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By: Bill Spencer — August 3, 2019

Small-Cap Saturday - This Software Stock Looks Ready to Break Out

Hello Gang...

How's everybody doing?


I'm "Big Bill" Spencer, and welcome to "Small-Cap Saturday".

Let's get right to it...

The insurance market might not be "sexy" but it is massive.

Last year alone insurers wrote more than $5 trillion worth of premiums.

Today you're going to discover a $16 company whose digital solutions are disrupting that huge market as the company pursues a shrewd Mergers and Acquisitions (M&A) strategy.

As you’re about to see, this firm has been knocking the cover off the ball in terms of revenue and earnings growth. 

That’s one reason the stock is up 78% in 14 months, now trades at an all-time high, with plenty of upside ahead.

Institutions have noticed.  

Over the past three quarters the number funds accumulating shares has increased 52% -- from 58 to 88.

And inflows are 118% higher than outflows.

On top of that, it also pays a respectable dividend yielding 2.5%.

Today's "Small-Cap Standout"

Sapiens International Corp. (NasdaqCM: SPNS) is an $803 million software firm providing digital solutions exclusively to the insurance industry.

It brands itself as a "one stop shop" servicing 450 insurance companies across 25 countries.

(Click any image to enlarge)


Sapiens' addressable market is the $40 billion that 11,000 insurance companies spend on software every year -- a market that's growing 7% to 8% annually.

The company has acquired 11 key companies in the past eight years pursuing an aggressive M&A growth strategy.

Each acquisition has allowed Sapiens to accomplish one of three things: expand into a new country or territory... gain customers... or gain control of a new software product.

To see this strategy in action, consider what happened when Sapiens acquired Ibexi, an India-based provider of "Insurtech" (insurance technology) in March of 2015.

In one swoop Sapiens gained 18 major insurance customers while more than doubling its revenue.  More importantly, it gained a foothold into an exploding market. (The Indian life insurance industry will go from $247 billion to $463 billion over the next three to five years.)

In the 7 months following the acquisition, the stock gained 87%. "We had 150 people in India in 2015 and now we have 1,004," CEO Roni Al-Dor told Forbes recently.

Screen Shot 2019-08-02 at 5.31.51 AM

Now the company is taking aim at the $220 billion German insurance industry. 

"We will acquire to get back into Germany,” says Al-Dor. “We will partner with systems integrators like Cap Gemini and Ernst & Young to serve smaller insurance companies; and we'll [partner with] carefully selected insurance startups."

Running the Numbers

On May 6th, Sapiens reported first-quarter results.  Revenue came in at $76.8 million, up 8% from the same quarter a year ago.  Profits grew 10.3% -- from $27 million to $29.8 million.  Gross margins ticked up 70 basis points (.7%).

Earnings per share are up a whopping 66.7%.


Strength in Two Sectors

Officially, SPNS is a member of the Software sector.  But the company could also benefit from strength in the Insurance sector. (Similar to how Amazon benefits from strength in both the Retailing and Internet sectors.)

Both the Software and insurance sectors look strong right now.

Their respective Bullish Percent Indexes (BPI) charts are showing long-term demand (most recently making higher highs, which means a larger and larger number of stocks in the sectors are participating in each wave higher).



The Insurance sector is on bull confirmed status -- the strongest of the seven designations.  The Software sector is in bull correction, meaning it's showing short-term supply but the long-term picture is demand, as I just described.

And of course, we'd love to buy on a pullback.

And that's exactly what this stock has done.

SPNS Passes the "True Market" Test

The stock is in a long-term uptrend and recently made new highs.

And I see plenty of upside ahead.  To see why, look at the green and yellow highlighted portion at the right of this chart...

SPNS_1Year_Flag_Taller Pole

Technicians call this formation a "bullish flag".  You see it in charts with strong uptrends.  The green vertical highlight is the "pole"; the yellow part shows the "flag".

After spiking about 20% on massive volume, the stock began consolidating sideways.  The bulls refused to let the stock fall too much, pushing it back above the 50-day (10-week) moving average.

In your classic flag formation, a breakout following consolidation can spark an up move equal to the size of the pole.  In this case about 20%.

Another Sign of Strength

That top- and bottom-line growth you just saw has caught the attention of analysts.  They're expecting Sapiens' Q2 EPS to clock in at $0.17 -- up 30.8% year-over-year when the company reports on Monday.


But as you can see, this company has made a habit of beating expectations -- another sign this is a quality stock.

Now I don't know what's going to happen, obviously.  Sapiens could surprise or disappoint or just meet earnings expectations.  The stock could go higher or even pull back, something we wouldn't mind seeing.

But I think SPNS can trade into the 20s, so anywhere under $17 and I'm a buyer.

I like the idea of owning a dividend-payer with a proven record of high growth and high returns over the long term.

Enjoy Your Weekend and Keep It Small,

Big Bill


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