Small-cap stocks had a nice day yesterday after consumer confidence numbers came in better than expected. Both FedEx (FDX) and Nike (NKE) also delivered quarterly results and forward guidance that were better than expected and gave the broad market a boost.
It may be that investors have had enough time to digest Fed Chair Jerome Powell’s hawkish comments after the FOMC meeting last week and have determined that, while the odds of a recession have gone up, it’s not yet a given that the U.S. economy will fall apart in 2023.
We have already seen that certain areas of the economy are faltering while others are more or less fine (for now). That pattern could persist into next year as a rolling recession scenario plays out.
While not nearly as clear cut as a harsh landing or no recession situation, the rolling recession scenario is logical. The pandemic distorted everything. It’s not all going to come back into alignment at the same time, especially as the Fed’s policies roll through areas of the economy at varying rates and severity.
As has been the case for much of 2022 the market is going to continue to move on economic news.
Today we’ll get November’s Index of Leading Economic Indicators. It’s been falling for the last eight months. Another weak reading will have the recession bears roaring.
Tomorrow (Friday) we’ll get the November personal income report (a.k.a. PCED inflation report). It’s probably going to show that, while wages remain strong and consumers are still spending, inflation continues to moderate.
The housing market is a whole different thing altogether. Talk to a mortgage broker and you get the sense the housing market is in a deep freeze. Existing home sales have fallen for 10 consecutive months.
On the other hand, median existing-home sale prices are up 3.5% to $370,000 and inventory of unsold homes has fallen for the fourth straight month, to just 3.3 months’ supply! All-cash purchases have surged to 32%, the highest reading since 2014.
You can thank a 6% 30-year mortgage rate for all of this.
The bottom line is that this continues to be one of the weirdest economies ever. And it’s going to take some time to get back to some semblance of normal.
In the meantime, small-cap stocks continue to trade at a very attractive valuation and a steep discount to large caps. That might not matter today, tomorrow, or next week. But it will matter soon.
As we march toward 2023 and what might be the weirdest recession ever (or the weirdest soft landing ever) we have a very attractive setup for our asset class. We just need a few things to line up for that potential to be realized.
By the way, with everyone so focused on their holiday plans let’s not forget that earnings season starts in mid-January. And the Fed is on deck again on February 1. There’s going to be plenty of action when 2023 kicks off!
Recent Changes
None
Updates
Enovix (ENVX) is trading about where it was a week ago. Management is going on the road soon, presenting at conferences at JPMorgan (January 5), Morgan Stanley (January 5), and Needham (January 11). Management also announced it will hold a “special presentation” on Tuesday, January 3 at 2:00 p.m. ET. What’s that all about? It’s a little cheeky, to be honest, but my guess is they have an update on either their manufacturing line progress or a customer update and they want to get it out (and promote their stock) so they can speak more openly about whatever it is at the investor conferences. BUY
Flywire (FLYW) is flat over the last week after another failed attempt to move above its 200-day line. On a positive note, this past attempt occurred around the same level as the previous one (in November). BUY
Huron Consulting (HURN) is also about flat over the last week. The stock is modestly below its 50-day line, though it touched it on an intra-day basis yesterday. There is no news and the stock remains a buy. BUY
Inspire Medical Systems (INSP) has been one of the stronger MedTech stocks lately. A lot of analyst attention has helped. Goldman upgraded recently, KeyBanc picked up coverage, and this week Truist Securities increased their price target to 308 from 270 (stock at 259). Seems like everybody thinks the obstructive sleep apnea (OSA) market remains large and that Inspire’s execution going after it has been confidence-inspiring (pun intended). I agree. Management will present at the JPMorgan Healthcare Conference on January 9. HOLD TWO THIRDS
Procept BioRobotics (PRCT) remains range-bound in the 41 to 47 area. Same as last week, there’s no major news to share. We’ll hear from management on January 10 when they present at the JPMorgan Healthcare Conference. HOLD
Rani Therapeutics (RANI) has slipped over the last five days. That would be unusual since the stock often seems to trade higher when the broad market is weak. But the company filed a shelf registration last Friday to allow the resale of up to 6 million class A common shares. Most of these shares are held by a couple of early investors, South Lake One and Aequanimital Limited Partnership. Rani won’t receive any cash from these sales. The company has just under 25 million shares outstanding so, if all of these six million shares are sold, there will be a significant change in ownership. It will be interesting to see how this plays out. After a spike in trading volume last Friday daily volume is back within the normal range. I’ll keep at hold as I don’t think this is going to help the stock in the near-term. Though it may be beneficial longer-term to have shares more distributed among a diversified investor base. HOLD
Repligen (RGEN) revisited its October 24 low this week and has bounced back over the last two days but remains on my “stocks to watch closely” list. There’s no new fundamental news. But Deutsche Bank picked up coverage with a 180 price target (stock at 169). Management expects to grow at an average rate of over 20% for the next five years. With expectations for 2023 having already been reset it seems that Repligen has room to surpass lower expectations, especially if more drugs are able to exit late-stage trials and reach commercial status (at which point bioprocessing needs for those companies would increase). HOLD
Sprout Social (SPT) continues to move sideways, mostly in the 47 to 70 range (stock at 57). No news. Sprout continues to forge deeper ties with Salesforce.com, which should continue to be a positive for growth and the stock. HOLD HALF
TransMedics Group (TMDX) dipped this week but then popped right back up to near the 60 level. The stock is just moving around based on macro news. Management present at the JPMorgan Healthcare Conference on January 11. HOLD THREE QUARTERS
Treace Medical (TMCI) was sold on December 6 for a modest gain of 8%. SOLD
Xometry (XMTR) has been one of the weakest stocks in our portfolio lately as the stock took four legs down from the 40 level where it was last week to land at around 32 on Tuesday. The stock popped more than 6% yesterday. There’s been no public event driving this weakness. In fact, Citigroup recently initiated coverage with a buy rating and 55 price target. We’ll keep at hold. HOLD
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
