and Myspace didn’t.

The chart of academic LMS solution market share that I showed ends in 2011. Since then, a new market leader has emerged that’s arguably better than the rest. And it’s grabbing academic customers faster than anybody else.

What’s more, it’s just introduced a set of learning solutions for enterprise clients.

It’s not very well known outside of the U.S. higher education market. But there are signs that that’s changing. And the stock looks like a good buy right now.

Without further ado, let me introduce you to Instructure (INST).


THE COMPANY/PRODUCT


Instructure (INST) is a $997 million market cap company that has developed an innovative and easy to use cloud-based learning management system (LMS) for academic and corporate customers. The company’s applications are valued for their ability to enable frequent and candid interaction between instructors and learners, streamline workflow and allow creation and sharing of content on devices from virtually anywhere.

Its products are powerful and feature-rich, but easy to use, and feature elegant user interfaces. Instructure has strived to drive the clutter out of its software, and has done remarkably well, succeeding where others have failed by throwing out some of the long-held beliefs of what an LMS platform needs to be.

As Michael Feldstein from MindWires, a consulting group that helps schools and educational companies navigate the world of digital education, said in 2010, “If I had to summarize Instructure’s strategy in one sentence, it would be “They use the lessons learned by consumer web companies to clear the clutter out of LMS software design and business model.”

Instructure’s approach to software design differentiates its solutions from those of many on-premise, inflexible and bloated legacy solutions. Instructure management calls out Blackboard on its conference calls, so I won’t shy away either. I used Blackboard years ago and hated it! Granted, some things have probably changed since I last used Blackboard, but from what I’ve heard lately, it’s still cumbersome to use and frustrates customers with significant downtime.

Instructure’s first product, Canvas, launched in 2011 and has quickly become the dominant solution in the higher education market. More recently, in 2015, the company launched Bridge for corporate customers, and essentially doubled its addressable market opportunity, which should grow from $7 billion to $10 billion over the next year or two. Perhaps more importantly, this new enterprise opportunity comes with higher profit margins than its products in the education space.

If Instructure can replicate the success it’s had in the education space in the corporate space, the stock could easily go on a multi-year run.

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Instructure’s software is used by seven Ivy League Schools, including Brown, Harvard, Stanford, Yale and Dartmouth, K-12 schools across all 50 U.S. states and a number of international schools, including London Business School.

Since the introduction of Bridge in 2015, many high-profile corporate customers have been added to the client roster, including Tesla, McKesson and the Better Business Bureau. All in, Instructure has over 3,000 customers, and revenue should grow by over 40% in 2017.

The company says its software makes people smarter. After studying the company and its products, I think that’s a fair claim. Millions of students, teachers and employees currently use the software to achieve their learning goals. And many schools are switching to Instructure because the software is so much better than other options on the market.

MindWires says Instructure’s Canvas platform accounted for 77% of academic deployments in 2016. The group’s data, collected in partnership with LISTedTECH, clearly shows Canvas market share growing at the expense of most other competitors, primarily Blackboard and Moodle.

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This first chart of LMS customer migrations between 2015 and 2017 shows where Canvas is grabbing customers from. And the second chart shows LMS implementations by software company from 2002 through April 2017 (remember, Instructure’s Canvas solution was introduced in 2011). You can see how it has been growing implementations—and how much competitors have suffered—since it was introduced.

Management 101: How Instructure uses Culture as a Competitive Advantage

There’s little doubt that Instructure is different. It’s trying to be fun, yet powerful and sophisticated. You can see this when you view Instructure’s website, read press releases and listen to management speak. A creative culture is clearly embraced. And that dovetails well in a market where engaging content, collaborative learning and all-around enjoyable learning experiences are the goal. This culture isn’t an accident, and sticking with it from inception through IPO and, so far, through life as a public company, is no small feat.

It all goes back to the company’s early days. It was started by two Brigham Young University grad students who found their school’s LMS clunky and outdated, and did something about it. They drew up an LMS design and business model, brought it to their entrepreneurship class, and not long after, were put in touch with a serial entrepreneur in the educational technology space named Cory Reid, who became CEO.

Instructure was born out of an entrepreneurial effort to rethink what an LMS should be, and that culture continues to exist today.

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The company has been listed as one of Utah’s Best Businesses to Work For by Utah Business Magazine for five years running. In 2016, it was rated the fourth best place to work in all small to medium-sized businesses on Glassdoor, and the current CEO, Josh Coates, was rated #15 overall.

Let’s dwell for a minute on Mr. Coates. He is a computer science guy that attended Berkeley, worked there after graduating, went on to Microsoft Research, then started a couple of companies, the second of which was online backup storage company Mozy, which he sold to EMC for $76 million in 2007 (and which is currently run as a subsidiary). Now, he runs Instructure.

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Most importantly, Mr. Coats purchased and restored a M18 Hellcat Tank Destroyer, which he’s rumored to keep in his garage. When in the mood, he and his wife take it to the local sandpit to blow stuff up, as you can see in this video.

Either Instructure is succeeding because it has a legitimately different corporate culture born out of a desire to be the best, throw out the old way of doing things, and deliver LMS solutions that feature the ease, convenience and slick user interfaces people love—or everybody working there is just towing the company line because they’re scared to death of their CEO!

Either way, what it’s doing is working.

Instructure’s Platform and Products

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Instructure says its LMS is the center of the learning ecosystem. The open platform permits integration with third-party publishers and software providers to foster a community of learning content and applications.

This modern, cloud-based platform is more robust than that of many legacy, on-premise peers. And it was designed to be nimble from the beginning, when the founders elected to build it on Amazon Web Services (AWS).

Canvas

Canvas was Instructure’s first LMS and was released into the higher education market in February 2011, rolled out to K-12 customers in 2012, then to international markets in 2014. The product gives customers an extensive set of flexible content creation, management and delivery tools to help in both face-to-face and online instruction. Among its many capabilities, Canvas helps instructors and learners communicate, collaborate, create and deliver quizes and assignments, perform assessments, automate classroom activities (syllabus, calendar, etc.), grade assignments, provide parental access to select content and integrate with many popular third-party student infromation systems (SIS). In short, Canvas provides access to all the critical user data, and the data format is optomized to facilitate reporting, which helps administration and teaching departments to continuously improve.

Modules handle special use cases. For instance, Canvas Network gives customers anywere in the world the ability to open online courses and deliver the content over the internet. It is used for both academic and professional development customers, including institutions that choose to pursue a massive open online course (MOOC) format. And Canvas Catalog is a white-label, web-based course catalog, registration and online payment system that allows organizations to build and maintain a branded marketplace for their online course offerings.

Signficant customer wins in 2017 include a statewide deployment by Utah for all public K-12 school districts and charter schools (650,000 students), the Wyoming Dept. of Education for K-12 and higher education (100,000 students), Tufts University (11,000 students), Georgia Institute of Technology (25,000 students) and the University of Colardo at Boulder (29,000 students).

Bridge

Instructure released Bridge, its Talent Management/Human Capital Management (HCM) suite, in 2015. Bridge addresses the needs of corporate customers who wish to deliver learning, performance management and professional development content to their workforces. With Bridge, users can create personalized courses and content, assign required training, track compliance, align employees with corporate goals and organize courses by relevant categories. The solution allows for continuous feedback so employees know where they stand throughout the year.

Given that data shows 75% of voluntary corporate turnover is influenced by manager behavior, that 25% of employees will leave because of a dearth of learning and training opportunities, and that companies know this and are willing to pay big bucks to keep and develop talent, Bridge has the potential to be a signficant contributor to Instructure’s top line.

Significant customer wins in 2017 include Discovery Communications, Clemson University (a current Canvas user), and Banco BTG Pactual, a Brazilian global financial company that specializes in investment banking, wealth management and asset management.

Arc

Arc is an interactive video platform that lets instructors better manage their video assets, while creating a collaborative learning environment within which learners can intereact with the content and each other. Teachers simply find or create a video, drag it into the Canvas platform, and bam!, it’s shared with all students. Learners can share insights, comment and give feedback within the video timeline in real time. Instructors can provide direction and feedback, while managing all the content in a centralized location, complete with analytics that allows them to see what their students watch, how long they watch, and when they stop watching. Arc was comercially released in October 2016 and integrates with both Canvas and Bridge, as well as other video platforms.

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Gauge
Gauge is a comprehensive assessment management system (ASM) designed to let K-12 districts better understand and act on the data they gain through interim and benchmark exams. Teacher surveys have found that teachers frequently say quick access to individual student performance data would be most helpful in terms of giving one-on-one attention and making changes to curriculum. Gauge delivers on both fronts and more, giving schools a simple, easy-to-use assessment platform so they can use data to improve student outcomes. It was released in July 2017.

Growth Strategies & Initiatives

Acquisition of Practice

On November 28, 2017, Instructure acquired the video assessment and coaching company, Practice, in an all-stock deal valued at roughly $18.2 million. Practice is used by corporate and academic organizations to develop and build people skills, and has a few large clients (Comcast, Domino’s Pizza and UCSF Medical School). Users record and upload a video of themselves working on a skill, such as a product pitch, conversation with an angry client or employee, or delivering difficult news to a patient. That video is shared with peers and managers, who provide direct feedback and coaching.

Practice’s founders wanted to emulate Instructure’s approach to learning and customer relationships when they started the company in 2011, so integrating the two cultures should be a snap. Practice will initially be integrated into Bridge, with integration into Canvas and Arc likely to follow. Integration costs should be minimal, a few enterprise-focused sales people will come with the deal, and the team should begin selling it any day now. The acquisition will likely add around $2.5 million to $4.5 million in revenue in 2018.

Expansion into Enterprise LMS Markets with Bridge

When Instructure went public in 2015, its new corporate solution, Bridge, only had around 40 customers, and all were relatively new. Word on the Street is that since then, growth has been strong, and customers say Bridge’s functionality is approaching that of larger, more established competitors, such as Cornerstone OnDemand. With each additional module Instructure adds to the Bridge platform, the market opportunity grows. It started with Bridge Learn, just recently added Bridge Perform, and is currently working on the next modules, which probably include workforce management, recruiting and compensation management. With mounting evidence that Bridge is selling into both smaller companies (1,000 to 3,000 seats) and larger companies (10,000 seats and more), this is a product that can absolutely move the needle.

New Product Releases Helps Land Bigger Clients

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“… we intend to put out new flagship products every 12 to 18 months. And what I mean by that is a product that’s really going to drive revenue over time in a significant type of way.”—Josh Coates, Instructure CEO, Q3 2017 conference call

While the ultimate potential of Bridge isn’t yet known, what is clear is Instructure’s track record of introducing great products that expand its target market. A larger suite of solutions should also help Instructure land larger enterprise clients. With high retention rates, but little incremental cost in terms of software development and sales and marketing, these clients could become cash cows, and drive dependable, high profit margin recurring revenue. That would do great things for Instructure’s share price.

International Expansion

“Just 2-3 years ago Canvas as an LMS brand was virtually unknown outside of the U.S. and Canada, but now Canvas is winning more than any others in North America, Europe, Latin America, and Oceania.”—MindWires, August 2017

International represents a sizeable opportunity for Instructure, which it began to address with the 2014 launch of Canvas International and the opening of an international headquarters in London. In 2016, international customers accounted for 9% of revenue. By Q3 2017, that had grown to 15% of revenue.

Significant international customer wins in 2017 include Brazil’s Centro de Integração Empresa-Escola (36,000 leaners), Australia’s Swinburne University of Technology (24,000 students, changed from Blackboard), Brazil’s Pontifical Catholic University of Minas Gerais (16,000 students, replaced Moodle), and the executive MBA program at Switzerland’s IMD international business school (7,000 students).

How Companies Succeed with Instructure

Here are a few examples of how Instructure is helping companies become better.

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A few years ago, William Pitt Southeby’s International Realty had an agent challenge. The company had 1,200 independent contractors, averaging 61 years old across 28 states, each of which has its own regulations. Training was completely optional, which meant fewer than 15% of agents completed it. With just one trainer, the company lacked the resources and technology to get all real estate agents up to snuff. It needed an e-learning strategy that would be easy to use, compatible with all mobile devices, and deliver robust reporting and analytics. It chose Bridge. Once implemented, Bridge saved 40–60 hours of annual training time per agent (48K–72K total), led to a 77% course adoption rate (well above goal of 12%), and drove Sotheby’s agent sales growth of 28% in a market that was down 33%.

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Eastern Michigan University (EMU) is a public university with 23,000 students. In 2014, the university knew its decade-old LMS was causing it to fall behind. But it contained 5,000 courses, so migrating the content to a newer technology without messing it up was essential. In 2015, Instructure implemented Canvas, and in the process, Instructure helped EMU migrate content, design online courses, and train teachers and students on how to use the platform.

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Embry-Riddle Aeronautical University specializes in aviation and aerospace and has locations in Florida, Arizona and 100 other places around the world. It was having issues with its LMS, especially during system upgrades, which required a lot of testing and downtime. The University’s CIO said that was like “… locking your classroom doors for your students …”. The university accepted proposals, and let everyone watch the vendor presentations. The vast majority preferred Canvas LMS, and the system was rolled out globally in 2014. In 2017, U.S. News & World Report named Embry-Riddle Worldwide the best online bachelor’s degree in the nation for the second year.

The Business Model

Instructure has a software-as-a-service (SaaS) business model and generates around 85% to 90% of its revenue from subscriptions and support, with the remaining 10% to 15% coming from professional services. In recent quarters, it has provided more professional services than usual. Applications are sold through a direct sales force. Most customers in the higher education market send request for proposals (RFPs), but this is less frequent in the K-12 space, and very unusual in the corporate market. Most contracts are for three years, and with net retention rates over 100%, Instructure has shown it has a very sticky client base. Roughly 70% of billings come in the last two years of three-year contracts, which gives the company a high degree of revenue visibility.

Instructure is a very efficient company. It doesn’t try to sell to clients when there isn’t a good fit. And given its culture of “make it simple,” support costs are relatively low. This all means that Instructure has a lower cost of customer acquisition then many other software companies, and enjoys relatively high customer lifetime value (i.e., the revenue it generates from customers over the life of their contracts). Coupled with high retention rates and potential success in the even higher value enterprise market, Instructure’s simple and efficient business model could prove to be a competitive advantage over time

The Bottom Line

Instructure is transitioning from a supernormal growth rate to a more moderate rapid growth rate. Revenue was up 65% in 2015, 52% in 2016 and should be up around 41% in 2017. Earnings are negative, but are trending in the right direction. With major Bridge-related investments in the rearview mirror (including building a sales force), Instructure’s cash flow should improve (will be close to cash-flow positive in 2017), as should gross margins (currently at 71% and trending toward management’s target of 75%). The company has no debt, and was sitting on $67 million in cash as of the end of September 2017.

Instructure beat expectations in Q3 when it reported 43% revenue growth (to $43 million) and EPS of $-0.27. Most of the above-expected performance was due to a jump in non-recurring professional services revenue (13% of total revenue in the quarter), and implementations that were started early (called “early starts”), both of which Instructure excludes from forward guidance. It’s likely this non-recurring revenue will trail off in Q4 since most new implementations are probably done or are close to being done.

Analysts currently expect revenue growth of 41% in 2017 (to $156.4 million) and 28% in 2018. The latter is conservative, and reflects slowing growth in Canvas, and no early starts revenue and limited professional services revenue, both of which are hard to predict. I think 30% to 35% revenue growth in 2018 is more likely, and there is potential it could top 40% if Bridge takes off (but let’s not get ahead of ourselves!). Instructure will likely report an EPS loss of $-1.20 in 2017, and $-0.80 in 2018 (roughly a 33% improvement). Profitability has significant potential to increase as sales and marketing efficiency (particularly with Bridge) go up.


RISK


Potential Slowdown in Higher Ed Market Penetration: Instructure has benefited from academic customers moving away from legacy, on-premise providers, including Blackboard, and to some degree, Moodle. Those companies are working to improve their products and customer experience. Should they succeed, Instructure could find it more challenging to attract customers that are currently unhappy.

Keep an Eye on D2L: As of midway through 2017, it looks like D2L is a standout performer in terms of new implementations. That said, on the Q2 2017 conference call, Instructure management was asked about the trend. The answer was that D2L wins large, complex deals that require a lot of customization, and Instructure management said these are not the kind of deals that it wants. As CEO Mr. Coates said, “We are simply not willing to turn our company into a software shop for custom development.” Still, we’ll keep an eye on this to see if it becomes a trend, and if so, what that means in terms of competitive market dynamics.

Execution Risk Expanding into Enterprise: The Enterprise LMS opportunity appears to be quite significant and attractive. But there’s no guarantee Bridge will succeed in the market. Selling into the enterprise market requires a different sales approach and sales force than selling into the education market. Plus, Instructure is going up against more established companies. While enterprise win rates appear to be solid so far, the stock’s future performance will require solid execution to address this market opportunity.

Canvas Growth Slowing: On the Q3 conference call, management talked about how the domestic Canvas business is slowing. It should grow in the low double digits in 2017, and could dip into the high single digits in 2018. Management says there is a lot of market to grow into, but the company must prioritize renewing contracts that come up over landing new clients, so there appears to be some constraints in terms of sales, marketing and implementation resources. We should get an update on this on the Q4 call.

Chief Revenue Officer Vacancy: In November, Instructure’s Executive VP of Worldwide Sales left the company for a position with startup Glint. While his departure appears to have come after the big push in the Bridge-related sales force expansion, and there are VPs in place for the various businesses (Bridge, International, Higher Ed. Domestic, etc.) there is no top dog for the sales teams at this point. Instructure has been recruiting for a Chief Revenue Officer, and on the Q3 conference call in late-October, indicated it was down to two candidates and that a hiring announcement should be coming soon. But we haven’t heard anything yet (I expected an announcement in November). Getting a CRO in soon would take some risk out of the stock, especially since 2018 guidance is largely dependent on this person’s input.


COMPETITION


Instructure’s education solutions (Canvas, Arc, etc.) primarily compete with solutions from Blackboard, D2L and Moodle, with some competition coming from solutions from big tech companies, including Google Classroom. Its corporate solution, Bridge, competes with a wide variety of Human Capital Management solutions from vendors big and small, but the main competitors are Cornerstone OnDemand, Saba Software and SumTotal Systems (owned by Skillsoft). On conference calls, the management team has made it clear that Canvas competes mostly with Blackboard, and analysts seem to think Bridge is making inroads competing against Cornerstone OnDemand.


THE STOCK


Trading Volume: Instructure has a market cap of $997 million and trades around 220,000 shares daily. That’s roughly $7.5 million worth of stock trading hands each day. Our group should not move this stock. Heavy volume days are 500,000 shares or more, and that’s happened nine times over the past six months.

Historical Price: INST went public in November 2015 at 16. As with most new issues, shares were volatile for the first few months, but the stock was trading over 25 by October. Then shares fell over 20% after the Q3 2016 conference call when management guided for “only” 35% revenue growth in 2017. Analysts came to the defense of the company (and have been right; revenue growth should easily top 40% this year), and the stock began to recover. It broke out to an all-time high in June 2017, and topped out at 36.6 in late November. For the last 3.5 months, INST has been trading sideways, mostly in a range of 32 to 36.

Valuation and Projected Price Target: Shares of INST trade with a 2018 EV/Sales multiple of 4.6, using the consensus revenue number of $200 million in revenue. That puts the stock’s valuation roughly on par with the broader subscription software group, but well below the average for peers that are growing above 25%, most of which fall in an EV/Sales multiple range of 6 to 8. The stock price should benefit from multiple expansion, and combined with a rapid growth rate (which could be above 30% if a few things fall into place), should justify a price target near 50 a year from now (roughly 50% above where the stock is now). But until we get Q4 results, 2018 guidance and a better idea of how corporate solutions are selling, let’s be a little conservative and go with a 40 price target (roughly 25% upside from here). I’ll reevaluate after the Q4 2017 earnings call.

Buy Range (next two months): Initially, I’d like to see buying in the 32 to 35 trading range. This captures the majority of price action since the stock began consolidating in late-September.

The Next Event: Management should be providing an update on the Chief Revenue Officer (CRO) hiring process any day. And based on last year, should deliver Q4 2017 results in the first 10 days of February.

Instructure (INST) Financials

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Instructure (INST 33)
Salt Lake City, UT
www.instructure.com

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UPDATES ON CURRENT RECOMMENDATIONS


Due to the nature of the stocks recommended, it is to your advantage not to share these recommendations.

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Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

The market has kicked off the New Year by doing exactly what it was doing at the end of 2017—chugging higher and higher!

Outside in the northeast, things aren’t too much different; piles of snow are chugging higher and higher. On the other hand, even my wind-up five-year old doesn’t want to spend more than a few minutes playing in it given that its freezing out there. And, just to make things a little sketchier, ice and rain is probably moving in. Oh well.

The only high-level things I’d like to mention before moving on to our stocks is that, as the chart below shows, small caps are on the verge of breaking out to another high. From what I read, I get the sense that many analysts out there continue to see upside in small caps, partially because of tax reform, but also because of robust GDP growth. I think we have enough momentum to keep buying, so most of my ratings reflect a bullish outlook.

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Updates

AppFolio (APPF) hasn’t moved much lately. But I’m not overly concerned that the long-term potential has faded. The stock is relatively inexpensive on a growth-adjusted valuation basis, and has an efficient business model. Like this month’s stock, Instructure, AppFolio enjoys a high lifetime value per customer. These qualities are valued by fund managers. Keeping at Buy. BUY.

Apptio (APTI) keeps ticking higher as it appears investors got the message from the last conference call. This business seems to be gaining momentum, and it has the potential to develop into a monster story. Keeping at Buy. BUY.

Asure Software (ASUR) went on another buying spree, spending $31 million to buy California-based TelePayroll, Michigan-based Pay Systems of America, and North Carolina-based Savers Administrative Services. All three companies currently sell Evolution, Asure’s HR information system. As we’ve discussed, a big part of the growth strategy here is to roll up these smaller service bureaus, which are relatively easy to integrate given they’re selling the same thing as Asure. Management increased 2018 guidance to reflect the addition of roughly $13 million from the three companies, giving a range of $78 to $81 million in revenue. That implies roughly 45% revenue growth. The stock is digesting the news, and still looks good to me. BUY.

AxoGen (AXGN) is looking terrific. Still a tight trading range. We’re sticking with it until the trend breaks. BUY.

BioTelemetry (BEAT) is still working to get meaningfully above its 200-day line. As I said a couple of weeks ago, there could be some resistance at the 35 level. Given the huge upside potential, I’m keeping at Buy. BUY.

Datawatch (DWCH) has been chopping along with a modest recovery taking shape after the stock fell sharply following earnings in early November. But something could be brewing! After the bell yesterday, the company put out a press release that it has hired an advisor “… after receiving expressions of interest from potential acquirers.” As I’ve stated in the past, I’ve believed the company has been working to get its house in order to sell itself. And part of this process has included an initiative to release subscription-based cloud software solutions. We know that in 2016, the company was the target of an activist investor campaign by a hedge fund, who succeeded in landing a spot on the Board of Directors (that man has since left). The three potential acquirers that come to mind are IBM (IBM), Hortonworks (HDP) and Alteryx (AYX), though given that Datawatch is a relatively small company, there could easily be interested parties that are not public. Or perhaps a private equity group is sniffing around. At any rate, the stock will likely go up as speculation mounts, and I’d like to see a deal come together. That said, this could also be a tactic to get the stock price moving, so don’t start buying shares hand over fist assuming that a quick sale is coming! I’ll update you as we move forward. For now, I suggest just holding on if you’re already in the stock. HOLD.

Everbridge (EVBG) is just cranking higher. I know the Vermont deal was a good thing, but given that it’s such a small state, I honestly don’t know how much that deal will move the needle, and I wouldn’t attribute this rise just to that. I think the message is that Vermont was another positive endorsement for the technology, and increases the likelihood that more statewide deals are coming. With all this crazy weather, I’ve been getting pinged with updates from the Everbridge app I downloaded. I’d love it if Rhode Island and Massachusetts would jump on the bandwagon! We’re up around 90% and with the stock on the verge of breaking out, I’m keeping at Buy. BUY.

LogMeIn (LOGM) fell quickly a few weeks ago after management held an investor day and gave forward guidance that was just a hair shy of analyst expectations. But it’s been coming back over the past two weeks after bouncing off 112, which has become a predicable support zone. Just keep holding. HOLD HALF.

Materialise (MTLS) is still weak, despite strength in the broader European equity markets. The stock dipped below support at 12.5 yesterday, which has likely triggered some technical-based sell orders. We should get support at 11.5, if we get that low. For now, I’m keeping at Buy, but if we see a dip below 11.5, I’ll have to reevaluate. BUY.

Primo Water (PRMW) is unchanged over the past week. The stock’s 50-day line just crossed back above the 200-day line, which is a technically bullish signal. But I just reviewed some potentially bearish notes from former Walmart (WMT) CEO Carter Cast, who said, “There is no question, there is too much square footage in the industry now.” He sees the retail giant growing its e-commerce sales, and says that, unlike other retailers, store closures will be a market of strength for Walmart. The issue is that Walmart is a big customer for Primo, who relies on physical stores to push water sales (nobody is buying five-gallon jugs over the internet). If Walmart starts closing locations, that’s a headwind for Primo, and a much more significant one than the Office Depot and Kmart closures that it’s been dealing with for a few years. While Primo has said it sees grocery stores as a big opportunity, I’d prefer to see them have a stable business with Walmart to build off. The punchline is that I don’t think this is going to wallop Primo Water’s stock price today, but it does give the bear case a little more credibility. Enough for me to go neutral on the stock, which at its current price has essentially performed in-line with our benchmark index since I added it in the beginning of 2016. Moving to Hold. HOLD.

Q2 Holdings (QTWO) is another efficient business, and given the rising popularity of stocks in the financial sector, shares should be bought. We’ve seen money move in this past week, and that’s lifted the stock back above its 200-day line. Keep buying it. BUY.

U.S. Concrete (USCR) is probing another all-time high. No new news, but keeping at Buy given the momentum in both the stock and the growth story. BUY.

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

Next Cabot Small-Cap Confidential issue is scheduled for February 2, 2018
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