December 8, 2022

This is the week the market began to think bad economic news might just be bad for stocks, even if it’s “good” in the eyes of the Fed.

Good economic news continues to be interpreted as bad for stocks because it suggests the Fed has “more work to do.”

This dynamic creates the dreaded scenario where both good and bad economic news are bad for the market. What do we do with that?

Well, we can pray for a Santa Claus rally! According to data from Carson, we should see this bump begin late next week. That is, if the average trend from the 1950s through 2021 shows up again in 2022.

Backing up a little, things got a little dicey last Friday when the November payroll report came in stronger than expected. This was especially true for wages. Fed members do not want to see strength in wages. They want to see the opposite.

Thankfully, FOMC members weren’t allowed to talk this week as the blackout period running into next week’s FOMC meeting began.

On Monday, the November non-manufacturing purchasing managers index came in stronger than expected. While good for the economy, this is bad for the market because, well good economic data is bad remember?

If you’re not a believer in Santa, you’re probably listening more closely to rising calls from big U.S. banks about how a 2023 recession is now a lot more likely.

JP Morgan Chase (JPM) CEO Jamie Dimon is one of the more vocal (and influential) economic prognosticators. His comments on Tuesday, along with news that Morgan Stanley (MS) will slash 2% of its workforce, didn’t help to ease recession fears.

Fast forward to Wednesday (yesterday) and the CEOs at Wells Fargo (WFC) and Bank of America (BAC) said they’re seeing slower consumer spending and borrowing.

Bad news for the economy. Maybe good news for the Fed, but not for the market.

Suffice it to say it gets confusing when the market changes how it feels about good and bad news. It would be a lot easier if good news was good, and bad news was bad. But that’s not the environment we’re in.

On a positive note, the Investors Intelligence Bull/Bear ratio is at about 1.3. That’s really bad, except from a contrarian perspective. Historically, bad readings around 1.0 have translated into good buying opportunities.

Specific to small-cap stocks, valuations are still low. That sounds bad, but like the bull/bear ratio, it is good from a buyer’s perspective. And analysts at the big investment banks continue to crank out notes about how small caps are very well poised for a big year in 2023.

That’s good!

Tomorrow and next week will be big. Tomorrow we’ll get PPI numbers, then Monday we get CPI. On Wednesday the FOMC wraps up its meeting and has a press conference.

The odds are we’ll get a 50bps hike and Jerome Powell will try to keep the market in check by saying the Fed remains data dependent.

Interestingly, if we look at who the voting members of the Fed are, we see that in 2023 three of the more hawkish members (Bullard, Mester and George) will give up their voting status in favor of two slightly less hawkish members (Kashkari and Logan), and one more dovish member (Evans). Harker (dovish) will replace Collins (also dovish).

That’s getting pretty granular. But as we look into 2023 and, hopefully, toward a time when the Fed has both the data and the votes to act in a more market-friendly way, anything that tips the scales in our favor should be viewed as being good.

Recent Changes

Treace Medical (TMCI): On Tuesday we sold our half-sized position for an 8% gain in about a month.

Inspire Therapy (INSP): On Tuesday we sold a third of our position for a 296% gain.

Updates

Enovix (ENVX) management has been at the 22^nd Annual Advanced Automotive Battery Conference (AABC) this week and met with several analysts. In the wake of these meetings, B. Riley started coverage with a buy rating and a 19 target. Also, JPMorgan analysts came out with a note on their meeting with management, saying they are impressed with the company’s manufacturing strategy and execution, especially relative to Gen2 line progress, which appears to be on track. Investors are looking for production to ramp up in 2023 and into 2024. And also, for profit margins to rise meaningfully as premium pricing and supposed sky-high demand sees ENVX batteries fly out the door. Enovix continues to be a higher-risk, higher-potential-return stock. We believe management is working with some mix of Samsung, Google (GOOG), Apple (AAPL), Meta Platforms (META) and/or Amazon (AMZN) but without any contracts or public disclosure (other than previous work with Samsung) we’re still waiting for a big reveal. BUY

Flywire (FLYW) has mostly moved sideways over the last two weeks on no big news. We added to our position in early November and that’s helped us get back to breakeven. I’ll continue to keep the stock at buy provided it holds up. Flywire operates a global payment platform that’s big in education and healthcare, two markets that are rebounding nicely from the pandemic. There was some weakness in Q3 due to reduced visas for Chinese students. But Europe and India helped to overcome that. China now represents upside potential should that market improve. BUY

Huron Consulting (HURN) was added to the portfolio last week. It’s a small-cap consulting company that’s growing revenue and EPS in the double digits as it helps organizations adapt to the changing times. Huron is growing especially quickly in areas like digital transformation, which is challenging for lumbering organizations in the healthcare and education segments where the firm generates the bulk of its revenue. The stock continues to look good and is trading at about the same level as last Thursday. BUY

Inspire Medical Systems (INSP) recently went on a 40% rally in a couple of months and, earlier this week, I elected to book a profit of nearly 300% on a third of our position. The company continues to look solid and is well-poised to grow in 2023. INSP showed up on a screen from Bank of America in which the U.S. Equity and Quant Strategy team looked at attractive M&A targets. HOLD TWO THIRDS

Procept BioRobotics (PRCT) dipped after the Q3 earnings report (which was solid) then popped back up a few days later. It’s been moving mostly sideways since, in the 43 to 50 range. There’s no news to share here and I’ll keep the stock at hold. HOLD

Rani Therapeutics (RANI) released positive repeat-dose data or RT-102, the Phase 1 study evaluating RaniPill GO capsule given daily for seven days with human parathyroid hormone (PTH) analog. The data showed that the repeat doses were generally well tolerated and there were no severe adverse events. That said, two of the 17 study participants (11.8%) experienced abdominal pain characterized as “mild and transient” and a total of seven patients were excluded or dropped out by the end of the study. Delivery of the RaniPill Go achieved a success rate of 91% and bioavailability was high (100% after day seven). With these study results, 185 RaniPill Go capsules have been administered to over 90 participants in clinical studies. The data is encouraging and continues to suggest RaniPill can succeed in the $400 billion injectable drug delivery market. On the downside, this was a small study, and we want to know more about why seven women didn’t complete the study. Looking into 2023, we’re also looking for updates on preclinical development of RT-111 (RaniPill Go capsule, with STELARA) in a Phase 1 study and advancement of RT-105 (adalimumab biosimilar for psoriatic arthritis) and RT-110 (PTH for hypoparathyroidism). HOLD

Repligen (RGEN) continues to lack momentum despite a Q3 beat and a few meaningful rallies since the summer. Keeping at hold as we look for RGEN to start enjoying some of the recent strength of its larger peers, TMO and DHR. HOLD

Sprout Social (SPT) beat on both the top and bottom line in Q3 and that result helped bring the stock up off the 45 level. It’s been mostly trading in the 55 to 63 area since. Management recently announced an integration with Tableau, which is owned by Salesforce.com (CRM). HOLD HALF

TransMedics Group (TMDX) reported Q3 revenue of $25.7 million (+378%) and EPS of -$0.25 (beat by $0.15). Management raised full-year guidance from $67 - $75 million to $80 - $85 million, far above consensus (about $76 million). Since the Q3 report, there’s been no news, and the stock has continued to inch higher. We’ll stick with it. HOLD THREE QUARTERS

Treace Medical (TMCI) was up, down and back up after we bought it due to a short-seller report that came out a week after TMCI was added to our portfolio. Earlier this week, with TMCI trading near recent highs, I advised selling our half stake to lock in a profit of around 8%. While I like the business, in this environment I’m hesitant to hold on to something too long that has questions swirling, even if I don’t believe they have merit. We made 8% in a month and that’s not bad. I’ll keep an eye on TMCI and consider adding back if/when the timing seems right. SOLD

Xometry (XMTR) will likely continue to be in the doghouse until management can assure investors they’ve fully “fixed” the algorithm issue that led to a Q3 period where they took in a ton of marketplace orders but filled them at less-than-ideal prices. Lacking an update on that, the stock will likely be rangebound for a while, hence the hold rating. HOLD

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.