December 14, 2023

Small caps are having a very nice week as a lot of rate-sensitive areas of the market zoom higher following the Fed’s meeting and Jerome Powell’s press conference yesterday.

I’ve been saying I think small caps are very attractive lately, so the directional move here isn’t a surprise, though the pace of this week’s gains is rather eye opening. The S&P 600 Small Cap index is up about 7% over the last two days through midday Thursday!

Still, small caps are relatively cheap as compared to their own historical valuation trend and as compared to large caps. As an asset class small caps also have significant EPS momentum, especially if interest rates come down as expected.

On that note, yesterday the Fed released its latest Summary of Economic Projections (SEP), which is a tally of where Fed officials see GDP and the federal funds rate (FFR) rates going. The punchline is the committee sees three rate cuts next year.

This is the “pivot” investors have been waiting for, when the Fed stops saying it will raise or hold rates higher and starts signaling some relief. Stocks love that.

It’s worth mentioning that the takeaway from the Fed’s minutes from the November 1 meeting, which were released on November 21, was that the Fed wasn’t thinking about thinking about cutting rates. The market wasn’t a believer of that line, as evidenced by the strong performance of stocks since.

Clearly, Fed officials WERE thinking about thinking about cutting rates. Right now, the market is pricing in a 66% chance of a March rate cut, a 58% of a second cut in May and a 55% chance of a third cut in June. That’s not set in stone, it’s just the average of what Fed officials think.

That would put the Fed funds rate at 4.5% to 4.75% in June, with potential for more cuts in the back half of 2024, depending on what happens with inflation. That means mortgage rates and all other forms of lending rates will come down.

It also means those fat money market yields are going to start coming down too! While that might not be great for savers, it means there’s a good stack of dry kindling that could be tossed into this market by those with even a small amount of risk tolerance.

That said, a guaranteed yield in the mid-4% range through 2024 is still pretty good.

Speaking of the market, it’s up again today, led by small caps, rate-sensitive REITs, homebuilders, utilities, banks, industrial types and select growth software names.

A number of our stocks are moving higher too. Let’s get into some details.

Recent Changes

Alphatec (ATEC) Moves to BUY
Enovix (ENVX) Moves to BUY

Updates

Alphatec (ATEC) has had a good week, rising 7% since last Wednesday’s close versus a 5.6% move in the small-cap index and 4.6% move in the iShares U.S. Medical Devices ETF (IHI). Granted, almost all of that move came yesterday (the stock is up again today) but we’ll take it. Prior to yesterday’s move ATEC was treading water, contemplating a move up through a little resistance at 13.1. It blasted through yesterday. We’re now eyeing the 200-day line at 14.5, which is about 7.5% higher. Moving back to buy. BUY

Braze (BRZE) reported earnings last Thursday and I detailed the results in a Special Bulletin. Shares were up in after and pre-market hours but the stock lost ground during the regular session. BRZE didn’t move much in the three trading days since, closing near last Thursday’s close level. Yesterday it was up 2.5%. Recall that I had moved the stock to hold prior to the earnings report because I thought it was a little extended. Taking it all in I think this pause is entirely healthy. We’ll keep BRZE at hold while the stock chills out. HOLD

Build-A-Bear (BBW) reported two weeks ago with results that were a little light on revenue but beat on the bottom line. This is a value-oriented stock with some growth initiatives to keep revenue trending up in the mid-single digits and profits growing faster, and for continued dividends, buybacks and special dividends to add a sweetener to total returns (they’ve added about 20% over the last two years). The early read on holiday spending was light, but it was picking up into early Q4 and it may well be that consumers will up their spending given the improved economic/interest rate out there. I’m not saying the average family that goes to Build-A-Bear is basing a trip on what the Fed says – they don’t – but both the data and anecdotal evidence suggests people are feeling A LOT better about the economy right now than they were in September and October. BBW is up very modestly over the last week (thanks to yesterday) and looking to push back above its 200-day line. Keeping at buy but continuing to watch closely. BUY

Docebo (DCBO) is our latest pick (last Thursday) and shares came out of the gate running. They were up 8% through yesterday’s close. I like our entry point on the latest dip and expect this stock could be up and down for a while (but generally trending higher) given that it’s somewhat thinly traded. Docebo was founded in 2005 and is a software company with a host of solutions (some with AI) for the Learning Management System (LMS) market. The company gives customers a learning platform where learning admin teams can centralize a wide variety of learning materials – for both internal (employees) and external (customers, partners, suppliers) workers – and deliver world-class learning experiences. It is a play on the trend to make employees more productive and better equipped to do their jobs and take on new challenges that can move their organizations forward. Revenue grew by almost 26% in Q3, is seen up about 24% in Q4 and should be at least 23% next year. The company is profitable. BUY

Enovix (ENVX) enjoyed an 8% pop yesterday which pushed the one-week (Wednesday close to Wednesday close) move to just over 11%. In early-December meetings with analysts management confirmed the plan to complete all factory acceptance testing (FAT) for Fab-2 with Line 1 installed and sampling of IOT destined batteries available by April. This line is expected to ramp up throughout the year with millions of units being produced later in 2024. From there we go to smartphone batteries in 2025 and laptops in 2026. Big-picture plan is that Enovix should be cranking out product for three markets in 2026 and turn profitable. EV batteries come later. The Routejade integration is going well and helping to reduce costs. The recent move in industrial and more rate-sensitive areas of the market is helping ENVX tremendously so moving back to buy, though I don’t think you need to rush in to buy today. Shares popped above their 200-day moving average line this morning. BUY

Intapp (INTA) is flat over the last week with no significant news to report. BUY

Liquidity Solutions (LQDT) fell last week after Q4 fiscal 2023 results showed revenue was a bit light but the company beat on the bottom line. Revenue grew 6.3% to $80 million while EPS grew 37% to $0.26 and beat by $0.02. It wasn’t a blowout quarter, but it certainly wasn’t bad. I detailed some of the moving parts in last week’s Special Bulletin. Keeping at buy as LQDT appears to be building a base just above its 200-day line. BUY

Remitly Global (RELY) had a tough go of it after the Q3 earnings report showed higher spending on advertising and customer acquisition, even though management characterized the decision as playing offense, not defense. Those marketing investments are expected to drive high returns and improve both lifetime value (LTV) and customer acquisition cost (CAC) efficiency. But the stock isn’t likely to reflect too much potential, investors seem to want to see hard results. That likely means RELY won’t do a heck of a lot until we get an update, which could mean the Q4 report in late February though I’d expect management to provide some clues before that if things are going well. BUY

TransMedics Group (TMDX) continues to act well in the weeks since a very nice Q3 report and the Piper Sandler Conference in late November. Nothing new to add to the story right now. TMDX is up about 5% today and is back above 80. HOLD A QUARTER

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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