Beat the Market with Small-Cap Stocks in Chief Analyst ... · Global trend is toward more digital...
Transcript of Beat the Market with Small-Cap Stocks in Chief Analyst ... · Global trend is toward more digital...
Beat the Market with Small-Cap Stocks in 2019
Tyler Laundon
Chief Analyst Cabot Small-Cap Confidential
[email protected] @tyleratcabot
Disclosure Statement
Neither Tyler Laundon, Cabot Wealth Network nor any employees
are compensated by the companies we recommend.
Sources of information are believed to be reliable, but are in no way
guaranteed to be complete or without error.
Recommendations, opinions or suggestions are given with the
understanding that subscribers acting on the information assume all
risks.
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My Area of Specialization
•Pure-play small caps (< $3B market cap)
•Exposure to major growth trends
• Long-term (at least 24 months)
Long-term focus means a few stocks will deliver greatest gains
Cabot Small-Cap Confidential Portfolio
• Not managing money. For self-directed investors
• 10 to 15 high-conviction small-cap positions
• Modest diversification across sectors
• Technology
• Health Care
• Consumer
• Greater diversification across secular growth themes
• Diversification across time (dollar cost averaging)
Goal: 100% upside potential within 2 years
A Look Back: 2018 Small-Cap Review
• Got off to a great start!
• Volatility increased later in Q1 …
• … But S&P 600 stayed above LT moving average line (200-day)
• Hit my year-end target of 1,100 (+17%) in September
What the Heck Happened?
• Fed seemed to signal aggressive rate hike schedule
• Q3 earnings were more mixed than prior quarters
• Tax cut benefit not a factor in 2019
• Geopolitical concerns, trade tensions, tariffs
• Stocks trading near peak valuation (forward P/E)
What the Heck Happened?• Last straw - Resilient stocks (FANG, software, small caps, etc.) rolled over
• Multiple breaks below technical levels (50DMA, 200DMA, etc.)
• Lack of buyers exacerbated decline
• S&P 600 Index fell 28% from all-time high to 794 in December
• Improved in last week but still: -10% in 2018
What About 2019?
• Good start, despite lingering issues
• International: trade, tariffs, Brexit, Eurozone growth
• Domestic: gov't shutdown
• Earnings estimates are coming down
• Positives:
• Low unemployment
• Subdued inflation, flexible Fed (?)
• Stock valuations well off peak
• Near-term recession risks low
What About 2019?
• One the one hand … it's not hard to see one or more of
aforementioned issues becoming a major stumbling block.
Something new?
• On the other hand … economy has proven resilient thus far and
could keep grinding, with help from the Fed
• What to do? Stay flexible!
• Don't get pigeonholed based on preconceived ideas that could prove wrong
• Take news flow with a very large grain of salt
"Best Guess" YE 2019 Target
• S&P 600 Small Cap Index +30% in 2019
• Implies +15% from Tuesday's close (955)
• Puts 2019 high at 1,100 (same as 2018 high)
• Implies current year P/E of 19 (estimated 2019 EPS = 57.00, +11%)
• Implies forward year P/E of 16.7 (estimated 2020 EPS = 66.06, +15.9%)
I reserve the right to change!
Five Reasons To (Still) Be Bullish On Small Caps In 2019
1. Tax Cuts and Jobs Act: Small cap avg. Tax rate to 21% from 32%
2. Small Caps Outperform During Economic Expansions
• Estimated 2019 U.S. GDP: ~ 2.5%, within ideal 2% to 3% range
• Estimated 2020 U.S. GDP: 2%+
3. Small Caps = High U.S. Exposure (80% U.S. revenue vs. 70% S&P 500)
Five Reasons To (Still) Be Bullish On Small Caps In 2019
1. Small Caps Lagged in 2017 and 2018. They're due!
Five Reasons To (Still) Be Bullish On Small Caps In 2019
1. Valuation is attractive: S&P 600 forward P/E = 16.1
• Was 17 to 20 for most of 2016 - 2018
• My 2019 S&P 600 high of 1,100 implies forward P/E of 16.7
Applications
• Solutions that help:• Complete &
automate tasks
• Optimize processes
• Collect, analyze and act on data
• $240 billion market
• Growing at ~6%
Small Cap = SaaS and/or PaaS
•A software delivery method that provides licensed multi-tenant access to software and its functions remotely as a web-based service
•Salesforce.com, Adobe, ServiceNow, Workday
Software as a Service (SaaS)
•Provides all the facilities needed to support everything required to build and deliver web apps and services entirely from the internet
•Salesforce.com, Microsoft (Azure), Google (App Engine), Facebook
Platform as a Service (PaaS)
•Delivery of technology infrastructure as an on-demand scalable service. Backbone/pipes of the system. $160 billion market, growing ~2%
•Amazon (AWS), Rackspace, VMware
Infrastructure as a Service
(IaaS)
Cloud Software – Big Picture: Why Invest?
Global trend is toward more digital economies
Cloud, security, etc. are strategic priorities
Gain exposure to secular growth trends/specific markets
Little exposure to trade; Avg. SaaS <25% rev. ex. US
~5.2% growth in software spending in 2019
Cloud Software – Stock Characteristics: Why Invest?
Fundamentals for the group improving with age
Increasingly proven, durable business models
Broadening, increasingly dependent user base
Defensive: Sticky/high recurring revenue = valuation support
Larger base of profitable SMID options
That said, smaller base of <$1 billion market cap options
Cloud Software: Why Invest NOW?
• Potential for expansion in Asia if trade deal with IP protection (LT)
• Pullback means SaaS trading multiples ~ in line with hist. avg. (EV/S)
• Strategic (M&A) value. Deals: 2016=71; 2017=84; 2018=120;
• SaaS stocks trading < 6 yr. avg. acquisition multiple (8x EV/TTM
sales) but with high strategic value
• Big capital gains potential (20%+ 12-month returns)
What To Look For?
Software and Platform SaaS Stocks With:
Exposure to secular growth trend(s)
Durable business models
High revenue and profit growth (or trending toward
profits)
Reasonable valuation relative to peers,
growth, etc.
Some insulation from cyclical trends, interest
rates, trade
Nothing's perfect. Try to come close
Q2 Holdings (QTWO): $2.8 billion
• Cloud-based virtual banking software for SMID banks, credit unions
• Pros: Moving upmarket, good environment for bank investment
• Cons: Financial institution consolidation
• Estimated 2018 (2/13/19): Revenue +24%: EPS $0.14 (+367%)
• Estimated 2019: Revenue +29%: EPS $0.13 (-7%)
SharpSpring (SHSP): $125 million
• Cloud-based marketing automation for small & mid-sized companies
• Email delivery, lead gen., sales conversion, blog builder, social media, CRM
• Competitors: HubSpot, Marketo/Adobe, Pardot/Salesforce
• Estimated 2018 (March): Revenue +49%: EPS -$1.11 (-147%)
• Estimated 2019: Revenue +0%: EPS -$0.75 (32%)
Upland Software (UPLD): $711 million
• Cloud-based enterprise work management (EWM) software
• Plan, manage and execute/collaborate on IT, workflow and digital projects
• Acquisition led growth strategy
• Estimated 2018 (March): Revenue +53%: EPS $1.60 (17%)
• Estimated 2019: Revenue +27%: EPS $1.98 (24%)
Blackline (BL): $2.7 billion
• Cloud-based finance and accounting software
• Financial close, account reconciliation, controls assurance, SEC filings
• Pulls data from banks, ERPs transactinoal systems, etc.
• Estimated 2018 (March): Revenue +31%: EPS $0.09 (800%)
• Estimated 2019: Revenue +22%: EPS $0.15 (67%)
Class of 2018 IPOs
• Zuora (ZUO) $2.2 billion• Helps companies transition to subscription business
• Eventbrite (EB) $2.4 billion
• Platform to plan, promote and launch live events
• Survey Monkey (SVMK) $1.7 billion• Survey software solutions
• Avalara (AVLR) $2.9 billion
• Sales tax automation software
• Tenable (TENB) $2.7 billion• Cybersecurity solutions
Medical Technology (MedTech)
• Any technology used in a care setting and/or devices with which a
patient can be diagnosed or treated
• Companies making products for the medical and life sciences industry
• Devices
• Implants
• Drug delivery systems
• Diagnostics
• Disposables
• Drug manufacturing equipment
• Data processing software
• Biomaterials• Connected health IT
• Life sciences software
MedTech: Why Invest?
• Relatively defensive
• Innovation/product development is more incremental than disruptive
• Gradual value creation and stock price appreciation (especially vs. Biotech)
• Product development timeline shorter than biotech
• Flip side is more drawn-out revenue growth profile
• That’s good! Long-term, durable growth is what we want
• Attractive M&A potential
MedTech: Secular Trends
• Consumerism:• You and I are becoming more a part of the decision making and care
process for ourselves and our loved ones
• We also have more control over how and where our HC dollars are spent
• Personalized healthcare/medicine:• Gene research
• Data analytics
• Customized prevention, diagnosis, treatment and drug dosing
• HC based on INDIVIDUAL biochemical makeup
Invest in the building blocks of a better healthcare system
Biotelemetry (BEAT): $2.5 billion
• Devices, monitoring services & lab services for clinical research
• Body worn remote cardiac monitoring & remote blood glucose monitors
• Platform behind the Apple Heart Study
• Estimated 2018: (Feb. 21): Revenue +39%; EPS +87% ($1.81)
• Estimated 2019: Revenue +10%; EPS +0% ($1.81)
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Tactile Medical (TCMD): $1.3 billion
• Pneumatic pump devices to manage lymphedema at home
• Lymphedema : @5 million people in U.S.; +20% a year
• Chronic swelling from lymph fluid (surgery, infection, trauma)
• Estimated 2018 (Feb. 28): Revenue +28%; EPS $0.35 (-5%)
• Estimated 2019: Revenue +21%: EPS $0.41 (17% )
• Enterprise Work Management software
• Helps clients optimize allocation/utilization of people
• Project & IT management, workflow automation, digital engagement
• Acquisition-led growth strategy
• Revenue 2017: $98 million (+31%)
• Estimated 2018: Revenue +44%; EPS $1.52 (+11%)
Inogen (INGN): $2.97 billion
• Compact & lightweight portable oxygen concentrators
• Oxygen therapy market: 2.5 million U.S; 4.5 million worldwide
• 2 recent short attacks (Muddy Waters and Citron) had little impact
• Estimated 2018 (Feb. 26): Revenue +40%; EPS $2.11 (61%)
• Estimated 2019: Revenue +26%; EPS $2.17 (3%)
Other MedTech Ideas
• Inspire Medical Systems (INSP) $1.4 billion• Neurostimulation solution to treat sleep apnea
• Glaukos (GKOS) $2.5 billion
• Injectable stents for glaucooma
• Nevro (NVRO) $1.5 billion• Spinal cord stiulation system for chronic leg & back pain
• Intersect (XENT) $964 million
• Drug delivery system for ear, nose/throat physicians
Tyler Laundon
Chief Analyst
Cabot Small-Cap Confidential
CabotWealth.com/small-cap-webinar