August 24, 2023

After three rough weeks in August, small caps have finally begun to stabilize around their 200-day moving average line.

I’d like to say blame for the weak performance rests fully on the shoulders of small-cap financials due to rising yields, commercial real estate mortgage default risk, etc.

But the truth is most sectors have been weak. Small-cap health care looks downright awful, with the Invesco S&P Small Cap Healthcare ETF (PSCH) hitting a new low for the year late last week.

The backdrop has been rising yields, which got to troublesome levels as I discussed in last week’s update, and a market that was just looking overbought heading into August.

Things are looking a little better now.

Yields have come down (10-year at 4.2%), tech/AI darling Nvidia (NVDA) exceeded lofty expectations when it reported yesterday (good for other AI/software names), and there’s been some talk from JPMorgan about how hedge funds and mutual funds now have room to increase equity exposure.

On the other hand, resilient consumer spending is being increasingly questioned as retail earnings have been anything but great.

There’s still talk about 2024 earnings expectations needing to be reeled in and some chatter about a potential government shutdown this fall. Congress is on recess through Labor Day so lawmakers will only have 12 sessions before government funding expires on September 30. Talk about annoying, especially since a shutdown would impact data flow to the Fed which remains in “data dependent” mode.

The next FOMC meeting is on September 20 (88% probability rates hold steady), then November 1 and December 13.

The big event this week comes tomorrow when Fed Chair Jerome Powell speaks at the Jackson Hole conference on Friday. The June FOMC dot plot suggested around 100bps of cuts could occur in 2024 so there’s rational hope of some target rate reduction signaling. But it’s also tough to believe we’ll get any real clarity given the aforementioned data dependent philosophy.

In any event, the market will be highly tuned to Powell’s speech tomorrow, so expect an interesting day!

Recent Changes
SI-BONE (SIBN) moves to BUY SECOND HALF

Updates

Alphatec (ATEC) hasn’t put out any new press releases in the week after management spoke at the Canaccord Genuity Growth Conference. Shares had a decent week, rising a bit more than 8.5% from last Thursday’s close through yesterday. BUY

Earnings: Done

Braze (BRZE) has announced its Q2 fiscal 2024 earnings date will be on Thursday, September 7 (about a week earlier than we expected). The next day management will speak at a Citi conference, then will move on to Piper Sandler on Tuesday, 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. Full-year revenue is seen around $445 million (+25.2%) while EPS should be around -$0.51 (about a 21% improvement). The stock is up about 6% from last Thursday’s close. BUY

Earnings: Expected September 12

Duolingo (DUOL) is up a little more than 7% over the last five sessions. A new Chief Marketing Officer, Emmanuel Orssaud, has been promoted from within. No other news after a strong August 8 earnings report. BUY HALF

Earnings: Done

Enovix (ENVX) looks to be stabilizing back in the 13 to 15 zone, where it traded in mid-to-late June. That means the nice run into the low 20s from July has been erased, a bit disappointing as the rally coincided with a lot of positive operational news from the new management team. However, this is a sizeable opportunity and we’re being patient, rather than trying to trade in and out. A little risk on rally and ENVX could easily be off to the races again. HOLD

Earnings: Done

Flywire (FLYW) had a great earnings report on August 8 and rallied intraday to 35.8, then announced a secondary offering priced at 32 after the close on the same day. That sent shares back to 30 within a few sessions. FLYW’ held steady there and has now traded up for the last six sessions, closing at 31.9 yesterday. We should be good to go now with the impact of the secondary offering behind us. BUY

Earnings: Done

Inspire Medical Systems (INSP) has continued to struggle, most likely due to concerns over the potential impact of the new class of weight loss drugs and related impact on the sleep apnea market. We elected to let go of our remaining quarter-sized position last week. SOLD

Earnings: Done

Intapp (INTA) will report Q4 fiscal 2023 results on Wednesday, September 6. 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). Shares are trading around their 200-day moving average line and about 30% from the June highs. Keeping at buy and watching closely. BUY

R1 RCM (RCM) has moved sideways over the last week on no significant news. BUY

Earnings: Done

Repligen (RGEN) wobbled a bit late last week but has bounced back some over the last three sessions. There was a small rally in some of the COVID vaccine and bioprocessing winners as cases have ticked a little higher. But there’s no doubt most of these players remain challenged after successive guidance reductions through 2023. That said, it appears investors want to own names like TMO, DHR and RGEN for their recovery potential and due to the long-term attributes of the bioprocessing market (and tools, which DHR and TMO have more exposure to than RGEN). Big picture, we’d like to see some strength return to biotech names since that’s where some of the pipeline for RGEN comes from. HOLD A QUARTER

Earnings: Done

SI-Bone (SIBN) pulled back to around the 20 level a couple weeks ago and has been grinding its way a little higher since. A bullish note from Morgan Stanley last week has probably helped given increasing investor focus on firms with profits, and SI-Bone’s trend toward breakeven. Taking this opportunity to average down into our second half (our first half position is down 12% as of yesterday’s close). BUY SECOND HALF

Earnings: Done

TransMedics Group (TMDX) is looking to get back in the groove after a roughly 30% correction from July’s highs (not an outlier, lots of SMID-cap MedTech stocks are down about the same). Shares are up about 4% over the last five sessions. The big deal here is, of course, the acquisition of Summit Aviation (to become TransMedics Aviation and provide air logistics for organ transplantation in the U.S.) which has a major impact on TransMedics’ business model. Investors want more clarity on the revenue and earnings, capex, etc., trajectory. 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.