January 11, 2024

The first two weeks of 2024 have been a bit sloppy with the markets down the first week, strengthening a bit this week then back down again today as this morning’s inflation numbers (CPI) came in a little higher than expected.

Thus far small caps have lagged large caps this year at the index level, though it’s not worth overthinking it too much just 11 days into the year.

As stock valuations (at the index level) climbed into the end of 2023, eventually reaching their highest levels since early 2022, small caps remain the only size segment that’s cheap! Both large and mid-caps trade above their long-term average P/E ratios.

That doesn’t matter much today or tomorrow, but it does for the next year plus. Attractive valuations for small caps should attract big money into the space given the data implies roughly 10% annualized returns over the next decade.

Falling interest rates, which will dramatically help smaller companies given their reliance on variable interest rates, should be a tailwind.

Of course, we’re not buying a small-cap index ETF given our focus on individual stocks. But still, a strong backdrop for our asset class is a bonus. And frankly, it’s also good for the broad market where a broad-based rally is much more sustainable than a narrow one.

In terms of notable trends early this year, there’s been a decent amount of M&A activity in the biotech space. And a few MedTech conferences have helped some of our positions in that arena move higher this week.

If there’s one thing I’m most excited for in the year ahead – as far as the market is concerned – it’s that the environment should be MUCH more friendly for the pure-play types of stocks we invest in than at any point over the last two years.

That’s largely because investors won’t be so squarely focused on rising rates, a massive headwind. And instead, will feel the push of falling interest rates propelling their interest into exciting companies with good stories, good growth numbers and compelling charts.

That’s our wheelhouse.

Recent Changes:
Remitly (RELY) moves to HOLD

Updates

Alphatec (ATEC) surprised us this week by putting out preliminary Q4 results. Not surprising is that they came in ahead of consensus expectations ($129.2 million), by about 5%. With the spine specialist seeing surgical volume growing in the high-20% range in Q4 (driven by lateral adoption) preliminary Q4 revenue was announced at $136.8 – $138.4 million ($121.8 – $122.8 of this is Surgical revenue). That means 2023 revenue will top 35%. Management also gave early revenue guidance for 2024 of $595 million, which is about $25 million (5%) ahead of consensus and implies roughly 24% revenue growth. Of course, management would be silly to put out a number they don’t think they’ll handily beat. The growth story remains intact. Shares are looking to bust through resistance at 15.5. BUY

Braze (BRZE) has had an uneventful week as the stock looks to regain momentum around the 50 level. This looks like an entirely normal pullback for this stock (so far). This week Oppenheimer raised its price target from 66 to 75. I have found that Oppenheimer’s price target updates don’t typically mean much. The thing with Braze is that the small business market was notably slower toward the end of 2023, though management has been controlling costs and beat expectations in Q3. They are just taking a conservative approach. We’re looking for low-to-mid-20% revenue growth in 2024 (not factoring in acquisitions). Guidance that confirms that (or better) would be nice. We’re up 17% on the position. HOLD

Docebo (DCBO) pulled back in the sessions after the tender period ended (on December 27) and the new year began, but shares found support near the December low of 43 late last week and have moved higher since. We’re up modestly on our position as of yesterday’s close. The result of the tender offer is that 19.4 million shares were tendered and the company bought and canceled 1.82 million (about 9.4% of the total tendered). That represents about 5.7% of all outstanding shares. The company said that shareholders who tendered shares were able to sell about 6.8% of those shares tendered. Bottom line – if you expected to buy a bunch of stock and unload it, that didn’t happen (this is not a surprise). With that behind us, we can re-focus on what the company does, which is sell learning management software. And how it’s expected to grow, which is by about 14.6% this year and 23% in 2024. EPS should be positive in both years and grow from $0.54 in 2023 to $0.76 in 2024 (i.e., by 41%). I like those numbers. BUY

Enovix (ENVX) shares are a bit all over the place, but the underlying story is developing nicely. Management was out with another technical announcement late last week. Sounds like they’ll team up with Group14, which supplies and makes active silicon battery material, to use Group14’s materials for the anode material within Enovix batteries. Also notable, Enovix made J.P. Morgan’s list of Top Picks for 2024, in the Clean Tech category. Let’s go! BUY

Intapp (INTA) is still trying to punch above 40, a price level that has proved to be a staunch barrier since August. It’ll happen. The only news lately has been a couple of press releases announcing a few client deals. BUY

Liquidity Solutions (LQDT) continues to consolidate just above its 200-day line. That could change in a few weeks given that management is slated to release Q1 2024 results on February 8, prior to market open. Conference call to follow at 10:30 am ET. One of the key questions will be how much merchandise Liquidity received from retailers that didn’t sell as much as expected over the holidays. BUY

Remitly Global (RELY) continues to struggle in the wake of the Q3 earnings call revealing that management has ramped up advertising and customer acquisition spending, which they say is an offensive move (good) and not a defensive one (bad). Investors want evidence of this paying off, which short of an update from management, means waiting for the Q4 call in late February. With the stock lacking momentum and no immediate catalyst, moving to hold today. HOLD

TransMedics Group (TMDX) presented at the J.P. Morgan Healthcare conference on Monday and the presentation was well received. The takeaways are that management is looking to expand its aviation business to reach 20 planes by the end of 2024 (has seven to eight operating today), is working to expand NOP support to get rid of bottlenecks and sees a better business for Lung now that the pandemic is in the rear-view mirror. Look for Lung to ramp up throughout the year. International reimbursement is also on the table, as I’ve mentioned. Stepping back, management reminded the audience that 80% to 85% of all heart, lung and liver transplants require a flight and 100% of those are on charter flights (no commercial flights allowed). You can see why management sees opportunity to become more of a logistics operation. The stock is acting well. HOLD A QUARTER

Weave (WEAV) is our newest stock and is about flat since I added it last Thursday. It is a small software company with a customer experience and payments platform specifically for small and medium-sized healthcare businesses, including dental, optometry, veterinary and medical practices. The key offerings of the platform include payments, texting, scheduling, reminders, reviews, phones, insurance verification, digital forms and more. While the last two years have been tough for really specific software companies with a narrow market, Weave has continued to succeed and is seeing customers that went away are now coming back. Looking into 2024, Weave should grow revenue by at least 15.5% to $195 million and slash the EPS loss by half, to around -$0.07. The transition to profitability is currently expected in Q4 2024, but given that just a few pennies per quarter could swing the pendulum here, I wouldn’t be remotely surprised if it happens earlier. Piper Sandler recently upped its price target on WEAV from 8 to 15. BUY HALF

That’s it for this week. 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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