December 21, 2023

First off, just a little housekeeping. I’ll be taking time next week to spend with my family, parents, siblings and new niece in Vermont. Much of our production staff will also be taking some time off, so there won’t be a Weekly Update next Thursday. If there is any pressing news I’ll address it via Special Bulletin.

I hope you have a Happy Holiday season!

On to the market, it’s certainly been getting in the holiday spirit. It was another productive week for small caps. The S&P 600 Small Cap Index is up 1.8% since last Wednesday’s close (through yesterday’s close), handily outperforming the S&P 500, which was down 0.6%.

Small caps have led in every single sector, with the best performance coming from the materials (+5.1%), energy (+4.2%) and consumer discretionary (+2.8%) sectors.

Small caps also led large caps across all sectors, with the largest outperformance in utilities, materials and healthcare.

The Fed’s dovish pivot, seasonality and soft-landing traction are the three main reasons behind the stock market’s strength. The only potential fly in the ointment is that things have been too good.

Just under half of the S&P 500 is now trading with a 14-day Relative Strength Index (RSI) over 70, the most in 30 years. A few Fed officials have also begun to push back against market expectations for rate cuts in 2024, though they feel like “empty threats.”

An interesting weekend note from Jefferies discussed how the current overbought conditions are actually good. The firm stated that, when looking back to 1990, there are only four other instances when more than 45% of the S&P 500 had overbought RSIs. In each case the S&P 500 was up over the next 12 months, with an average return of 13%.

Hopefully they’ll have to update their data to “five instances” in just over a year.

One other potential re-emerging concern is the war in Gaza. Ed Yardeni was out with a note on this yesterday, discussing it as a potential driver of the late-day selling. He wrote, “The only one (trigger for a selloff) we can point to is mounting evidence that the Gaza war is turning into a more regional one.”

The average investor hasn’t been paying attention to the Gaza war. The Investors Intelligence Bull/Bear Ratio (BBR) leapt to 3.1 this past week!

The bottom line is that the path of least resistance for the market has been up. But the evidence showing things are overbought is clear. The unanswered question is whether or not that condition will drive a broader selloff, or if a pause in the advance can suffice.

In either event, I think 2024 will continue to be productive for small-cap stocks.

For our part, we’ll continue with most of the same ratings we had last week, with the exception of one sell notice in a stock that’s just not getting the job done.

Recent Changes

Build-A-Bear (BBW) Moves to SELL

Updates

Alphatec (ATEC) was moved back to buy last week and shares continue to work their way higher, rising 8% from last Wednesday’s close through yesterday when ATEC traded right up to its 200-day line. It looks like management is going to participate in the JPMorgan Healthcare Conference on January 10. This week Needham adjusted their price target higher (from 16 to 18). I’m keeping at buy. BUY

Braze (BRZE) remains at hold as the stock is still chilling out in the 52 to 56 range after reporting a couple of weeks ago (I moved to hold just prior to the report). We’re up 23% on the position. HOLD

Build-A-Bear (BBW) hasn’t done anything over the last week and I’m getting frustrated that the stock isn’t making any headway in an up market, or getting any of the seasonal boost that I expected when I added the stock in October. The reason is likely that the November 30 earnings report wasn’t fantastic and management wasn’t able to give a clean look at the all-important Q4, which had just begun on November 1. Management said activity was picking up, and we know that September and October was pretty bad in terms of consumer sentiment. So it’s entirely possible that things are going much better now (sentiment has improved in December). But without confirmation from the company investors are still left guessing. This isn’t a stock I was expecting to hold for a long time; rather, it was a shorter-term, lower-risk play based on seasonal factors. Since those aren’t working yet and I’m concerned about a lack of catalysts after a Q4 report (probably not until late February or early March) I’m going to let BBW go today. SELL

Docebo (DCBO) continues to look good and pushed up to the November high yesterday before backing off a little. Shares are up 7% over the last week. It will take some doing for the stock to punch through this overhead resistance at 52.7. I sent out a Special Bulletin earlier in the week discussing the pros and cons of accepting the tender offer and stated that I plan to keep my shares and maintain a full position in this portfolio. I think this is an interesting story and like the growth trajectory. Docebo 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. It is altogether possible that shares will fall back a little after the tender offer period ends on December 27 (DCBO stock can be a little volatile) but I expect the long-term trend to be up. BUY

Enovix (ENVX) continues to act well and is now back above its 200-day moving average line. William Blair picked up coverage with an “outperform” rating earlier in the week. The next major milestone is sampling of IOT destined batteries from Line 1 by April, followed by production ramp to millions of units by the end of 2024. I upgraded to buy last week. BUY

Intapp (INTA) was trading near 30.6 three months ago and has been trying to punch through the 40 level for the last week. The stock hasn’t quite gotten the job done yet but with a good earnings report in November and very solid profit outlook (EPS expected to grow 65% to $0.44 next year) and sales momentum (including with Microsoft), the path of least resistance should continue to be higher. BUY

Liquidity Solutions (LQDT) continues to consolidate just above its 200-day line. There’s been no company-specific news over the last week. BUY

Remitly Global (RELY) has lost some of its recovery momentum though there’s nothing out there to suggest that anything has deteriorated with the business over the last month. Recall that at the time of the Q3 earnings call management talked about going on the offensive to ramp up advertising and customer acquisition spending. Those investments are expected to drive high returns and improve both lifetime value (LTV) and customer acquisition cost (CAC) efficiency. But investors want to see results before they’re willing to give RELY stock credit. Looking for management to provide some clues that things are going well before the Q4 report in late February. BUY

TransMedics Group (TMDX) management will present at the JPMorgan Healthcare conference on Monday, January 8. There was no news over the last week. We’re still awaiting confirmation that the aviation business is ramping up and that this significant investment will ultimately pan out and help management achieve its vision of turning TransMedics into the go-to service provider for lung, liver and heart transplants in the U.S., (and eventually select international markets). 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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