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Small-Cap Confidential
Undiscovered stocks that can make you rich
Issues
This month we’re going with a little-known consulting company that’s growing revenue and EPS in the double digits as it helps organizations adapt to the changing times.

It is growing especially quickly in areas like digital transformation, which is challenging for lumbering organizations in the healthcare and education segments where the firm generates the bulk of its revenue.

With a fresh revenue and profit growth strategy and a plan to return more money to shareholders, this little company’s stock looks great.

Enjoy!
With market jitters returning following the Fed’s meeting yesterday, we’re going back to a segment that’s served us well so far this year – MedTech.

Today’s portfolio addition is another highly specialized company that’s doing things far better than the competition and growing by over 30%.

Enjoy!
The market has been trying to climb off its knees this week as we’re finally getting some solid evidence that both inflation and the job market are cooling.

In a seemingly odd twist, in the short term what’s bad for the economy is probably good for the stock market. While that doesn’t mean we’re out of the woods just yet, I’m going to up our risk profile slightly with a potential big winner in the battery industry.

This company is currently qualifying batteries for wearable technologies and expects to move into more consumer markets, as well as the EV market, in the coming years. All the details are inside the October Issue.

Enjoy!
The market has been iffy since Fed Chair Jerome Powell’s “prepare for pain” speech at Jackson Hole last Friday.

With interest rates up and (most) stocks down since I’m going with a high-quality name this month.



This healthcare specialist just posted 44% growth in Q2 and has grown its covered lives by 80% over the last 12 months. It’s profitable, and with a bucket of new contracts in the first half of 2022 the business looks set up for a terrific 2023.



Enjoy!

The market is getting stronger and higher-growth names are leading the charge.

This month we dig into an overlooked company with a global payments platform that’s helping solve digital payment challenges in complex industries.



Growth is expected to be over 30% for a number of years, and the stock is acting well.



Enjoy!


This month we go back to the MedTech well and pull out a small company with a potentially transformative technology that could shake up the organ transplant market.

With recent FDA approvals and a platform that appears to be head and shoulders above the standard of care, this company is enjoying rapid revenue growth now.



Enjoy!


The market continues to be messy, but we’re going to take a partial swing at a profitable software company playing in a big, growth market – cloud services.

This company is like a smaller version of Amazon Web Services and Microsoft Azure. But without all the other parts of those much, much larger companies.



We may be a bit early. But we’ll manage that risk by taking a half position in a company that’s likely to grow above 30% for years and is very profitable.


Enjoy!


The market remains very challenging for high-growth stocks. While I have a list of innovative companies I’m excited to recommend (at some point), for now we’ll continue to diversify our portfolio with more value-oriented names.

This month’s new addition is a little-known supermarket chain I’ve been following for some time. The pitch is very straightforward – rising prices and an insulated business model should help the company post impressive growth in 2022 and 2023. Not to mention we have upside if/as the name spreads among investors that are increasingly looking for just this kind of stock.



Last but not least, the chart looks fantastic.


Inflation is hot and the Fed just began raising rates. It is expected to hike ten more times by the end of next year.

While yield curve inversion and recession risk is out there, many banks are flush with cash. And consumers are in great shape. As rates go steadily higher, bank stocks are poised to significantly grow earnings.



The most aggressive way to play this is with a bank that’s leveraged to short-term rates. That’s the strategy we’ll take today with a pure-play digital currency bank.



Enjoy!


With so much going on in the world the trends are a bit messy. That said, I have noticed an uptick in several of the small-cap MedTech players on my watch list.

These businesses could be poised for a nice recovery in 2022 and 2023 as COVID-19 recedes. And the one that tops my list is posting massive growth as its revolutionary treatment for BPH has just gained full Medicare backing and is rolling out into U.S. hospitals.



With revenue set to grow by multiples in the coming years and the stock trading at an apparent steep discount to peers, we’ll jump in now.



Enjoy!


With the bulls and bears continuing to fight it out in the growth arena, we’re moving into a more cyclical industry with today’s addition.

The company is a leading maker of semiconductor manufacturing equipment. This industry is growing rapidly as the current innovation wave requires smaller, faster and more durable chips.



Making those chips at scale can only be done with specialized measurement and process control equipment. Which is exactly what this company specializes in.



Enjoy!

The market is a bit of a mess, but the selloff has created opportunities to pick up shares in high-growth small- cap names at what seems like extremely attractive prices.





Today’s recommendation is one of those names. It’s a marketplace company that is revolutionizing the outdated industrial manufacturing industry.





While the stock hasn’t been immune to bouts of market volatility it has been far more stable lately than most other high-growth names. It’s up over the last three weeks! And it offers investors exposure to an industry that is seen rebounding in 2022 and 2023.





Enjoy!

Updates
A quick reminder that Cabot will be closed tomorrow and Friday for Thanksgiving. I hope you have a great holiday and enjoy a break from the market.

As far as our portfolio goes there is very little that’s changed since last week.
As far as today goes, the S&P 600 Small Cap Index has come up against a wall at 1,230, which is where support was in January and February.
This week the cryptocurrency market is in absolute turmoil as one of the biggest exchanges, FTX, is insolvent. This is bleeding into equity markets too.
A couple of weeks ago the S&P 600 SmallCap Index was trading at a greater than 25% discount to the S&P 500 on a forward PE basis.
Small caps are still trading at a very steep discount that implies very attractive returns in the coming year. The Wall Street Journal had a so-so piece on this earlier in the week.
We’re entering a period where macro factors are going to fade slightly as investors refocus on company specifics. That’s because earnings season kicks off tomorrow with financials.
The market tried to stage a small rally yesterday. But the combination of a consistently hawkish Fed, rising concerns of a global recession and increased risk of something going sideways in the financial markets (witness the Bank of England launching an emergency government bond buying program) is making it tough for the market to get off its knees. Stocks are selling off again today.
Well, the market got exactly what it expected yesterday when the Fed hiked by 75bps (the odds were over 80% that’s what they’d do). Fed Chair Jerome Powell’s messaging was consistent with what he said back in August in Jackson Hole.
Tuesday’s CPI report served up a 0.02% miss, which sent the market into a tailspin. The Nasdaq fell more than 5%, its worst day since 2020. The S&P 500 Index fell 4.3%. And small caps? The S&P 600 fell 3.9%
The broad market pulled back 7% in the week after Fed Chair Jerome Powell’s Jackson Hole speech and small caps did a little worse, drifting as much as 10% lower as of Tuesday’s close. But the last couple of days have been better, setting up what could be a little relief rally next week.

Of course, the CPI numbers (to be released next Wednesday) will likely dictate broad market movement in the back half of the week (they should show continued moderating inflation).
After bumping up against its 200-day moving average line the S&P 500 has pulled back this week. The S&P 600 Small Cap Index has followed suit.
We had a one year old in 2013 and took a trip to Nevis, an island in the West Indies where my grandfather had retired in the 1980s.
Alerts
Shares of Treace Medical (TMCI) have sold off this morning following the publishing of a short report from Culper Research.
This morning’s “less bad” CPI report (what a difference 0.2% makes!) is just what the market needed to get off its knees.
Treace Medical (TMCI) delivered a Q3 beat after the bell yesterday with revenue of $33.1 million (+53%) beating estimates by $3.03 million and EPS of -$0.22 beating by $0.07.
Procept (PRCT) beat on the top line and missed on the bottom line. Revenue grew 135% to $20.3 million ($3.1 million beat) while EPS of -$0.51 missed by $0.03.
Of the many scenarios I considered for Enovix (ENVX) following Q3 earnings, seeing the stock down 40% was way down the list. Clearly the risks are relatively high with a stock like this – not unlike an early-stage biotech company – but so too are the potential rewards.
We’ve had TransMedics (TMDX) for just two months and the stock has traded up 45% - 50% in that time frame, with very little volatility.
We’ve had TransMedics (TMDX) for just two months and the stock has traded up 45% - 50% in that time frame, with very little volatility.
We’re going to step away from Ingles Market (IMKTA) today and book a modest, single-digit loss on the name. I’ve had IMKTA on a short leash following the stock’s reversal soon after it hit an all-time high on August 23.
CS Disco (LAW) is getting hammered today after the company lowered full-year guidance. The main issue is that the company’s Review solution isn’t selling as well as expected. The idea here is that revenue per customer jumps when they add more modules to the eDiscovery solution. This is a standard software business model.
Today’s CPI reading showed inflation moderating a little (not a huge surprise) and the market has, so far, loved the result. The Nasdaq has been up over 2% in the early going.
DigitalOcean (DOCN) delivered Q2 results yesterday that slightly missed on revenue but beat by a good margin on EPS. Revenue was up 29% to $133.9 million (missed by $600K) while EPS of $0.20 beat by $0.10. Full-year revenue outlook was left unchanged, but profit outlook was raised as management has, and will continue to, rein in spending.
Waking up today to more rumors that Avalara (AVLR) is going to be sold to Vista Equity Partners wasn’t too surprising. Speculation had been swirling for weeks. But when the implied takeover price of 93.5 was announced anybody that follows this company did a double take. Was there an error in the press release? AVLR closed at 95.6 last Friday.