December 15, 2021

In the December Issue of Cabot Early Opportunities we try to capitalize on the pullback in stocks with the addition of disruptive players in the electric vehicle (EV) and metaverse arenas as well as an up-and-coming apparel/footwear company. We also take a swing at a dinosaur that may finally start to become relevant again following the spin-out of a dying business segment.

Market Overview

Stock Name	Market Cap	Price	Investment Type
Allbirds (BIRD)	$2.20 billion	15.2	Rapid Growth – Apparel/Shoes
Intl. Business Machines (IBM)*	$111 billion	124	Value – IT Services
Matterport (MTTR) - Watch	$5.41 billion	22.3	Rapid Growth – Metaverse
MP Materials (MP)*	$7.44 billion	41.8	Growth – Rare Earth Mining
Rivian (RIVN)	$104 billion	117	Rapid Growth – EVs

* Trade Opportunities

Current Market Outlook

Perspective
While there is a lot we could talk about this month – the relative outperformance of mega-cap tech (MSFT, AAPL, GOOGL, NVDA), thus far a “normal” correction in software stocks (happens once or twice a year) and seemingly positive data around vaccine effectiveness against Omicron – in the immediate term investors are most focused on interest rates.

With the Fed wrapping up its two-day meeting today, with a statement and press conference to follow, investors are anxiously awaiting the latest commentary.

While there is some variability in opinion regarding the precise timing and pace of things the general consensus is that the Fed will further reduce the rate of its monthly bond purchases and solidify the timeline of rate hikes.

Economists and analysts see two or three hikes in 2022 followed by (roughly) three each in 2023 and 2024.

However, Covid is the wild card and Fed Chair Jerome Powell will want to leave some wiggle room on the precise timing and pace of hikes.

Back to the big picture, it’s preposterous to think that rates won’t go up from here. So let’s look at what history shows in terms of market returns during periods when the Fed is aggressive. This data comes from Bank of America.

As you can see, while there has been some variability in certain sectors in different years there are pockets of relatively consistent opportunity (highlighted in green).

Specifically, growth, pharma and tech have typically tended to do well during years with aggressive Feds. In 15 scenarios there was only one year in which one of these factors delivered a negative return (tech in 1979).

Energy stocks haven’t been as reliable but the dramatic gains in certain years (1979 and 1980) pulled that factor’s average up.

Overall, stocks haven’t been awful, delivering an average gain of 3.2% in the five years with aggressive Feds.

As always, historical data isn’t anything to bet your life savings on. These are one-year snapshots and not inclusive of a start-to-stop tightening cycle. There are different things happening during each rate hike cycle and the current environment is pretty messed up.

But as I’ve been evaluating the current pullbacks in many stocks and considering what we expect out of the Fed this data provides a good amount of comfort—especially when the market is going a little wild.

The punchline is that growth stocks may have considerable upside in 2022, especially from current levels. But it’s not guaranteed so we’ll need to stay on our toes.

What to Do Now
Continue to be careful.
With the Fed commentary coming later today, many investors making end-of-year trading decisions (tax-loss harvesting, rebalancing, etc.) and the upcoming holiday period there’s potential for a lot of distortion in the market.

Nothing should be off the table in the near-term. We could see a larger correction, stocks do basically nothing, or the market rip higher as beaten down growth stocks are aggressively bought.

In this environment it’s best not to make all-or-nothing bets. Averaging in and averaging out is the preferred strategy. And in general, take smaller positions than you normally would.

Stock Summaries

Allbirds (BIRD)

Allbirds (BIRD) is a neat little footwear and apparel company that was founded in 2015 and has a market cap near $2 billion.

The company just came public in November and popped 92% the first day but has since been pulled down below the IPO price by the general malaise in growth stocks. With shares beat up but the growth story intact (20% to 30% revenue growth expected over each of the next three years) we’ll step in.

The company just came public in November and popped 92% the first day but has since been pulled down below the IPO price by the general malaise in growth stocks. With shares beat up but the growth story intact (20% to 30% revenue growth expected over each of the next three years) we’ll step in.

There are several things that help Allbirds stand out from the competition in the $1.8 billion global athletic footwear and apparel market.

First is its focus on sustainability. This is of increased importance to many consumers and investors. Allbirds uses materials (wool, eucalyptus tree, sugar cane, trino now, recycled plastic bottles, recycled nylon, castor bean oil and more in the future) that are sustainably grown/harvested or recycled and which still allow it to develop comfortable and in-style products. Its sneakers are estimated to have a 30% lower carbon footprint than the average sneaker.

Second is Allbird’s focus on innovation. Its first hit was the Wool Runner shoe, which got 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 Sweatpant.

Last but not least is Allbird’s direct-to-consumer retail distribution strategy. This helps the company control both the customer experience and pricing (98% of sales completed at full price). While the bulk of sales (80%) still come online, Allbirds sees the ongoing retail store expansion moving the online-store mix closer to 60%-40% over the next two years.

That forecast is based on Allbirds growing its current store count from 35 (23 in the U.S., 12 international) to 52 in 2022 and to 73 in 2023. Roughly two-thirds of these will be in the U.S., which should mean international revenue should hold steady near 25% of total sales.

While footwear made up 95% of sales in 2020 the addition of apparel lines should diversify the business over time. Analysts see apparel generating 11% of total revenue in 2021 and expanding to 14% in 2022, helped by the launch of performance apparel in August.

Turning to the most recent quarter (reported November 30) results came in largely as expected. Revenue was up 33% to $63 million while adjusted EPS came in at -$0.10. Factoring in roughly 16% growth in Q4 Allbirds should deliver 2021 revenue growth of at least 23% ($270 million).

That said, the company stacked up inventory heading into the holiday season so there is potential that Allbirds could surpass expectations in Q4. Hopefully this was a wise decision that also helps the company secure supplies for new product launches in the first half of 2022.

Stepping back, Allbirds should be able to deliver 20% to 30% growth for several years. Profitability is not on the near-term horizon.

The Stock
BIRD came public on November 3 at 15 and jumped 93% to 28.9 the first day. Shares fell over the next few sessions then rallied back to their closing all-time high on November 18. BIRD then took several steps down, finally landing at its IPO price early last week. With another dip this week shares hit an intra-day all-time low of 12.56 on Monday. While we’re not in the business of trying to catch falling knives or perfectly time bottoms, the evidence in front of us suggests BIRD could easily pop 50% higher (give or take) in the near-term. And that potential makes it worth taking a swing right now.

International Business Machines (IBM)
While International Business Machines (IBM) was formed 110 years ago it made the cut this month because the company is taking potentially transformative steps to shape a future around hybrid cloud and artificial intelligence opportunities.

The biggest change is the recent spin-out of Kyndryl (KD), the slow growth managed infrastructure services business that represented something like a lead chain attached to IBM’s faster growth transformation services business.

With workloads transitioning to the cloud, managed infrastructure seems to be dying a slow and painful death. The spin-out not only improves the IBM story but gives the company flexibility to take bigger steps toward becoming relevant again.

To put things in context, in 2020 IBM generated $73.6 billion in revenue, $7.8 billion in net income and $10.8 billion in free cash flow. Stripping out the roughly 25% of revenue associated with Kendryl IBM would have had net income around $7.7 billion and free cash flow around $10 billion.

In other words, IBM loses 25% of slow/no-growth revenue but net income and free cash flow almost hold steady.

The remaining company is now comprised of highly resilient businesses with recurring revenue and potential to gain market share through product improvement and M&A, while enhancing profit margins through further cost cuts.

Those remaining businesses are comprised of cognitive solutions (cloud, data and transaction processing platforms), global business services (consulting, process services, application management), global technology services (infrastructure and technical support), systems (hardware and operating systems software) and global financing.

Cognitive solutions and global business services are the bigger business, representing an estimated 35% and 25% of 2021 revenue, respectively. Kyndryl was carved out of IBM’s Global Technology Services business.

Moving forward, IBM bulls would like to see the company do more with IBM Watson and get deeper into blockchain-based solutions, similar to the progress it is making in the logistics market. Given the company’s virtual ownership over the global mainframe market and credit card transaction processing (90%) it’s not hard to see a scenario in which IBM plays a larger role in blockchain-based payments in certain markets.

That said, we’re not drawing straight lines here. Technology is evolving rapidly and in many ways IBM missed the cloud computing boat that Amazon (AMZN), Microsoft (MSFT) and Apple (AAPL) jumped on more than a decade ago.

A long-term investor getting into IBM now must believe that the company will do better this time around. Shorter-term investors may just be interested in the company’s defensive characteristics and the stock’s undemanding valuation and high yield (over 5%).

Regardless of which group you fall into there appears to be more upside potential than downside risk in IBM stock right now. We’ll jump in with the intent to swing trade IBM but i’m open to holding longer if the story improves relatively quickly.

The Stock
IBM has been around since dinosaurs ruled the earth and it has been a horrible performer over the last decade, especially compared to stocks like AAPL, MSFT and AMZN. But with shares 20% off their 2021 high and trading in an area that has provided some support in recent years (120 +-), plus with a little momentum beginning to show, we’ll jump in. The recent low of 114 (-8% from here) will serve as our first warning bell to get out (if we get there) while a break above 130 (the threshold IBM crashed through after the latest earnings release and 5% above here) should signal even higher prices ahead.

Matterport (MTTR)
This is a Watch List stock.

Matterport (MTTR) is one of the first movers in the market for digitizing buildings and physical spaces.

The company has a software platform that digitizes buildings and physical spaces so that they can be brought online as interactive 3D models. This is done with a combination of software, spatial data-driven data science, artificial intelligence (AI), machine learning (ML) and 3D capture technologies.

By bringing buildings online – i.e. creating digital twins, or digital replicas of physical items – property owners are better able to understand their options when it comes to major decisions, such as how to design, build, promote, insure, maintain, operate and/or manage their physical assets.

It is even possible for homeowners to scan their homes to help them with design and home improvement projects or to showcase the property to potential renters.

Once brought online Matterport can help clients add features to 3D scans including 3D floor plan perspectives, pop-up notes, links and videos, measurements, collaboration notes and more.

The company was founded in 2011 and currently has over 6.2 billion spaces under management and nearly 440,000 subscribers, 54,000 of which are paying. Clients come from all markets including residential and commercial real estate, facilities management, retail, architecture, engineering and construction, insurance, repair, and travel and hospitality.

Management believes it has barely begun to scratch the surface of the market opportunity and is working on several initiatives.

The company has recently jumped into the public sector with the deployment of a government-compliant 3D special data platform for modeling interior spaces on AWS GovCloud. It is currently seeking FedRAMP certification.

Matterport is also working on third-party integrations, such as the one recently released with Autodesk Revit. And the release of Matterport for Mobile – a free app that lets anyone turn their Android and iPhone devices into a Matterport capture device – is a significant opportunity as it makes basic 3D capture technology available to millions of potential users that aren’t ready to invest in higher tech capture equipment.

Matterport has a premium business model, which means it brings users on with free subscriptions and tries to convert them to paying clients. Revenue is a mix of subscriptions (53% of total revenue), licenses (5%), services (11%) and products (31%), which includes cameras like the Pro2.

In the last quarter, revenue was up 10% to $27.7 million. Subscription revenue was up 36% to $15.7 million. Net dollar expansion rate was 114%, showing that customers continue to increase spend with Matterport.

Matterport is an aggressive stock selection and revenue trends could be volatile. Wedbush has been one of the more vocal supporters of the stock. We’ll add to the Watch List now.

The Stock
MTTR came public via SPAC IPO on July 22, when the stock closed at 14.5. Things were uneventful at first then in September MTTR rallied as high as 24. A 27% correction followed but MTTR began to move again as November approached and shares hit an all-time intra-day high of 37.6 on December 1 (closing high of 31.2). The stock has been in correction mode since, sliding in eight of the last nine sessions. Yesterday it fell below its 50-day moving average line, which has been a reliable indicator for a bounce since August. We’ll add to the Watch List now.

MP Materials (MP)
MP Materials (MP) owns Mountain Pass, the only rare earth mining and processing facility of meaningful size in the Western Hemisphere. It currently produces 15% of globally available rare earth concentrates. Mountain Pass is based in California, while MP Materials is headquartered in Las Vegas, NV.

Rare earths are essential commodities for manufacturing the permanent magnets that are critical components in green technologies, especially electric vehicles (EVs), offshore wind turbines, drones and robots. The key ingredient is neodymium-praseodymium (NdPr), which is what Mountain Pass is chock full of.

While rare earths aren’t exactly “rare” – they are abundant in the earth’s crust – finding them in high grade deposits where they are economical to mine is rare indeed, especially outside of China (where roughly 60% of production comes from).

Mountain Pass has high grade deposits. Moreover, MP Materials has what appears to be a viable plan to transition from a producer of rare earth concentrates (which it is now) to a producer of higher value separated rare earth oxides (a multi-year plan).

Not only should this allow MP Materials to produce at higher scale it should also lower MP’s costs relative to other producers. In fact, analysts think Mountain Pass will be the lowest cost rare earth producer in the world.

The company’s assets were acquired from the now defunct Molycorp (went bankrupt in 2017). Those assets reflected the $1.7 billion investment to get through Stage 1 of development, which involved building an open pit mine and crushing, milling and flotation facilities. Those are all operating now.

MP is currently working to achieve Stage 2 optimization – the restart of existing but idled separation and related facilities – which is expected to be done in 2022 at a cost of $220 million.

Phase 3 involves the downstream expansion, i.e. making the rare earth magnets that will feed the EV supply chain. Just last week management announced the formal beginning of this phase with its plan to build a rare earth metal, alloy and NdFeB magnet manufacturing facility in Fort Worth, TX. Production of 1,000 tonnes (t) annually is seen beginning in 2023, two years earlier than previously expected.

While General Motors (GM) was announced as the first customer (with a binding, long-term supply agreement) we don’t know too much more about this facility, other than that management said the plan is to make it as small as possible but still be economically viable. The implication is that it should cost less than MP’s currently available cash balance ($457 million as of September 30).

Because of the reserves in Mountain Pass and the strategic importance of securing rare earth supplies outside of China, MP Materials is considered somewhat crucial to the domestic supply of rare earths. It’s not out of the question that the company could be acquired by, or partner up with, an EV manufacturer that wants to secure critical materials.

Our intent will be to capture a modest short-term gain with MP.

The Stock
MP came public via SPAC IPO on November 17, 2020. The stock closed at 14.4 that day then rallied for the next month, closing at 40.7 on December 22. After a 30% correction shares rallied again to close at their all-time high of 51.8 on March 2. MP fell back in the spring of 2021 and spent most of the summer and fall months trading between 30 and 40. Shares broke out above 40 following the recent November 4 earnings report and have traded as high as 50 since. With resistance at the 50 level, support at the 40 level and a share price near 42 we can buy MP near the lower bounds of its recent trading range and have well-defined thresholds to get out (break below 40) or confirm a major breakout (jump above 50-52). This is intended to be a shorter-term trade opportunity.

Rivian (RIVN)
Rivian (RIVN) is one of the new crop of electric vehicle (EV) companies and just might have the best potential to become a viable threat to the EV whale – Tesla (TSLA) – as well as to incumbent automakers that are jumping into the EV pool.

On the surface it seems crazy to buy into a company with a market cap of $100 billion and few wheels on the road (yet). But with a business model that makes sense (not entirely different from Tesla’s) and a really cool product there’s an argument to be made that Rivian breaks the valuation mold just like Tesla, Amazon (AMZN), Shopify (SHOP) and Snowflake (SNOW).

Much of the excitement around Rivian stems from how this business is set up to operate in the insanely complex global auto market.

First, the company is going after some of the biggest and most profitable markets, namely pickup trucks, SUVs and commercial vans.

Second, Rivian is looking to monetize customers throughout the entire life cycle of the vehicle (not just the initial purchase) with sales of software and other services. This could nearly double revenue for each vehicle sold.

And finally, Rivian is looking to integrate many functions in the auto building, selling and servicing market under one roof, including aspects of manufacturing (mainly batteries and drive units), dealerships, distribution, aftermarket service and more.

There is risk that this is overly ambitious. However, if the vision comes to fruition Rivian would have control over so many aspects of the customer experience. That will be huge as the company looks to sell additional services (insurance, financing, maintenance, software, charging solutions, resale programs and fleet management subscriptions, among others) potentially wrapped up in one subscription/membership.

For now, it’s all about pre-orders, rubber on the ground and customers behind the wheel. This has already begun. Rivian has over 55,000 pre-orders for its first consumer vehicles, the R1T pickup and R1S SUV, and deliveries are happening now.

Analysts see roughly 760 R1Ts delivered this year and around 10 R1S SUVs. This jumps to 22,000 R1Ts and 5,000 R1S SUVs next year.

The R1T has 835 horsepower, 826 pound-feet of torque and can keep pace with a Ferrari up to 60 MPH. Try to convince me that’s not awesome.

The first commercial vehicle is the EDV, which is co-developed with Amazon who has an order for 100,000 units extending through 2025. That said, Amazon is trying to visibly de-carbonize its footprint. Could they increase the order 2x or 3x? Why not. We all see Amazon vans daily and with a 20% stake in RIVN there is incentive for the company to grow the number of EDVs on the road.

All in, Rivian should deliver about 42,000 vehicles in 2022, 110,000 in 2023, 225,000 in 2024 and 400,000 in 2025. Somewhere in that timeframe other vehicles, including a mid-sized SUV (R1S Sport), a small van (RCV) and off-road SUV (R1X) should hit the market.

Selling prices are seen ranging from $62,500 (commercial van) up to around $91,000 (R1S).

Assuming the above, Rivian should be able to generate revenue somewhere in the neighborhood of $70 million this year, $3.4 billion in 2022, $9 billion in 2023 and $17 billion in 2024.

Granted, these are rough numbers and a lot can change. But with an estimated $18 billion in cash on the balance sheet and management moving forward briskly it seems likely Rivian will make considerable progress toward its ambitious vision in the next couple of years.

The Stock
RIVN came public on November 10 at 78 and closed up 29% that day. Shares bolted higher over the next four sessions to reach an intra-day high of 179.47 on November 16. RIVN pulled back over the next four sessions and has since traded between 100 and 126. While shares could easily fall further 60% of the stock is locked up (for now) and there is considerable excitement surrounding the company. I see a trading range of 100 to 180 being most likely over the next three months. We may trade the stock within this range, depending on how things go.

Previously Recommended Stocks

We’ve trimmed a number of positions since the November Issue of Cabot Early Opportunities.

We said goodbye to The RealReal (REAL), AppLovin’ (APP), Descartes (DSGX) and Maravai LifeSciences (MRVI). We also sold another quarter each of Bill.com (BILL) and Upstart Holdings (UPST).

With these sales the average gain on positions sold in 2012 is 41%. The average gain on positions sold since the beginning of September is 49%.

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.

^Average of high and low price if published intraday, or closing price if published after 4 PM ET

^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, 2022.