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Small-Cap Confidential
Undiscovered stocks that can make you rich

August 17, 2023

Welcome to this week’s Cabot Macro Investor update.

I’m joking. We’re still all about small-cap stocks. But now that earnings season is over it’s all about the macro again. So we’ve got to address it.

In the second half of July, I felt like we were due for a pullback.

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Welcome to this week’s Cabot Macro Investor update.

I’m joking. We’re still all about small-cap stocks. But now that earnings season is over it’s all about the macro again. So we’ve got to address it.

In the second half of July, I felt like we were due for a pullback.

Now that it’s here I’m like, whoa. Wait, wait, wait. Let’s not overdo it!

The difference between thinking stocks are getting overheated and assessing a correction is that, once the correction begins, you need to consider why it happened. And what needs to happen for it to end.

So, why are stocks, including small-cap stocks, correcting? The short list:

1. The yield curve remains inverted (yields of long-term bonds are lower than short-term bonds). But long-term bond yields are rising to close that gap.

2. Moreover, the yield on the 10-year bond is at 4.3%. That’s about the high for this cycle, which was last struck on 10/21/22. Not coincidentally the S&P 500 bottomed (intraday) at 3,492 just a few days before that, on 10/13/22. The index is up 17.3% since, partly on expectations that the Fed is done hiking rates and that yields will flatten out and/or fall.

3. There is talk of default risk in commercial real estate (CRE) if CRE mortgage rates continue to climb with bond yields. That’s bad for financial stocks and therefore the broad market. Moody’s downgrade of 10 U. S. banks on August 7 and Minneapolis Fed President Neel Kashkari’s comments about raising capital requirements on banks with over $100 billion in assets hasn’t helped.

4. Big picture, the U.S. economy remains resilient. Good in many ways, but maybe not for signaling an end to the Fed’s higher-for-longer rate policy.

So, what could help end this correction? The short list:

1. It would be great to move toward an eventual disinversion of the yield curve. But not by having the 10-year keep going higher. We want shorter-term bond yields to fall and move through the 10-year yield.

2. For that to happen we need signals that the Fed will begin cutting rates next year. Since this week’s FOMC meeting minutes didn’t do the trick, we’re now looking to Fed Chair Jerome Powell to dangle the carrot in Jackson Hole next Wednesday and Thursday when he speaks at the 2023 Economic Policy Symposium. This is certainly not a given since the economy remains strong.

3. Anything that helps return investor focus to the probability of a soft landing, earnings growth in 2024, and the amount of cash in money market funds that could flow into equities would be good.

4. Getting through the seasonally slow month of August could also give stocks a boost.

We’re through most of the Q2 earnings season (just a few positions left to report). The S&P 600 SmallCap Index trades with a forward PE around 13.5. That’s pretty attractive, and A LOT lower than the S&P 500’s forward PE of 18.7.

It shouldn’t take too much to get stocks to bounce soon. But watch that 10-year yield. Stocks aren’t likely to move materially higher without yields coming down.

Recent Changes: Inspire Therapy (INSP) moves to SELL


Alphatec (ATEC) management spoke at the Canaccord Genuity Growth Conference late last week. Speaking about the next couple of years and growth potential, management said (I’ve corrected some text), “Well, you look out into the future what hasn’t had an impact yet. And it’s things like EOS and the technology advantage there. We’ve grown that business at 20% CAGR since we bought it with really no ... introduction of new technology there. And so, 2024 we talked about that on our call that kind of some new technology coming to that platform from a software development standpoint ... we really haven’t had a meaningful contribution from the international business at all. And so, that’s really in front of us ... the navigation robotics is really a 2025 and beyond driver. And so, just really excited about the sustainability and the levers that are still out there to drive long-term growth.” Canaccord recently picked up coverage of ATEC with a buy rating and 22 price target (more than 50% higher than the current price). BUY

Earnings: Done

Braze (BRZE) 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. I’ve also been keeping an eye on Freshworks (FRSH), a slightly larger company in the same space. They had a good quarter and the stock responded well. This may be another sign that spending in this area is fairly resilient. Braze is expected to report on September 12. Analysts expect Q2 fiscal 2024 revenue will be up about 26% to $108.6 million and EPS loss will improve about 14% to $0.14. BUY

Earnings: Expected September 12

Duolingo (DUOL) has pulled back along with most other stocks. There’s no company-specific reason for the dip. The 8/8 earnings report was very strong. BUY HALF

Earnings: Done

Enovix (ENVX) has been in a downtrend for the last three weeks despite a slew of positive reports on operational progress. A shelf offering for 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 probably hasn’t helped. But it’s not surprising that the company is planning to raise capital at some point. HOLD

Earnings: Done

Flywire (FLYW) went to market with a secondary offering last week (up to $287.5 million, priced at 32) and shares immediately went to that level. FLYW has been between 30 and 32 for the last five sessions. No press release stating the offering has closed yet but it should have on August 14. Looking for the stock to recover relatively quickly after this dip. BUY

Earnings: Done

Inspire Medical Systems (INSP) continues to confound. The company did better than expected on all fronts when it reported on 8/1 yet the stock can’t get a bid. I detailed some potential concerns from Bank of America analysts last week (lower website visits, higher-than-normal Medicare mix) as well as reasons not to overthink them. However, the market is in overthink mode right now. I hate, hate, hate to do it but INSP has broken below its April 2023 low today, so we need to exit the position. On that front, many months ago I mistakenly wrote that we’ve been holding a two-thirds position in INSP when we’ve been holding a one-quarter size position (we sold a quarter position on each of these dates: 10/30/20, 5/13/21 and 12/6/22). My apologies if this has created any confusion. Will watch INSP to see if we want to buy it back down the road. SELL REMAINING QUARTER

Intapp (INTA) isn’t expected to report until around September 6. The stock is trading right around its 200-day moving average line. In the upcoming quarter (Q4 fiscal 2023) analysts are looking for revenue to grow 23% to 93.1 million and for EPS of $0.01. We’ll be looking for fiscal 2024 guidance of at least $402 million in revenue (+15%) and EPS of $0.17 (up from consensus for $0.09 this year). There will also be discussion about the CFO transition (Steve Robertson stepping down and David Morton stepping up). Keeping at buy and watching closely. BUY

Repligen (RGEN) continues to move sideways in the weeks after reporting Q2 results. This morning the company announced it is launching a system with German competitor Sartorius. The bioreactor system is used by drug manufacturers to streamline the way users can control cell growth and improve cell retention in perfusion processes. HOLD A QUARTER

Earnings: Done

R1 RCM (RCM) was picked up by Cantor Fitzgerald this week, which slapped a 20 price target on shares (23% above current price). No other news. BUY

Earnings: Done

Si-Bone (SIBN) sold off after the 8/7 earnings report (it’s not alone) but I’ve said the story remains good and the stock is still at buy. Morgan Stanley put a note out this week following a conversation with SI-Bone management. The analysts wrote, “... underlying adoption and utilization trends remain solid (if not improving), the coverage and reimbursement environment is supportive, and P&L leverage is becoming more visible with the company getting closer to breakeven ... We see the recent pullback as a buying opportunity for a growth asset, and reiterate our Overweight rating.” Morgan Stanley has a price target of 30 on SIBN (45% above the current price). Looking to add second half but would like yields to calm down. BUY HALF

Earnings: Done

TransMedics Group (TMDX) had a solid report on 8/3 with revenue up 156% and an increase to full-year guidance (93% to 103% revenue growth expected). Yesterday afternoon the company completed the acquisition of the previously announced Summit Aviation business, which will become TransMedics Aviation and provide air logistics for organ transplantation in the U.S. With the deal done, investors have been grappling with the reality of all the uncertainty that comes with operating an aviation business. Not that TransMedics management has no clue what it’s getting into – it has been working with air charter operators for years and Summit’s founder Ben Walton is coming in-house as part of the deal – but this is still a big change to the business model. For now, more questions than answers. And combined with generally lackluster growth stock performance following earnings reports, TMDX stock has taken a hit. Looking for shares to stabilize in the low-60s and get back in gear soon. HOLD THREE QUARTERS

Earnings: Done

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

Stock NameDate BoughtPrice BoughtPrice on 8/17/23ProfitRating
Alphatec (ATEC)4/10/231614-9%Buy
Braze (BRZE)8/3/234240-4%Buy
Duolingo (DUOL)6/1/23152128-16%Buy 1/2
Enovix (ENVX)10/6/222014-29%Hold
Flywire (FLYW)8/4/22 & 11/9/2221.623146%Buy
Inspire Medical (INSP)10/4/1959215268%SELL
Intapp (INTA)1/4/23263538%Buy
R1 RCM (RCM)7/6/231816-8%Buy
Repligen (RGEN)11/2/18 & 12/31/1859163176%Sold 3/4, Hold 1/4
Si-Bone (SIBN)5/3/232421-12%Buy 1/2
TransMedics Group (TMDX)7/7/22346386%Hold 3/4
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.