Caesarstone (CSTE)

Caesarstone (CSTE) has worked well for us. The stock broke out to new all-time highs following blowout Q4 results in mid-February; growth in the US accelerated once again. Recent reports indicate the co’s US production facility will not come on line until 1H15. While this is a bit disappointing, the market’s current concerns over the US housing market appear overblown. This small cap growth stock should continue to work and the positive thesis appears to remain intact. More cautious investors may want to take some profits near the $60 level where the stock appears to face some resistance, while more aggressive investors may look to add if the stock retests the $50 area.

On March 26, an update on SPNS was published as the stock pushed to new 10-year highs. Here is the text of that comment:

"Just wanted to quickly mention that Sapiens Intl (SPNS), a Israel-based provider of software to insurance carriers, made a new 10-year high earlier today. SPNS has been a nice little mover since we added it to our Swing Portfolio on January 30 at $6.91 (+23%). There does not appear to be any specific catalyst for today's move but what's nice about SPNS is that the stock never seems to make a big move higher or lower in a single day. Rather it seems to slowly inch higher which we think is actually a good thing in this market. 

We have covered the stock quite a bit. Be sure to read our Jan 30 initiation report (click here), our Feb 26 post-earnings analysis (click here) and our March 4 analysis of an important contract win (click here). There are a number of reasons why we like SPNS. A majority of insurance carriers are still using outdated IT systems and insurers are increasingly relying on external IT vendors like Sapiens. SPNS is a play on both trends and this industry transition is still in the early stages. Management often compares its industry to what the ERP market was like 10-15 years ago. Sapiens is confident it can be a big player in this market as it develops over the next few years. 

Sapiens is not a barn burner for growth, but it's nice and steady. It boasts mid-to-high teens revenue growth and operating margins in the low double digits. We like that the stock has a market cap of just $365 million and with 2014 sales projected in the $154-158 million range, that computes to a price/sales of just 2.3x vs. roughly 10x for rival Guidewire (GWRE). GWRE deserves to trade at a premium, it just seems too big a gap. Finally, Sapiens has about $70 million in cash, or $1.35/sh, with no long term debt which should help to protect its downside."

NOTE: In accordance with Briefing.com's trading policy, we disclose that the author of this comment holds a position in SPNS, which he acquired a few days after we published the January 30 report.

Ambarella (AMBA)

With the stock down about 16% from our original investment, this is obviously not the start we were looking for. It has been a frustrating ride so far, and as expected, the stock has been quite volatile. As we have stated on prior occasions, this stock is not for the feint of heart, and following every intra-day movement in it can be stress-inducing.

Although it has been a bumpy start for AMBA, I remain quite bullish on it. On March 6, the company reported its Q4 results, and once again, the company knocked it out of the park. AMBA has never missed analysts' quarterly estimates, and that streak continued as it beat EPS consensus by $0.07 and revenue by 5%. Demand was strong across all segments, but especially so in its IP Security and Wearable Sports Camera markets. Gross margin came in materially higher than expected, at 64.1%, up from 61.8% a year ago. This was driven by sales of higher end/higher margin IP Security Cameras, particularly from China-based customers.

After a knee-jerk reaction higher, the stock began to sell off once it provided guidance during its conference call. While it issued inline net income and revenue guidance for Q1, it commented that it expected gross margin to tick down a bit to 61-63%. The cause for the dip is that AMBA is expecting product mix to be less favorable in Q1 as sales of lower end security cameras have been experiencing strong demand. Further, the company is expecting wearable sports cameras revenues to decline y/y as it laps a very strong 1Q13, which saw 3 new product introductions from GoPro that quarter.

That was enough to precipitate an excuse for investors to sell the stock, which had been rallying into the Q4 print. Given its volatile nature, shorts piled on and added fuel to fire, pushing shares lower, taking it below its 100-day MA on March 26. The stock has since found support at the $26 level, and has shown signs of stabilization there over the past few days. 

Fundamentally, there are still a few very solid reasons to like this stock. First, its worth pointing out that its gross margin guidance is well within its recent historical range. Perhaps investors became accustomed to the 64% performance over the past couple quarters, but its target model is for 61-63%. So, that guidance really shouldn't have been all that alarming. It's also worth pointing out that AMBA has a history of issuing conservative guidance, and then easily surpassing it.

At any rate, the company has at least three potentially lucrative, identifiable catalysts ahead. Its IP Security Camera segment has been its strongest area, mostly driven by larger orders from commercial customers in China and other Asian markets. But, it is now breaking into the residential market security camera market with its recent partnership with DropCam. During its Q4 conference call, it also discussed how cable network companies are now beginning to introduce new cameras and video security services. This could translate into a significant opportunity for AMBA.

AMBA is also currently working with Google (GOOG) to bring GOOG's "Helpouts" applications to wearable cameras. At this point, it is unclear what the magnitude of this opportunity will be in dollars, but, AMBA is expecting revenue from this venture next year. Lastly, there is the GoPro IPO coming later this year. Go Pro, as many already know, is one of AMBA's largest customers. An infusion of cash should help GoPro expand its product line and expand into new geographies, which could generate higher demand for AMBA's SoC's.

In terms of analyst estimates, the Street is forecasting EPS of $1.13 and revenue of $183.21 million this year, followed by $1.43 and $221.94 next year. That equates to annual EPS and revenue growth expectations of 27% and 21%, respectively.  Furthermore, the recent slide lower has made the stock more attractive on a valuation basis. At the moment, it is trading with a 1-Year forward EV/Sales of about 2.7x. That is not expensive for a high growth, higher-margin company like AMBA.

In terms of trading strategy, my stop loss remains just below the $23 level. With a full position on already, I won't be adding to the position here. But, with that said, I do feel that the stock looks attractive here. The stock appears to have found support at the $26 area, its RSI has flattened out after tumbling lower earlier in March, and, as noted above, the valuation looks compelling.

Note: We consider a full position to be a $10,000 investment and a half position to be $5,000. To derive our cumulative performance of the Swing Portfolio, we compare the current value of the portfolio, which includes outstanding unrealized gains and losses, plus or minus any realized gains or losses generated by trades, versus the original investment amount. The period is from the close of 10/24/13 (date of our first purchase) to the close of 3/31/14.

Company/Ticker	Date(s) Acquired	Position Size/Shares Acquired	Purchase Price	Original Investment Value	Current/Ending Investment Value*	Current Unrealized Gain/(Loss)*	Stop Loss Limit	Date(s) Sold	Cumulative Realized Gain/(Loss) on Sales	Cumulative Percentage Gain/Loss
Caesarstone	10/24/13	Half/126	$39.53	$4,980.78	$6,851.88	$1,871.10	--	--	--	+38%
Sapiens/SPNS	1/30/14	Full/1,447	$6.91	$9,998.77	$11,735.17	$1,736.40	$6.50	--	--	+17%
Ambarella/AMBA	2/26/14 & 3/7/14	Full/313	$31.88	$9,978.44	$8,360.23	($1,618.21)	$22.95	--	--	-16%
EPAM Systems/EPAM	11/21/13	Full/280	$35.77	$10,015.60	$11,502.10	--	--	2/19/14 & 3/3/14	$1,486.50	+15%

Index/Portfolio	Cumulative Return
S&P 500	+6.8%
DJIA	+6.1%
Nasdaq	+6.9%
Briefing Swing Portfolio	+10.0%

The goal of the Swing Portfolio is to provide a compilation of our top investment and trade ideas, seeking to provide a return that consistently outperforms the major indices. As potential investment candidates arise, the Swing Portfolio team meets to discuss and analyze investments up for consideration in order to determine whether the pick is appropriate for the portfolio. If the team arrives at a positive consensus, the team will then publish an in-depth report on the investment and add the position to the Swing Portfolio. Once a position has been added, the team will then provide continuing coverage, analysis, and position updates on investments within the portfolio.