In the May Issue of Cabot Early Opportunities, we spread things around, taking a look at a rising MedTech star, a possible breakout biotech stock, a boring discount retailer, an oil and gas income play and a familiar apparel manufacturer.
Enjoy!

About the Analyst

Tyler Laundon

Tyler Laundon is chief analyst of the limited-subscription advisory, Cabot Small-Cap Confidential and grand slam advisory Cabot Early Opportunities. He has spent his entire career managing, consulting and analyzing start-up and small-cap companies. His hands-on experience has taught Tyler that the development of a superior business model is the biggest factor in determining a company’s long-term success. Accordingly, his research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.

Tyler’s small-cap portfolios favor a high allocation to stable, high growth companies, upon which he layers strategic purchases of higher risk, event-driven investments. He first began publishing his analysis of small-cap opportunities in 2009. Since 2012, he has led his subscribers into 10 doubles. Between 2012 and September, 2015 his small-cap recommendations generated cumulative returns of over 2,300%, including both winners and losers, and outperformed the Russell 2000 Index by an average of 28% per year.

Prior to joining Cabot, Tyler founded and operated a small business for 15 years. He then worked as a consultant for start-up technology companies, as well as Vermont’s largest health care institution. From 2009 to 2015, he was the chief analyst of growth stocks at Wyatt Investment Research, where his research spanned the full spectrum of the growth stock universe, from micro-cap start-ups to multi-national mega-caps.

Tyler holds a B.S. and MBA from The University of Vermont, where he graduated Valedictorian. He has been a long-time contributor to the Wall Street’s Best Investments, has been quoted by U.S. News & World Report, and has presented investing ideas and strategies for The Money Show and Bloomberg Markets LiveINSIGHTS.

Cabot Early Opportunities Issue: May 18, 2022

Stocks in This Issue

Stock Name	Market Cap	Price	Investment Type	Current Rating
Allbirds (BIRD)	$734 million	4.95	Rapid Growth – Apparel/Shoes	Buy Half
Axonics (AXNX)	$2.3 billion	49.7	Rapid Growth – MedTech	Buy
Caribou Biosciences (CRBU)	$585 million	9.67	Clinical Stage – Biotech	Watch
Grocery Outlet (GO)	$3.57 billion	36.8	Growth – Discount Stores	Watch
Kinetik Holdings (KNTK)	$1.3 billion	79.9	Income – Oil & Gas Transport	Watch

Tough Start

The last few months have been one of the most challenging investing environments in recent memory.

Beyond the atrocious index performance (S&P 500 -18% YTD last week, closer to -16% now) that tells us what we’re all feeling – that this is one of the market’s worst starts to the year ever – we have also seen exceptional volatility during the Q1 earnings season.

Whereas a “normal” earnings season brings many 5% to 10% drops/pops this time it seemed the new normal was 10% to 20% moves! Many were in the wrong direction.

The practical challenge during these periods of volatility is that it can seem impossible to determine what’s moving individual stocks. There are no simple answers. One of the most credible explanations for recent stock specific volatility is that the surge in ETF popularity over the years has added fuel to the fire when broad based selling intensifies. ETFs are not prohibited from high stock specific concentrations. When investors bail on them that can make some stocks move far more than normal.

Regardless of the underlying reasons, in recent weeks stocks have been flying this way and that, often seemingly uncoupled from fundamentals or anything tangible.

While the details are different during each bear market, the big-picture strategy is the same.

It’s time to be calm, measured and patient.

While it may not feel like it, these are the times when big opportunities start to surface. Having the clarity of mind to recognize them and act is a challenge, but I’m confident we can succeed by keeping an open mind and listening to what the market tells us.

Right now, I’m looking at data from the Q1 earnings season as well as forward estimates. As of May 17, Q1 earnings in the S&P large, mid and small cap indices were up 13%, 36% and 32%, respectively. That data captures over 90% of large cap companies and over 80% of small and mid-cap companies.

Take out energy, which is the biggest growth contributor by far, and Q1 large, mid and small cap EPS growth is still 6.3%, 32.2% and 20.6%, respectively. Not bad.

But when we look out into the rest of the year analysts see earnings growth tanking, right?

Not exactly. Forward estimates have actually ticked up recently.

This data tells us analysts don’t see the economy falling off a cliff. What we need to build confidence in the market is, as Jerome Powell indicated this week, concrete evidence that inflation is getting under control. At the moment, data from the Federal Reserve Bank of New York suggest it will. The one year ahead inflation expectation is 6.4%, while the three-year ahead expectation is 3.9%. We’ll see.

It’s going to take time to sort through the messy economy we find ourselves in now. And given the mixed data I don’t see the market snapping back into rally mode soon. Still, as I mentioned previously, staying calm, measured and patient will help us identify the stocks that can deliver big gains once the market gets back in gear.

What to Do Now

No change from last month. Tread carefully. Investor sentiment is bearish, interest rates are likely to keep rising and recession risk is ticking up, despite a good Q1 earnings season and decent forward EPS estimates.

That said, there is so much bearish news out there that we seem overdue for a relief rally. But when it comes, I’m not sure it will stick around for long.

Just keep new positions on the smaller side, stay diversified, and don’t stick your neck out too far.

We’ll continue to aim for modest gains and, with a little luck, let some of those grow into bigger profits.

Allbirds (BIRD)
We took a swing at Allbirds (BIRD) at the end of 2021 and the timing didn’t work out, but I’ve continued to keep an eye on it. BIRD could be one of the big consumer stocks to run when things turn around. With shares down more than 50% from where we stepped aside and an intact – albeit dented – growth story, we’ll take a stab at a half position today.

The backstory is that Allbirds is a small footwear and apparel company that was founded in 2015 and came public last November. The company is extremely focused on sustainability, something investors and consumers are caring more and more about.

Allbirds uses materials that are sustainably grown/harvested or recycled (merino wool, eucalyptus tree, sugar cane, recycled plastic bottles, recycled nylon, castor bean oil and more) and which still allow it to develop comfortable and in-style products.

The company continues to innovate. Its first hit was the Wool Runner shoe, which enjoyed a publicity boost when Time magazine called it the world’s most comfortable shoe. Other innovations include the Trail Runner SWT performance shoe and several apparel lines, such as Wool Cardi and the R&R Sweatshirt and Sweatpants.

Allbirds just released another potential hit, the Tree Flyer, a performance-oriented sneaker.

Allbird generates about 80% of sales online but is also building out physical stores. It has 39 open now and expects to end the year with closer to 52 stores, then have around 73 open by the end of 2023. Over time, the mix of online to in-store revenue should move from 80/20 to closer to 60/40.

Roughly two-thirds of new stores will be in the U.S., implying international revenue of 20% to 25% of total sales.

That said, in Q1 2022 (reported last week) management talked about how demand in Europe has been slowed by the Ukraine war and sales in China (second largest market outside of U.S.) have been hurt by lockdowns. While momentum in the EU picked up in recent weeks and China should be a temporary situation, there are clearly some moving pieces in international markets.

The bottom line from Q1 2022 was that revenue was up 26% to $63 million (slight beat) and GAAP EPS came in at -$0.15 (slight miss). Management lowered their full-year guidance, citing supply chain cost pressures and international market turbulence.

Still, revenue growth should be around 23% this year then accelerate toward 28% in 2023 and tick up from there as more physical stores are added. Management also reiterated a commitment to EBITDA breakeven next year.

The Stock
BIRD came public on November 3 at 15 and jumped 93% to 28.9 the first day. The stock was back near the IPO price in December, had a quick rally to 19.7 right before the end of 2021, then slid all the way to 5 by March 15. BIRD has been back in the 6s a few times since then, but the most notable move was a drop to 3.99 last week following the earnings report. There’s a chance that was a bottom for the stock as it was an incredibly volatile period. BIRD has linked together several positive days since, bringing the stock back within a few pennies of 5 by yesterday’s close. Calling a bottom is a fool’s errand so we’ll step back in with a half position. BUY A HALF

Axonics (AXNX)

Axonics (AXNX) is developing disruptive solutions for patients that suffer from overactive bladder (OAB), Urinary Retention (UR) and Fecal Incontinence (FI). The most common symptom of these ailments is the frequent and urgent need to go to the bathroom. They are often the result of abnormal communication between the brain and the bladder and bowel.

A proven treatment option is sacral neuromodulation (SNM). SNM involves implanting a programmable stimulator in the body to send low amplitude electrical stimulation to the sacral nerve, thereby restoring normal control of the bladder and bowel.

Historically, the SNM market has been dominated by Medtronic (MDT). But Axonics built a better mousetrap. It now has three solutions.

The Axonics R15 System is a miniaturized, long-lived rechargeable neurostimulator works for up to 15 years. It is MRI compatible. Charging is required after one to two months. An upgraded system that lasts six months is expected to launch early next year.

The company also just released the F15 this spring. The F15 is the only truly recharge-free SNM therapy option and works for ten to twenty years.

Even though it’s only been a couple months since launch, early indications are that the F15 is a home run. Some practices say they are switching over their entire SNM volume to Axonics and its F15. It’s not out of the realm of possibilities that the F15 could take over half the market in a few years.

Axonics is also enjoying huge success with Bulkamid, a best-in-class urethral bulking agent for women with stress urinary incontinence (SUI). Bulkamid was acquired for $35 million in February 2021. The solution is very synergistic with both the R15 and F15 solutions and seems to be turning into a front-line option (replacing sling /mesh surgeries) for patients, some of whom may later progress on to an implanted SNM solution.

The company released Q1 results on May 6 that surpassed expectations. Revenue grew 41% to $48.4 million (beating by $3 million) while GAAP EPS of -$0.50 beat by $0.13. Full-year revenue guidance was raised by $4 million to $238 million (+32%). Of that, SNM solutions are seen growing 26% to $199 million while Bulkamid should grow around 70% and make up the balance of revenue.

The Stock
AXNX came public at 15 in October 2018 and was trading near 38 before the pandemic, which knocked it down to the IPO price of 15. AXNX then went on a terrific run that carried shares to 80 in September 2021. The stock has pulled back considerably since (roughly 40% off the high), but there was some momentum from January through mid-April indicating that investors have not lost interest. With the stock having recently dipped to near 40 but gathering momentum now, we could have an attractive entry point in another nice MedTech growth story. BUY

Caribou Biosciences (CRBU)
Caribou Biosciences (CRBU) is a clinical-stage biotech company developing genome-edited allogeneic cell therapies for hematologic malignancies and solid tumors.
The special sauce is Caribou’s proprietary CRISPR hybrid RNA-DNA gene editing technology, called chRDNA. It was developed by Nobel Prize laureate Dr. Jennifer Doudna and Dr. Rachel Haurwitz (current CEO) and is expected to be more efficient, specific, easier to use and allows more edits than first-generation gene-editing technologies.

Caribou’s path to commercial success is predicated on progress developing allogeneic cell therapies. In this approach stem cells are collected from a donor and then used to create a master cell bank, in essence creating an “off the shelf” therapy that permits simple manufacturing and yields very consistent therapies.

This could be an easier path to eventual approvals and/or market adoption than the autologous approaches pursued by other players, which involves sourcing stem cells from a patient’s own body. That approach can be difficult/complex and yield highly variable therapies in terms of potency.

Caribou’s vision is to take what’s been learned through the development of first-generation autologous cell therapies and develop next-generation allogeneic CAR-T and CAR-NK (chimeric antigen receptor natural killer cells) therapies.

It has four candidates in its pipeline, led by CB-010 for relapsed/refractory B Cell non-Hodgkin lymphoma (B-NHL), which is in the Phase 1 ANTLER trial. Earlier-stage candidates include CB-011 for relapsed/refractory multiple myeloma (MM), CB-012 for relapsed or refractory acute myeloid leukemia, and CB-020 for solid tumors.

Caribou has also partnered with AbbVie (ABBV) to develop a few Car-T cell therapies.

Shares of Caribou came to life last week when the company released patient response rates from cohort one of the ANTLER Phase 1 trial. While not a large study (just five patients), the first in-human data showed a single dose of CB-010 led to a 100% overall response rate and an 80% complete response rate among B-NHL patients.

This data is off-the-charts good as compared to autologous Car-T therapies Yescarta, Kymriah and Breyanzi which, at best, posted 73% overall and 54% complete response rates, respectively. Safety was in line with approved therapies.

Again, this was a small cohort. But the data is extremely encouraging and does a lot to bolster confidence in Caribou’s platform. Cohort 2 is now enrolling with dose level 2, with results expected by the end of the year, potentially at ASH in December.

In the meantime, investors should expect a deeper look at cohort 1 data at the European Hematology Association (EHA) Congress on June 10.

Caribou has around $391 million in cash, which should easily be enough to get it into 2024.

The Stock
CRBU came public on July 23, 2021, at 16 and traded as high as 32.7 on September 7 before pulling back and mostly trading in the 20 – 25 range through November 19. Shares then began sliding, and did so up until late last week, when the ANTLER Phase 1 trial data was released and ignited a rally (+22% last Thursday). We’ll put CRBU on our Watch List and see if the strength sticks. WATCH

Grocery Outlet (GO)
Grocery Outlet (GO) is the type of stock that can do well when the economy doesn’t. It is an extreme-value retailer that was founded in the 1940s and is still led by the founding family. The company has 418 stores in seven states, mostly along the West Coast.

Grocery Outlet has an interesting ownership model, called Independent Operator (IO), in which store owner-operators have an equity stake in their stores and considerable autonomy over hiring, merchandising, marketing and more.

The company is very focused on low-cost items. Over 50% of products are sourced at a deep discount through an opportunistic sourcing model. Buyers scour the world looking for deals on brand-name groceries, either through packaging changes, surplus inventory or product overruns.

Those deep discounts are passed on to consumers. Yet Grocery Outlet maintains very predictable profit margins.

Admittedly, this is not the most exciting business out there. But as consumers continue to go out into the world to shop and prices rise, Grocery Outlet stands to capture a larger share of their spending. If the economy turns south, Grocery Outlet could pull even more consumers through its doors.

The stock is relatively inexpensive, trading at around 32-times estimated 2023 EPS of $1.14. With food price inflation that EPS number could easily go up, and it’s worth noting that GO has traded with a forward PE of over 50 at times.

While I’m not looking for this stock to trade at a superior premium valuation any time soon, I like that GO had been performing well this spring and, after a little weakness in April, has popped back up following last week’s earnings report.

In Q1 2022 revenue was up 10.5% to $831.4 million, beating by $21 million. Adjusted EPS of $0.22 beat by $0.02. Management expects to open 28 new stores. Full-year guidance was raised modestly, to around $3.4 billion. Same store sales are seen rising 5.5% to 6.5% (versus 4.0% to 5.0% previously) and adjusted EPS is now seen in the range of $0.94 to $0.99, up from a range of $0.92 to $0.97 previously.

The main fly in the ointment I see with GO right now is that both Walmart (WMT) and Target (TGT) have whiffed on EPS expectations as markdowns and higher costs pressured profit margins (many other metrics were just fine). While they have exposure to far more categories than Grocery Outlet the steep drops in both WMT and TGT stock could hold back buying in other discount retailers. For that reason we’ll give GO a few days/weeks to chill out and keep an eye on it.

The Stock
GO came public at 22 in June 2019 and was a decent performer, ultimately closing out the year near 33. While 2020 was a messed-up year, GO did well, eventually peaking at 44 in November. The stock had a tough 2021. There were some rallies here and there, but the overall trend was down. Shares eventually found bottom at 21 last October. The stock was able to get back near 29 toward the end of the year, then after a spell of weakness in January, GO walked up to 36.6 in early April. A choppy five-week spell followed during which GO slipped to 30.6, but the stock popped right back up near 36 following the May 10 earnings report. WATCH

Kinetic Holdings (KNTK)
Kinetic Holdings (KNTK) is an integrated gas gathering and processing (G&P) and natural gas/NGL/oil pipeline takeaway company focused on the Permian.
This is a growth and income stock, with revenue growth expected in the mid-single digits. KNTK sports a yield of 7.6% ($6 per share dividend, expected to grow by about 5% a year) and is moving toward investment grade as growing free cash flow should allow retirement of over $600 million in preferred debt by the end of this year (meaning a roughly 3.5x net debt/EBITDA ratio that drops closer to 2.5x by 2025).

Kinetic is the only pure play Permian midstream company operating exclusively in the Delaware basin. It is organized as a C Corp (not an MLP) and is the result of an early-2022 merger between Altus Midstream and EagleClaw. Its processing capacity is the highest in the Delaware basin, slightly above that of Energy Transfer LP (ET).

The company operates in a competitive market of midstream service providers. But its ability to offer a bundled G&P and gas takeaway solution out of the Permian sets Kinetic apart from many other players in the area. Beyond Kinetic, only Enterprise Product Partners (EPD), Energy Transfer LP and MPLX LP (MPLX) have both G&P and gas takeaway capabilities in the area.

Kinetic owns 1.9 Bcf/d (billion cubic feet per day) of processing capacity, made up of EagleClaw’s legacy system and Altus’ 600 MMcf/d (million cubic feet per day) cryogenic facility (built in Southern Reeves County, TX).

However, the company also has 800 MMcf/d of latent processing capacity that can be added at very little cost. Analysts believe, once fully utilized, this latent capacity could add $150 - $225 million in EBITDA (an 18% to 27% increase over estimated 2022 EBITDA of $824 million).

With management having recently signed agreements for up to 360 MMcf/d (details and ramp schedule not released yet) this EBITDA could be added sooner than expected.

Additionally, Kinetic has ownership interests in gas pipelines that total 1.4 Bcf/d. these include a 16% interest in Kinder Morgan’s (KM) Gulf Coast Express gas pipeline (2 Bcf/d), a 53% interest in Kinder’s Permian Highway Pipeline (2.1 Bcf/d) and a 33% interest in Enterprise Product Partner’s Shin Oak NGL pipeline.

Analysts see the company increasing its ownership in the Permian Highway Pipeline by about 21% once expansion projects are complete late next year. And Kinetic has a partnership with Kinder Morgan to participate in the future Permian Pass Pipeline, a 2 Bcf/D pipeline extending from the Permian to East Texas. These projects could add another $87 million to EBITDA by 2024.

The bottom line is Kinetic stock isn’t likely to be a rocket ship, but in the current environment investors should be increasingly attracted to the high yield (with upside) and mix of EBITDA growth and debt reduction.

The Stock
KNTK began trading on February 23, 2022, and closed at 61.8. Shares immediately rallied to 78 then a secondary stock offering priced at 58 sent KNTK back to 60 in early March. KNTK has been on a slow and steady climb since then, with very little volatility. That said, on Monday the stock popped 6% to close above 75 for only the second time since the merger was completed. With shares slightly elevated after a four day rally and the dividend just paid, we’ll put KNTK on watch and see if we can’t buy below 75 on a pullback. WATCH

Previously Recommended Stocks
Since the April Issue we have sold Snowflake (SNOW), the rest of our stake in Altair Engineering (ALTR), Triumph Group (TGI), Piedmont Lithium (PLL), another quarter stake in CrowdStrike (CRWD) and TaskUs (TASK). Returns for these positions are included in the table below.

Today we’re going to move Petco Health And Wellness Company (WOOF) to HOLD. The stock is trading down sharply, likely in sympathy with WMT and TGT. It could be a short-term buying opportunity for sure, but in this market ... best to be conservative. HOLD

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 June 15, 2022.