Cabot Early Opportunities Issue: July 20, 2022

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Stocks in This Issue

Stock Name	Market Cap	Price	Investment Type	Current Rating
Dutch Bros (BROS)	$6.36 billion	38.9	Rapid Growth – Coffee Shop	Buy
Matador Resources (MTDR)	$5.61 billion	47.6	Growth – O&G Production/Midstream	Buy - Trade
Option Care Health (OPCH)	$5.67 billion	31.4	Growth – Medical Services	Watch
Palantir (PLTR)	$18.8 billion	9.20	Rapid Growth – Software	Watch
Samsara (IOT)	$7.26 billion	14.2	Rapid Growth – Software	Buy Half

It’s Earnings Season!

There was a lot I wanted to talk about this month but with earnings season upon us I thought the most pressing thing is a quick review of upcoming earnings dates and a preview of expectations. After all, in this environment earnings reports will be analyzed down to the word and updates to full-year guidance will likely determine how individual stocks act in the coming months.
So, I elected to skip the prose and go straight for the numbers. Let’s jump in.

Airbnb (ABNB) reports on Tuesday, August 2. The stock has been beaten up but I still like it long term and am biding time before filling the second half of our position. In the upcoming quarter analysts see revenue climbing 57% to $2.1 billion and adjusted EPS of $0.45. Full-year revenue is seen up 38% to $8.24 billion and EPS is seen turning positive and coming in at $1.87.

Aris Water Solutions (ARIS) hasn’t hinted at an earnings date yet and analyst projections are likely a little sloppy given how new the company is (IPO in October 2021). Still, they’re looking for quarterly revenue to grow 36% to $77.2 million and EPS up 200% to $0.24. Full-year revenue is seen rising 40% to $320 million while EPS goes to $1.01 from a loss of -$0.16 in 2020.

Axonics (AXNX) reports on Monday, August 1 and is expected to deliver revenue of $59.6 million (+30%) and EPS of -$0.55. Full-year revenue is seen up 33% to $240 million while EPS dips to -$2.11.

Dutch Bros (BROS) hasn’t released an earnings date yet. Look for quarterly revenue of $183 million (+42%) and EPS of $0.06. Full-year revenue is seen rising 43% to $710 million while EPS is cut in half versus 2021, to $0.15.

Bill.com (BILL) should report in late August and deliver quarterly revenue of $183.3 million (+134%) and EPS of -$0.14. Full-year revenue is seen up 160% to $620 million while EPS dips to -$0.37.

CrowdStrike (CRWD) should report in late August and deliver quarterly revenue of $516 million (+53%) and EPS of $0.28 (+155%). Full-year revenue is seen up 52% to $2.21 billion while EPS dips jumps 82% to $1.22.

Fisker (FSR) reports on Wednesday, August 3. Analyst expectations are all over the map given that production of the Fisker Ocean is supposedly going to start in November in Austria. The company began taking $5,000 deposits on July 1. While the official consensus estimate for 2022 revenue is $50 million in sales are expected though Q3, so we’ll continue to take a wait-and-see approach here.

GitLab (GTLB) hasn’t announced an earnings date yet. The company is expected to deliver quarterly revenue of $94.5 million (+62%) and EPS of -$0.23. Full-year revenue is seen up 58% to $400 million while EPS should come in around -$0.89 (+18%).

Grocery Outlet (GO) should report between August 8 - 12 and deliver quarterly revenue of $860 million (+11%) and EPS of $0.24 (+4%). Full-year revenue is seen up 11% to $3.4 billion while EPS jumps 8% to $0.97.

Matador Resources (MTDR) reports next week on Tuesday, July 26. Quarterly revenue is seen up 124% to $801.3 million while EPS is expected to soar 200% to $3.07. Full-year revenue is seen up 80% to $2.99 billion while EPS is expected to jump 160% to $11.11.

Samsara (IOT) hasn’t announced an earnings date yet. Quarterly revenue is expected to rise 42% to $143.3 million and EPS should come in at -$0.06 (flat). Full-year revenue is seen up 40% to $600 million while EPS should improve by 66% to -$0.24.

ShockWave Medical (SWAV) reports on Monday, August 8. Revenue is expected to rise 92% to $107.5 million while EPS soars to $0.44 from a loss of a penny in the year-ago quarter. Full-year revenue is expected to climb 90% to $450 million while EPS jumps to $2.04 from a loss of -$0.26 last year.

Sprout Social (SPT) will report on Tuesday, August 2. Look for revenue of $60.3 million (+23%) and EPS of -$0.06. Full-year revenue should be up 36% to $250 million while EPS comes in near -$0.12.

What to Do Now

With investor pessimism about as bad as it can get, recession calls rising, the Fed still hiking rates (let’s hope they don’t do 100bps next week!) and a strong dollar there is absolutely no reason to own stocks.

Or is there?

History shows that when it gets so bad that investors don’t want anything to do with the market that it’s a good time to buy.

That may be why the market has been able to shrug off some of the bad economic readings (CPI, housing, etc.) in recent weeks.

Yes, things can always get worse. But they can also get better too. Big picture, investors have low exposure to stocks and the market believes the Fed can only hike another 150 to 200bps before having to hold steady, or even cut.

There are all sorts of scenarios of how things could go in the coming months, but the bottom line is it makes sense to wade a little deeper into the market now (but not too deep!).

Continue to keep position sizing in the small to medium range and the total number of positions you own on the low end as well. Don’t be afraid to cull positions that aren’t making any upside progress. And also don’t hesitate to take partial profits when you have them.

Still, net-net it’s OK to ramp up your market exposure a little as compared to the last two months … but do so slowly. We’ll be in earnings season for a number of weeks and with the Fed set to hike next week then take August off (they’ll meet again in September) things could turn on a dime.

Dutch Bros (BROS)

Dutch Bros (BROS) has been on our Watch List for just a month and the stock has been acting consistently well enough over that time to jump in.

Absolutely nothing has changed with respect to the company over the last month. Dutch Bros remains a rapid growth drive-through coffee chain focused on fun, fast and excellent service.

It began as a pushcart in 1992, the first franchise opened in 2000, and it now has over 535 company-owned and franchised units across 12 states. The biggest presence is still in the northwest and California, but Dutch Bros is expanding across Arizona, Utah, Colorado, Texas and as far east as Tennessee.

The heart of the business is espresso-based beverages. But the menu has expanded to over 9,000 combinations of unique, customizable cold and hot beverages including smoothies, lemonades, teas, sodas and more.

Fun is a key part of the story. Employees report high job satisfaction while customers appear to love it too, even if they’re just going through the drive-through. With high engagement Dutch Bros has a successful rewards program (Dutch Rewards), which captures roughly 60% of transactions.

Dutch Bros skews toward a younger crowd. More than half of customers are under 25 years old (roughly 65% are female). Most sales tend to come in the afternoon, though morning beverage sales have increased lately.

While growth is very rapid (revenue +52% 2021) Dutch Bros is facing some challenges in the current environment.

The company has been growing locations quickly (98 units opened in 2021) and has plans to open at least 130 in 2022 (32 were opened in Q1). This pace of growth comes with costs (building, staffing, etc.) so ramping up volumes at new locations is critical.

Rising gas prices may also be pressuring consumers. On the Q1 call management said as soon as gas prices jumped in March daily sales were impacted. This led BROS (and analysts) to reduce 2022 same-store-sales growth from around 4%-5% to flat.

Ingredient costs are also up with dairy (almost 30% of ingredient costs) up 25% in Q1 and syrup and coffee prices higher too. While a 3% price hike this spring offsets these costs somewhat there is a point at which consumers won’t absorb both gas and price increases just to have a beverage treat.

Still, adding it all up this is a stock that big investors are likely to want to own. Should some of the inflation trends moderate, even just a little, BROS stock could take off.

Look for revenue growth of 43% this year (to $710 million) and continue growing above 30% for years as BROS ultimately is tracking toward several thousand stores across the country. Adjusted EPS this year may be about half of what it was in 2021 ($0.15 estimated) as the aforementioned costs curb, but don’t kill, profitability.

The Stock
BROS came public at 23 on September 15, 2021 and jumped 60% the first day. Shares traded as high as 81.4 a month and a half later. Not surprisingly BROS then pulled back but held firm in the 40 – 66 range through May 11. Then the stock plunged 65% over a couple days to an intra-day low of 20.5 after the Q1 earnings report (the drop coincided with the broad market’s steep declines). By the beginning of June BROS was back above 40, then another 30% correction took it down to 30 by June 13. Over the last five weeks the stock has held firm above that level and twice run up near 38. BUY

Matador Resources (MTDR)

Matador Resources (MTDR) is an independent energy exploration and development company focused on oil and natural gas shale and other unconventional plays.

The bulk of operations are focused on the oil and liquids-rich areas of the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas. It also operates in the Eagle Ford shale play in South Texas and the Haynesville shale and Cotton Valley plays in Northwest Louisiana.

Matador also has a midstream joint venture, San Mateo, that provides natural gas processing, oil transportation services, natural gas, oil and produced water gathering services, and produced water disposal services.

In June 2022 Matador took another step to build out its midstream business by announcing its intent to acquire Summit Midstream Partners’ (SMLP) gathering and processing system in New Mexico. The $75 million acquisition is strategically important to growing MTDR’s natural gas business (might be especially important this winter) by adding a cryogenic natural gas processing plant, three compressor stations and around 45 miles of gathering pipelines.

Big picture, Matador is all about consistent growth of both reserves and revenue, and management is currently focused on debt reduction and returning cash to shareholders.

As of the end of 2021 the company had 323 million barrels of oil equivalent (56% oil, 44% gas). That represents a tripling of reserves from 2016 and a 20% increase over 2020.

Revenue in 2021 surged by 93% to $1.66 billion over the depressed results from 2020. Revenue this year should be up nicely again, by around 80% to nearly $3 billion, then moderating to single-digit growth in 2023.

With free cash flow and profit bouncing back (EPS surged from $0.55 in 2021 to $4.25 in 2021 and is seen up 160% to $11.12 this year) management is attacking the balance sheet. A revolving loan that reached $475 million in Q3 2020 was paid off in April of this year and $1 billion in 2026 notes is likely the next target.

Moreover, the company initiated an annual dividend of $0.10 – its first dividend ever – in Q1 2021, subsequently doubled it to $0.20 in Q4 2021 and then doubled it again to $0.40 in June 2022. With an estimated yield of roughly 0.9% MTDR’s yield won’t make you rich but if crude and natural gas prices stay strong more dividend hikes are likely. We’ll enter this as a trade opportunity. BUY

Earnings are due out Tuesday, July 26.

The Stock
MTDR came public in February 2012 at 12 and has seen its fair share of ups and downs over the years. In early 2020 it traded at 19, then during the depths of the Covid pandemic MTDR traded at 1.11! Since the beginning of 2021, when MTDR traded near 14, the trend has been up and to the right with somewhat consistent pullbacks of 15% to 35% attracting buyers. The current retreat of 32% is the first to crack the stock’s 200-day line since the beginning of last year. Given the pullback in energy prices this isn’t surprising, and may offer a terrific entry point. We’ll jump on it now and set a stop-loss at 40 just in case energy prices tank.

Option Care Health (OPCH)

I’ve been monitoring the advances of several healthcare stocks in the managed care and medical services spaces. While there are company and market-specific factors at play with each one Humana (HUM), Cigna Corp (CI), Centene Corp (CNC), Alignment Healthcare (ALHC) and Convey Health (CNVY), which was just acquired at a 180% premium (from a very depressed level), keep flashing onto my radar.
Rather than ignore them – despite their horridly boring profiles – we’ll add one of the smaller players to our Watch List today.

The company is Option Care Health (OPCH). It is the largest home infusion company in the United States and has been in business for over four decades, helping administer medicine, nutrients and/or special fluids intravenously (IV) directly into patient’s bodies.
Option offers a range of infusion therapies to treat both acute and complex conditions, either at an infusion site (it has more than 125 of them) or at a patient’s home (where over 80% of revenue is derived). It also offers portable infusion pumps.

The stock offers investors exposure to the big-picture trends of more at-home health care and growth of specialized medicines delivered via IV.

Research shows that home infusion can slash the costs of inpatient/outpatient infusion by roughly 50%. That alone is a good reason to consider OPCH.

But industry analysts also believe that many (maybe even the majority) of specialty medicines in development are infused medicines.

Management believes it plays in a $13 billion market that’s growing in the high single digits. However, home infusion is fragmented so precise numbers are hard to pin down. Option has a large number of potential acquisition targets as it seeks to consolidate the industry.

The most recent acquisition was Specialty Pharmacy Nursing Network which added 400 nurses, bringing Option’s total nursing team to over 2,900.

Option is an in-network provider for most of the big commercial payers (BCBS, Cigna, Anthem, UnitedHealth, Aetna, Humana, etc.). And while gridlock is holding up the process, there appears to be bipartisan support for Medicare reimbursement for home infusion.

One of the bigger risks may also be a potential opportunity. Option’s two largest insurance customers, UnitedHealth and Aetna, operate their own home infusion divisions. At some point those multi-year contracts might not be renewed. On the other hand, Option could also be an attractive acquisition target for one of these players.

Revenue grew by 13% to $3.44 billion in 2021 and is seen growing 12% to $3.85 billion this year. Option turned profitable in 2021, delivering EPS of $0.77. That figure should grow by around 22%, to $0.94, in 2022.

Earnings are due out Wednesday, July 27.

The Stock
OPCH came public in 1996 so has been through many changes over the years. We’re interested in the company’s exposure to the growing at-home and specialty infusion medicines in recent years. As you’d expect the stock was crushed during the pandemic but since September 2020, when it traded ear 10.5, the stock 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. OPCH clawed its way back and made a fresh high near 31 in both April and May, then made another new high of 31.6 earlier this week. WATCH

Palantir (PLTR)

Palantir (PLTR) has been acting OK since mid-May, revenue is likely to grow above 30% through 2025, the firm is increasingly profitable (EPS seen up 23% to 50% this year and next) and there remains a large government opportunity.
While PLTR can be a somewhat controversial stock the case is strong enough to throw PLTR on our Watch List today.

The company is a player in the big data and data visualization market. It builds and sells software that functions as the central data operating system for clients that need to collect and analyze massive amounts of data from many unstructured sources.

Palantir’s platform pulls in the unstructured data, uses machine learning (ML) and analytics to find trends that other big data software misses, then cleans it up and presents it in a user-friendly fashion.

Armed with easy-to-digest data insights, some of which are gained through intra-company and across-industry collaborations, users can make faster and more informed decisions.

These users come from both enterprise (42% of revenue) and defense markets (58% of revenue).
The defense segment draws both criticism and support, depending on one’s perspective.

On the one hand, the company gets a hard time because of its facial recognition tech. Organizations such as Amnesty International say it fails to protect human rights. Palantir’s tech supposedly helped the Immigration and Customs Enforcement (ICE) agency locate illegal immigrants in 2018 and 2019 and helped police departments in LA and New Orleans profile citizens to forecast criminal behavior.

On the other hand, Palantir also helped locate Osama Bin Laden in 2011 and uncover Bernie Madoff’s Ponzi scheme. And management has drawn a very clear line with China, saying they will not consider any opportunities with China or host any platforms in the country. CEO Alex Karp has come out in clear defense of Europe and against the Russia-Ukraine conflict.

The bottom line is that if you’re not down with the U.S. government this isn’t a stock for you. If you are, you may like PLTR.

It has three products.

Gotham optimizes networks (people, places, things, events) and geospatial analysis and is used for things like tracking potential threats, mission-readiness, disaster relief, mission logistics and fraud detection. Gotham was used to support U.S. intelligence counterterrorism efforts in Iraq and Afghanistan.

Foundry gives enterprises a central operating system for data. It embraces complex data interactions and operations and is used by over 50 industries and nearly 150 clients (Airbus, Merck, United Airlines, Morgan Stanley, Ferrari) and several federal agencies (U.S. Space Force, DoE, FAA).

Apollo is a commercial solution that allows customers to deploy their own software in virtually any environment (cloud, on-premise, hybrid, etc.). It is basically a SaaS platform for highly sensitive and regulated industries. The DoD uses it for IL-5 (highly sensitive unclassified) and Apollo is under consideration for IL6 (classified).

In 2021, Palantir grew revenue by 41% to $1.09 billion and grew EPS by 63% to $0.13. This year it is seen growing revenue by 28% to $1.98 billion and delivering EPS of $0.16 (+23%). Revenue growth in 2023 should be about the same while EPS growth could jump 50%.

Earnings are due out Monday, August 8.

The Stock
PLTR came public at 7.3 in September 2020. At peak euphoria in January 2021 it hit an intra-day high of 45. Things calmed down soon after and PLTR spent most of 2021 trading in the 20 to 30 range. But like a lot of stocks PLTR began to slip last fall then kept sliding in the first third of 2022. It appears shares bottomed at 6.4 on May 12, just a few days after the Q1 2022 earnings report. Since then PLTR has wormed its way back above 9 and could be establishing a pattern of higher highs and higher lows. With that trend yet to be confirmed I’ll add PLTR to the Watch List today. WATCH

Samsara (IOT)

Samsara (IOT) has been on our Watch List since February. It appears to have bottomed in May and since then shares are up over 40%. Given that I still like the story, the stock trend is good and we’re past lockup expiration (June 13), we’ll add a half position of IOT today.

Samsara has developed a platform for tracking vehicle fleets and other physical assets with a combination of devices, cameras and software. These solutions help customers operate more safely and more efficiently, and often pay for themselves through lower accident expenses, less waste and lower fuel and insurance costs. Its target market is valued at roughly $55 billion.

Samsara uses a combination of in-vehicle devices, gateway sensors, video-based AI and a cloud platform – Samsara Connected Operations Cloud – to monitor and manage commercial vehicles and their drivers, worksites, manufacturing equipment, heavy equipment and more.

The Connected Operations Cloud platform combines vehicle telematics, video-based safety and apps & driver workflows with connected equipment and connected physical sites.

Not only does it help get things where they need to go it can also reduce CO2 emissions and limit accidents, lawsuits, workplace injuries and equipment damage.

Customers come from the wholesale, retail, construction, shipping, logistics, utilities, field services and manufacturing industries. They all need to oversee thousands of employees and pieces of equipment and coordinate the production and transportation of goods so that the right items arrive at the right place, safely and on time.

Samsara’s best-selling solution continues to be Vehicle Telematics, which provides GPS tracking, fuel efficiency monitoring, etc. But Video Solutions (both forward and driver-facing cameras) is catching on quickly.

In the coming quarters look for newer products/features (Apps, Driver Workflow, Equipment/Site, Multi Stop ETAs, In-Cap Nudges, etc.) and partnerships with OEMs (such as GM and Stellantis) to facilitate new customer additions (OEM’s imbed hardware), increase spend with existing customers and, potentially, drive margin improvement.

Revenue in fiscal 2022 grew by 71% to $428 million and is seen rising by 40% to $600 million in fiscal 2023 (ends in January). Samsara is not profitable and should deliver adjusted EPS around -$0.24 in fiscal 2023. BUY HALF

The Stock IOT came public at 23 on December 15 and rose 7% the first day. Shares traded up to an intra-day high of 31.4 in the quiet market that persisted through the holidays, then the trend turned south. IOT looks to have bottomed at 8.7 on May 12 and has (mostly) made a series of higher highs and higher lows since then.

Previously Recommended Stocks

With the market acting OK we’ve had few changes in our portfolio since the June Issue. What changes we did make were done this past Monday when I elected to trim a little to lock in some profits.

On Monday, June 18 we sold Allbirds (BIRD) for a 10% gain, Pfizer (PFE) for a 3% loss, and half of our position in ShockWave (SWAV) for a 30% gain.

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.

^ Average of high and low price if published intraday, or closing price if published after 4 PM ET

Recently Sold Positions

^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 August 17, 2022.