Cabot Early Opportunities Issue: April 19, 2023

Stocks in This Issue

It’s Earning Season!

With earnings season upon us, I’m dedicating this month’s intro to laying out expectations for those stocks in our portfolio set to report in the next two weeks.

The only caveat to my “priority list” here is that some companies haven’t announced their official reporting date yet. And if they haven’t, then the “expected” report date from FactSet (which might end up being wrong) is what I’m going with.

With that said, let’s jump in.

Microsoft (MSFT) is expected to report on April 25, which is next Tuesday. Nobody in the world wants to read about everything expected from MSFT. But suffice it to say investors will be listening keenly to trends in Bing (search engine) and Edge (web browser) usage given the company’s effort to integrate ChatGPT technology. Beyond that, Azure growth will also be in focus. Consensus estimates suggest quarterly revenue should be up 4% to $51.1 billion and EPS should be up 1% to $2.24. Bigger picture, fiscal 2023 revenue is expected to be up just 5% (last year was 18%) while EPS is seen up just 1%. Next year looks better as analysts see revenue up 11% and EPS up 16%. BUY

TechnipFMC (FTI) has confirmed Q1 earnings will come out next Thursday, April 27. We’re looking for revenue to be up at least 7% to $1.67 billion and EPS of around $0.02. Full-year guidance should be for revenue growth of around 11% ($7.46 billion) and EPS of $0.49 (up from a loss of -$0.03 last year). FTI is an offshore oilfield services specialist, and that market seems to be resilient even while onshore U.S. remains weak. Recent OPEC+ production cut haven’t helped oilfield services stocks. The practical challenge here is, if onshore does prove weak and oil stocks, in general, suffer through earnings season as a result, can FTI buck the trend? I want to say “yes,”. However, I am wary whenever there isn’t an industry-wide positive trend with oil stocks. Therefore, to reduce our risk I’m going to sell FTI for a modest but still positive gain in the low single-digits today. SELL

NerdWallet (NRDS) has confirmed its Q1 earnings release will be a week from next Tuesday, on May 2. Analysts expect revenue will be up 29% to $166.5 million while EPS loss will improve by almost 70%, to -$0.05. Full-year 2023 revenue expectation is $670 million (+24%) while EPS is $0.06, an improvement from a -$0.14 loss last year. This has been a volatile stock lately, which suggests to me that investors just aren’t sure what the underlying growth profile really looks like. Recall that after the Q4 report shares surged higher on the back of really nice growth in certain verticals, including banking, credit cards and small business (up 90% to 280% each). NerdWallet has also refreshed its auto insurance vertical, which if you’re anything like me you’re considering digging into other options (our auto and homeowners insurance premiums have gone up an absurd amount over the last year). We’ve locked in partial profits of 66% to 71% on two quarter-position sales and are holding the rest. HOLD HALF

Pulmonx (LUNG) has confirmed that May 2 is the Q1 report date. We have a half-sized position in this company that specializes in minimally invasive devices to treat chronic obstructive pulmonary diseases. For obvious reasons the pandemic was rough on LUNG, but it’s set to accelerate business in the coming years. First-quarter revenue is seen up 25% to $13.5 million while EPS should be around -$0.44. Full-year revenue should be up 12% to $60 million and EPS is seen around -$1.76. Next year, 2024, is when revenue is really seen kicking up and growing by 33%. BUY HALF

Airbnb (ABNB) hasn’t confirmed its reporting date but May 3 is the current expected day. Revenue in the quarter is seen up 19% to $1.79 billion while EPS is seen around $0.17 (up from -$0.03 in the year ago quarter). Full-year revenue is seen up 14% to $9.6 billion while EPS is seen up 28% to $3.56. It’s fully baked in that growth for Airbnb will be slower over the coming years than during the pandemic (revenue up 77% in 2021 and 40% in 2022), but profitability is taking off. The question is exactly where does revenue growth land. Like other companies Airbnb is re-focusing on its core hospitality offering and pulling back on other projects, such as its Experiences business. BUY

The Timken Company (TKR) has confirmed Wednesday, May 3 for the next earnings date. Analysts expect revenue to grow by 9% to $1.23 billion and EPS to grow 17% to $1.88. Full-year revenue should be up around 7% and EPS up 15% to $6.95. The forward yield is around 1.6%. The industrial company, which specializes in bearings and other precision components, has exposure to high growth renewables markets, is doing a better job at cross selling and has been growing profit margins. Key to the stock’s performance will be an update on pricing. BUY

SiTime (SITM) has confirmed May 3 is the Q1 earnings date. The expectation is that SiTime’s business is bottoming and growth will resume in 2024. Analysts expect Q1 revenue will be down 46% to $38 million and EPS will be $0.00. For 2023, we see revenue down 29% to $200 million and EPS of $1.37. We’re expecting revenue to grow by 35% in 2024 and EPS to more than double. BUY HALF

What to Do Now

The market has acted better than expected over the last month as the banking crisis seems to be fading. I’d like to lean into it with a bunch of new positions. However, earnings season is highly unpredictable. And with the FOMC up again in a few weeks (hopefully with the last hike of this cycle) we have a potentially volatile mix of macro and company-specific events to drive stocks in the coming weeks. Given all the factors we’ll continue to dip our toes into a few new positions rather than strip down and jump right in.

STOCKS

e.l.f. Beauty (ELF)

e.l.f. Beauty (ELF) makes and sells value-oriented, high-quality cosmetics and skin care products. Products are vegan and paraben- and cruelty-free.

The company has four brands: e.l.f. Cosmetics, e.l.f. SKIN, W3LL People and Keys Soulcare. While it’s not the biggest cosmetics company out there it’s also no slouch, having around 9% market share in the U.S.

ELF leads in some categories, including primers, brushers, concealers, brows and sponges, which collectively make up over half of total sales. Roughly 13% of sales come from outside of the U.S.

The company is going after a huge market that primarily targets Gen Z and young millennials, though it does capture sales from all age groups and income brackets.

It’s mainly selling through the major retailers, including Target (TGT), Walmart (WMT), Ulta Beauty (ULTA) and Shoppers Drug Mart (in Canada). The company also does a small portion of sales direct-to-consumer (DTC).

Analysts believe ELF has around 13% market share at Target. That’s significantly higher than its 9% U.S. market share. And it’s one of the reasons analysts are so bullish on the stock.

It’s not a big leap to think that the same forces that have helped ELF gain outsize market share at Target can’t materialize at Walmart and Ulta. Especially given management’s recent comments about new distribution gains, innovative new products launching this spring, market share gains in skincare, mascara and lip color, and leading digital engagement with its target market.

Growth has been terrific. In fiscal 2022 (ended last March) revenue was up 23% to $392 million, and EPS was up 18% to $0.84. In the most recent quarter, revenue grew 49% to $146.5 million. EPS grew by 100% to $0.48. Both results beat expectations by a wide margin.

The company’s fiscal year ends in March, so the next quarterly report (due May 24) will be the Q4 fiscal 2023 report. Analysts currently see revenue up 46% to $154 million and EPS up 46% to $0.19.

But it’s really a look toward fiscal 2024 that’s going to determine how ELF stock performs. On that front, management is typically conservative with guidance, whereas analysts are turning increasingly bullish.

Consensus estimates are still on the conservative side, calling for fiscal 2024 revenue up 15% to $630 million and EPS up 13% to $1.61. But it’s entirely feasible revenue growth tops 20% ($654 million or more) and EPS surpasses $1.73.

We’ll lean cautiously bullish and start with a half-sized position.

The Stock

Like a lot of growth stocks, ELF did really well during the pandemic, then faltered in 2022. It suffered a 39% drawdown that turned around at 20.5 last May. Since then, the stock has been trending higher almost exclusively above its 50-day line. There was a consolidation phase in the mid-50s at the end of 2022, then ELF gapped up after the Q3 report in early February and briefly paused to consolidate in the mid-70s. A small dip to 67.6 on March 13 (banking crisis) set the stock up for the current run, which has pushed ELF up to around 93. BUY HALF

HubSpot (HUBS) ★ Top Pick ★

I added HubSpot (HUBS) to our Watch List last month, and with the stock continuing to act well, we’ll take a stab with a half-sized position today.

Over the last month nothing significant has changed in the story, except there seems to be growing confidence that HubSpot is a beneficiary of businesses - both large and small - consolidating IT spend.

When we look for best-of-breed software companies that customers gravitate toward even when they’re looking to trim budgets, HubSpot is at the top of the list.

But let’s back up a little.

If you’re new to the name, HubSpot is an inbound marking company that came public in 2014. The company’s platform is a key tool in a $45 billion (and growing) marketing automation market.

It includes all sorts of inbound marketing tools (called Hubs) to help clients manage website content, blogging, email campaigns, SEO, social media monitoring, CRM and more.

With HubSpot businesses can have marketing teams use a single console to generate new leads, convert those leads to customers and drive customer retention initiatives. It’s also a relatively easy platform to use.

Management talked about how well HubSpot’s value proposition has been resonating with customers on the February 16 earnings call, even though the macro picture remains quite cloudy.

At that point, the company had just beaten expectations (revenue up 27% to $470 million while EPS grew 34% to $1.11).

Management guided for higher-than-expected revenue growth in 2023 and for better-than-expected profit margins. Analyst estimates have not changed over the last month. They still see 2023 revenue rising 19% to $2.06 billion while EPS is expected to come in at $4.28.

Management just attended the Morgan Stanley Technology Conference, and no red flags were raised. We’ll step in with a half-sized position and look for a better-than-feared Q2 report and better-than-expected forward guidance in a few weeks to kick the stock above its recent trading range.

The Stock

HUBS came public in 2014 and was a solid performer prior to the pandemic, then again, afterward, as growth stocks took off. Shares traded higher through most of 2021 and hit an all-time high near 866 just before the end of the year. But 2022 was ugly. HUBS bottomed at 245 last October then bounced around in the 250 to 320 range for a while before moving above that range, and the 200-day line, in mid-January. The Q4 earnings report sent the stock from 362 to 418. After two months of moving mostly sideways, the stock is still at roughly the same level. BUY HALF

Iveric Bio (ISEE)

Iveric Bio (ISEE) is a small-cap biotech company specializing in treatments for progressive retinal diseases, including geographic atrophy (GA), age-related macular degeneration (AMD) and Stargardt disease.

The company is pre-revenue, but as the $4 billion market cap suggests, there is a lot of potential value here owing to potential treatments that are, hopefully, nearing approval. That means the first revenue could be right around the corner.

The lead asset is Zimura (avacincaptad pegol), a pegylated RNA aptamer that has shown at a 12-month primary endpoint in two Phase 3 clinical trials (GATHER1 and GATHER2) to slow the rate of vision loss (by 56%) by slowing the progression of geographic atrophy.

Those trial results have helped to kick the commercial leadership team into action as Iveric prepares to launch Zimura into the U.S. market.

One of the first steps was the FDA’s acceptance of the company’s NDA for Zimura for the treatment of GA secondary to AMD. That happened in February. The NDA was granted priority review with a Prescription Drug User Fee Act (PDUFA) date of August 19, 2023.

On that day we should know if Zumira is cleared for takeoff, so it is a very significant date for the stock.

Prior to August 19, from April 23 – 27 management will present full analysis of the GATHER trials at the Association for Research in Vision and Ophthalmology’s (ARVO) annual meeting. This data may provide incremental insights on the chances of approval ahead of the PDUFA.

Additionally, Iveric has an open-label extension study to the GATHER2 trial to collect additional safety data for patients who are using Zumira for over 24 months. There is also a Phase 2b screening clinal trial (STAR trial) evaluating Zumira for treatment of Stargardt disease. And the company is on track to submit regulatory approvals for Zumira in Europe later this year.

The takeaway message here is that Iveric could start to generate revenue from Zumira this year. Early estimates pin 2023 revenue at around $14 million, but of course that’s highly variable. As are early estimates for 2024 and 2025 revenue of $122 million and $225 million, respectively.

With the ARVO meeting coming up next week let’s put ISEE on our Watch List. After the event, we’ll have a better feel for whether or not this is a name we want to get involved with.

The Stock

ISEE was a no-name stock back in 2019 when the stock traded for under a dollar. But things got interesting at the end of that year when shares blasted off and traded up close to 9. ISEE gave a good deal of that back when the pandemic broke out. But since mid-2020 the longer-term trend here has been mostly up, albeit with a big drawdown of around 50% in 2022. Shares bounced off the 9 level several times between May and September of last year, then broke out with conviction on September 6 when, within a five-day span, ISEE rose over 120%. Since then, the stock has been up and down in about a 30% range, but generally tracking higher. And on April 3, ISEE jumped above resistance near 25. It has worked its way up to over 29 since. WATCH

Open Text (OTEX)

Open Text (OTEX) is a Canadian software company providing enterprise information management (EIM) solutions. The software helps clients better use their data for competitive advantage in an increasingly digital world.

Solutions span content management, digital process automation, and customer experience management.

In the words of the company’s CEO, “Customers need a single real-time view of information across complex business infrastructure that is intelligent, connected, secure and responsible. That is what we do, and it is unique.”

Open Text serves clients of all sizes and has a significant presence in financial services, government and healthcare markets.

The main product is the OpenText Content Suite, a comprehensive platform for managing all types of content, including documents, emails, and multimedia files. The Experience Suite helps businesses manage their customer experiences across multiple channels, while the Process Suite automates business processes and workflows.

Part of Open Text’s growth strategy revolves around acquisitions. The latest purchase of Micro Focus (closed in January) was significant, both strategically and financially. The purchase price was $5.8 billion ($600 million cash, $4.6 billion in new debt and $600 million on a revolving credit line) and it almost doubled the size of the company.

Micro Focus has a portfolio of solutions for networking, host connectivity, identity access and security, development and IT operations management. It too has been an acquirer, having purchased the software division of Hewlett-Packard Enterprise (HPE) in 2016. The company has an annual revenue base of about $2.3 billion that’s not growing much (some assets were sold recently, and they exited Russia completely), but which is expected to return to growth when integrated with Open Text.

Management says the growth trajectory of Open Text should yield a company that looks something like Oracle (ORCL) or SAP (SAP). Which means an enterprise software company that has solutions spanning cloud and hybrid cloud environments, and which also has a significant professional services and support revenue stream.

On the Q2 fiscal 2023 earnings call back in February, management talked about streamlining the combined companies by cutting about 8% of the workforce (to around 23,000 employees).

The team sees full-year fiscal 2023 revenue up 28% - 30% to $4.47 - $4.55 billion (around $900 million from five months contribution from Micro Focus) and 2024 revenue up 33% - 35% to $5.7 - $5.9 billion. Analysts see adjusted EPS of around $3.00 in 2023 and $4.36 in 2024. Open Text is a cash flow generator and pays a dividend equal to 2.5%.

I’m intrigued by this combined company, especially since we’re seeing other enterprise software stocks like ORCL continue to do well. That said, I’d like to know more before buying. Therefore, Open Text will go on our Watch List today and we’ll look to the Q3 fiscal 2023 report (May 4) for an update.

The Stock

OTEX has been around for a few decades and the long-term trend has been up, though shares are trading about 30% below their September 2021 high of 55.3. Like a lot of software stocks, OTEX had a very rough 2022 that saw the stock fall as low as 25 in October. A good chunk of the stock’s retreat came after the August 25 announcement of the Micro Focus acquisition. Since the beginning of 2023, OTEX has been in a relatively steady climb and just recently passed above the 37 level, where it was just prior to the acquisition announcement. WATCH

Shockwave Medical (SWAV)

We made good money on Shockwave Medical (SWAV) last year (sold half for a 30% gain and the other half for a 47% gain) then stepped aside as the stock entered a funk. With shares looking better now and the growth story still alive, I’m putting SWAV back on our radar.

The backstory is that this is a medical device company with a new solution to treat calcified cardiovascular disease.

Its approach – called intravascular lithotripsy (IVL) – combines traditional balloon angioplasty and lithotripsy. It can treat calcified artery disease and calcium buildup in both the inner (intimal) and middle (medial) layers of peripheral arteries and coronary arteries.

The company’s technology combines a small generator, a connector cable and an intravascular lithotripsy catheter.

In basic terms, the catheter is inserted into the target artery and delivers localized treatment via sonic pressure waves. Those waves crack calcium without harming soft tissue and expand the vessel with very low pressure.

Shockwave claims its IVL can treat the most complex calcified anatomies while minimizing common complications from other technologies, including high-pressure balloons and atherectomy, which can lead to dissection and perforation and have steeper learning curves.

In other words, it’s a relatively safe treatment option. And the company is targeting a roughly $9 billion market that includes peripheral artery disease (PAD), coronary artery disease (CAD) and aortic stenosis (AS).

The latest bit of good news is that the CMS just proposed 2024 inpatient payment rates that include IVL-specific codes, and which pay around $4,000 more per procedure.

That alone is good news. But it also suggests the CMS sees value in Shockwave’s IVL. And it will be looking at outpatient reimbursement as well, with an update expected in July. Given that outpatient reimbursement rates have been an ongoing question for the company, a specific code (and higher reimbursement rate) for outpatient would be another significant win.

The takeaway here is that there could be a double win for Shockwave; lower reimbursement risk and higher rates. That’s not certain enough yet for analysts to go crazy pounding the table on the stock. But it’s certainly piqued the interest of those aware of this company, and it’s helped push the stock up recently.

I’d like a little more detail on the situation before we chase SWAV stock. So, we’ll throw it back on our Watch List and look to the Q2 earnings update (should be around May 8).

In terms of growth, we’re looking for Q2 revenue to be up 57% to $147.3 million and EPS to be up 115% to $0.84. That should put the company on track to grow 2023 revenue by at least 37% to $670 million and EPS by 22% to $3.85.

The Stock

SWAV came public at 17 in March 2019 and traded as high as 68 before the pandemic and as low as 22 during the worst of the crash. It had a fantastic stretch afterward, trading up to almost 250 in November of 2021. The market correction was rough, however, and SWAV hit a low of 113 last May. The stock got back in gear after that and enjoyed another run to 320 last fall before correcting yet again, this time to a low of 172 in January. A few months of consolidation in the 170 to 200 range was enough of a reset. In mid-March, SWAV broke back above 200 and has been ticking steadily higher since, including a nice jump above the 200-day moving average line early last week when news of the CMS decision broke. WATCH

Previously Recommended Stocks

We haven’t sold any stocks since the last Issue on March 15. However, today we are selling TechnipFMC (FTI) for what should be a single-digit gain.

We are also dropping a few stocks from our Watch List today to tighten our focus there. Among them is Arhaus (ARHS), which had a nice run until it hit a brick wall in early-March, Farfetch (FTCH) which perked up early in the year but looks like garbage now, and SolarEdge (SEDG), which I’ll keep tabs on personally but haven’t felt compelled to buy in four months of watching so it’s off our published list.

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.

Active Positions

Recently Sold Positions

The next issue of Cabot Early Opportunities will be published on May 17, 2023.