January 12, 2023

The inflation outlook has certainly moved toward the “less bad” end of the spectrum over the last week. That’s the big-picture reason stocks have been doing well since last Friday.

On Tuesday the NFIB Small Business Survey (December data) showed that the percentage of small businesses with job openings is falling, as are the percentage of businesses expecting to increase hiring over the next three months and the percentage planning to raise average selling prices. The NFIB jobs opening data closely tracks the JOLTS job report that Fed officials watch closely. The NFIB data release is much more current than the recent JOLTS report, which was November data.

Bottom line: the NFIB survey helps sell the case that a wage price spiral isn’t imminent, and that’s good for the market.

This morning the CPI inflation report came out and matched expectations. December headline and core CPI were up 6.5% and 5.7%, respectively. Over the last three months on a seasonally adjusted annual rate, they are down to 0.0% and 2.2%, respectively.

The image below is courtesy of Yardeni Research.

Bottom line: this CPI report was not bad. And that’s good.

Yesterday midday the market odds of a 25bps hike at the FOMC’s February 1 meeting were running at 77%. This afternoon that probability has jumped to 94%.

This has all been good for stocks.

While the Dow has spent most of the last two months above its 50 and 200-day moving average lines we’ve just seen the S&P 600 Small Cap Index jump above them this week.

The S&P 500 is trying to do the same, while the Nasdaq is working on its 50-day line now and sees the 200-day about 6.5% higher.

Bottom line: market breadth is improving.

Also notable is that the yield on the 10-year is falling swiftly. Two weeks ago, it was 3.9%. Today it’s at 3.45%. That’s good for stocks.

While this all doesn’t mean that stocks are going to rip higher for weeks, this does have the feel of a more constructive setup than we’ve seen in some time. We’re beginning to see the market pay less attention to hawkish Fed officials and more attention to the trends in the data.

What we need now is an earnings season that isn’t awful. And maybe, just maybe, we’ll get the soft landing (or dare I say no recession?) scenario we’ve been hoping for.

Recent Changes

Procept BioRobotics (PRCT) was sold via Special Bulletin yesterday, January 11.

Updates

Enovix (ENVX) is up about 20% from its closing low after the train wreck of a conference call management put on early last week. I had wanted to go into all the things on that call that were just awful, but since a lot of it was about presentation skills, organization and things not really about the story I decided not to. Check out the video for yourself. And let me know what you think of the references to Rocky and The Right Stuff, two great movies that management referred to in … let’s just say not a very inspiring way. Anyway, while presentation skills may not be a core competency, battery design and manufacturing is (we think). And that’s much more important in the long term. This week Canaccord Genuity jumped on ENVX with a buy rating and 20 price target. Late last week JPMorgan had a fireside chat with Enovix SVP of Sales and Business Dev. and the SVP of Investor Relations. Highlights:

• Gen2 equipment still expected in the second half of 2023, with some coming in early 2024. Maybe this is not as bad as the train wreck presentation implied.
• Fab1 line shows batteries can be made at scale. Challenge is automating more of the process, which is what Gen2 is all about.
• Active designs and design wins continue to climb (up 50% in Q4). Demand is there.
• Electric vehicle (EV) work is in process, but it’s early-stage. Enovix is focused on wearables (small form factor) now, but EV is an eventuality. Management says its dedicated EV team met with OEMs and believes their batteries can get to 80% charge in five minutes, while also dissipating heat better than many other options out there. Those are two huge competitive advantages. Busting into the EV market will require a ton of cash. Enovix would need a JV, strategic investor or something like that.
• Enovix will likely need to raise capital in the back half of 2023. Execution will increase its options on how best to do that.

Keeping at hold. HOLD

Flywire (FLYW) has trended higher over the last two weeks. A recent buyout of competitor Paya Holdings (PAYA) by Nuvei (NVEI) and decent performance from Shift4 (FOUR), a fintech player in the hospitality space, shows investor interest in these types of stocks is improving. BUY

Huron Consulting (HURN) announced a host of promotions as the company kicks off the year moving key players up to managing director and principal roles. No major news here. The stock has pulled back 12% from its recent high in what looks like a normal pullback. BUY

Inspire Medical Systems (INSP) has held up better than a lot of other small and mid-cap MedTech stocks over the last week. I issued a Special Bulletin on Monday after the company released preliminary Q4 results that came in ahead of expectations. Management said it sees Q4 revenue up 76% to around $137.7 million (consensus was at $117 million, or +49%). The quarter implies full-year 2022 revenue of $407.7 million (+75%) versus consensus at $390 million (+67%). The company is increasing selling prices in the U.S., submitting Inspire 5 for approval and expanding more overseas (European revenue already ramping). The stock is well-liked by analysts. HOLD TWO THIRDS

Intapp (INTA) continues to crawl higher. We’re starting to approach the May high of 28 so the next week or so is going to be VERY interesting. An upside breakthrough would be bullish. We haven’t seen a ton of those lately. Intapp is a small software company that provides industry-specific, cloud-based software for the global professional and financial services industry. The stock is doing relatively well now because management keeps raising guidance; revenue, earnings and cash flow are growing despite a challenging macro backdrop; and a transition from term licenses to a subscription SaaS revenue base is progressing very well. Management’s latest guidance increase was in November when they called for $332 to $336 in fiscal 2023 revenue. Fiscal Q2 results should be out in February. BUY HALF

Procept BioRobotics (PRCT) pre-released Q4 results earlier this week that came in just ahead of expectations. However, the stock hasn’t looked great lately and the pre-release didn’t help. I elected to take a roughly 40% gain on our remaining half-sized position yesterday. I’ll keep an eye on PRCT but with many other stocks showing positive momentum I suspect it’ll be a while before we revisit the name. SOLD

Rani Therapeutics (RANI) has provided a number of updates recently, including an update from an FDA meeting suggesting a simplified/accelerated approval process may be suitable for RT-102, the RaniPill Go capsule containing parathyroid hormone (PTH) for treatment of osteoporosis. Management also announced a collaboration with Celltrion, which will supply the ustekinumab biosimilar (CT-P43) needed for RT-111 (for psoriasis). Celltrion will get a right of first negotiation to acquire worldwide rights following a Phase 1 clinical trial, expected to start this year. The following slide from Rani’s January slide deck provides a nice overview of the pipeline and expected next milestones. HOLD

Repligen (RGEN) has put together a string of decent days and is now back above the 170 level. This week management presented at the JPMorgan conference. While there was nothing earth-shattering divulged, confirmation that things are looking good and should get better once COVID-related inventory destocking is complete (another quarter or two needed) is likely restoring some confidence in the name and helping shore up the stock. In terms of details, management noted 15% to 20% growth in 2023 is likely in the base business and that foreign exchange is a factor (weakening dollar is way better for RGEN now than it was a few months ago). Repligen is increasing prices by about 5% in 2022 and 3% to 4% in 2023. That should help gross margins, which management sees at about 56% in the year ahead. The company is integrating real-time analytics into products, starting with select solutions in Q4 2023 and rolling out to more over the coming months. Big picture, management says the bioprocessing market is healthy and thinks it’s only 10% penetrated into a nearly $9 billion market. HOLD

Sprout Social (SPT) has been doing nothing and, at about 60 today, is in the upper part of the 47 to 70 trading range that’s held since summer. The company will report Q4 results on February 21. HOLD HALF

TransMedics Group (TMDX) has been quiet and steady for several weeks now. Management presented at the JPMorgan conference and kept its talk high-level. They said they’re working hard to improve supply and capacity by quadrupling production capacity and doubling assembly staff, all of which should be paying dividends by this coming summer. With utilization of the National OCS Program (NOP) rising and annualized revenue ending 2022 just above $100 million there should be room for management to continue with a beat-and-raise cadence. The launch of heart and liver over the last year are big help. HOLD THREE QUARTERS

Xometry (XMTR) has been under pressure since the beginning of December, most likely as a result of weakening manufacturing data and still-lackluster performance from many software providers. So why have we stuck with it? XMTR stock took a major hit after the Q3 report due to what should be temporary issues (price matching) on its platform. At the same time, volume on the platform was up significantly. Even in a challenging supply chain environment, the company’s disruptive marketplace attracted a ton of business last year (revenue up around 75%). While macroeconomic conditions are anything but clear right now, this platform streamlines operations and increases pricing visibility for both customers and suppliers. Xometry is expanding further into Europe and offers local supply chains, pricing in local currencies and local languages. With a lot of bad news priced in, the stock seems to have considerable upside this year so we’ll hang in there. Revenue is seen rising 33% in 2023. HOLD

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