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Early Opportunities
Get in Before the Crowd

January 9, 2023

The market has linked together a few decent days, helped by a better-than-feared jobs report last week (showed wage gains moderating), reopening in China (good for global growth) and greater recognition that higher-growth stocks reflect A LOT of bad news.

Even slightly better-than-expected readings on inflation (CPI out on Thursday), wages and the Fed’s rate outlook (Fed Funds rate should be peaking around 5% to 5.25% in the next few months) could spark a decent rally.

On the flip side, we have earnings season (financials start later this week) and a slowing economy/downtrend in earnings expectations that are raising the odds of a first-half 2023 recession.

Bottom line: the Fed has a very narrow path through which to steer the U.S. economy if it’s to avoid a recession this year. Therefore, we’re not likely to see a broad-market rally in the near future. We need more evidence that the Fed’s path to a soft landing is getting wider before we will see the broad-based strength that we all crave. It could very well happen; it just won’t be an overnight buy signal-type event. We need to keep an eye on the trends.

We’re going to make a few changes to our portfolio today.

Axonics (AXNX) isn’t looking great today (along with a number of other small and mid-cap MedTech stocks). The stock has dipped below the November and December lows (59 and 57, respectively). Management speaks at the J.P. Morgan Healthcare conference Wednesday. Given the stock’s trend, we’re going to take partial profits again by selling a quarter of our position. This will leave us with half of our original position. I’ll evaluate AXNX as this week progresses and we hear what management has to say. SELL A QUARTER, HOLD HALF

BioAlta (BCAB) should be out with some data on pipeline progress (specifically the Phase 2 BA3021 trial (NSCLC, Melanoma, SCCHN, Ovarian Cancer) as early as tonight, given management is presenting at the J.P. Morgan Conference tomorrow. Over the last week, the company has filed an Open Market Sale Agreement with Jefferies for up to $100 million in stock as well as a $200 million registration statement. Given that the stock is essentially unchanged through these filings, it would seem investors are expecting a combination of trial data (to be positive) followed by execution of the stock offerings. That’s the typical cadence. That said, there is no guarantee we’ll get a data update soon and/or that it will be good. I just think the odds are tilted in that direction. We are down 8% on the first half of our position and will stick with a buy a half rating on half until we know more. BUY HALF

Xponential Fitness (XPOF) management has been vocal lately, talking up the business. This morning they issued a press release indicating the business should meet or exceed the high end of management’s full-year outlook of $235 - $240 million (+53%). The company has also repurchased 85,340 shares of convertible preferred stock, which removes pending dilution of about 5.9 million shares of class A common stock. The stock was pennies away from an intra-day all-time high today. Keeping at hold. HOLD

Watch List Stocks Update

Arhaus (ARHS) today released preliminary 2022 results that are ahead of expectations as sales seemed to ramp up from November through the end of December. Management now sees 2022 revenue up 51% to around $1.23 billion versus prior guidance of 43% to 48% growth to $1.17 - $1.19 billion. I had considered adding ARHS to our portfolio recently but ultimately decided against increasing our market exposure. I’m intrigued by this result, but also question how sales will hold up in the first half of 2023. We’ll continue to keep ARHS on the Watch List.

Sight Sciences (SGHT) had a nice day on Friday after a price target increase from Morgan Stanley (MS), which cited management’s commitment to around 30% growth in 2023. Stifel also upgraded the stock. Suffice it to say, the odds of adding SGHT to our portfolio are increasing. Continue to watch.

DoubleVerify (DV) is a business with too many moving parts (the platform measures ad effectiveness across desktop, mobile apps, connected TVs and social) in the ad spending market for me to feel confident recommending it in the current environment. It’s still a relatively defensive stock in its specialized marketplace but shares lack momentum and I just don’t have enough confidence in the name to warrant focusing on it. Dropping from our Watch List today.

Mission Produce (AVO) has remained on our Watch List as I thought we could snag a quick profit trading the name, but that opportunity has been elusive. With the stock down big on the last quarterly report I’m not going to mess around here. Dropping from our Watch List today.

Paya Holdings (PAYA) announced today that the company will be sold to the Canadian fintech company Nuvei (NVEI) for 9.75 (a roughly 25% premium to yesterday’s closing price). With the stock to be acquired, there’s no play here for us. Dropping from our Watch List today.

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.