March 16, 2022

In the March Issue of Cabot Early Opportunities we talk honestly about the current state of the market and what to do now.
I also cover five opportunities that continue to pique my interest. I have a familiar software stock that’s been resilient lately, an alternative energy supplier that could help reduce Europe’s reliance on Russian energy, a pharma company set to make big moves over the coming years, an early-stage electric vehicle play, and an innovative MedTech company that’s growing like a fertilized weed in early spring.

Enjoy!

Previously Recommended Stocks

Since the February Issue we sold Allbirds (BIRD), a quarter position in Sprout Social (SPT), SentinelOne (S) and Cactus (WHD).

On March 11 we added the second half of our positions in Snowflake (SNOW) and Portillo’s (PTLO). I are currently maintaining SNOW at BUY, however given the recent breakdown below support at 185 I am keeping a very close eye on it.

I am also maintaining GitLab (GTLB) at buy following this week’s earnings report. While shares have continued to slide (except for yesterday and today) we have lockup expiration this week and the earnings report was terrific. If investors come back to higher growth software names even a little GitLab should be one of the names that sees inflows. That said, it is on a tight leash.

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 April 20, 2022.

Stock Summaries

Descartes Systems Group (DSGX)
Descartes Systems (DSGX) specializes in logistics management software solutions that help users in the shipping industry communicate with each other.
In a world plagued by persistent global supply chain issues – which have only been made worse by the conflict in Ukraine – Descartes’ solutions are in high demand.

The company operates the largest multi-modal logistics network in the world, connecting 200,000 shippers, manufacturers, suppliers, retailers and government agencies.

The company’s core software product is the Global Logistics Network (GLN), a proprietary logistics data and analytics platform that automates and optimizes inefficient delivery processes. The GLN modernizes disparate and incompatible software solutions used by all the various parties so that they can “talk.”

The end result is that users are able to get things where they need to go much more efficiently than when they use older, disparate solutions.

Customers typically pay a monthly fee as part of a multi-year contract to use the GLN, which allows them to send and receive messages, data and documents. Additional software modules cover things such as route planning, inventory and asset visibility, wireless dispatch, rate management and warehouse optimization.

Management has been building a portfolio of solutions that address specific challenges faced by the company’s customer base. Acquisitions have been part of the growth strategy as well. The latest addition was NetCHB (acquired February 9, 2022), a small company that provides custom filing solutions in the U.S.

Descartes was a double-digit growth story prior to the pandemic. It has returned to form following a COVID-driven dip in 2021 (2021 sales up just 7% versus 18% in 2020).

Management delivered Q4 and full-year fiscal 2022 results on March 3 that featured 22% revenue growth (to $425 million) and adjusted EPS growth of 10% ($1.10). Looking into fiscal 2023 analysts expect 11% revenue growth (to $470 million) and adjusted EPS growth of 21% (to $1.33).

Given the softness in software stocks we’ll add Descartes to our Watch List now. WATCH

The Stock
While DSGX has had its fair share of pullbacks the stock has been a consistent performer over the years. The current drawdown (-23% off all-time highs) is within the normal range (excluding the Covid crash). The last retreat of this magnitude was in September 2020 when DSGX fell 20% from its previous high of 63. The stock’s recovery after that event looks similar to what we’re seeing now: a period of consolidation followed by a (hopeful) return to strength within a few months. While I’m not expecting DSGX to rip back to 91.5 (which is what it did when it broke out above 63 last June) in the next month I like the relative stability in the stock and the well-defined “get out” price (around 65) should things start to deteriorate.

Enviva Partners, LP (EVA)
Investors looking for alternative energy stocks that offer both growth and value should love Enviva (EVA). The company (a limited partnership, so it issues a schedule K1 at tax time) is a pure-play provider of wood biomass for use in coal-fired power generation and power plants.
Enviva has production capacity of around 6.2 million metric tons per year (MTPY) across 10 industrial-scale wood pellet production plants in North Carolina, Virginia, Florida and Mississippi. It has a deep water marine terminal in Chesapeake, Virginia.

While wood biomass (wood pellets and wood chips) doesn’t get the same love as wind and solar it’s still likely to be a significant contributor to the alternative energy-generated mix in the decades to come. And contrary to some of the other technologies wood biomass offers an immediate option for baseload, renewable power generation.

This is extremely relevant right now, especially in Europe where countries are trying to move away from Russian natural gas by … tomorrow.

Enviva reported Q4 results on February 28 and while management said the company is still recovering from some Omicron-related labor challenges the big-picture growth story is very much intact.

The company ended the year with record backlog (up 44% to $21 billion) and production capacity of 6.2 MTPY, up 17%.

For the second quarter in a row management announced a new industrial customer. The one announced in Q4 is a European customer with production facilities in continental Europe and the U.K. It expects to ramp annual volumes (starting in 2023) to 600,000 MTPY by 2030. This means 1.8 metric tons in annual volume announced within the last two quarters.

Management reiterated fiscal 2022 guidance, calling for adjusted EBITDA of $275 - $300 million (+27.5%) and a dividend of $3.62 (implies current yield of 4.6%).

In terms of revenue growth expect Enviva to generate around $1.37 billion in sales in 2022 (up 32%). That should translate into adjusted EPS of $1.00.

We’ll step into EVA now and try to catch a modest gain in the 10% to 20% range.

The Stock
EVA’s stock was stable but not outstanding prior to the pandemic. It’s done better since as growth has accelerated. Shares broke out above their pre-pandemic high of 40 in October 2020 and ran into the mid-50s by March 2021. Following a small wobble EVA spent most of last summer trading in the 47 – 57 range, then broke out to fresh highs in October. EVA then climbed steadily, ultimately reaching the mid-70s in the first half of January 2022. After a quick selloff late in the month EVA stabilized near 70 in February and has traded as high as 80 in March.

Pfizer (PFE)

Pfizer (PFE) is the story of a large biopharma company that is coming out of a growth trough (due to 2019 patent expiration of Lyrica) and re-igniting its growth engines courtesy of COVID-related products and the transformative M&A that those revenue streams should permit.

The short version is that management says Pfizer’s core portfolio should drive 2022 revenue of around $45 billion (and EPS of $2.74) while Comirnaty (Pfizer’s Covid-19 vaccine) should generate 2022 revenue of $32 billion (EPS of $1.50).

Comparing these figures to 2022 revenue guidance of $100 billion leaves a shortfall of $23 billion. That revenue represents management’s early estimate of 2022 Paxlovid sales based upon contracts in place as of Q4 fiscal 2021 earnings (February 2, 2022).

For those that don’t know, Paxlovid has been authorized (under emergency use) to treat mild-to-moderate COVID-19 in adults and children 12 years of age and older. It is the clear market leader in terms of oral COVID-19 antivirals based on efficacy (89%).

While vaccines are critical to the battle against COVID treating infection effectively is essential if we’re to win the war, partly because there are a lot of places in the world where it’s more practical for sick people to take a pill than it is to deal with the supply chain challenges of shipping mRNA vaccine.

Analysts see 2022 Paxlovid sales of $28 billion, or 22% higher than management’s early guidance. Actual results could differ materially depending on how much governments stockpile.

The punchline here is that, with both Comirnaty and Paxlovid, Pfizer stands to generate free cash flow of around $40 billion in 2022 (peak year), $33 billion in 2023 and $27 billion in 2024. For reference, free cash flow in 2021 was $30 billion and 2020 (pre-COVID) was $12 billion.

In other words, COVID-related products mean Pfizer should have a venerable war chest of cash to pursue transformative M&A. The recently announced acquisition of Arena Pharma (ARNA), which has a potential blockbuster compound for atopic dermatitis and ulcerative colitis, is just one example.

While there is risk in how management spends it, this cash has the potential to completely reshape Pfizer’s growth profile from a roughly 5% growth business (ex-COVID) into something much more attractive long-term.

Granted, we don’t know exactly what this looks like as details on what “could” happen are admittedly fuzzy. But developing and acquiring growth assets is the business Pfizer is in. Provided Paxlovid and Comirnaty sales meet or exceed expectations Pfizer management just needs to execute.

I expect more investors will come around to this story as it develops. We’ll jump in now.

The Stock
PFE was a 41 stock just prior to the pandemic’s breakout in March 2020. It wasn’t until July 2021 that the stock was comfortably back to that level (it fell as low as 28 in 2020). As vaccines became more widely distributed in summer 2021 shares of PFE worked their way higher. But the stock peaked at 52 in August then slid all the way back to 41 by October. PFE then took off again, ultimately rallying as high as 62 just before Christmas. But those gains evaporated and PFE was pulled back down to 45 by the end of February. The turnaround was swift, however. Over the last two weeks PFE has jumped back into the low 50s.

Piedmont Lithium (PLL)
Piedmont Lithium (PLL) is a pre-production lithium company working to build an integrated lithium hydroxide from spodumene business in the U.S.

Lithium hydroxide is required for long-range electric vehicle (EV) batteries, so Piedmont could ultimately help boost America’s clean energy production and storage.

If successful, Piedmont could become the lowest cost producers of both spodumene (preferred feedstock for lithium hydroxide) and lithium hydroxide, thereby making it a key partner for companies within the EV supply chain. Tesla (TSLA) is planning to supply its Gigafactory with Piedmont-sourced spodumene concentrate.

Should EV sales ramp up as significantly and quickly as expected (50% global penetration by 2035) the world is going to need a heck of a lot more lithium than is expected to be available at current production rates. Piedmont can help fill that gap.

To get the job done the company will need to fulfill plans to ramp up capacity at its flagship Carolina Lithium project, which is in the Carolina Tin Spodumene Belt of North Carolina.

This location, just 25 miles west of Charlotte, is highly strategic as it is relatively close to both labor and supplies.

At the Carolina Lithium site Piedmont is targeting production of 242,000 tons per year of spodumene concentrate that will be converted to 30,000 tons per year of battery-grade lithium hydroxide. The next step is for Piedmont to obtain state mining permits, hopefully in Q2 2022, then achieve rezoning from Gaston County (potentially Q3 2022).

Beyond North Carolina, Piedmont also holds a 37% interest in the Sayona project in Quebec, Canada and a 50% interest in the Atlantic Lithium project in Ghana.

In terms of potential catalysts, we’re looking forward to a restart decision on the Sayona Project in Canada at some point in the first half of 2022. A positive outcome is crucial for first production to begin in 2023.

At the Atlantic Lithium project in Ghana we’re looking forward to a prefeasibility study (PFS) in the first half of 2022 and a bankable feasibility study (BFS) in Q4 2022. Both are crucial for first production to start in the first half of 2024.

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

As a pre-production company Piedmont is very early stage. No project has been fully approved yet and the company will need partners and/or financing to fulfill its plans (capex for Carolina Lithium alone is close to $1 billion).

But given the energy trends and the strategic importance of securing domestic lithium supplies there is immense potential for Piedmont. Given all the factors we’ll put it on our Watch List right now. WATCH

The Stock
PLL was trading for less than 10 in 2020 but a listing on the Nasdaq and more definitive plans to ramp up production in North Carolina and elsewhere helped the stock soar as high as 89 by March 2021. Following a secondary offering priced at 70 later that month PLL has been mostly moving sideways, albeit in a wide trading range. The latest retreat began at 69 last November and PLL appears to have bottomed at 41 in mid-January 2022. The stock has been much stronger since, even racing as high as 73 last week. Since this is clearly a speculative stock (at this stage) we’ll keep it on the watch list and look for an opportunistic buying opportunity, or a material positive catalyst that significantly reduces risks.

Shockwave Medical (SWAV)
Shockwave Medical (SWAV) is a medical device company with a new solution to treat calcified cardiovascular disease.

Its approach – called intravascular lithotripsy (IVL) – combines traditional balloon angioplasty and lithotripsy. It can treat calcified artery disease and calcium build up in both the inner (intimal) and middle (medial) layers of peripheral arteries and coronary arteries.

Treatment is achieved with use of a device that combines a small generator, a connector cable and an intravascular lithotripsy catheter.

In basic terms, the catheter is inserted into the target artery and delivers localized treatment via sonic pressure waves. Those waves crack calcium without harming soft tissue and expand the vessel with very low pressure.

Shockwave claims its IVL can treat the most complex calcified anatomies while minimizing common complications from other technologies, including high pressure balloons and atherectomy, which can lead to dissection and perforation and have steeper learning curves.

Management says target market segments in peripheral artery disease (PAD), coronary artery disease (CAD) and aortic stenosis (AS) represent a combined target market of over $8.5 billion.

What’s exciting now is that on the back of FDA approval and better payment reimbursement Shockwave launched coronary in the U.S. in February 2021 (coronary was already approved in select international markets).

That means revenue is surging right now.

Revenue in Q4 was up 271% to $84.2 million. Roughly $70 million of that came from the U.S., and roughly $62 million came from coronary.

Shockwave continues to roll out in more international markets (should be in about 60 countries now, with China and Japan to be added this year) and management sees significant growth in 2022.

Initial revenue guidance calls for $405 million to $425 million (+71% - 79%). Baked into guidance is roughly $320 million in coronary revenue and $96 million in peripheral revenue.

Revenue growth is making Shockwave profitable. In Q4 adjusted EPS was $0.34, up from a loss of -$0.46 in Q4 2020. Looking out through 2022 we could see adjusted EPS of around $1.40, then $2.50 in 2023.

In most markets this type of profile would make SWAV a very attractive stock. Granted, this isn’t exactly a bull market. But we’ll still take a swipe at SWAV now.

The Stock
SWAV came public at 17 in March 2019 and enjoyed a run into the high 60s before a multi-month slump, followed by the pandemic. The stock got going again in mid-2020 and ran up to 144 by the beginning of 2021. There were a number of 20% to 35% corrections in 2021 but SWAV continued to bounce back, ultimately trading as high as 250 in early November 2021. Shares have fallen with the market since. But SWAV appears to have bottomed at 125 on January 28 and has made a series of higher highs and higher lows since. The current retreat to around 150 from the March 2 appears to be a good entry point, provided this pattern holds.

Market Overview

Stock Name	Market Cap	Price	Investment Type
Descartes Systems (DSGX) - Watch	$6.11 billion	71.1	Growth – Supply Chain Software
Enviva (EVA) - Trade	$5.20 billion	78.0	Growth + Value – Wood Pellets
Pfizer (PFE)	$294 billion	52.2	Rapid Growth – Biopharma
Piedmont Lithium (PLL) - Watch	$1.00 billion	63.1	Development Stage – Mining
Shockwave Medical (SWAV)	$5.80 billion	154	Rapid Growth – MedTech

Less Bad
About 15 years ago I attended a talk at Seventh Generation headquarters in Burlington, VT. The CEO spoke about the role the company plays in the market for eco-friendly cleaning paper and personal care products.

He was blunt when talking about the company’s goals around sustainability. Basically saying, listen, we acknowledge that the environmental impact would be better if nobody made soap, paper towels, etc., and all the packaging that these products require.

But that’s not the world we live in. People buy these products every day. So Seventh Generation is trying to minimize the environmental impact and be better than everybody else in its industry.

In short, he was saying he was trying to be less bad.

It was a surprising and refreshing admission.

That concept of being less bad seems highly relevant today for those trying to manage a portfolio of individual stocks.

Stating the obvious, we buy stocks on the expectation that they’ll go up within a reasonable amount of time. Now, more than any point since the market crash in 2020, we’re also trying to find stocks that won’t go down TOO much before they go up.

We’re trying to find stocks that can be less bad.

It might seem a little sad to think about investing that way. But that’s the reality of the times—especially for those pursuing a relatively aggressive strategy intended to deliver big returns over the long-term.

The broad market has been going down since the beginning of the year. The S&P 500, Dow, Nasdaq and S&P 600 Small Cap Index are all below both their 50- and 200-day moving average lines.

The same can be said for most sector ETFs in both the large- and small-cap asset classes, save areas like energy and utilities.

In short, it is a bear market. And in this environment, before we buy any stock we have to ask ourselves – what’s the downside risk?

For some, the answer might be just elusive enough to make it not worth buying stocks at all or to drastically limit new buying. To be one million percent clear … there is nothing wrong with this approach.

In the grand scheme of things, sitting out a few weeks or months (or more) is not a big deal if doing so helps to preserve capital and mental stamina to stick with stocks over the long haul.

While I continue to recommend attractive stocks every month in Cabot Early Opportunities based on the information available at the time, remember that part of the deal is recognizing the big-picture environment we’re in.

Right now, it’s not great. Even for many of the most resilient companies out there.

So don’t fight it too much. Things will turn around (possibly very soon). And when they do those that focused on being “less bad” now will likely be in a better position to pursue big opportunities.

What to Do Now
Be careful. While we could be at or near a market low and pessimism is extremely high there is also too much uncertainty to make it worth sticking your neck out too far.

The most consistent big-picture theme lately is that the experts have been wrong. Wrong on Putin, wrong on Ukraine’s resilience, wrong on inflation, wrong on how far riskier assets would fall.

While the U.S. economy seems poised to accelerate out of “Omicron Winter,” momentum could easily stall given macro concerns. The situation in Europe could be more dire than here. We don’t yet have a picture of how the Russia-Ukraine conflict will be resolved and, or if/how other countries will be pulled into the mix. We don’t yet know the trajectory of interest rate hikes in 2022-23 as there is a large gap between what the market has priced in and the latest Fed dot plot (we should have a little more clarity this afternoon).

To be perfectly clear, these aren’t questions we should have answers for at this point as there are too many unknowns. The answers will come gradually. The bottom line is the market is not a big fan of unknowns so it’s going to take some time before we can manage any sustained upside progress.

So, keep new positions small, focus on diversification and don’t be afraid to step back from any stocks if they are making you queasy.

Cash is a great position too.