Published on June 25th, 2019 by Tyler Laundon
This is a guest contribution by Tyler Laundon, Chief Analyst for Cabot Small-Cap Confidential.
There are a lot of weird acronyms, abbreviations and catch phrases in the investing world. Use of that kind of investment jargon persists because analysts, media personalities and market commentators try to communicate what they see going on with the most interesting stocks in an engaging and descriptive way.
Shortening a sentence or two can make your message easier to digest, especially when there is a common thread among a group of stocks that can be quickly explained by a clever acronym, abbreviation or mashup of words.
Still, if you use too much lingo you just sound like an idiot.
Despite my best efforts to avoid sounding stupid, it occasionally happens. But there are some phrases and abbreviations I just can’t stop using because they’re too descriptive and convenient.
I wanted to draw a connection between them, and the best-performing small-cap stocks they can be used to describe.
This is what I came up with.
Investment Jargon Phrase #1: SMid-Cap
SMid-Cap is short for Small & Mid-Cap Stocks. The asset class has been attracting more investors because it offers big capital gains potential from small-cap stocks and the added stability and lower volatility, plus significant upside, of more mature mid-cap stocks.
Mutual fund companies are also increasing their SMid-cap product offerings to meet demand and adapt to market conditions. They’ve done so for a couple of reasons. First, with a long-running bull market there is a limited supply of attractive small-cap stocks for fund managers to purchase. A fund can only invest so much money in a $1 billion market cap company, for instance, before it will move the share price.
And second, money managers that have done well with their small-cap funds continue to attract capital, but their small-cap funds are maxing out. By starting a SMid-cap fund they can continue to attract money, which is good for their business, while diversifying into larger companies, which gives investors exposure to the increasingly attractive SMid-cap asset class.
A good example is the Conestoga SMid Cap Fund (CCSMX), which also happens to be one of the best-performing SMid-Cap funds of 2019 (up roughly 28% through the first five-plus months of the year). Conestoga added this offering a few years back when the Conestoga Small Cap Fund (CCASX) became just too big. However, the SMid-Cap fund holds roughly 30 of the same stocks as Conestoga’s small-cap fund. With only 40 to 60 stocks in the SMid-cap option, that’s a lot of overlap.
Investment Jargon Phrase #2: MedTech
MedTech is short for Medical Technology. It refers to any technology used in a care setting, and/or devices with which a patient can be diagnosed or treated. This includes devices, implants, diagnostics, disposables, drug delivery systems, drug manufacturing equipment, biomaterials, data processing software, connected health IT, and so on.
MedTech stocks have long been a favorite among small-cap growth investors due to the attractive qualities of gradual, long-term growth in a relatively defensive industry. Throw in M&A potential and it’s not hard to see why this group of stocks tends to outperform the broad market.
One of the best-performing small-cap MedTech stocks of 2019 is Omnicell (OMCL), which is up around 49% year to date. The company specializes in automated delivery of medications and surgical supplies. That plays into the big picture trend of pharmacies becoming more strategically important within the healthcare system. Pharmacy is the fastest-growing area of spend, and Omnicell can help control costs while improving care by automating medication management. The company has a market cap of $3.7 billion.
Investment Jargon Phrase #3: SaaS
SaaS is short for Software-as-a-Service. It is also commonly referred to as cloud-based software. SaaS is a business model in which centrally hosted software is accessed through a web browser and delivered on a subscription basis. It is different from the on-premise delivery model in which software is installed on a client’s servers and paid for with an upfront fee, plus annual maintenance and service fees.
With a SaaS delivery model, the applications are stored in the cloud, updates are rolled out across the entire user base simultaneously, and new applications can be more easily developed, purchased, and deployed.
One of the best-performing small-cap SaaS stocks of 2019 is Rapid7 (RPD), which is up 87% year to date. Rapid7 is an IT security solutions provider that’s helping businesses solve complex security and IT operations challenges. Customers use its SaaS solutions to better understand, prioritize and address the threats facing their physical, virtual and cloud assets. Rapid7 has a market cap of $2.8 billion.
Investment Jargon Phrase #4: CPaaS
CPaaS is short for Communications-Platform-as-a-Service. It refers to a subset of SaaS stocks that are focused on communications technologies, like voice, video, and text messages. A CPaaS specialist develops a cloud-based platform that gives developers all the necessary tools they need to build real-time communications applications. Because the CPaaS company provides the infrastructure, developers can just focus on the functionality they want their applications to deliver. This saves time, resources and money, and can lead to better and more reliable products.
Twilio (TWLO) is a category leader and is one of the best-performing SMid-cap CPaaS stocks of 2019, rising 68% year to date. J.P. Morgan has called Twilio the Amazon of communications software vendors because of the breadth of their solutions.
Twilio’s solutions give enterprises multiple ways to build, scale and operate real-time communications, including voice, video and text message, and to embed these capabilities directly into web and mobile applications. These solutions are elegant and modern, and represent a significant upgrade from the old, patchwork solutions that many current customers became frustrated with. Twilio has a market cap of $19.3 billion.
Investment Jargon Phrase #5: Pure-Play Stock
Pure-play stocks offer investors exposure to one investing theme, market or sector. They are the total opposite of diversified companies. By investing in pure plays investors are placing a bet on that company succeeding in a very specific target market. If it does the stock is likely to outperform the market. Omnicell, Rapid7 and Twilio are pure-play stocks for their respective target markets.
Instead of seeking diversification through one company, investors can gain diversity through a well-balanced portfolio of pure-play stocks. Cabot Small-Cap Confidential is one such portfolio.
As the Chief Analyst of Cabot Small-Cap Confidential, my number one priority is to find the best small-cap pure-play stocks in the market. This means I look at a lot of SaaS, MedTech and SMid-Cap stocks. And I cull the herd to put the best of the best in our portfolio.
My investing system has been dominating the market, delivering subscribers an average gain of 105% across our current portfolio. That’s 76% better than the Russell 2000 Small Cap Index over the exact same timeframe.