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Early Opportunities
Get in Before the Crowd

Cabot Early Opportunities 116

In December’s Issue of Cabot Early Opportunities we look back at one of the strangest years in decades and discuss the seemingly counterintuitive strategy that drove huge portfolio gains.

Then we look at a fresh batch of names that seem ripe for the picking now and which could serve us well in the beginning of 2021. Our new stocks span clean energy, PC gaming, biotech, industrial supplies, and payment processing. As always, there should be something for everyone!

Cabot Early Opportunities 116

Stock NameMarket CapPriceInvestment Type
Array Technologies (ARRY)
$4.9 billion38.64Rapid Growth – Solar
Corsair Gaming (CRSR)$3.2 billion35.16Growth – PC Components
Halozyme Therapeutics (HALO)$5.7 billion42.2oRapid Growth – Biotech
Lawson Products (LAWS)$449 million49.71Growth – Industrial Supplies
Shift4 Payments (FOUR)$5.0 billion62.78Growth – Payment Processing


Current Investing Environment

Barreling Through 2020 Out of Control
In thinking of an analogy for investing in 2020, I have this image of a full-size pickup truck towing a trailer of expensive snowmobiles through a blizzard in the mountains of British Colombia (don’t ask why, and yes, I’m sober).

We, investors, are driving the truck. The snowmobiles represent our portfolios.

Snow is flying at us from left, right and center. The road is hidden beneath a layer of slush and we are headed downhill.

Because of our momentum and the slick roads our brakes don’t really work. When we try to pump them to slow down, our trailer fishtails wildly, swinging left and right and threatening to pull us into a huge and violent crash.

We are, to put it mildly, completely out of control.

In this scenario we do the only thing that makes sense, counterintuitive though it may be. We punch it.

Foot on the gas we barrel faster and faster downhill trying to pull our trailer back in line behind us. Mission accomplished, the only thing to do is maintain momentum. At some point we’ll get to a flat or uphill part of the road where we can let gravity slow us down in a somewhat controlled manner.

This analogy works for me because 2020 has thrown so much at us that it has been nearly impossible to see through it all to find an obviously safe spot to just chill out.

Yet, in this wild real-world environment, just like stepping on the gas seems insane in my blizzard analogy, aggressively buying growth stocks hand over fist worked beautifully.

I have heard from so many subscribers that 2020 has been their best year of investing ever. I know I’m not alone in stating that, given where we were in March and April, the type of performance we’ve enjoyed since then comes as a very pleasant surprise.

The big question now is… what’s next? Are we still going downhill? On a flat road? Uphill? And how do we navigate what comes next?

Like everyone, I wish I knew the answer. My best guess is that 2021 is going to feel a lot more like driving on just a regular dangerous flat road than barreling uncontrolled downhill through a blizzard!

As far as how to navigate it, we’ll just have to take it as it comes while trying to peer out as far as we can.

One of the neat things about recommending stocks to buy on a set schedule every month is that it forces you to search for things that will work in a wide variety of conditions. That tends to keep us centered, even when things around us seem crazy.

What to Do Now
Keep two hands on the wheel, two eyes on the road, and proceed cautiously.

The rumblings about stocks, and growth stocks in particular, getting overheated have gotten louder in December, thanks in no small part to the huge performance of IPOs like DoorDash (DASH), Snowflake (SNOW) and AirBnb (ABNB), and the lofty valuations that many growth stocks have been able to sustain so far.

Rumblings don’t always translate to a correction. And in fact, questioning outstanding performance is generally a good thing. But still, the point is that investors should not get complacent. There is always a correction coming at some point and it’s best to realize that so when it comes, you’re not surprised. It’s just part of investing.

In terms of new buying, be sure to average into new positions to accumulate a full position over time. And in terms of selling, consider reducing position sizes in some of your biggest losers in order to gain the tax benefits before the end of the year.

Also, don’t be afraid to take some partial profits here and there. The end goal is to be able to participate in the big, sustained moves, while sleeping well at night. If you are having trouble with that, you could probably take down the risk profile of your portfolio a little.


Array Technologies (ARRY)


Array Technologies (ARRY), which went public in October and has a market cap of $4.9 billion, is one of the world’s largest manufacturers of ground-mounting systems used in utility-scale solar energy projects. Ground mounting systems include all the supports, electric motors, gear boxes and electronics that support solar panels and continuously orient them toward the sun.

The company’s trackers, which represent around 25% of the cost of a major solar array, can increase electricity yield by around 25% while only adding 7% to the cost per watt. That attractive ROI has translated to a roughly 70% attachment rate in the U.S., where the estimated market size is nearing $2 billion a year and growing by 10%.

Array is winning business because it has a technology advantage (supported with patents) that allows relatively simple systems to drive entire arrays. Competing products just drive rows of panels, so multiple systems are needed for large projects. Array’s solutions make for quicker installations, fewer parts, lower maintenance, and lower total cost of ownership over time.

The company’s main product line is the DuraTrack follow-the-sun single axis tracker. DuraTrack includes an electric motor that rotates up to 32 rows of panels (3,200 panels) in unison, using an articulated metal rod. Panel attachment is easy with a single-bolt module clamp, and the company offers product add-ons to deal with wind.

Coupled with Array’s SmartTrack machine learning software, which will optimize system performance, DuraTrack systems are tough to beat. That’s why Array has become the dominant player in the U.S.

Revenue was up 123% in 2019 and adjusted EPS was $0.60. Revenue trends in 2020 – 2023 will be impacted by step downs in the investment tax credit (ITC), which incentivizes customers to place orders in the second half of the year (Q3 and Q4) but take delivery in the first half (Q1 and Q2) of the following year. This will have the impact of depressing revenue in the second half of a year and boosting them in the first half.

Taking this change into consideration, and the step down in revenue in Q3 2020 (down 29% versus Q3 2019) analysts see revenue up around 33%, to $860 million, in 2020 and adjusted EPS up 43%, to $0.86.

Looking out to 2021 revenue is seen growing by 15%. However, numerous initiatives, including international expansion (where Array has just 30% market share) and acquisition potential, combined with what is likely to be significant political support for solar around the globe, could add meaningful growth above current expectations.

The Stock
ARRY came public at 22 on October 12, 2020 and jumped 66% the first day. It traded as high as 44 in the days afterward, then fell back to 34. Two more surges took ARRY to 49 (November 6) and 51 (November 24). Then a secondary offering was announced, and shares fell below 40 over three sessions. The offering was priced at 35 on December 3. The stock found firm footing near that level, the offering closed on December 7, and ARRY has been stable and rising modestly since. I think the pullback offers an intriguing entry point.


Corsair Gaming (CRSR)
Corsair Gaming (CRSR) is a computer hardware company that specializes in high-performance gear for gamers and content creators. Products range from PC components and peripherals to premium streaming equipment and smart ambient lighting.

In addition to the Corsair brand the company also owns Elgato Gaming (acquired 2018), Origin PC (acquired 2019), and SCUF Holdings (acquired 2019). Corsair has a market cap of $3.3 billion.

An investment in the company represents a play on the rise in eSports and streaming. Strange though it may seem to many, over 100 million people in the U.S. watched gameplay livestreams or pre-recorded gaming videos in the third quarter of 2019. In fact, data shows 100 million people watched the League of Legends 2019 World Championship!

That’s a lot more than the 19 million that watched Game 6 of the 2019 NBA finals, and about the same as the 100 million that watched the 2020 Super Bowl live on Fox.

With both gamers and viewers getting better and more sophisticated, the equipment they require to keep progressing is hugely important. That’s where Corsair comes in.

Until a few years ago the company was mostly a niche supplier to DIY PC builders. But management saw an opportunity to leverage its engineering prowess and offer products to the growing throngs of people flooding into eSports and streaming.

Corsair assembled a specialized marketing team that focused on social media, influencers, and eSports marketing. This helped them reach potential customers that were not aware of the company’s products.

Today, Corsair is near the top of the heap in terms of market share for gaming peripherals, keyboards, mice, headsets, streaming gear, and performance controllers. In aggregate, it is now the third most popular brand of PC gaming peripherals. It is mounting a considerable offensive against Logitech and Razer.

Corsair has also retained its position as one of the top computer component manufactures (around 26% U.S. market share), which includes high-performance power supply units (PSUs), cooling solutions, computer cases, DRAM modules, and prebuilt and custom-built gaming PCs.

Revenue was up 18% in 2019 and is seen jumping 50%, to $1.65 billion, in 2020. Adjusted EPS this year should be around $1.24. There’s no doubt the pandemic has helped drive more gaming activity and some of that will likely moderate in 2021. However, the big picture trend is enticing and CRSR has just endured a significant pullback from all-time highs, opening the door to new investors.

The Stock
CRSR came public at 17 on September 23, 2020 with little fanfare. The stock was down 16% its first day. But it soon jumped over 20. Then, between October 19 and November 24 CRSR went on an insane rally that carried the stock as high as 51. That was a bit too much. After three down days shares were back below 40. For the last two weeks CRSR has been knocking around between 32 and 39. This looks like a good time to start a position.


Halozyme Therapeutics (HALO)
Halozyme Therapeutics (HALO) is a biotechnology company that has developed a drug delivery platform called ENHANZE that is used to deliver injected drugs and fluids. It has a market cap of $5.7 billion.

The key part of ENHANZE is Halozyme’s proprietary recombinant human hyaluronidase enzyme, rHuPH20. This enzyme works by breaking down a naturally occurring carbohydrate in the extracellular matrix in tissues (such as skin and cartilage) to improve the absorption and dispersion of injectable biologics, small molecules, and fluids.

This means drugs that were required to be delivered via IV can now be delivered just under the skin (subcutaneous injection) with ENHANZE. The technology can cut delivery time by hours, reduce adverse reactions, simplify dosing requirements, and allow more flexible treatment options, such as dosing at home by nurses, or even the patient.

Suffice to say, patients and doctors always want to slash treatment times and make life a little easier. During a pandemic this is even more important, and demand for subcutaneous administration of drugs has grown significantly since Covid-19 broke out.

Beyond the patient-focused benefits, some proprietary drugs co-formulated with ENHANZE have even been granted additional exclusivity, which extends the patent life beyond that which the drug would have gotten independently. That’s an added incentive for drug developers to partner with Halozyme.

Halozyme makes money by licensing its technology to biopharmaceutical companies and collaborating with them to develop products that combine ENHANZE with their own compounds.

So far, Halozyme has licensed ENHANZE to ten companies, including Roche, Baxalta, Pfizer, Janssen, AbbVie, Lilly, Bristol-Myers Squibb, Alexion, Argenx and, most recently, Horizon Therapeutics (HZNP).

Horizon wants to use ENHANZE to develop a subcutaneous formulation of its treatment for Thyroid Eye Disease, which could cut infusion time from over an hour to five minutes. The deal was worth up to $190 million, plus mid-single digit royalties.

Several products have received regulatory approval in the U.S. and/or Europe and are contributing to revenue now. These include Roche’s Herceptin (breast cancer), Roche’s Rituxan/MabThera (multiple blood cancers), Baxalta’s HyQvia, Roche’s Phesgo (breast cancer) and Janssen’s Darzalex Faspro (multiple myeloma). The last two drugs have recently been approved and Darzalex Faspro was a major driver of Q3 2020 revenue, which was up 41%.

Regarding the pipeline, investors should look for around six ENHANZE partner clinical trials to start in 2020 and drive milestone payments in Q4.

Halozyme’s revenue is a mix of product sales, collaboration revenue and license revenue. In aggregate, the trend is strong. Revenue was up 29% to $196 million in 2019 and is seen up 33% to $260 million in 2020, then rising another 58% to $410 million in 2021. The company is also profitable now and should deliver adjusted EPS of $0.92 in 2020. EPS should double, to $1.84, in 2021.

The Stock
HALO has been around for a while, but the stock had not done much until just prior to the pandemic when shares briefly broke out to a multi-year high near 22. That trend was cut short by the market’s crash, but HALO bounced back quickly and jumped above 22 in late-April. It consolidated between 22 and 26 through June then rallied and consolidated between 25 and 30 through October. In the four sessions following the strong Q3 report on November 2, HALO rallied from 28 to 38. It has since advanced to just above 40.


Lawson Products (LAWS)
If you’re looking for a nuts and bolts-type of investment to play the economic recovery, you’ll be intrigued by Lawson Products (LAWS). It is a distributor for the Maintenance, Repair and Overhaul (MRO) market, literally selling nuts and bolts, as well as things like cutting tools, chemicals, and protective clothing.

Customers are small and midsize businesses, many of which have been hard-hit by the pandemic. But they’re clawing their way back.

Lawsons, which has a market cap of $447 million, has an interesting history. The company dates back to the 1950s when it was started in Chicago by Sidney Port, who was trying to make a living selling fasteners out of his car trunk. It went public in 1970 and did fine through the mid-2000s. But the wheels started to come off during the Great Recession and without any real competitive moat Lawsons was in trouble and overdue for a shakeup.

That shakeup came in the form of a new CEO, Michael DeCata, who took the helm when the stock was worth just 6. Mr. DeCata focuses on the small things and continually improves them until he sits atop a well-oiled machine.

That’s a good match for Lawson’s where the average product price is just 94 cents. Lawsons sells products all over North America for just about every industrial market out there, including automotive supplies, fasteners, shop supplies, storage solutions, hand tools, welding supplies, material handling equipment and more.

As Decata put it, these things might not seem important until a $400,000 excavator goes down because of a broken part that only costs a buck.

Lawsons focuses on customer service and building a comprehensive line of consumables for the MRO market, including private label products. Its high-touch value proposition now includes vendor managed inventory (VMI) solutions, wherein Lawsons manages the inventory at customer locations so they always have what they need.

Revenue was up just 6% in 2019 and will likely be down 6%, to $350 million, in 2020 due largely to the pandemic. Adjusted EPS should be about $2.05 this year (down 9%). Looking out into 2021 we could easily see revenue surge 20% to a record $420 million (helped by the recent Partsmaster acquisition) and EPS jump 13% to $2.31 if the economy recovers as expected.

The Stock
LAWS has been around forever, but we’re just interested in the time after DeCata came on board in 2012, when the stock was trading at multi-decade lows near 6. Prior to the pandemic it had been trending higher and peaked at 58 at the beginning of 2020. The market crash pulled LAWS down 58%, to 24.5. After a few head fake rallies LAWS began building momentum in August. On a weekly basis the stock has made a series of higher highs and higher lows since. With the stock trading near 50 now, it is clear investors are looking into 2021 and beyond, when these types of economically sensitive stocks can do extremely well.


Shift4 Payments (FOUR)
Shift4 Payments (FOUR) is a provider of integrated payment processing and technology solutions for the U.S. hospitality market. It offers a unified platform that consists of end-to-end payments solutions, a proprietary gateway, and a variety of technology solutions.

It sells through a network of over 7,000 software partners. And at last count the company had processed payments for over 200,000 businesses, most of which are in the food and beverage, lodging, and/or leisure areas of hospitality. Notable brands include Pebble Beach, Caesers, Wendy’s, Hyatt, and Hilton. Most customers generate $300,000 to $2.5 million a year in annual sales volume.

Payments can be a confusing business. But the (sort of) simplified version is that Shift4 owns a collection of very well-established point of sale (POS) providers – including Future POS, Harbortouch, POSitouch, SkyTab, Restaurant Manager and more – that have been serving the hospitality industry for decades.

Once a customer slides a debit or credit card through a POS terminal a gateway passes the transaction information to the relevant payment processor and/or merchant acquirer, and then receives approval (or denial).

Gateways are like toll operators. They charge based on the number of transactions. In Shift4’s case it gets $0.04 per transaction. However, Shift4 also offers merchant acquiring services, which are priced based on volume, plus some other fees.

As a provider of end-to-end solutions, Shift4 can do it all. But not all customers are currently using all services. That spells opportunity.

Gateway services accounted for around 15% of revenue last year, while end-to-end payments accounted for 57%. Subscriptions and hardware sales accounted for 29%.

The big opportunity here is for Shift4 to convert its gateway merchants – around 55,000 of them, representing roughly $200 billion in volume – to its end-to-end payment solutions. Pre-Covid-19 the company’s end-to-end payments business had 65,000 customers and generated $34 billion in volume.

Management believes that, over time, it can capture just about all of the $200 billion it’s currently missing with its gateway merchants. If so, Shift4’s long-term growth rate would likely be above that of much larger competitors Global Payments (GPN) and FIS, probably somewhere in the mid-teens.

Additionally, aggressive M&A, a hallmark of the seasoned management team, will likely add material growth. The latest example here is the recent acquisition of ecommerce platform 3dcart, which powers over 12,000 websites. This acquisition has interesting implications, effectively putting Shift4 in position to compete better with Shopify, Square, and Weebly, while staying consistent with the strategy of converting merchants to Shift4’s end-to-end payment platform.

While the near-term impacts from Covid-19 are significant, and aren’t likely to ease until spring 2021, the longer-term opportunity with Shift4 is pulling investors in now. Revenue, which was up 30% in 2019, is seen falling by 55% this year, then rebounding to grow 21% to $400 million in 2021, when adjusted EPS should be around $0.29.

Let’s jump in while the outlook is still murky, but the potential is huge.

The Stock
FOUR came public at 23 on June 5, 2020 and rose 46% the first day. Since then, the stock has been trending higher, making a series of higher highs and higher lows, albeit while trading in a wide range (the lows have represented 20% to 30% retreats). The most-recent retreat saw FOUR fall from 62.6 on October 12 to 47 on November 3. But the stock shot back to a fresh all-time high four days later. It has since absorbed a convertible debt offering, a secondary offering (selling shareholders only) priced at 55, and made it through lockup expiration on December 2. Despite all that turbulence FOUR is still trading within a hair’s breadth of all-time highs.


Previously Recommended Stocks
Our portfolio today is stuffed to the brim with positions, many of which are up handsomely from where we entered them. Keeping track of everything in such a large portfolio is a bit of a challenge. However, at the same time we are not traders and wish to hold positions for some time to let the gains accumulate.

Still, a little pruning here and there is necessary to keep things manageable. Today, we do just that and bid adieu to a few names that seem to have less upside potential in the near term than other opportunities.

First up is Teladoc (TDOC). I like the stock and the opportunity in telehealth, however, we’re seeing shares dip below their 200-day moving average line today and there are some questions about what multiple this stock should be rewarded with once Covid-19 abates. Patients have flocked to the platform while in-person visits have been less than ideal, and that trend isn’t like to end. Plus, the Livongo business (which is how we came to own TDOC) adds stickiness to the model. If you’re a fan of TDOC please feel free to maintain a partial position as I do think the company will do well. But for us, right now and looking out over the next three to six months, I think there is more opportunity elsewhere. Let’s book a very handsome profit of around 350%. SELL

Let’s also wave goodbye to Vital Farms (VITL). We jumped into the stock in September and October, but it hasn’t worked out. Selling now allows investors to harvest the loss to offset taxable gains elsewhere. SELL

Nikola (NKLA) is also moving to sell. We only have a half position, but this stock has proven to be a lightning rod. While I don’t want to sell it just to reduce the drama factor in our portfolio, the fact is that we’re down quite a bit on our half position and taking the tax loss now can offset taxable gains elsewhere. If that doesn’t matter to you and you like the story, there’s no reason you can’t continue to hold it. But for us, right now, it’s time to trim. SELL

Freshpet (FRPT) is moving from hold to buy. The stock has been grinding higher for months and has proven to be resilient during bouts of market volatility. BUY
Berkely Lights (BLI) moves from buy a half to buy a full position. The stock has maintained the pattern of rallying and pulling back that has persisted since the IPO. With shares off roughly 10% from our entry point this looks like a good time to increase our position. BUY SECOND HALF

An updated table of all stocks rated BUY and HOLD, 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 call or email with any questions.

StockSymbolDate CoveredNotesOriginal Price^Price 12/16/20 Current Gain
10x GenomicsTXG12/17/1966.78149.54124%
Altair EngineeringALTR8/26/2042.7557.0433%
Array TechnologiesARRY12/16/20Top PickNEW38.64NEW
AvantorAVTR11/18/20Top Pick27.2327.441%
Berkeley LightsBLI11/18/20, 12/16/2091.7483.57-9%
Corsair GamingCRSR12/16/20NEW35.16NEW
CrowdStrikeCRWD12/17/19Hold 3/449.45174.93254%
e.l.f. BeautyELF11/18/2022.0121.23-4%
Farfetch LimitedFTCH11/18/20Buy 1/245.1158.7030%
Halozyme TherapeuticsHALO12/16/20NEW42.20NEW
Kornit DigitalKRNT11/18/2078.0685.099%
Lawson ProductsLAWS12/16/20NEW49.71NEW
Shift4 PaymentsFOUR12/16/20NEW62.78NEW
Solaredge Tech.SEDG1/15/20104.18313.77201%
Sprout SocialSPT2/19/2020.3852.71159%
Virgin GalacticSPCE4/15/20, 6/5/2017.6624.5139%
TFF PharmaceuticalsTFFP8/26/2013.1914.389%
Adaptive BiotechADPT4/15/2027.9156.01101%
ChewyCHWY1/15/20Hold 1/231.2291.13192%
DatadogDDOG4/15/20Hold 1/238.69101.23162%
Five9FIVN11/20/19Hold 1/264.37167.44160%
Company NameTickerDate CoveredDate SoldReference Price^Price Sold^Gain/Loss
Five9 (sold 1/4, hold 1/2)FIVN11/20/1911/10/2064.37130.93103%
Dynatrace (sold last 3/4)DT9/18/1911/10/2020.4934.7970%
Jamf HoldingJAMF8/26/20, 10/27/2011/13/2036.1436.080%
The AZEK CompanyAZEK8/26/2011/17/2038.8434.27-12%
Vital FarmsVITL9/16/20, 10/27/2012/16/2036.41SELLSELL
Teladoc (Used to be Livongo)TDOC11/20/1912/16/2028.23SELLSELL

^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 January 20, 2020

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