April 20, 2022

In the April Issue of Cabot Early Opportunities, we take a look at the earnings calendar for our current portfolio and spread new research around by covering a diverse group of small-cap companies.
We have a newly public (again) pet retailer, a leaner and meaner defense and aerospace company, and a rising star in the fitness studio space. We also upgrade two stocks from our Watch List (and ditch a few others), including a key supplier for the EV market and a rapidly growing IT services company.

Enjoy!

Market Overview

Stock Name	Market Cap	Price	Investment Type
Petco (WOOF) - Trade	$6.79 billion	22.4	Growth – Pet Supplies Retailer
Piedmont Lithium (PLL)	$1.35 billion	75.2	Development Stage – Mining
TaskUs (TASK)	$3.58 billion	36.8	Rapid Growth – Services
Triumph Group (TGI)	$1.70 billion	26.2	Restructuring – Aerospace/Defense
Xponential Fitness (XPOF) - Watch	$1.10 billion	22.5	Rapid Growth – Fitness Studios

Updates
With earnings season upon us I want to devote this month’s intro to a quick look at what we should expect in the coming weeks. Let’s get right into it.

Airbnb (ABNB) will release Q1 2022 results on Tuesday, May 3. Consensus estimates point to revenue of $1.45 billion (+64%) and adjusted EPS of -$0.26. For the full year, 2022, revenue is seen up 32% to $7.89 billion, and EPS is seen up 337% to $1.35. The company has roughly 38% exposure to Europe and recently suspended all operations in Russia and Belarus. Analysts see growth outside the U.S. as being faster than within the U.S. BUY

Altair Engineering (ALTR) hasn’t given an official earnings release date. Estimates for Q1 2022 call for revenue growth of 3%, to $154 million, and adjusted EPS of $0.30. This would put Altair on pace for 2022 revenue growth of 9% ($580 million) and EPS growth of 18% ($0.78). Management has a tendency to be a little on the extreme end of the “under promise and over deliver” spectrum, which can be good sometimes. However, in this environment I think investors will just want to hear what’s up and what’s not. HOLD

Bill.com (BILL) will report Q3 fiscal 2022 results on Thursday, May 5. Analysts expect revenue to grow 164% to $158 million and adjusted EPS of -$0.16 (down from -$0.02 in the year-ago quarter). Full-year revenue is seen up 152% to $600 million while adjusted EPS drops from -$0.12 last year to -$0.49 (acquisitions impacting). HOLD

Cloudflare (NET) reports Thursday, May 5 and is seen delivering revenue growth of 49% ($206 million) and adjusted EPS of breakeven. Full-year revenue is seen up 42% to $930 million while EPS is seen up from -$0.05 to $0.03. HOLD

Crowdstrike (CRWD) hasn’t given an earnings release date but has been touted by several analysts as a beneficiary of the Ukraine/Russia conflict (Crowdstrike provides endpoint protection). Look for quarterly revenue to climb 53% to $464 million and adjusted EPS to jump 130% to $0.23. This should put the company on pace to grow full-year revenue 48% to $2.15 billion and EPS by 66%, to $1.11. HOLD

Endava (DAVA) is a European-focused provider of IT services that is expanding further in North America with a Canadian office. There’s no report date yet, but revenue in the most recent quarter is seen up 43% to $221 million while EPS should jump 23% to $0.58. HOLD

Enviva (EVA) reports Thursday, May 5. Analysts expect revenue to rise 11% to $269 million and EPS to jump 129% to $0.17. For the full year, revenue is seen up 30% and EPS is seen near $1.32 (+171%). We jumped in at a good time last month and are up around 14%, well into our target gain range of 10% to 20% for this trade opportunity. With EVA looking extended and trading above most analyst price targets let’s lock in the gain now. We can always come back to EVA. Move To SELL

Fisker (FSR) reports Wednesday, May 4. With revenue just beginning to ramp this year (maybe $70 million total) the report will be more about updates on production for the Ocean SUV and reservations for PEAR. HOLD

GitLab (GTLB) just reported a month ago, so there’s a little more time until the next event. When it comes the market will be looking for signs the company will grow revenue by at least 54% this year, to around $390 million. It hasn’t been a great performing position for us since I added it, but the big picture is attractive enough to keep nibbling (or just hold on). BUY

Pfizer (PFE) should report in May though we don’t have a date yet. The market is looking for quarterly sales of $23.9 billion (+66%) and EPS of $1.53 (+56%). The pace of Covid-related sales and pipeline development will be key. Some of the larger drug company stocks, including PFE, have fallen off lately. Interestingly, J&J just pulled guidance for its Covid-19 vaccine due to low demand in low-income countries. This shot accounted for just 3% of all doses administered in the U.S. and 2% in the E.U. Pfizer’s has been much more popular. BUY

Portillo’s (PTLO) reports Thursday, May 5. Analysts expect revenue to rise 16% to $136 million and EPS of -$0.03. For the full year, revenue is seen up 12% and EPS is seen near $0.14 (+75%). BUY

Shockwave Medical (SWAV) has shot up more than 25% since I added it a month ago. The stock moves to hold now given the move. No official report date yet, but when it comes look for revenue growth of 171% ($86.4 million) and EPS growth of 126% ($0.18). MOVE TO HOLD

Snowflake (SNOW) hasn’t been a great position for us, though doubling down in early March helped us get back to breakeven a couple weeks ago. SNOW has pulled back with the market since. With unclear trends and lingering concerns about the price cut (which should ultimately be a positive) we’ll likely look to exit this position if we can get a little strength to sell into. Moving to hold in anticipation of selling in the near future. MOVE TO HOLD

Sprout Social (SPT) will report on Tuesday, May 3. Analysts expect revenue to grow 38% to $56.2 million and the company to deliver adjusted EPS of -$0.04 (up a penny from the year ago quarter). Full-year revenue is seen up 33%. HOLD

ZoomInfo (ZI) has not given us an earnings date yet. Analysts expect quarterly revenue growth of 12% to $1.07 billion and EPS of $0.88. Full-year revenue is seen up 11% to $4.55 billion. HOLD

What to Do Now
Continue to tread carefully and be mindful that investor sentiment is bearish and interest rates are likely to keep rising.

Don’t get me wrong. I like the stocks this month (and our current positions as well). But as I stated last month in the current environment it’s about not sticking your neck out too far.

Keep new positions on the smaller side of things, keep focusing on diversification and cut positions that don’t look and/or feel right.

We’ll continue to aim to lock in modest gains and, with a little luck, let some of them balloon into bigger gains.

Stock Summaries

Petco (WOOF)

Petco Health & Wellness (WOOF) sells pet-related products and small animals, including birds, reptiles, fish and rodents. It also provides health and wellness services for pets, including training, grooming, in-store vaccination clinics and it even has some full-service vet hospitals.

The company has been around since 1965 and has had stints as both a private and public company. Petco rejoined the public market in January 2021 after spending six years owned by private equity firm CVC Capital Partners and the Canada Pension Plan Investment Board.

During that time, the company was a slow grower, and the pandemic created more challenges while giving online specialist Chewy (CHWY) a big boost (we owned CHWY, ultimately selling half our position for an 89% gain and the other half for a 149% gain).

However, more recently shares of CHWY have been heading south while WOOF has been gaining. It’s not that Petco is going to become a super-grower. Management recently upgraded its growth outlook to a still modest “high single digits” from “mid-single digits”.

But there’s enough here to keep the stock moving higher. The company’s large footprint of almost 1,500 physical stores coupled with all the services it proves give Petco access to aspects of the growing pet market that online-only competitors simply can’t reach. This means Petco should be one of the faster growing, high-quality retail stocks out there.

And it’s not like consumers can’t order things from Petco online. They can. They can also order online and pick up in store. In the coming quarters Petco will also begin testing stores in more rural locations and selling larger animals.

Bigger picture, the pet specialty retail space is one of the most resilient areas of consumer spending. That’s not to say pet owners won’t pull back if there’s a recession, but historical data has shown that people tend to slash spending on things like transportation and their own food before curbing spending on their pets.

In 2022 Petco management sees revenue growing by roughly 7% to a range of $6.15 - $6.25 billion. Adjusted EBITDA is seen growing more quickly while adjusted EPS should be up 9%, to almost $1.00.

With the stock acting well right now we’ll jump on WOOF with the intention to ride it higher for a modest and relatively quick gain of 10% to 20%, hopefully within a few months.

The Stock
WOOF came public at 18 on January 14, 2021, and jumped 63% that day. Over the next six months the stock was volatile, trading as high as 28.7 and as low as 17.9. There was a little rally in the fall and the stock reached 26.2 on November 5. But a disappointing earnings report two weeks later sent shares back below 18. WOOF traded mostly between 17 and 20 through March 2022. Shares jumped off the 20 level on April 8, and a recent analyst day presentation has helped keep momentum going.

Triumph Group (TGI)
Triumph Group (TGI) is a small-cap aerospace and defense company that engineers, designs and manufacturers aircraft components, systems and accessories.
In a rising-rate environment where U.S. (and allies) defense spending seems likely to rise to keep pace with threats posed by Russia and China, defense stocks seem increasingly attractive.

Triumph Group offers exposure, not to mention a compelling restructuring story that should streamline the business and improve profitability.

The story is that Triumph operates in two business segments, (1) Aerostructures and (2) Systems and Support. Aerostructures, a lower-margin business, was historically focused on metallic structural assemblies while Systems and Support, a higher-margin business, is focused on components and aftermarket services.

For the last five years, management has been slashing non-core businesses within the Aerostructures segment. Most recently, Triumph announced the sale of Stuart Aerostructures, which generated 54% of sales in 2020 but just 28% of sales in Q2 fiscal 2022 (reported November 9). Stuart was focused on complex metallic structures, including wings and fuselage for Boeing (BA) 767, 777 and Gulfstream G650.

Analysts see this sale as more or less signaling the end of the restructuring effort and setting Triumph up to focus on higher-margin systems and aftermarket services in the years ahead. Think things like fuel pumps, actuators, heat exchangers and engine controls. The remaining Interior structures business will focus on smaller, proprietary components, which are also higher margin, and should benefit from an ongoing recovery in international travel given contracts on the 737 MAX.

Until the Stuart sale is complete (should be within the next two months) consensus estimates will continue to include the business in estimates, which currently imply fiscal 2022 revenue of $1.48 billion (down 28%) and adjusted EPS of $0.83 (up from a loss of $0.03 in fiscal 2021).

But investors should really care about what Triumph will look like post Stuart sale. According to management we should expect around 25% growth in the remaining business as Triumph develops new programs and platforms and lands new customers.

The trends are good. New orders grew 38% in the most recent quarter, including work form Airbus, Raytheon, GOL Airlines (GOL) and more.

We should also expect to see Triumph slash debt with the cash raised through the Stuart sale. It ended the last quarter with over $200 million in cash and $1.4 billion in debt (down 11% over the last twelve months).

The Stock
TGI has been public since the mid-1990s. It hasn’t been a strong performer for most of the last eight years and revenue has shrunk for four out of the last five (partly due to divestitures). But TGI stock has done much better over the last two years as the restructuring has neared the final stages. From May 2021 through mid-February 2022 TGI was rangebound in the 15.5 – 22 zone (aside from a quick rally to 24.5 in November). Shares began to creep higher after the Q3 fiscal 2022 report on February 9 and have made a series of higher highs and higher lows over the last 10 weeks.

Piedmont Lithium (PLL)
Piedmont Lithium (PLL) was added to the Watch List last month and is being upgraded to the portfolio today. Big picture, the company could help boost America’s clean energy production and storage.

Piedmont is a pre-production lithium company working to build an integrated lithium hydroxide from spodumene business in the U.S. Lithium hydroxide is required for long-range EV batteries. A lot of lithium will be needed for EVs to reach targets of 50% global penetration by 2035.

Piedmont could become one of the lowest-cost producers of both spodumene (preferred feedstock for lithium hydroxide) and lithium hydroxide. Tesla (TSLA) is planning to supply its Gigafactory with Piedmont-sourced spodumene concentrate.

Piedmont’s flagship project is the Carolina Lithium project, which is in the Carolina Tin Spodumene Belt of North Carolina. This location, just 25 miles west of Charlotte, is highly strategic as it is relatively close to both labor and supplies.

Carolina Lithium is targeting production of 242,000 tons per year of spodumene concentrate that will be converted to 30,000 tons per year of battery-grade lithium hydroxide. The next step is for Piedmont to obtain state mining permits, hopefully in Q2, then achieve rezoning from Gaston County (potentially Q3).

Beyond North Carolina, Piedmont also holds a 37% interest in the Sayona project in Quebec, Canada and a 50% interest in the Atlantic Lithium (ALLIF) project in Ghana. On March 29, Atlantic Lithium announced a 42% increase in mineral resources at its Ewoyaa Project in Ghana.

We’re looking forward to a restart decision on the Sayona Project at some point in the first half of 2022. At the Atlantic Lithium project in Ghana, we’re now looking forward to a prefeasibility study (PFS) in the first half of 2022 and a bankable feasibility study (BFS) in Q4 2022.

Piedmont also has plans for a second lithium hydroxide plant in the U.S. (the LHP-2 project) to produce lithium hydroxide from spodumene that’s sourced through offtake agreements with Sayona Quebec and Atlantic Lithium. Management just dropped a Preliminary Economic Assessment (PEA) for this project on March 9.

Piedmont is very early stage (pre-production), and no project has been fully approved yet. The company will need partners and/or more financing to fulfill its plans (capex for Carolina Lithium alone is close to $1 billion). Along these lines, in late March Piedmont raised $130.8 million in a secondary offering, the proceeds of which will go to help advance all of the aforementioned projects. The stock has acted well since that offering.

The Stock
PLL was trading for less than 10 in 2020 but a listing on the Nasdaq and more definitive plans in N.C. helped PLL soar as high as 89 by March 2021. Following a secondary offering priced at 70, PLL traded in a wide range, consistently finding support in the 47 – 50 range through January 20, 2022. Then the stock was pounded for two days, falling as low as 40.7 on January 24. That appears to have been a wash out. PLL rallied to 80 by the end of March. A little dip to 64.4 in early April has pulled in buyers and PLL is now back in the mid-70s.

TaskUs (TASK)
I’ve been keeping an eye on TaskUs (TASK) since January and am upgrading the stock from our Watch List to our portfolio today. Shares have held up relatively well despite a difficult market. And enough time has passed since the short attack from Spruce Point Capital and lockup expiration (both in mid-January).
Recall that TaskUs provides customer support and customer experience (CX) services to “new economy” companies. Its client base consists of many high-growth, digital-first business models and includes Zoom (ZM), Uber (UBER), Netflix (NFLX), Coinbase (COIN), DoorDash (DASH) and Instagram, among others.

The company is focused on delivering services around customer care, content moderation/security, and data labeling and annotation services. TaskUs grows with clients by taking on incremental work volumes as their businesses scale up.

Clients are attracted to the company because it was borne on the web and has grown up in the cloud. There is no legacy software code to work around. This cultural similarity with clients is a large part of what sets TaskUs apart from other IT service providers.

The company is also differentiated by its ability to get new projects going quickly. This ties back to the efficiency of modern technology solutions. Management says that TASK employees are roughly three-times faster than the competition when it’s time to get integrated and start working on customer accounts.

As a leader in the industry, TaskUs has a hiring advantage. The company is able to charge a higher rate than competitors, which can mean more flexibility when looking to bring on staff. At the same time TaskUs is hiring in lower-cost locations (Philippines, India, etc.), which should help margins in 2022 and beyond. In Q4 2021 the company grew headcount by 4,500 and plans to add over 4,000 in each quarter of 2022 (there will likely be natural attrition as well).

Management reported Q4 2021 results on February 28 that surpassed expectations on the top line and gave TASK stock a nice boost. Revenue grew 63% to $227 million ($10.8 million above consensus) while adjusted EPS came in at $0.34.

More importantly, 2022 guidance of $980 million - $1 billion (around +30%) came in above consensus. EPS is seen at around $1.36.

In that guidance there isn’t any extra growth embedded for the company’s biggest client, even though TaskUs is adding several hundred employees to service the company in 2022. Also noteworthy is that management said that, among the other top four clients, two are expected to grow above 100% while the other two are expected to grow double-digits.

We don’t have an official Q1 2022 earnings release date just yet.

The Stock
TASK came public on June 11, 2021, and closed up 35% that day. The stock went sideways for a couple months then exploded higher, racing from 30 to 85.5 from the beginning of August through September 24. The trend then got a little choppy, then shares cratered, trading as low as 35.2 by December 6. A little rally carried TASK back to 56.6 by the end of 2021, but shares slid again in January (short report didn’t help), ultimately landing near 26 in late January and again in late February. TASK reported Q4 results on February 28 and has been stronger since, trading near 40 for much of the second half of March. This little pullback to 35 seems like a decent entry point.

Xponential Fitness (XPOF)
Xponential Fitness (XPOF) will go on the Watch List today. The company came public last year and is the largest franchisor of boutique fitness brands in the U.S. with 1,954 studios across 48 states. It also has 176 studios open in 11 foreign markets.

The company’s ten brands cross several verticals including Pilates (Club Pilates), barre (Pure Barre), cycling (CycleBar), rowing (Row House), dance (AKT), yoga (YogaSix), running (Stride), boxing (Rumble), functional training (BFT), and stretching (StretchLab).

Xponential offers small class sizes in easy-to-access retail locations, often with several brands located in a “fitness row”. The majority of consumers are female, ages 20 to 60 years old. Consumers can buy recurring memberships or just walk in. Retail locations sell both branded and third-party products.

One of the new initiatives that could drive some outperformance is the new XPASS, an offering with three different price points/classes allowed, that gives consumers access to all brands’ class offerings on one platform.

There is also the XPLUS virtual on-demand class offering ($19 - $29.99 per month) that offers access to all brands and gives consumers an alternative to offerings from Apple Fitness+ (AAPL) and Peloton (PTON).

Finally, Xponential has a new partnership (signed November 2021) with L.A. Fitness and City Sports Club to add Xponential brands in more than 500 Fitness international locations. Buildout costs for these locations will be less than standalone studios.

Xponential has done well growing even through the pandemic. While 30% of U.S. boutique studios closed, Xponential opened 555 new studios and grew members by 49%.

Acquisitions have been a part of the growth story for years and continued in 2021 with Rumble (14 studios) acquired in March 2021 and BFT in October 2021 (151 studios).

BFT in particular has helped Xponential grow internationally given its studios are located in Australia, New Zealand and Singapore. BFT sellers have become Xponential Master Franchisees and will continue to help the company expand internationally.

Xponential has been a rapid grower. After the initial impacts of the pandemic drove sales down 20% in 2020, revenue surged by 49% to $155 million in 2021. The year was closed out by 98% revenue growth in Q4.

Looking forward, Xponential is expected to grow 2022 revenue by 35% to $210 million and deliver EPS of $0.79. I’ll add it to the Watch List today.

The Stock
XPOF came public at 12 on July 23, 2021. Shared didn’t do anything until October when they began a rally that carried XPOF to 24.7 by November 12. The stock was up and down through the end of the year then retreated all the way to 12.9 by lockup expiration on January 18. That was the low. XPOF took off again, ultimately hitting an all-time high of 26.9 on March 29. The stock pulled back into a secondary offering earlier this month (priced at 20) and is currently trading 15% off the high.

Previously Recommended Stocks

Shockwave Medical (SWAV) is moved to HOLD today, April 20. Snowflake (SNOW) is also moved to HOLD today and will be sold soon unless something magical happens.

Enviva (EVA) is moved to SELL as the stock has risen roughly 13% over the last month, putting this trade opportunity into our target profit range of 10% to 20%. We may be leaving some upside on the table, but EVA looks extended, is trading above most analyst price targets and has earnings coming up soon. With a quick gain and shares seemingly priced for perfection I think it’s worth booking the gain. SELL

From the Watch List, Descartes Systems (DSGX) and Solo Brands (DTC) are both dropped due to lackluster performance.

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 May 18, 2022.