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Early Opportunities
Get in Before the Crowd

Cabot Early Opportunities 109

Growth stocks are red hot! In this month’s Issue of Cabot Early Opportunities, I sift through all my ideas to feature a compelling mix of five stocks that still look to have significant upside potential over the coming months. Several of these names should represent new ways for investors to participate in long-term growth trends.

Cabot Early Opportunities 109

Stock NameMarket CapPriceInvestment Type
DraftKings (DKNG)$9.2 billion29.57Rapid Growth – Sports Betting
Enphase (ENPH)$8.4 billion67.02Rapid Growth – Solar
Formula One Group (FWONK)
$7.6 billion31.17Growth – Auto Racing
GFL Environmental (GFL)$5.8 billion17.78Rapid Growth – Waste Services

Viela Bio (VIE)

$2.7 billion54.21Clinical Stage Biotech


Current Investing Environment

Dot Com Bubble 2.0 or Rational Exuberance?
When then-Fed Chairman Alan Greenspan publicly wondered in 1996 how we would know if irrational exuberance has “unduly escalated asset values”, three years before the dot com bubble burst, there were few investors that heard, then acted.
The promise of an internet-enabled world where goods and services could be sold online with little friction and huge profits was just too attractive. It was the perfect delivery model. How could anything go wrong?!!

Of course, things did go belly up as the promise of the internet went largely unfulfilled. Turns out it wasn’t all that easy to buy whatever your little heart desired online, or become an overnight success selling whatever sculch you could dig up and hawk on a poorly designed and barely functioning ecommerce site.

Twenty years later there is a rising cacophony of voices saying we’re entering a similar environment where valuations and stock prices for internet, ecommerce, cloud and other such digital-enabled stocks are too hot to touch.

The difference now is that all the promise that powered the dot com bubble has been realized, and more!

Many of the companies with soaring share prices are not only hugely valuable (even if that value is inflated), they are insanely profitable too. They are legit businesses that consumers, businesses and governments rely on every day.

If COVID-19 has taught the world one thing it is that we can handle a freaking pandemic, so long as we have internet access.

I’m not saying that current share prices are rational or irrational. I’m not smart enough, or delusional enough, to pretend I know the difference right now (I’ll tell you in two years).

But I am saying that, in aggregate, today’s internet/ecommerce/digital/cloud companies are not the Sirens of the late-1990s, but rather the circulatory system for much of the world, responsible for delivering life-sustaining goods and services.

The stocks might be pricy. But it’s not hard to understand why we keep buying them.

What to Do Now
Last month I wrote this:

“Thinking big picture, what we know is that massive crises require government intervention. This is often the best time to put money to work. Yes, risks and uncertainties are high, but stock prices and valuations are low.

All things considered, if you have time and liquidity on your side, you must invest, at least a little. It’s really that simple. History has shown these opportunities don’t come by all that often.”

That bullish view has worked out well for us since.

Last month’s additions, Adaptive Biotech (ADPT), Datadog (DDOG), Descartes Systems (DSGX) are all firmly in the black with gains of 44%, 81% and 15%, respectively!

Our half position in Virgin Galactic (SPCE) is down 18%, while we stepped away from Conmed (CNMD) right near our entry point.

Now, the pickings are slim for growth investors not willing to buy stocks that have levitated over the last month. Everything has.

We now need to tread carefully. But despite all the strength it is not time to cease all buying.

For that we would need more evidence that stocks are set to lose momentum and fall dramatically. Taking some partial gains here and there is certainly wise (as we’ve been doing) and stepping aside from stocks that aren’t working makes sense too (also, as we’ve been doing).

Overall, just take it one step at a time. Average in, and if a stock continues to look healthy then add to the position. If it starts to break down, it is fine to step aside. Don’t do anything that’s going to keep you up at night.

This month’s Issue of Cabot Early Opportunities features a variety of stocks that are all looking strong right now.

We have a newly public company with a legalized platform for sports gambling, a solar energy innovator, a newly independent way to invest in car racing, a compelling waste handling stock and a biotech company on the verge of its first commercial success.

They’re all relatively aggressive ideas because, well, that’s the environment right now. Enjoy!


DraftKings (DKNG)
Other than Korean baseball there aren’t a lot of options for sports betting these days. That hasn’t hurt enthusiasm over DraftKings’ (DKNG) sports betting and online gambling (iGaming) platform, however. It is arguably the best single stock to play the growth trend. DraftKings should gain meaningful market share (20% or more) when in-person events resume and keep growing steadily in the online gaming market in the interim.

The stock’s current strength is testament that investors see a huge market evolving. So too do analysts, who peg the U.S. sports betting market as nearing $9 billion by 2025. Add in iGaming and the market approaches $12 billion.

That number is going up as new states legalize the practice. While the pandemic stalled legislative action temporarily, the current tally of 20 states having legalized sports gambling since May 2018, with legislation pending in 14 more, clearly illustrates the trend. Analysts see 38 states approving by 2023.

DraftKings, which went public in 2020 and has a market cap of $9.2 billion, was started in 2012 by fantasy sports fans Jason Robins, Paul Liberman and Matt Kalish out of their Watertown, MA apartment. It had roughly 100,000 registered accounts at the time. Now, it has 12 million.

DraftKings is the leading daily fantasy sports platform, operates in 26 countries, and is the official fantasy partner of the NFL. Much of the special sauce is contained in the vertically integrated technology and regulatory platform that connects players, marketing, and data science with the current product lineup of Daily Fantasy Sports, Sportsbook and iGaming.

Players can participate in 16 sports (golf, football, tennis, baseball, Nascar, etc.) and six games (slots, blackjack, roulette, etc.). The platform is nimble enough to bring new products quickly to market. DraftKings has recently been promoting eSports sportsbook and Korean baseball fantasy, both of which helped offset revenue declines from fewer live sporting events.

While there are short-term risks (for example, that sports won’t come back soon) and the stock has had a heck of a run, the bull case scenario still points to considerable upside for the risk-tolerant investor. Revenue of $113 million in Q1 met expectations while average revenue per user was up 10% to $41.

Analysts see modest revenue growth of 5% this year accelerating to 53% in 2021, then staying above 40% through 2023. The company should lose around $0.63 a share this year but be profitable in 2023. DraftKings has roughly $500 million in net cash.

The Stock
DKNG was established on April 24, 2020 when it was combined with SBTech and merged into the special purpose acquisition vehicle Diamond Eagle Acquisition Corp. On that date the stock closed at 19.35. It dipped the following session and has steadily climbed, on rising volume, to the current price near 30.


Enphase Energy (ENPH)
Enphase (ENPH) is a $8.4 billion market cap energy company specializing in semiconductor-based solar microinverters. Solar energy is converted at the individual solar module level and the company’s IoT platform, complete with gateway and cloud software, connects the generated energy with storage and energy management in one high-tech package.

The key to success was early recognition that solar energy generation would follow the same “distributed architecture” evolutionary path as telecommunications and computing systems, wherein end points (like a PC, or in this case, smart solar modules and battery systems) make autonomous decisions.

As an example, Enphase’s Ensemble system will kick in to create a microgrid for a home and power it, even when the grid fails or goes off-line. This solar plus storage solution solves the “grid-tied” issue that plagues so many other solar systems today that don’t power a home during power outages.

Enphase operates in a fiercely competitive market. Its most direct competitor is SolarEdge (SEDG), another of our holdings, whose rate of market share wins from Enphase was significant, but has slowed and possibly reversed course, in recent quarters. Still, with distributed solar and energy storage, there is enough market growth out there for multiple winners. Both ENPH and SEDG seem to be holding their own just fine.

Management has aggressive growth and profit targets, as illustrated by their 35-15-25 financial model. This establishes baseline expectations for 35% gross margin, 15% operating expenses and 20% operating margins through December 2021

In Q1 2019, reported on May 5, the company beat expectations on both revenue and EPS. Revenue of $206 million was up 105% while adjusted EPS of $0.38 was up 375% and beat by $0.06. U.S. revenue was up 130% while international was up 15%.

Guidance for Q2 of $115 million to $130 million was better than feared, as was the profitability forecast. The rollout of a new storage solution, Encharge, was delayed until June (from March), and should help juice results in the back half of the year.

Stepping back, while the stock has recovered all its market crash losses and trades at a valuation premium, investors should look to forward growth, not backward stock volatility. Enphase is expected to deliver only modest revenue growth of 12% this year (largely due to COVID-19) but should bounce back with 47% revenue growth in 2021. Expected adjusted EPS of $1.08 this year and $1.52 in 2021 (up 41%) illustrates the attractive margin profile.

The Stock
ENPH went public at 6 in 2012 and was an initial success, then fell on hard times from 2015 – 2017. A new CEO came on board and while there have been three corrections of 50% or greater since, the stock has performed splendidly. ENPH rose steadily from 18 last November to 59 in February. It then crashed with the market, hitting an intra-day low of 21.5 in March. The bounce back was swift. ENPH was back near 40 within a couple of weeks and after a wobble or two took off again in late-April. Following the Q1 report in early-May shares jumped back to the previous high and have broken out this week.


Liberty Formula One (FWONK/A)


If you’ve never been to a Formula 1 race you need to go when they open again. I’ve never been huge into car racing but a while back while in Melbourne, Australia the event was in town, so we went. The sound permeated the entire city. You just can’t describe the level of excitement and total insanity of how fast those cars can go, especially around corners. The crashes are spectacular too.

Finally, you can own shares in the company that brings that excitement to the main track. Just recently Liberty Media split its Formula One (FWONK) business from the Live Nation (LYV) concerts and ticketing business that used to be wrapped up together.

No more. If you want to invest 100% in Formula 1 (along with a smattering of other minority interests, including the Braves MLB team, Drone Racing League and Tastemade), now you can.

Sure, the 2020 season is a little up in the air due to COVID-19 related suspension. But even if this season requires racing teams and staff to isolate prior to spectator-free events, that’s better than nothing. Go or no-go decisions can be made relatively quickly when tens of thousands of spectators and vendors are removed from the mix.

There is potential for this season to be canceled outright, but on the May 7 Q1 call management said it is targeting a 15 to 18 race season, starting in the July-September timeframe. That’s enough for FIA to certify the season (minimum is eight races) and above the 15-race threshold to receive full payment from broadcast partners (fees are pro-rated for each event missed), though some sponsorship concessions would likely be made.

Bigger picture, a return to a normal 22 race schedule in 2021 is in the cards. With all the trends pointing toward strong pricing for media rights, a longer race season and improving economics around merchandising, digital, hospitality and sponsorship, combined with rising perceived value of the sport among spectators, Formula One has a lot to offer investors that can look past the current uncertainty.

On the financial front, F1 likely had enough cash (roughly $450 million at the end of 2019) and short-term credit availability ($500 million) to get through the season, even if it was totally canceled. The recent split with LYV has topped off the tank with an additional $1.4 billion of cash that nearly ensures continuity, even in a worst-case scenario.

As it stands now analysts see an abridged 2020 season generating $1.6 billion in revenue, roughly 23% less than stand-alone F1 generated in 2019. Adjusted EBITDA profitability goes down by roughly a similar percentage. In 2021 revenue jumps nearly 50% over this year (and 13% over 2019) as business gets back to normal. Adjusted EPS profitability is a 2022 – 2023 event.

The Stock
When FWONK was combined with LYV shares traded near 49, then fell to 18 during the market crash. FWONK split off on March 22 when it traded around 21.5. Since the split FWONK has been gaining altitude. It traded up to 32 a couple weeks ago, pulled back to just below 30 last week, then jumped back to a fresh two-month high near 33 early this week.


GFL Environmental (GFL)
This past Sunday found me picking up garbage that was spread around the yard when racoons got into the bags my dad had put in his trailer to take to the transfer station, but never got around to dropping off. It was the latest reminder of how residential garbage and recycling pickup is one of the best inventions in modern history. I called the local company and purchased three months of service for my parents.

Regardless of whether or not my parents stick with it, providers of solid waste services tend to enjoy a steady business. Yet the market remains very fragmented with many smaller players operating on the same routes as larger competitors. Consolidation potential is huge.

One of the latest entrants is GFL Environmental (GFL). Roughly three-quarters of the company’s revenue comes from solid waste services while infrastructure and soil remediation contribute about 16%. Liquid waste services make up the remaining 10%. Business is done across Canada and in 23 states in the U.S.

It has a cool story. Entrepreneur Patrick Dovigi started with a small transfer station near Toronto, Canada and grew it bit by bit, completing 124 acquisitions since 2007. Along the way he picked up executives from acquired Waste Industries, which has a 50-year operating history.

In 2018 GFL’s acquisitions were responsible for 31% of growth. In 2019, they drove 73%. Looking forward acquisitions should drive 20%, plus or minus, depending on the year.

Those acquisitions are translating into huge growth. Revenue was up 39% in 2018, then 81% in 2019. In 2020, revenue is expected to approach $3 billion, implying roughly 15% growth. Unannounced acquisitions will likely add to that, however, and bring growth to north of 20% in my view.

The company isn’t yet profitable. Adjusted EPS was -$0.93 in 2019 and should improve by around 50% to -$0.44 this year. It’s trending in the right direction. Debt is meaningful (debt/adjusted EBITDA nearing 4.4 at year-end 2020, versus around 2.5-times for peers), but that risk is largely offset by the recurring revenue nature of the business.

The Stock
GFL just went public at 19 on March 3, which was about the worst timing of an IPO ever. The stock closed down 12% the first day and kept falling from there, finally hitting an intra-day low of 11.92 on April 6. It came back strong and has closed near or above 17 since the beginning of May.


Viela Bio (VIE)
Viela Bio (VIE) is a clinical-stage biotech company developing treatments for autoimmune and severe inflammatory diseases, including neuromyelitis optica spectrum disorder (NMOSD), cutaneous lupus erythematosus (CLE), kidney transplant rejection, and Sjögren’s syndrome.

Its lead asset, inebilizumab, is on the cusp of gaining FDA approval as a first-line monotherapy treatment for NMOSD, a rare condition that attacks the optic nerve, spinal cord and brain stem and often leads to irreversible blindness and paralysis. The Biologics License Application (BLA) was accepted by the FDA after positive Phase 3 data and is seen gaining approval by the June 11 PDUFA date. Analysts believe inebilizumab can become one of the leading front-line treatments.

Approval would be a good indication that Viela’s scientific approach, which is focused on shared critical biological pathways to target underlying causes of autoimmune diseases, works.

Beyond progress on NMOSD, Viela is also progressing inebilizumab for three other indications; myasthenia gravis (MG), IgG4-related disease and kidney transplant desensitization.

Two other potential treatments, VIB4920 and VIB7734, are also being advanced, the first for kidney transplant rejection and Sjögren’s syndrome, and the latter for CLE. All these programs are in varying stages of Phase 1 and Phase 2 studies.

Most recently the VIB7734 program was in focus given the release of interim Phase 1b data. The data was encouraging and management is collecting final data before deciding on dosage for the next phase.

Related to COVID-19, enrollment in other programs has been temporarily paused, but a Phase 3 trial for MG is expected to start soon, as is a Phase 2 trial for IgG4-related disease. It all adds up to a potential approval in the near-term, with updates on three additional programs also due around mid-year.

With $335 million in the bank and the potential for a commercial launch sending 2021 revenue soaring to $110 million, Viela represents a moderately risky biotech that could have meaningful near-term upside, and huge long-term upside.

The Stock
VIE came public on October 3, 2019 at 19 and jumped 23% the first day. After a dip, the stock traded in the 24 to 33 range for a few months before rallying up to 48 in mid-January. Another consolidation phase (a relative term with biotech) was followed by a huge intra-day spike to 70 on March 4. The COVID-19 market crash was a quick and painful three-day affair for VIE that saw shares bottom at 25. Shares began to climb again in early-April and reached 48 before a little dip to 37. They’ve since advanced to 52 and look strong trading near their previous closing highs.


Previously Recommended Stocks
We have made a few changes since the April Issue, all communicated through Special Bulletins.

On May 8 we sold Survey Monkey (SVMK) for a 32% gain, Bellring Brands (BRBR) for a 19% gain and Conmed (CNMD) for a modest loss of -2%.

Then on May 13 we sold Deciphera Pharmaceuticals (DCPH) for a 46% gain, one quarter of our Five9 (FIVN) position for a 59% gain and half of our Livongo (LVGO) position for a 110% gain.

All these sales are reflected in the updated tables 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.

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 call or email with any questions.

StockSymbolDate CoveredNotesOriginal Price^Price 5/19/20 Current Gain
Adaptive BiotechADPT4/15/2027.9140.0744%
Axonics ModulationAXNX1/15/20Top Pick30.4439.8231%
BlackLineBL3/19/20Top Pick48.9866.5936%
Descartes SystemsDSGX4/15/2038.8244.7415%
Formula One GroupFWONK5/20/20Top PickNEWNEWNEW
GFL EnvironmentalGFL5/20/20NEWNEWNEW
Solaredge Tech.SEDG1/15/20104.18134.8629%
SunnovaNOVA2/19/20 & 3/19/2012.4114.9020%
Viela BioVIE5/20/20NEWNEWNEW
Virgin GalacticSPCE4/15/20Buy Half19.3515.87-18%
10x GenomicsTXG12/17/1966.7878.2017%
Five9FIVN11/20/19Hold 3/464.37103.8061%
LivongoLVGO11/20/19Top Pick, Hold 1/228.2360.91116%
Sprout SocialSPT2/19/2020.3826.1728%
Y-mAbs TherapeuticsYMAB2/19/2033.9938.5013%
Company NameTickerDate CoveredDate SoldReference Price^Price Sold^Gain/Loss
Deciphera PharmaDCPH10/16/195/13/202034.4250.3746%
Five9 - Sold 1/4FIVN11/20/195/13/202064.37102.5959%
Livongo - Sold 1/2LVGO11/20/195/13/202028.2359.34110%
Bellring BrandsBRBR3/19/205/8/202015.2718.1819%
Survey MonkeySVMK10/16/19 & 3/19/205/8/202014.5119.1632%

^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 June 17, 2020

Cabot Wealth Network
Publishing independent investment advice since 1970.

CEO & Chief Investment Strategist: Timothy Lutts
President & Publisher: Ed Coburn
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