Cabot Early Opportunities Issue: November 16, 2022

Stocks in This Issue

Stock Name	Market Cap	Price	Investment Type	Current Rating
Arhaus (ARHS)	$1.25 billion	8.96	Rapid Growth – Furnishings	Watch
BioAlta (BCAB)	$416 million	8.80	Development Stage Biotech	Buy 1/2
NerdWallet (NRDS)	$955 million	13.0	High Growth – Personal/SMB Finance	Buy 1/2
PBF Energy (PBF)	$5.79 billion	47.5	High Growth – O&G Refining	Buy
Terran Orbital (LLAP)	$360 million	2.62	High Growth – Small Satellites	Watch

Earnings Updates: RIVN, SWAV and XPOF

We have three positions in our portfolio that have reported since my last earnings update, so I’m devoting this space to updates on those stocks. We’ll kick things off with Rivian (RIVN), which is up more than 10% since I added it last month.

Rivian (RIVN) sold off hard going into its earnings report, but the next day coincided with the CPI release and a decent report sent the stock soaring 17% (it has gone up more since then). The highlights from the quarter are that Rivian is benefiting from lower shipping costs, is tightening its belt to reduce CapEx and, seemingly, doing a great job ramping up production as efficiently as is reasonably possible. Deliveries in the quarter totaled 6,584, a little lighter than hoped but up nicely from 4,401 in Q2. The company produced 7,363 vehicles, up 67% from Q2. This all translated to $536 million in revenue, which is a hair on the light side. But management reaffirmed its guidance to produce 25,000 units by the time 2022 is done and said pre-orders for R1T and R1S are now around 114,000, an increase from 98,000 in August. There are an additional 100,000 vehicles on order from Amazon (AMZN). By pushing some spending out into 2023, Rivian’s current cash balance of $13.8 billion should now stretch well into 2024. It has been encouraging to see some of these vehicles on the road lately, and I think that will become more common and help the stock, assuming the company continues to execute. BUY HALF

Shockwave Medical (SWAV) beat on both the top and bottom lines with Q3 revenue of $131 million (+102%) beating by $7.5 million and EPS of $0.92 beating by $0.24. Full-year guidance was raised by $13 to $18 million to a range of $483 to $488 million. With expansion in Asia and the potential to move into new, non-arterial applications in a few years on the back of strengthening cash flow there could easily be legs to this story, even as the company continues to execute on the U.S. coronary opportunity. That all said, with some recent weakness among MedTech stocks I’ll keep SWAV at hold for now. HOLD HALF

Xponential Fitness (XPOF) delivered a Q3 revenue beat with sales rising 56% to $64 million. EPS of $0.10 missed by $0.05. Management raised full-year guidance to $236 million (at the midpoint), implying 53% growth, well above previous guidance of just 39% growth. North America led the charge with 17% same-store sales growth. Franchisees continue to invest, with 36 studios opening just in the last week of September. XPOF has nearly 3,000 more studios contractually obligated to open. With so many fitness studios having closed during the pandemic and a lot of momentum XPOF continues to look good. Still, we’ll move to hold and give XPOF some time to chill out after it moved above resistance around 21. HOLD

Off-Cycle Reports Yet to Come

CrowdStrike (CRWD), Snowflake (SNOW) and SentinelOne (S) will report on November 29, November 30, and December 6, respectively.

What to Do Now

Last week’s Consumer Price Index (CPI) report for October, combined with yesterday’s reading of October’s Producer Price Index (PPI), has shown just how far a little good news on the inflation front can go.

While neither report suggested inflation is going to return to the Fed’s 2% target in the coming months, both help build the case that we’re past peak inflation. That’s exactly what’s needed to give the market some support. And while the Fed isn’t likely to pivot to rate cuts anytime soon, this is another sign that, as I said last month, the Fed should be getting close to the end of this rate hike cycle.

This is, of course, lighting a small fire under more growth-oriented stocks. This is good for us.

Still, we’re not going to go crazy on the buy side. Assuming the Fed is going to move forward with smaller hikes and maybe only do two or three more, the economy is still going to feel the effects of much higher rates, a weakening labor market and numerous other growth headwinds.

It will take some time to repair the damage.

In short, continue to carefully manage the number of positions in your portfolio, as well as position sizes. And if something isn’t feeling right for you then don’t be afraid to cut it loose.

While it’s always great to nab some stocks near a market low (if that’s what we saw recently), it’s the sustained market rallies where the big money is really made.

Arhaus (ARHS)

Arhaus (ARHS) is an omnichannel retailer of premium home furnishings. The company was founded in 1986 by John Reed and his father, Jack Reed, in Cleveland, Ohio. It came public last year at 13 (current price is under 9).

The company stands out in a fragmented industry because of the heirloom quality of its furniture and décor products, and its commitment to working with artisan partners around to world to use sustainably sourced, reclaimed and recycled materials whenever possible.

Arhaus has more than 75 showrooms and design center locations in the U.S. as well as interior designers to help with in-home design services. In 2021 the company opened a 500,000-square-foot manufacturing and distribution facility in North Carolina. Roughly 50% of sales come from the U.S.

In an iffy economy, I’m sure some investors will think twice about buying shares of a premium furniture retailer. However, while Arhaus’ customers aren’t immune to the effects of a slower economy, they are considerably more resilient than most.

The company’s Q3 results, reported last Thursday, illustrate its momentum. Revenue of $320 million grew by 57% and surpassed expectations of $297 million. The beat was driven by strong demand and better order fulfillment as supply chains are improving. Adjusted EPS was $0.16, an $0.11 improvement over Q3 2021.

This compared very favorably to a premium furnishings market that shrank by around 9% in Q3, indicating Arhaus is grabbing market share from other players.

On the conference call, management said the entire industry is leaning into promotions heading into the holiday season. Arhaus is doing the same. They have begun earlier than normal, and marketing campaigns are running longer than normal. While this could dent gross margin in Q4, Arhaus was still able to raise its Q4 EBITDA (a measure of profits) guidance.

Looking into 2023, Arhaus will be opening new stores, building out its online capabilities and launching new products. All this could propel revenues to around $1.4 billion in 2023. That would represent more than 18% growth, far better than current consensus estimates of 12% growth (Arhaus has been consistently beating expectations). EPS in 2023 should be at least around the same as this year ($0.84 expected).

The Stock

ARHS came public at 13 last November and jumped into a tough market. The stock sold off to around 7.6 right away, rallied to an all-time high of 15 by year’s end, then slid to a new low of 6.2 by early March. A solid Q1 2022 report ignited a rally, but ARHS was pulled back down by the market and made a new low of 4.2 in early July. Shares climbed above 6 heading into the Q2 print in August then gapped up to close around 8 afterward. The stock has since traded in the 6.8 to 9.7 range. With ARHS failing (like a lot of stocks) to move above resistance but seeming to have that potential if the Fed doesn’t kill the economy. I’ll put it on the Watch List today. WATCH

BioAlta (BCAB)

BioAlta (BCAB) is a clinical-stage biopharmaceutical company developing a new class of highly specific and selective antibody-based therapeutics to treat solid tumor cancers that have previously been difficult or impossible to target. It has a market cap under $400 million.

BioAlta has patented its Conditionally Active Biologics (CAB) platform. CAB is a potentially disruptive technology for developing conditionally active therapeutics. CAB yields antibodies and other biologics that can be activated or inactivated under defined physiological conditions.

Typically, they become active close to a tumor and inactive if they drift away from the tumor.

This approach helps BioAlta identify the necessary targeting and potency required to destroy cancer cells while getting rid of/reducing on-target, off-tumor toxicity. This is one of the biggest challenges to existing cancer therapies.

If it works, CAB could not only reduce toxicity but allow for higher dosing, more combination therapies and even expand the number of potential drug targets.

The most advanced compound is BA3011 (Phase 2), in development to treat soft tissue sarcomas (STS), non-small cell lung cancer (NSCLC) and ovarian cancer. Management provided an update on BA3011 a couple weeks ago, showing continued positive data. BioAlta is working with the FDA (dosing, protocol, etc.) for the potentially registrational part two of the Phase 2 study. Expect updates in the coming months.

The second compound is BA3021 (Phase 2), in development to treat NSCLC, melanoma, squamous-cell cancer of the head and neck (SCCHN) and ovarian cancer. We expect to get a look at interim Phase 2 data in January.

Next in line is BA3071 (Phase 1, multiple tumor types) for which a higher dose is being considered. And there are five additional pre-clinical assets being developed for multiple tumor types as well.

Stepping back, investors will care most about continued progress with BA3011, then BA3021. We’ll keep an eye on developments as they come public.

As with all early-stage biotech stocks, both the risks and reward potential of BCAB are considerable. Invest accordingly.

The Stock

BCAB came public at 18 in December 2020 and was off like a shot, soaring above 70 within a few months. As we moved deeper into 2021 and speculators dropped out of the market, BCAB drifted lower, and lower, ultimately bottoming near 2 this past spring. That was more than 97% below its all-time high. BCAB sprang back to life in August after Q2 earnings came out and was briefly back above 12 before drifting back into the low-to-mid 6s. In early November management reported Q3 results and launched a secondary offering, priced at 6.67. With a near-term funding overhang now gone and potential pipeline catalysts coming soon we’ll take a partial swing at this speculative biotech stock. BUY HALF

NerdWallet (NRDS)

Nerdwallet’s (NRDS) mission is to “provide clarity for all of life’s financial decisions.” The company pursues this mission by operating a website and app for personal and small business finance.

The company’s digital platform aims to give consumers and small businesses trustworthy and knowledgeable financial information so they can make smart money moves. Go to www.nerdwallet.com and you’ll find information on credit cards, banking, travel, personal loans, mortgages, insurance, investing and more.

Consumers and businesses in the U.S., Canada and U.K. can access content and comparison shop marketplaces for free, as well as use a data-driven app to stay on top of finances, save time and money, and more.

The company makes money through fees paid by financial services partners. It has over 19 million average monthly unique users (MUU), defined as a user with at least one session in a given month, as of the end of September 2022.

That’s an increase of 11% over the previous year, which might not sound like much. But in a time where consumers have drifted away from online platforms, even modest growth is impressive. Registrations are up 60% over a year ago as a better user experience appears to be drawing in eyeballs.

Moreover, NerdWallet has taken steps to diversify its revenue base through international expansion (Canada) and stepping into new markets (small business, loan matching).

In Q3, reported two weeks ago on November 2, the company surpassed expectations to deliver revenue of $143 million (+45%), well ahead of the consensus of $135 million. EBITDA, a measure of earnings, was $14.5 million. That was way ahead of expectations of just $8.9 million.

Management said growth was driven by banking, credit cards and small business solutions, which collectively overpowered weakness in loans due to higher mortgage rates.

While there are some moving parts here, the growth is attractive, especially given NerdWallet is trending toward breakeven, has a market cap under $1 billion, and few investors are aware of it.

Look for revenue to grow by around 42% in 2022 once Q4 is in the books (partially helped by the acquisition of Barrelhead) then expand by 17% in 2023. EPS this year should be about -$0.21, then -$0.07 in 2023. Start with a half-sized position.

The Stock

NRDS came public at 18 last November and, after an initial pop, began to decline with the market. By lockup expiration in May 2022, it was an 11 stock. By July 1 it was trading at 7.8. That appears to be the bottom and, from August through October, NRDS bounced around in the 8.2 to 11.8 range. Shares blasted through the top end of that range after the Q3 earnings report two weeks ago and closed at 13.6 (+37%) the day after. NRDS has been trading between 12.4 and 14 over the last two weeks. We’ll step in with a half-sized position here. BUY HALF

PBF Energy (PBF) *TOP PICK*

I added PBF Energy (PBF) to our Watch List back in June when the company was still working to reduce the unsustainably high amount of debt it took on (along with the rest of its industry) to survive the energy demand crush that came with the pandemic.

Now, just five months later, PBF’s net debt is at just 1%, down from an astounding 59% at the end of 2021. Management has also reinstated the dividend (yield about 1.5%) and is looking toward a much brighter future. The stock is up but the risks are down. We’ll jump in.

If you can’t recall, the backstory is that PBF Energy is an independent refiner that produces gasoline, diesel, heating oil, lubricants, etc. The company owns and operates six domestic oil refineries (CA, LA, OH, DE, NJ) with a combined processing capacity of over 1 million barrels per day (bpd).

While a relatively small player, PBF’s operations are diversified across the country and it has two refineries in California, a market that is set to lose its second refinery in three years in 2023.

This diversification, combined with the rise in oil prices, has helped PBF repair its balance sheet (debt is down $2.6 billion over 18 months), grow revenue and boost cash flow.

In Q3, reported in late October, revenue was up 78% to $12.7 billion and EPS was $7.96, a massive $1.47 ahead of consensus expectations. Free cash flow was over $1.1 billion, more than a third higher than analysts expected. Refining throughput of 985mbd was at the high end of guidance.

The U.S. continues to have too little refining capacity. PBF is a play on this, specifically in California where 30% of PBF’s capacity lies. Should energy prices stay reasonably stable, PBF should be able to continue to exploit a market cap and preserve strong margins.

Of note, PBF currently holds a 48% ownership interest in PBF Logistics LP (PBFX), which has also taken steps to repair its balance sheet (and pays a 5.5% dividend). PBF has announced it will acquire all shares of PBFX, with the transaction expected to close before the end of this year.

The Stock

PBF traded near 30 at the end of 2019, then the pandemic killed the stock. It traded as low as 4.0 in October 2020. Shares had a bumpy 2021, trading as low as 7.2 in August and as high as 18 in March before ending the year near 13. In 2022 PBF has been strong, making a series of higher highs and higher lows into June when it peaked near 44. The summer months were a bit bumpy as PBF pulled back into the mid-20s a few times but heading into late September the stock gained momentum and was back to its previous high near 44 in late October. After the Q3 earnings release, PBF broke out to new highs. The stock is currently inching higher, toward 50. BUY

Terran Orbital (LLAP)

Terran Orbital (LLAP) is a speculative play on the space revolution. The company makes small satellites for the U.S. and Allied aerospace and defense industries, including military, civil and commercial customers. Both NASA and the Pentagon are on the customer roster.

These satellites are used for defense and intelligence, communications, weather, climate, disaster recovery and navigation.

Industry analysts expect the number of satellites out there to surge from less than 5,000 at the end of 2021 to over 40,000 by the end of 2029. The biggest drivers of growth are better and more resilient technology, faster manufacturing time and lower launch costs.

Orbital makes an “end-to-end” satellite solution, which includes satellite design, production, launch planning, mission operations and in-orbit support. With 85% of parts made in-house, the company has considerable control over sourcing and assembly.

While the company is new to the public markets, Orbital has been around for over a decade. In that time, it has provided over 200 satellite launch services to NASA and the DoD and supported over 80 missions.

A very recent success is the November 13 announcement that Terran’s CAPSTONE spacecraft successfully arrived in a Near-Rectilinear Halo Orbit (NRHO) around the moon. This mission and its orbit lay the groundwork for the same orbit for the Gateway space station that will circle the moon to provide astronauts with access to the surface of the moon and support NASA’s Artemis missions.

Another positive development came on October 31 when Lockheed Martin (LMT) invested $100 million in Terran Orbital and entered into a strategic agreement that runs through 2035 and opens the door for more work with Lockheed.

With this funding, Terran expects to acquire more satellite assembly space, boost satellite module production (roughly 250/year by the end of Q4, growing as high as 100/month) and build out its manufacturing abilities in Irvine, California, where the company has already added 140,000 square feet over the last twelve months.

Suffice it to say it is early days for space stocks and LLAP is early-stage, and therefore has a high risk profile. But it’s making great progress. Revenue in Q3 was 27.8 million (+171%) while EPS was -$0.19. For full-year 2022, revenue is expected to be around $90 million, then jump to $260 – $290 million in 2023.

There’s a lot to this story and we’ll take some time to get more comfortable with it by putting LLAP on our Watch List today.

The Stock

LLAP came public via SPAC IPO at around 10 in the end of March and, after a few volatile days, shares sold off and landed near 3.8. From April through mid-September the stock went mostly sideways in the 4 to 5 range, with a few spikes above 6 and a few dips toward 3.6. In September LLAP came under real pressure and drifted down to 1.7 by October 3. Since then, the stock has been trending higher, and there was a high-volume pop on October 31 when the LMT investment was announced. Still, the stock has work to do before we want to invest, so we’ll keep an eye on the story and shares and see if things can come together before buying. WATCH

Previously Recommended Stocks

Since the October Issue we have only sold one stock, GitLab (GTLB), which we let go on November 4.

Today, we move one stock, Xponential Fitness (XPOF) to HOLD. We’ll let things cool down with this name and see if it can gold on to the breakout above 21 before being too aggressive.

^ 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

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.

The next issue of Cabot Early Opportunities will be published on December 21, 2022.