August 8, 2024

What a wild couple of weeks.

For two weeks after the June 11 CPI print, small-cap stocks were advancing at such a record pace that they were finally being talked about again in the financial media.

Everything seemed great through the Fed meeting last Wednesday.

Then the wheels came off.

First, last Thursday we got higher-than-expected unemployment claims for the week ending July 27. Second was the unemployment component of manufacturing data (national M-PMI) from July, which showed such a steep drop in employment that it was on par with lows from the pandemic and Great Financial Crisis.

Third (last Friday morning) was the July payroll number, which missed by a wide margin (June was also revised downward), driving the unemployment rate up to 4.3% versus expectations of 4.1%.

These reports were not a good look at all, especially since Fed Chair Jerome Powell had just said on Wednesday that the labor market (which the Fed has been trying to cool down) was “normalizing.”

Naturally, all of this raised the question of whether or not the Fed really is behind the curve and should have cut rates. If and how Hurricane Beryl affected the jobs numbers was also being debated.

Fast forward to Monday morning, and I check futures at 6:00 AM ET and see the Nasdaq pointing to a 5.0% decline. Oh boy.

It’s been a few days since the crazy Monday selloff and we think we know what happened (Japan raised rates from near zero, yen carry trade, etc.). But the turmoil in the stock market has likely created enough questions/done enough damage that it’s going to take some time to completely work through the big drop in investor sentiment (which is probably bullish from a contrarian perspective) and get this market going again.

But who knows. Today feels very encouraging.

On the positive side of things, Japan doesn’t seem likely to raise rates again while the markets are on edge, J.P. Morgan says (as of this morning) that three-quarters of the carry trade has been removed, and at 8:30 AM ET the BLS released jobless claims data for the most recent week that were about in line with expectations. That’s good.

At the risk of sounding like a market cheerleader, it’s very possible that this was a situation where a confluence of factors with somewhat coincidental timing all hit at the same time and created a super volatile, but quick, correction.

If we assume the big-picture drivers of the bull market are still in place, and factor in that there is now an increased likelihood of accelerated rate cuts (the second is an open question, odds of a 50 bps cut in September have fallen from over 80% on Monday to around 55% this morning), there could be a very strong case that stocks can rally into the end of the year (after some time to repair has passed).

On the flip side, an actual recession (J.P. Morgan says 35% probability) would severely dent that potential. But this is NOT the base case right now, far from it.

Importantly, it’s reassuring that the S&P 600 Small-Cap Index held above its pre-June 11 CPI level, and seems to want to go higher today.

Let’s move on to our stocks.

Recent Changes:
Zeta (ZETA) moves to BUY

Updates

Artivion (AORT) reports after the close today. We’re looking for 9.4% revenue growth ($97.6 million) and EPS of $0.03. The company beat on revenue by almost 6% last quarter and smashed EPS expectations by $0.30. Artivion is a pure-play aortic disease MedTech company, selling medical devices, implantable human tissue and preservation services to cardiac and vascular surgeons treating patients with heart valve disease, aortic aneurysms and dissections. In terms of the growth strategy, the company’s playbook is exactly what we’re looking for from an emerging MedTech player, with growth coming through new product introductions, new indications, global expansion and M&A. BUY

Earnings Date: TODAY, August 8

Docebo (DCBO) reported a slight beat early this morning and gave forward guidance that was higher/good but also seems overly conservative (maybe because the stock market just melted a few days ago). Revenue grew 22% to $53.1 million (beat by $800K) and EPS grew 86% to $0.26. I listened to the conference call at 8 AM ET this morning. The short summary of key items is (1) management is seeing relative strength in the Enterprise segment and expects more government customers later this year, (2) AI monetization will begin with AI authoring solutions, followed by virtual role play and coaching solutions, and (3) new pricing strategy is expected to accelerate deal cycles and help in discussions with customers. The stock is up on the report (was up more earlier) and SHOULD do better coming out of this, but I’m going to be watching closely for any signs of DCBO breaking down. It’s a compelling business given how solid the growth is and the level of profitability, especially given many other Customer Experience/Learning Management type companies aren’t doing so hot. BUY

Earnings: Done

Enovix (ENVX) reported last week, and I detailed the results in a Special Bulletin. No changes since, and the stock remains a buy near its 200-day line. BUY

Earnings: Done

EverQuote (EVER) reported a big beat earlier this week, and shares appeared ready to break out but have failed to do so. Keeping at hold. HOLD HALF

Earnings: Done

FTAI Infrastructure (FIP) was added last Thursday, right before the market rout. All things considered, the stock has held up very well (a solid earnings report helped). The company, which operates like a private equity holding, owns infrastructure businesses across the transportation, energy, clean energy and industrial products markets. It is focused on generating and growing positive, stable cash flow and EBITDA (a measure of earnings before deducting interest, taxes, depreciation and amortization) from a portfolio of diverse companies and assets that have long-term growth potential. BUY

Earnings: Done

Mama’s Creations (MAMA) is our play on prepared food in grocery stores, which is a big trend that you’ll likely notice as you walk around your favorite grocery stores. Earnings won’t be out until September. I think this is a really interesting story and has the makings of a terrific business. We’re hoping for news of significant new customer wins in August and/or September, along the lines of Walmart (WMT) and/or Target (TGT). BUY

Expected Earnings Date: September 11

RxSight (RXST) reported this week, and shares shot higher as concerns over procedure volumes proved to be overdone. The stock has thus far held on to its post-earnings move and remains a buy. BUY

Earnings: Done

TransMedics Group (TMDX) reported last week and, as expected, delivered a monster quarter. No big news since. The stock has been rock solid through the market turmoil. Hold A Quarter

Earnings: Done

Weave (WEAV) reported a very solid quarter last week and shares were higher initially, then gave some back and ultimately sold off a little through the market’s rough patch. But the story remains as solid as ever and we should see buyers stepping in. BUY

Earnings: Done

Zeta Global (ZETA) is another stock that reported last week, surged higher, then gave the move back. I’ve kept at hold since the stock has advanced so much this year, but it’s impossible to ignore just how resilient ZETA has been over the last week and how good the quarter was. While I want to be somewhat conservative, I also don’t want to keep new investors out of the name simply because shares have done well. Moving back to buy, just suggest keeping new positions on the small side and averaging in. BUY

Earnings: Done

That’s it for this week. Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

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