December 29, 2022

I hope you’ve been having a good holiday season and are looking forward to a New Year. I know I am, especially considering the rough year for the stock market. It’s time to move on!

With the holiday schedule translating into two consecutive shortened trading weeks and most companies going quiet until investor conferences in early 2023, there’s very little company-specific news to report today. I’ll keep our last Weekly Update of 2022 brief.

Big picture, it looks like we’ll end the year on a sour note. While both the large- and small-cap indices are above their 2022 low the current trend is down, and has been since the last FOMC meeting a couple of weeks ago.

The Nasdaq has made a new closing low for the year and is within a hair of making a new intraday low as well.

The cleanest explanation is to blame the current trend on bonds. For the last two weeks bond prices have been weak, driving bond yields higher. The current yield on the 10-year is 3.89%, up from 3.45% two weeks ago.

With the yield curve remaining inverted – current spread between the 10-year and 2-year is roughly 50bps – it is signaling a looming recession (bad news) and, if history is any guide and projections on FOMC monetary policy are close to accurate, the imminent end of this tightening cycle (the good news).

On that note, the odds remain at about 70% that we’ll get a 25bps hike at the next FOMC meeting (February 1). There could be another 25bps hike in March, but of course the Fed’s decision then will be data dependent.

Despite the bear market in stocks and the consensus view that the U.S. will enter a recession in 2023, this economy is proving very difficult to kill. Just before Christmas the Atlanta Fed increased its Q4 2022 GDP estimate by a full percentage point, to 3.7%.

The bottom line is that it looks like the first quarter of 2023 will be another wonky quarter as investors evaluate incoming data and try to determine how much bad news is already priced in.

Fourth-quarter earnings season, which kicks off in about two weeks, will give management teams a chance to update us on what they’re seeing. I’m expecting a lot of conservatism as nobody wants to stick their neck out and sound too upbeat when the Fed is still trying to cool things down.

Back to small caps, with the asset class continuing to trade at a low multiple and an attractive discount to large caps, the “valuation pitch” remains clean and clear.

That doesn’t mean small caps will start to rip higher when the first trading day of 2023 starts on January 3. But it does suggest very attractive returns in the coming years.

Recent Changes
None

Updates

Enovix (ENVX) management will be presenting at conferences at J.P. Morgan (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. BUY

Flywire (FLYW) is flat over the last two weeks. BUY

Huron Consulting (HURN) is roughly flat over the last week and about 10% off its high. No new news. BUY

Inspire Medical Systems (INSP) remains resilient above 250. Management will present at the J.P. Morgan Healthcare Conference on January 9. HOLD TWO THIRDS

Procept BioRobotics (PRCT) management will present at the J.P. Morgan Healthcare Conference on January 10. HOLD

Rani Therapeutics (RANI) continues to be under pressure in the wake of the company filing a shelf registration 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 may be beneficial longer-term to have shares more distributed among a diversified investor base. HOLD

Repligen (RGEN) continues to bounce around in the 160 to 180 range on no news. HOLD

Sprout Social (SPT) has lost a little altitude this week along with most other software stocks. Still, the stock remains in the 47 to 70 range where it’s been since early summer. HOLD HALF

TransMedics Group (TMDX) is holding up well and management will present at the J.P. Morgan 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) continues to be weak, even though 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.