August 10, 2023

The last two weeks have been a lot less fun than June and most of July. But big picture, a pullback is not remotely surprising.

Through yesterday’s close, both the large and small-cap indices were down about 2.6% from their recent highs. The Nasdaq was down almost 5%.

What is a little surprising is the rapid change of tone out there. This can be squarely blamed on Fitch’s downgrade of U.S. debt and Moody’s bearish notes on those 10 banks they think don’t look so hot.

Somewhat ironically, the large and small-cap financial ETFs have handled both relatively well, so far.

The other story has been just how blah this earnings season has been. FactSet data shows that companies reporting beats have way underperformed in the two days after reporting relative to history.

We’ve experienced that firsthand, with stocks like SI-Bone (SIBN), Inspire (INSP) and more giving the desired “beat and raise” report only to falter afterward. Super frustrating.

On the other hand, we did see a bump from Duolingo (DUOL) and Flywire (FLYW) yesterday on very good quarters. And on the macro picture, this morning’s CPI report was just a hair lighter than expected. This is good.

We now have a lull in earnings season with two stocks off-cycle and reporting in early September. But there’s still a lot going on. Updates on what’s new below.

Recent Changes: None

Updates

Alphatec (ATEC) is a spine specialist that makes implants, screws and spacers for a variety of spinal disorders. It also develops patient positioning systems that achieve spinal alignment and help surgeons complete procedures that Alphatec has helped develop. The company reported late last Thursday that revenue grew 39%. Management also raised full-year guidance. Shares have pulled back along with other MedTech names, but this should prove to be a shorter-term move and doesn’t change the longer-term bullish outlook for the company. BUY

Earnings: Done

Braze (BRZE) is our newest addition and was added last Thursday. The software company specializes in engagement solutions that connect consumers with brands. Think of things like text messages, emails, web chat apps, etc. that let you know a product you like is back in stock, you left a shopping cart with items in it and so on. Braze is one of the players to beat in the space and has a competitive advantage in that it takes in, processes and applies analytics to first-party data in real-time. That gives customers a reliable data source and current trend analysis, which can make the difference when it comes to marketing messages. Analysts expect fiscal 2024 revenue to grow 27% to $450 million while EPS should improve by around 20% to -$0.51. The company announced Q1 fiscal 2024 results on June 8, so we have about a month to go before the next quarterly result comes out. Suffice it to say going with a stock with relatively current updates and little earnings season risk in August factored into my decision to go with Braze, as did the big-picture attractiveness of the company’s market and growth strategy. BUY

Duolingo (DUOL) reported Wednesday afternoon and I sent out a Special Bulletin yesterday detailing the good results. The stock had a decent day and I’m evaluating when to add the second half of the position. BUY HALF

Earnings: Done

Enovix (ENVX) reported on July 26 and the stock moved higher after the report, then gave it back, plus some. To recap, the Gen2 Autoline equipment is on track for factory acceptance testing (FAT) in August with delivery and site acceptance testing in Malaysia to follow later in the year. Enovix’s manufacturing partner YBS has committed to $70 million in non-dilutive financing as well as facilities and labor in Malaysia. This will help save about $70 million in Enovix CapEx spending this year. Yesterday, Enovix filed its 10-Q with the SEC as well as a base prospectus detailing an offering of up to $1 billion in various securities (equity, debt, preferred stock, warrants), including up to $250 million in equity to be handled by Cantor Fitzgerald and Oppenheimer. Note that this is a “shelf” offering. That means the company is priming the pump for an offering at some point, but not today. This isn’t unusual for a young growth company (especially one facing considerable CapEx). On the one hand, it’s eye-opening that a $2.7 billion market cap company is considering raising up to $1 billion. On the other, that says something about the size of the opportunity here. Big picture, the story continues to evolve for the better and when Enovix raises capital it SHOULD be right after positive news is released. We will see. ENVX shares are trading right on their 50-day line. HOLD

Earnings: Done

Flywire (FLYW) reported another beat and raise quarter on Tuesday, and I detailed the results in a Special Bulletin yesterday. Then yesterday after the close, the company announced a secondary offering to raise up to $287.5 million, priced at 32. Not surprisingly FLYW is trading down around 6% (to 32ish) in early trading today. It’s not surprising management would tap the market given how well the stock is doing. The first question on my mind is if there is an acquisition in the works. In any event, this will be a great test for the stock and may create a little buying opportunity. Keeping at buy while watching closely for any notable break in trend, which has been solidly up and to the right for several months (aside from a wobble in early February and early July). BUY

Earnings: Done

Inspire Medical Systems (INSP) beat expectations when it reported early last week and most analysts raised price targets, but the stock has reacted extremely poorly. This doesn’t necessarily put INSP in its own class as the broader MedTech space has been under pressure lately too. But it’s still been enough of a head-scratcher to warrant some digging. I was able to review a note from Bank of America analyst Travis Steed, who dug into a couple of questions he’s been receiving from investors that may explain some of the weakness. For the record, he doesn’t think the questions/answers change anything for the worse and he’s still bullish, with a price target of 355 (stock at 240 now).

The first question is about lower website visits (2.9 million in Q2 vs. 3.4 million in Q1) and physician contacts (12K in Q2 vs. 19K in Q1). Travis suggests there are metrics that Inspire doesn’t disclose that explain away these seemingly bearish trends. Specifically, the company’s website approach is evolving after it launched a direct-to-consumer approach in Q1 2022 (when it saw a big boost in web traffic), and it is now trying to engage visitors with its advisor care program (ACP) as well as trying to get more patients through primary care referrals (which appears to be working). “Physician Contacts” are just calls coming into the ACP and aren’t actual appointment bookings. Bottom line, the company isn’t disclosing all metrics so there is some part of the story that’s missed if just looking at website visits and physician contacts, according to Travis.

Second, in Q2 Inspire’s U.S. sales were nearly 50% from Medicare, versus a typical mix of 25% to 30%. Travis suggests this is due to a big surge in older patients that had delayed procedures during the pandemic and who are doing them now. This trend is not unique to Inspire, and management sees commercial (i.e., non-Medicare) volumes picking up into the end of the year.

These seem like plausible explanations for concerns that could have contributed to INSP’s recent selloff, which can also be partly attributed to a generally weak market lately. In any event, we’ll stick with our current rating for now. HOLD TWO THIRDS

Earnings: Done

Intapp (INTA) has begun to fall apart over the last week. Shares held at support near 36.5 (price of the May equity offering) on Monday, but with the broader market slipping over the week and earnings not due for about a month, INTA hasn’t had anything to catalyze investor interest. Recall that the reactions to the last two earnings reports have been overwhelmingly positive (+18% and +15.5%, respectively). It may be that investors are concerned about the CFO transition (Steve Robertson stepping down and David Morton stepping up), but I don’t think even a senior management change signals anything majorly bad going on with the company. Keeping a buy rating for now but certainly watching closely. BUY

Repligen (RGEN) has been a total nothingburger since it reported meh results last Wednesday morning. In a weird way, this is pretty encouraging. Management took guidance down and the broad market has not been great. But RGEN has been going sideways. It suggests the sellers may be gone. HOLD A QUARTER

Earnings: Done

R1 RCM (RCM) reported last Wednesday with in-line results that were enough to keep shares above their 50-day line, until today. Revenue grew 43% and the full-year outlook was bumped up a hair. There wasn’t any notable negative from the quarter and the story remains intact. I think we can “blame” the recent dip on the broad market, which in fairness has been a lot harder on many stocks than it’s been on RCM. Sticking with a buy rating. BUY

Earnings: Done

Si-Bone (SIBN) reported another beat and raise quarter on Monday (for the third quarter in a row) and I detailed the results in Tuesday’s Special Bulleting. No changes since then. Still have a buy a half rating and looking for SIBN to bounce back. BUY HALF

Earnings: Done

TransMedics Group (TMDX) reported late last week with solid results (revenue up 156%) and an increase to full-year guidance (93% to 103% revenue growth expected). The company also announced the acquisition of Summit Aviation so it can take ownership of charter flights for organ transplants given supply chain issues in the market. Given the change to the business model this acquisition creates, as well as guidance that implies a second-half 2023 slowdown (summer holidays, fall travel, etc.), investors appear to be a bit lukewarm on the stock these days. I think this will prove to be temporary, but of course, management will need to execute in the coming quarters for TMDX to get back in the groove. HOLD THREE QUARTERS

Earnings: Done

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.