Cabot Early Opportunities Issue: October 19, 2022
In the October Issue of Cabot Early Opportunities, we try to interpret some of the latest commentary from Fed officials and look at the future cadence of expected interest rate hikes.
Then we dive into five stocks that seem poised for gains into the end of the year. On balance, we’re still optimistic the worst is behind us. But it’s not (yet) time to be overly aggressive. We try to balance the risks and possible rewards by managing position sizes and continuing to build up our Watch List.
Stocks in This Issue
|Stock Name||Market Cap||Price||Investment Type||Current Rating|
|DoubleVerify (DV)||$4.73 billion||28.8||Rapid Growth – Digital Advertising||Watch|
|InMode (INMD)||$2.85 billion||34.4||High Growth – Cosmetic Surgery||Watch|
|Option Care Health (OPCH)||$6.20 billion||34.1||Growth – Home Infusion/Care||Buy/Trade|
|Rivian (RIVN)||$29.0 billion||31.6||Rapid Growth – EVs||Buy 1/2|
|Snowflake (SNOW)||$55.4 billion||173||Rapid Growth – Data Software||Buy 1/2|
The Fed Might Be Close
With the market swinging around like a bunch of grade schoolers on a jungle gym, it can be hard to avert your attention from the day-to-day long enough to focus on the big picture.
So let’s step back for a minute.
We’ve been living under the dark clouds of interest rate hikes all year. The storm clouds got even darker after Fed Chair Jerome Powell became even more hawkish in Jackson Hole with his “There Will Be Pain” speech.
That’s when he indicated rates would be higher for longer. That speech effectively killed what is now known as the bear market rally of summer 2022.
While that stormy environment still persists today, there is an argument to be made that the market’s recent bounce may just signal a break in the cloud cover.
Specifically, last Friday, St. Louis Fed President James Bullard said he’s in favor of frontloading interest rate hikes, then hitting the brakes in 2023 (not his words exactly, but same point).
He basically suggested the Fed hike by 75bps at the November 1-2 meeting (current odds of this are 95%) then do another 75bps at the December 13-14 meeting (current odds of this are now 64%, which is higher than a few weeks ago).
This scenario would take us into the holiday season with a Federal Funds rate of 4.5% to 4.75%. And the market odds are currently suggesting only one 25bps hike in 2023 (in February) meaning a federal funds rate peak of 4.75% to 5.0% this cycle.
I’m honestly not sure if that scenario would have investors wearing “Happy Holidays” or “We’re Scrooged” sweaters at New Year’s parties. But my inclination is that it would be the first.
Bottom line? The market just, might, maybe, but who the hell knows, be starting to think the end of rate hikes is in sight.
And that could kick off a bad-to-better investing environment.
What to Do Now
While the most recent action (i.e., last four sessions) in the stock market has been somewhat encouraging, there are countless investors that have felt their hearts skewered by the hot steel of dashed hope accompanying the aftermath (i.e., selling) of a bear market rally.
Therefore, we will curb our enthusiasm until more evidence builds that we’re in a more investor-friendly environment.
Yesterday we elected to cut two positions, partly to take advantage of tax loss harvesting.
Remember, tax loss harvesting means selling a stock showing a loss so that the loss can count against either short- or long-term capital gains in the current year. If the tax loss is greater than $3,000 the excess can be applied in future years.
The catch is you can’t buy the same stock (or ETF) back within 30 days. But you can buy a different stock. In our example, if you sold Fisker (FSR) for a loss you can buy Rivian (RIVN) and get the benefit of the tax loss harvest. Check with your accountant on details specific to you.
Back to our portfolio, continue to manage the number of positions in your portfolio and position sizes too. You should have plenty of cash on the side, ready to be deployed when the evidence builds that things are getting better.
In the meantime, cutting losses short and giving current winners a little rope (but not too much) is sensible. I’ll continue to look at taking partial gains here and there, but at the moment, no change to any current positions with gains.
DoubleVerify (DV) operates a software platform for digital media measurement and analytics across desktop, mobile apps, social media platforms and connected TVs.
Global media buyers and sellers rely on this information to conduct secure and fair transactions, and that helps global advertisers improve the effectiveness and return on digital advertising investments.
The company’s user interface is called DV Pinnacle. It provides customers with real-time metrics showing performance data related to digital transactions.
The most insightful metric is the DV Authentic Ad, DoubleVerify’s proprietary measurement of digital media quality. It measures whether an ad was delivered in a brand-suitable environment and if it was fully viewable by a real person in the intended geography.
DoubleVerify’s solutions are incredibly sticky and have become something of a currency in the marketplace. That’s because they are integrated into media transaction workflows for programmatic platforms, social media channels and digital publishers.
It is very difficult for competitors to boot DoubleVerify out of these networks once its platform is in place. That’s part of why, even in a challenging digital ad-buying economy, DoubleVerify is still posting steady growth and consistent profitability.
In Q2 revenue grew 44% and EPS was $0.06. Revenue should be up around 35% this year while EPS should grow about 175% to $0.52.
When reporting Q2 results, management increased full-year guidance by the amount of the Q2 beat, opting to be somewhat conservative given that digital ad spend typically takes a hit in a weakening economy. On the flip side, certain industries (travel, entertainment, etc.) are still bouncing back.
On balance, DoubleVerify’s blue-chip customer base, market-leading position and volume-based business model give it some resiliency and are enough to pique my interest. Still, I want to see how Q3 results come in before officially recommending DV. We’ll put it on the Watch List for now.
DV came public at 27 last April and was up and down afterward then settled into a trading range between 30 and 40 through the end of the year. The stock retreated in the first four months of 2022, ultimately hitting a low of 17.22 after Q1 earnings on May 10. Since then, it’s mostly been a series of higher highs and higher lows. The chart doesn’t blow me away, but DV has been surprisingly steady in a garbage market for the last few months. A breakout above 30 (stock at 28 – 29 now) would be very bullish, especially if Q3 results and management commentary alleviate some of the future slowdown concerns. WATCH
Everybody could use a little help to look their best. InMode (INMD) provides that help.
The Israeli company provides energy-based aesthetic treatments, primarily in the three areas of: (1) face and body contouring; (2) medical aesthetics; and (3) women’s health. Target areas of the body include the face, neck, abdomen, upper arms, thighs and intimate feminine regions.
Products – a platform consisting of multiple energy sources, one or more handpieces/hands-free applicators, proprietary software and a simple user interface with a touch screen – are sold to plastic and facial surgeons, aesthetic surgeons, dermatologists and OB/GYNs.
Physicians use InMode’s minimally invasive surgical treatment solutions to remodel fatty tissue (subdermal adipose) in a variety of procedures including liposuction with simultaneous skin tightening, face and body contouring, ablative skin rejuvenation treatments and treatment of Genitourinary Syndrome of Menopause (GSM).
Beyond minimally invasive solutions, InMode also sells non-invasive medical aesthetic products for simultaneous fat-killing and skin tightening, permanent hair reduction and other treatments targeting skin appearance and texture.
InMode’s radio frequency (RF) based technologies stand out in the market because they provide surgical-grade results under local anesthetics with much lower risk of scarring, downtime, pain and other complications that are often associated with surgery.
Since 2010 the company has launched ten products (BodyTite, Optimas, Votiva, Contoura, Triton, EmbraceRF, EvolveX, Evoke, Morpheus8 and EmpowerRF), most of which are relatively lightweight and mobile and can be upgraded as physician needs evolve.
Two of these solutions, Embrace RF and EvolveX, were launched in 2021 and represent the next leap forward in InMode’s RF energy-based surgical and medical treatments.
In May management reported Q2 results that included 30% revenue growth ($113.5 million) and adjusted EPS of $0.59 (+16%).
Last Thursday management pre-announced Q3 results (around $120.7 million expected) and boosted its full-year revenue outlook from $425 – $435 million to $445 – $450 million (roughly 25% growth). EPS should also surpass expectations.
Suffice it to say this is positive news for a stock that was on fire in 2021 but has pulled back considerably, along with other growth-oriented names. With the pre-release removing some near-term risk and the fundamentals appearing sound, we’ll put INMD on our Watch List.
INMD came public in 2019 at 7 and had a great launch, then the pandemic hit. INMD fell from almost 30 to 6.50. After that the stock surpassed any reasonable expectations, rising over 1,400% to peak at 99.3 last November. The following selloff was as excruciating as the rally was invigorating. By May 12, 2022, INMD was a 20 stock. Shares enjoyed the mid-summer rally and traded up to 38.7 before retreating back into the mid-20s by September 26. Since then, INMD has been climbing, and results from the pre-announcement suggest the trend could continue. WATCH
Option Care Health (OPCH)
We added Option Care Health (OPCH) to our Watch List in July and the stock has held up beautifully since then. With the fundamentals suggesting upside potential into 2023, an earning’s report due out next Thursday and a history of solid pops after reporting we’ll jump in today. Note that this position could turn into a short-term trade.
The backstory is that Option Care Health is the largest home infusion company in the United States. It has been in business for over four decades, helping administer medicine, nutrients and/or special fluids intravenously (IV), i.e., directly into patients’ bodies.
Over 80% of revenue comes from treatments delivered at a patient’s home. The company also has more than 125 infusion sites and offers portable infusion pumps.
Management believes it plays in a $13 billion market that’s growing in the high single digits. Future growth is supported by a trend of specialty medicines being developed for infusion.
Option offers a range of infusion therapies to treat both acute and complex conditions. It is poised to grab share in the Alzheimer’s market if/when new treatments lecanemab, donanemab and gantenerumab are approved and/or covered by payors.
This may take a few years since, in the early days, infusion would likely start at clinics then move to homes. Bank of America believes Option’s 23% share of the home infusion market implies nearly 30% earnings growth potential from Alzheimer’s.
Stepping back, the home infusion market remains fragmented, and Option is one of the bigger fish out there. That makes it an acquirer of smaller players.
The most recent acquisition was Specialty Pharmacy Nursing Network (SPNN) which added 400 nurses, bringing Option’s total nursing team to over 2,900.
Option could also be a potential acquisition target itself. Its two largest insurance customers, UnitedHealth (UNH) and Aetna (AET), also operate their own home infusion divisions. Either could see Option as a nice addition.
The company will report Q3 earnings next Thursday, October 27. Investors will be looking for details on contributions from acquisitions and impacts/challenges of adding labor.
Revenue in Q3 is seen growing 12% to $996 million while EPS should be up 5% to $0.21. For the full-year 2022 revenue is expected to grow 14% to $3.9 million while EPS should be up 6% to $0.82.
OPCH came public in 1996 and has been through many changes over the years. Shares took a big hit during the pandemic, but since September 2020, when it traded near 10.5, OPCH has mostly made a series of higher highs and higher lows on a weekly chart. The latest sizeable pullback (-26%) occurred in January when shares fell from 28.9 to 21.3 over a three-week period. Since then, OPCH has consistently found support at the upsloping 200-day line. The stock is currently 5% off its July high. BUY
I added Snowflake (SNOW) to our Watch List last month when shares were trading a few points higher than they are now. With about a month and a half before it reports and with a little more risk tolerance creeping back into the market, we’re going to add a half position today.
As I’ve said many times, Snowflake is one of those rare companies that posts insane growth at scale and should be a long-term winner. This is a $50-billion-plus market cap company that grew revenue by over 80% last quarter.
That performance has kept the stock at the top of analyst buy lists, even in a bear market. After the Q2 report, JPMorgan bumped their price target for SNOW up to 210 from 165.
Specifically, the analyst team called out Snowflake’s consistent beat-and-raise cadence, recent revenue growth acceleration, strength in Europe (a rarity these days) and optimism around the new Snowpark solution as all supporting strong share price performance.
Big picture, Snowflake is a hyper-growth company that has brought the benefits of public clouds (scalability, flexibility, etc.) to data management so customers can better understand their data.
The company’s disruptive, cloud-native data warehouse solution is becoming part of nearly every cloud data warehousing discussion, included with offerings from Microsoft (MSFT), Alphabet (GOOG) and Amazon (AMZN).
The technology is cloud agnostic, hugely scalable, very flexible, easy to use, and different from other options in the market. So much so that Snowflake has the potential to create its own market, the Data Cloud.
As this Data Cloud emerges, we will see a network of data providers and consumers all sharing and analyzing data across clouds and across the world. Those not in the network will want in as the value of being “inside” grows exponentially and the drawbacks to being “outside” mount.
Some of Snowflake’s sales partners say it’s not so much about selling Snowflake – because customers know they need it – it’s more about selling the data warehousing environment that surrounds the solution.
A recent example concerns the new Snowpark solution, which allows code development and deployment to happen inside Snowflake’s virtual data warehouse. On the Q2 call in August, management said customers are “trying to tear it out of our hands.”
The bottom line is that Q2 revenue was up 83% to $497 million. For the full year, revenue growth is seen around 68%, then remaining above 50% in 2024. That’s impressive for a company of this size. Snowflake is just turning profitable on an adjusted basis and is seen delivering adjusted EPS of around $0.16 this year, then $0.42 in 2024.
Snowflake is currently in fiscal year 2023, which ends in January. I expect Q3 fiscal 2023 earnings around December 1. We’ll start with half a position.
SNOW came public at 120 in September 2020 and jumped 112% the first day. After chopping around in the 200 to 300 range for a few months, shares shot to 429 in December 2020. SNOW fell back to 185 by mid-May then went on a six-month tear that carried it back to 405 by mid-November 2021. The next drawdown was rough. SNOW finally landed at 110 on June 14. It then made a series of higher highs and higher lows through August but failed to move much past 200 before a wave of selling in early October sent it back to 150. SNOW is currently working higher off that level and trades right on its 50-day line. BUY HALF
Rivian (RIVN) *TOP PICK*
Rivian (RIVN) is a young electric vehicle (EV) company that has the potential to become one of the more successful new entrants in the market.
The company is going after some of the biggest and most profitable markets, namely pickup trucks, SUVs and commercial vans. On the van front, in September management announced a 50-50 JV to produce electric vans at an existing Mercedes factory in Poland, Hungary or Romania.
This is great as it de-risks the company’s European van business and helps it focus on the current launch of consumer vehicles here in the U.S.
Back to the business model, Rivian is looking to monetize customers through sales of vehicles, software and other services. Owning more of the life cycle through software sales, as opposed to just a vehicle sale and some follow-up service, could nearly double revenue for each vehicle sold.
The company is also trying to maintain control over manufacturing, service, dealerships, invoicing, distribution, aftermarket service and more. This is an ambitious plan.
However, if it works, Rivian will have control over many aspects of the customer experience that competitors have outsourced, and that could lead to some competitive advantages. Especially as it looks to sell additional services (insurance, etc.), potentially wrapped up in one subscription/membership.
Right now, the market is hyper-focused on deliveries of Rivian’s first crop of vehicles, the R1T pickup and R1S SUV. These vehicles boast towing capacity up to 11,000 lbs., 0-60 times as quick as three seconds, range up to 400 miles and prices starting at $73,000.
While Q3 results won’t be out until November 9, earlier this month management gave a Q3 production update. Rivian produced 7,363 vehicles in Normal, Illinois, 67% more than it produced in Q2.
Rivian also delivered 6,584 vehicles in Q3, a 47% increase over Q2. This was about 5% higher than analyst expectations.
Management said it’s on track to hit its full-year production target of 25,000 vehicles. That implies around 10,700 vehicles produced in Q4, or 45% more than in Q3.
Following that report, Rivian also issued a recall. That news dented the rally that came after the production update, but big picture, this recall is very minor.
If things go to plan Rivian should be very well positioned to exceed production of 50,000 vehicles in 2023.
The company should also be well-capitalized through most of next year. If market conditions improve, management could capitalize on a stronger share price to complete an equity raise late in 2023.
Turning to revenue, analysts are looking for $1.8 billion this year and $5.9 billion in 2023 (+231%). These numbers will likely be adjusted (possibly significantly) pending Q3 results. Start with a half-sized position.
RIVN came public on November 10 at 78 and jumped 29% that day. Like a lot of IPOs last year, it went crazy, closing as high as 172 just a few days later. From then through mid-May 2022, when lockup expiration passed, it was mostly downhill. May 11 was an all-time low closing of 20.6. RIVN has made some progress to the upside since then, trading as high as 40 in both mid-August and mid-September. Since the September high it has pulled back to around 32. This is one of those stocks that looks pretty awful on a chart given how strong the share price was when it first came public. However, if we look at what RIVN has done over the last four to six months it looks a lot more encouraging. BUY HALF
Previously Recommended Stocks
We’ve made just three changes to our portfolio since the September Issue, opting to limit trading activity while the market tries to build a base upon which to build off of. On September 23 we stepped away from Toast (TOST). Yesterday we opted to sell Fisker (FSR) as well as Caribou Sciences (CRBU).
An updated table of all stocks rated BUY, HOLD and WATCH as well as recent stocks SOLD, is included below.
Please note that stocks rated BUY are suitable for purchasing now. In all cases, and especially recent IPOs, I suggest averaging into every stock to spread out your cost basis.
For stocks rated BUY A HALF, you should average into a position size that’s roughly half the dollar value of your typical position. We may do this when stocks have little trading history (for instance, IPOs), when there is more uncertainty in the market or with a stock than normal, or if a stock has recently jumped higher.
Those rated HOLD are stocks that still look good and are recommended to be kept in a long-term-oriented portfolio. Or they’ve pulled back a little and are under consideration for being dropped.
Stocks rated SOLD didn’t pan out, or the uptrend has run its course for the time being. They should be sold if you own them. SOLD stocks are listed in one monthly Issue, then they fall off the SOLD list.
Please use this list to keep up with my latest thinking, and don’t hesitate to email with any questions.
|Company Name||Ticker||Date Covered||Ref Price||9/21/2022||Current Gain||Notes||Current Rating|
|Airbnb||ABNB||1/20/22 & 8/4/22||139.02||118.26||-15%||Top Pick||Buy|
|Axonics||AXNX||5/18/22||49.09||68.94||40%||Top Pick||Sold 1/4, Hold 3/4|
|Bill.com||BILL||6/17/20||77.73||130.78||68%||Took Partial Gains||Hold 1/4|
|CrowdStrike||CRWD||12/17/19||49.45||156.36||216%||Took Partial Gains||Hold 1/4|
|Option Care Health||OPCH||7/20/22||NEW||34.20||NEW||Buy/Trade|
|Rivian||RIVN||10/19/22||NEW||31.19||NEW||Top Pick||Buy 1/2|
|Shockwave Medical||SWAV||3/16/22||160.86||268.76||67%||Took Partial Gains||Hold 1/2|
|Xponential Fitness||XPOF||9/21/22||19.86||19.23||-3%||Top Pick||Buy|
^ Average of high and low price if published intraday, or closing price if published after 4 PM ET
Recently Sold Positions
|Company Name||Ticker||Date Covered||Reference Price^||Date Sold||Price Sold^||Gain/loss||Notes|
|Shockwave Medical||SWAV||3/16/22||160.86||7/18/22||208.37||30%||Sold 1/2|
|Grocery Outlet||GO||6/15/22||38.32||7/29/22||43.22||13%||Top Pick|
|Aris Water Solutions||ARIS||6/15/22||19.04||8/16/22||17.19||-10%||HOLD 1/2|
|Sprout Social||SPT||2/19/20||20.38||8/16/22||63.03||209%||Sell Final 1/2|
|Samsara||IOT||7/20/22||14.85||9/16/22||12.61||-15%||Bought 1/2, sold 1/2|
|Bill.com||BILL||6/17/20||77.73||9/21/22||142.38||83%||Sold 1/4, Hold 1/4|
|Caribou Biosciences||CRBU||8/17/22||10.29||######||9.31||-10%||Bought 1/2, sold 1/2|
|Fisker||FSR||2/17/21 & 4/20/21||16.16||######||7.04||-56%|
^Average of high and low price if published intraday, or closing price if published after 4 PM ET
The next issue of Cabot Early Opportunities will be published on November 16, 2022.