Stocks in This Issue
|Stock Name||Market Cap||Price||Investment Type||Current Rating|
|HubSpot (HUBS)||$19.4 billion||393||High Growth – Software||Watch|
|nVent (NVT)||$7.40 billion||44.7||Growth + Value – Electrical Equipment||Watch|
|Pulmonx (LUNG)||$422 million||11.2||High Growth – Medtech||Buy Half|
|Shift4 (FOUR)||$5.68 billion||68.5||Rapid Growth - Fintech||Watch|
|SiTime (SITM) ★ Top Pick ★||$2.93 billion||135||Recovery Story – Integrated Circuits||Buy Half|
Never Say Never
London, June 2017. Fed Chair Janet Yellen had helped steer the U.S. through the aftermath of arguably the worst financial crisis in history.
She said, “Would I say there will never, ever be another financial crisis? You know probably that would be going too far, but I do think we’re much safer, and I hope it will not be in our lifetimes, and I don’t believe it will be.”
Well, here we are again.
On the plus side, one of the benefits of managing through a disaster is (hopefully) being better at it the next time around. And it looks like the Fed, Treasury and FDIC haven’t wasted a minute trying to get on top of things this time.
But let’s back up. What happened? And what does this mean for the market and the FOMC’s rate-hike trajectory?
The short version is that the inverted yield curve (2-year yield higher than 10-year yield) has been signaling for some time that something in the financial system could crack.
Silicon Valley Bank (SIVB) was the first “real” bank to snap in what looks like a classic bank run. That happens when depositors pull money out and a bank is forced to raise money by selling bonds at a loss.
Those bonds are at a loss because the Fed has been raising interest rates so quickly. Depositors may be concerned their capital is at risk, especially if balances surpass FDIC insurance limits of $250,000. But they may also pull funds in order to generate higher returns elsewhere, such as relatively short-dated Treasuries.
As depositors pull funds to chase higher yields banks must increase their own deposit rates. Which then cuts the interest margin they make on loans.
The bottom line is banks get pinched. The more funds that depositors pull out the more they get pinched. Sometimes it goes so far that the bank becomes insolvent.
This is basically what happened to SIVB. And it has spilled over into other smaller regional banks.
In response the Fed, Treasury and FDIC said over the weekend that they stepped in to backstop depositors even if their balances surpassed the FDIC insurance limit. The reasoning is that these banks represent a systematic risk.
That was a good move. Suffice to say it’s unnerving when a company whose stock you own puts out a press release saying 10%, 20% or more of their cash is held at a bank that’s insolvent.
Still, this is a royal mess. And it gives critics of the FOMC’s rapid interest rate hike program a TON of ammunition.
It also raises market uncertainty by a factor of … well, you pick a number. It’s a lot.
And it raises questions as to what the Fed’s next move is. Yesterday’s CPI inflation number came in as expected (this morning’s PPI number came out after we prepared this Issue for publication). That’s “good.”
As all this has been unfolding, expectations for the Fed’s March 22 rate hike decision (next Wednesday) have been bouncing all over the place. At the beginning of last week a 50bps hike was predicted. Now, 25bps is the call. Some even expect no hike at all.
Risks to the financial system will surely have the FOMC considering a pause. Hiking into a deepening financial crisis, inverted yield curve and uncertain market doesn’t seem like a great plan!
This may just be what has been needed to get the Fed to back off. That’s the silver lining for the market. I just hope it’s not too late.
What to Do Now
This is a volatile time and not one in which we’ll make big moves. We lightened up last week so I’m comfortable adding a little new exposure now. But keep new positions small (that’s why any new additions are half-positions) and let’s give the market a little time to digest developments in the financial system, yesterday’s CPI numbers and today’s PPI release.
I’ve been keeping an eye on HubSpot (HUBS) since the inbound marketing company came public in 2014. We even owned it for a spell in 2021, made 26% and got out right at the beginning of 2022, just days before the sellers really took over.
The main attraction is that HubSpot’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.
Those are huge selling points. Especially now, when many companies are consolidating spend with fewer vendors and making sure every dollar spent on marketing and sales really counts.
Management talked about how well HubSpot’s value proposition has been resonating with customers on the recent Q4 earnings call (February 16), even though the macro picture remains quite cloudy.
Revenue in the quarter grew 27% to $470 million while EPS grew 34% to $1.11. Both results surpassed expectations. New customer additions increased over the previous quarter (to 8,400 from 8,000) and more customers are signing up for three and five Hub multi-product deals.
This isn’t to say HubSpot is immune to what’s going on in the world. Management also acknowledged that sales cycles are getting longer, and customers are being more careful with their spending.
In response, the company slashed its workforce by 7% and is consolidating real-estate facilities.
That said, management guided for higher-than-expected revenue growth in 2023 and for better-then-expected profit margins. Revenue in 2023 is seen rising 19% to $2.06 billion while EPS is expected to come in at $4.28 ($2.82 was the previous consensus estimate).
The strong quarter and forward guidance vaulted HUBS to the top of many analysts’ buy lists, including mine. We’re not ready to jump in right now but I expect we will soon. HUBS goes our Watch List today.
HUBS came public in 2014 and was a solid performer prior to the pandemic, then again afterward as growth stocks took off. Shares ticked higher through most of 2021, ultimately hitting an all-time high near 866 just before the end of the year. But 2022 was ugly as sellers drove HUBS back below 250. Shares look to have 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. HUBS held in the 380 to 415 range in the three or so weeks after the report, only faltering late last week. WATCH
nVent Electric (NVT)
NVent (NVT) is a U.K. based company helping to electrify the world by designing, manufacturing, selling, installing and servicing electrical connection and protection solutions.
Its enclosures (52% of revenue), electrical fastening solutions (27% of revenue) and thermal management solutions (21% of revenue) connect and protect customers’ critical equipment from hazardous conditions while also lowering costs, minimizing downtime and helping to improve utilization. Management says the company can slash facilities operating costs by up to 75%.
Customers come from the industrial (42% of revenue), commercial and residential (28% of revenue), infrastructure (25% of revenue) and energy (5% of revenue) markets.
These clients are looking at big picture trends like growth in renewable energy generation, infrastructure and electrical transmission line upgrades and industrial Internet of Things (IOT) investments and seeing that nVent’s solutions offer automation, digitization, sustainability, protection and resiliency.
The company grew revenue by 11% ($742 million) in Q4 2022. That quarter wrapped up a year in which revenue grew 18% to $2.9 billion. Fourth-quarter EPS of $0.66 beat expectations and pushed full-year EPS to $2.40, up 22% from 2021.
NVent has been investing in new products (about 50 a year), software-driven solutions (over 10% of sales enabled by proprietary software) to connect products, and operational improvements to push margin-expanding growth.
Looking forward, analysts expect nVent will grow revenue by about 5% in 2023 while growing EPS by 8%. The company has been an active acquirer so don’t be surprised if more deals are announced this year and actual growth is higher than forecast.
There is also upside potential toward the end of the year from both the Infrastructure Investment and Jobs Act (broadband, airports, etc.) and the Inflation Reduction Act (renewables, solar, etc.).
The company has been returning cash to shareholders through dividend payments. The current yield is about 1.5%.
NVT was spun out of Pentair (PNR) in April 2018. The stock traded mostly in the 20 – 28 range until the pandemic, took a big hit then spent most of the rest of 2020 trading in the high teens. Things got going again in 2021 and NVT broke out to new highs in the spring then ran all the way up to 39.5 by early-January 2022. The stock then spent most of 2022 consolidating in the 30 to 38 range. Shares rallied up to 40 in the weeks after the Q3 earnings report in October, then after another multi-month consolidation (36 to 40.5 range) the Q4 earnings report on February 7 sent NVT to new highs above 45. We’ll give it some time on our Watch List to see if NVT can earn a spot in the portfolio. WATCH
Pulmonx (LUNG) is a commercial-stage MedTech company that develops minimally invasive treatments for patients with severe emphysema, a form of chronic obstructive pulmonary disease (COPD).
COPD is a lung disease that reduces airflow and interferes with normal breathing. It is one of the leading causes of death globally. Emphysema, which is a progressive form of COPD that destroys lung tissue, accounts for about 25% of all COPD patients.
The conditions can make it difficult (or impossible) for people to do simple things, such as climb stairs, take a shower or just walk around. Their quality of life can be worse than patients with lung cancer.
Pulmonx has come up with a solution designed to treat severe emphysema patients who don’t want, or are not eligible for, surgery.
The company’s solution is comprised of the Zephyr Endobronchial Valve, the Chartis Pulmonary Assessment System and the StratX Lung Analysis Platform.
For the patient, things begin with a standard pulmonary function test and a CT scan. That scan is uploaded to the cloud. Then Polmonx generates a StratX Report, which identifies which lobes in the patient’s lungs are eligible for treatment.
The patient is sedated and a Chartis Assessment is completed. This involves placing a balloon catheter in the target lobe(s) to simulate valve placement. If all goes well Zephyr Valves are placed in the target lobes. These valves allow for one-way air flow. Patients stay in the hospital for a few nights, then off they go to live a better life.
The Zephyr Valve has been shown to work across four randomized trials. Over 100 scientific articles have been published on the clinical benefits. The treatment is now available in over 25 countries and Pulmonx thinks it has a roughly $12 billion global opportunity.
It’s going after it with a direct sales model that is currently broken down into 55 sales territories in the U.S. and 36 around the rest of the world. Most procedures (about 73%) are covered by Medicare, while Medicaid covers 6% and commercial payers cover about 21%.
As you’d expect, the pandemic was a crusher for Pulmonx. Whereas revenue grew by 48% in 2021 it was only up 11% last year, to $53.7 million. EPS fell 18% to -$1.59.
But things are on the upswing now. Q4 revenue was up 13% to $15.4 million (18% in constant currency) and the company added 17 new U.S. centers, bringing the total to 278. U.S. revenue was up 30% to $9.5 million while sales outside the U.S. was down 7% to $6 million (still facing healthcare constraints abroad).
Looking forward, management guided for 2023 revenue growth of about 20% to $64 million, with Q1 revenue being the low point due to normal seasonality.
We’ll step in with a half-sized position.
LUNG came public at 19 on October 1, 2020. By the end of the year it was trading north of 69. That was the top. LUNG trended down for all of 2021 and for most of 2022. The capitulation event appears to be the Q3 2022 earnings report on November 4, after which LUNG plummeted by 80%. It has been grinding its way higher since. After the Q4 report on February 22 the stock closed up 22%. It’s now trading around 11.3, just a hair below where it was just prior to the Q3 earnings disaster. BUY HALF
We owned Shift4 (FOUR) for about nine months back in 2020-2021 and made 27%, eventually selling the stock above where it is now and avoiding the bulk of the 2021 – 2022 weakness. With a recent Q4 beat and forward guidance above Street expectations we’ll take another look at FOUR today.
The backstory is that Shift4 is a provider of integrated payment processing and technology solutions for food, travel, sports, entertainment, travel, hospitality, retail, casino and non-profit markets.
It offers a unified platform that consists of end-to-end payments solutions, a proprietary gateway, and a variety of technology solutions. Shift4 processes over 3.5 billion transactions annually for over 200,000 customers. It makes money by charging a fee for transactions and also for merchant acquiring services, which are priced based on volume plus some fees.
Management talks frequently about its growing role in the world of integrated payments, where commerce-enabled software and payments converge. Whether at a ski resort, restaurant, professional sports game or casino you’re often likely to have payments flowing across Shift4’s technology.
In addition to having over 10,000 of its SkyTab POS (point-of-sale) systems deployed so far (just one of Shift4’s solutions), the company has also signed agreements with PayPal (PYPL) and Venmo to offer these as checkout options for select customers.
In the recently reported fourth quarter, end-to-end (E2E) payment volume rose 55% to $20.7 billion, driving gross revenue up 35% to $538 million. EPS was $0.47, up from $0.08 in Q4 2021.
That result helped to push full-year E2E payment volume up 53% to $71.6 billion, gross revenue up 46% to $1.99 billion and EPS up 209% to $1.39.
On the Q4 conference call management talked about confidence in 2023 guidance, despite macro uncertainties. They plan to keep costs under control, hold off from hiring, and continue to focus on the areas of high growth that helped in the quarter, such as sports, entertainment, travel, non-profit and especially international.
In terms of 2023, management says they see E2E payment volume of $100 - $109 billion and gross revenue of $2.5 - $2.7 billion (+25% to 35%). That should mean full-year EPS comes in around $2.47, up about 75% over last year. A delayed acquisition (Finaro) could add about 15% to revenue.
We’ll put FOUR on our Watch List.
FOUR came public at 23 in mid-2020 and had a great start. A year later shares were trading just north of 100. Of course, the 2021 – 2022 market retreat pulled FOUR down with it. Despite a rally last spring FOUR headed south again, ultimately bottoming around 30 last June and July. Since then the stock has acted much better. FOUR rallied back above 40 following the Q2 earnings release last August. After spending several months trading mostly in the 40 to 50 range the stock made a decisive move above 50 in December and was close to 70 before a wobble a few weeks ago drove a quick retreat to 56. Shares hung out in the mid-50s until the Q4 report on February 28 drove them to a new multi-year high above 70. WATCH
SiTime Corporation (SITM)
I added SiTime Corporation (SITM) to our Watch List last month and the stock has acted very well since. We’ll add a half position in the name today.
SiTime is a fabless semiconductor company that provides MEMS (micro-electro-mechanical systems) and silicon-based timing systems. Silicon MEMS is a superior technology as compared to quartz crystal because it offers higher performance, programmability and lower power consumption.
SiTime is a precision timing specialist. Its solutions allow electronics to do what they’re supposed to do, reliably. It’s going after a roughly $10 billion market.
The product portfolio encompasses oscillators, clock ICs and resonators. Some solutions include all three in a single package.
Apple is a major customer (+20% of revenue). And SiTime continues to serve the datacenter, auto, aerospace, industrial and mobile/consumer electronics markets with robust systems that can handle varying temps, shocks, vibration and other atmospheric challenges.
Despite ongoing supply challenges SiTime continues to roll out new products. It introduced four in the fourth quarter of 2022 and expects to introduce five more in 2023.
These new solutions are helping to drive average selling prices (ASPs) higher, and management expects pricing in 2023 will be stronger than in 2022.
That said, the company is still working through supply-demand imbalances. Some manufacturers loaded up on supplies once they became available and are currently working through this excess inventory.
That meant revenue fell in Q4 2022. And we’ll likely see lower revenue in 2023 than we saw in 2022. But that’s priced into the stock. And investors are now seeing that things are set to get better.
Management says excess inventory should be drawn down in the first half of the year. The first quarter should be the low point. There are signs that the recovery in China is getting better, and large customer Apple may be enjoying strength there and working through its subcontractors’ excess inventory.
As it stands now, analysts see full-year 2023 revenue of about $210 million, down 26% from 2022. EPS should be down about 65%, to -$1.32.
Then, in 2024, growth should return. Revenue should be up 30% and EPS should double. We’ll know more about the trends in May, when SiTime is set to report Q1 2023 results.
SITM came public at 13 in November 2019 and had a heck of time during the pandemic. In November 2021, the stock peaked at 342. Tall trees fall hard and SITM was no exception. Last October this was a 73 stock. But a recovery seems to have taken hold and SITM has traded in a tight range while inching consistently higher since crossing back above its 50-day line in November. The stock just bounced off its 200-day line right at 128. BUY HALF
Previously Recommended Stocks
We’ve been more active than normal lately.
On February 16, we sold a quarter position in NerdWallet (NRDS) for a 66% gain. Then, about a week later, on February 23, we trimmed both Option Care Health (OPCH) and PowerSchool (PWSC) for modest losses of -8% and -1%, respectively.
We cut Pinterest (PINS) on March 8, booking a 6% gain. Then, on March 10, we trimmed our biggest loser, BioAlta (BCAB), for a 57% loss. I also elected to sell our half stake in Sight Sciences (SGHT) ahead of this week’s earnings report, figuring the market was looking very iffy and I’d rather step aside ahead of earnings. We booked a loss of 21% on that half position. Lastly, we sold another quarter of our position in NerdWallet for a 71% gain on Friday.
On the buy side, on March 3, following excellent Q4 results I pulled Samsara (IOT) off the Watch List and added a half position to our portfolio.
As far as Watch List changes, on March 8 we dropped both InMode (INMD) and Terran Orbital (LLAP) to make room for new ideas.
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.
Recently Sold Positions
|Company Name||Ticker||Date Covered||Ref Price||3/15/23||Current Gain||Notes||Current Rating|
|Airbnb||ABNB||1/20/22 & 8/4/22||139.02||116.36||-16%||Top Pick||Buy|
|Catalyst Pharmaceuticals||CPRX||12/21/22||18.99||14.85||-22%||Hold 1/2|
|NerdWallet||NRDS||11/16/22 & 1/13/23||11.31||16.82||49%||Hold 1/2|
|Rivian||RIVN||10/19/22||31.17||13.21||-58%||Top Pick||Buy 1/2|
|SiTime||SITM||3/15/23||NEW||132.21||NEW||Top Pick||Buy 1/2|
|Snowflake||SNOW||10/19/22 & 3/8/23||156.555||139.82||-11%||Buy|
|Xponential Fitness||XPOF||9/21/22||19.86||27.52||39%||Top Pick||Hold 2/3|
RECENTLY SOLD POSITIONS
|Company Name||Ticker||Date Covered||Reference Price^||Date Sold||Price Sold^||Gain/loss||Notes|
|Axonics||AXNX||5/18/22||49.09||1/9/23||57.38||17%||Sold Second 1/4|
|Halozyme||HALO||12/21/22||57.89||1/11/23||50.45||-13%||Bought 1/2, sold 1/2|
|Bill.com||BILL||6/17/20||77.73||1/13/23||101.75||31%||Sold Final 1/4|
|Chewy||CHWY||12/21/22||40.75||1/13/23||43.57||7%||Bought 1/2, sold 1/2|
|Xponential Fitness||XPOF||9/21/22||19.86||1/13/23||25.4||28%||Sold 1/3|
|Axonics||AXNX||5/18/22||49.09||2/2/23||61.57||25%||Sold Final 1/4|
|NerdWallet||NRDS||11/16/22 & 1/13/23||11.31||2/16/23||18.78||66%||Sold 1/3|
|Option Care Health||OPCH||10/19/22||33.78||2/23/23||31.13||-8%||Trade Opportunity|
|PowerSchool||PWSC||2/15/23||23.73||2/23/23||23.59||-1%||Bought 1/2, sold 1/2|
|PINS||9/21/22||24.49||3/8/23||25.94||6%||Bought 1/2, sold 1/2|
|Sight Sciences||SGHT||1/18/23||12.38||3/10/23||9.79||-21%||Bought 1/2, sold 1/2|
|NerdWallet||NRDS||11/16/22 & 1/13/23||11.31||3/10/23||19.32||71%||Sold second 1/4|
The next issue of Cabot Early Opportunities will be published on April 19, 2023.