January 18, 2024

With the market bouncing around in the first two weeks of the year on more speculation about Fed rate cut magnitude/cadence (economists are now thinking slower and fewer of them) and mounting geopolitical risks, small caps as an asset class have begun to trail the broader market.

That said, on a stock-specific basis there’s been a lot of positive motion in small caps in the MedTech and software space, which is where we concentrate.

That’s not to say all is going perfectly – it’s not. The rally from 2023 has grown tired and we could very well be in for a choppy few weeks and a broad market pullback. In fact, we’re getting kicked out of part of a position today.

But we’re also seeing a decent mix of resilience and strength in areas of our portfolio, including TransMedics (TMDX), Braze (BRZE), Docebo (DCBO) and Alphatec (ATEC).

I continue to believe that, while the Fed will play a significant role in determining the market’s behavior this year (remember the next FOMC meeting is at the end of January) that when all is said and done 2024 will mark a turning point when investors began to re-focus on company-specific factors.

That should play to our favor.

This week, with very, very little going on news wise in our portfolio I’ve included a few high-level notes on each company to refresh your memory regarding what each company does.

Recent Changes

Remitly (RELY) moves to SELL HALF

Updates

Alphatec (ATEC) is a MedTech company with a portfolio of surgical solutions for spinal conditions ranging from degenerative disc disease to complex deformity and trauma. Offerings include comprehensive procedural solutions, body positioners, surgical tools/access systems, informational systems for pre-, intra-, and post-operative care, implants, fixation systems, and biologics. The entire platform is designed to support the company’s vision to become the standard bearer in spine. Management released preliminary Q4 results last week (better than forecast) which I detailed in last week’s update. Shares still looking to bust through resistance at 15.5. BUY

Braze (BRZE) is a software company with a multi-channel, personalized cloud-based customer engagement platform. Customers/brands use Braze to connect with consumers in real time.

Platform tools allow brands to listen and understand consumers then engage them with contextual messages that are as relevant and authentic as human interactions. Messages are sent as push notifications, email, text, in-product messaging and more. The platform lets brands ingest and process customer data as it comes in, manage marketing campaigns across channels, and test and measure the impact of those campaigns. We’re looking for low to mid-20% revenue growth in 2024 (not factoring in acquisitions). Shares are trading roughly 10% below their 52-week high. HOLD

Docebo (DCBO) is a little-known software company disrupting the Learning Management System (LMS) market, grabbing market share from the large legacy providers while also expanding into new markets.

The company was founded in 2005 and is based in Toronto. The platform is modern, easy-to-use, cloud-based, customizable and just more engaging. Complete with AI-driven solutions, Docebo gives customers a learning platform where learning admin teams can centralize a wide variety of learning materials – for both internal (employees) and external (customers, partners, suppliers) workers – and deliver world-class learning experiences. Docebo is particularly strong with external training situations, which are a bit trickier than internal cases. It also has a solid reputation providing a cohesive platform that functions as a single pane of glass for all of an organization’s learning initiatives. I expect Docebo to grow revenue by about 15% 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%). BUY

Enovix (ENVX) is an early-stage battery architecture company developing a 100% silicon anode battery for consumer electronics (now) and electric vehicle (EV) markets (down the road). Its strategy for improving the energy density of a battery as compared to mass-market lithium-ion (Li-ion) batteries is to alter the internal structure. This is intended to address the challenges of silicon (versus graphite) while also taking advantage of silicon’s significant performance benefits. The end result is a battery with superior energy density, high cycle and calendar life, charges quickly and is safe for use in wearables, in mobile devices and in EVs. Overseas production of batteries destined for wearables is set to take off this year. BUY

Intapp (INTA) provides industry-specific, cloud-based software for the global professional and financial services industry, a traditionally underserved market. Its front and back-office SaaS applications help private capital, investment banking, legal, accounting and consulting firms drive digital transformation, adapt to changing client, investor and regulatory requirements, deliver insights to partners and other key leaders, replace legacy systems, and operate more competitively. Most revenue comes from the U.S. with the U.K. represents the second biggest market. Big name clients include The Carlyle Group, Owl Rock, Raymond James, Stephens, White & Case, Linklaters, KPMG and FTI Consulting. We’ve been looking for the stock to punch back above 40, which it did last Friday. Shares have looked very good so far this year and management will hold its first Investor Day on February 22. BUY

Liquidity Solutions (LQDT) operates the world’s largest business-to-business (B2B) eCommerce marketplace for matching buyers and sellers of surplus and salvage assets. The company’s platform connects millions of buyers and thousands of sellers through auction marketplaces, search engines, asset management software and related services. Like most online marketplaces the key benefits are efficiency, transparency, network effects, etc. But in Liquidity Services’ case there is also a special sauce added to the mix because of the uniqueness of dealing in surplus goods, which is a somewhat inefficient market where price discovery is nuanced. It works with all variety of sellers across industries, including Wal-Mart (WMT), Caterpillar (CAT), The Home Depot (HD) and Boeing (BA), among others. The company is transitioning its business model for certain products to a consignment model, which means it won’t take ownership of the goods. That reduces revenue in that business, but also reduces risk and increases ROI. The company recently acquired Sierra Auction (vehicles, equipment, surplus assets for government agencies, commercial business and charities). BUY

Remitly Global (RELY) has a platform providing financial services for immigrants and their families in over 170 countries around the world. The company helps families transfer money internationally across 100+ currencies with no hidden fees. Most money is sent from the U.S., Canada and the EU. A few of the largest recipient countries include India, Mexico and the Philippines. The company has relationships with major banks, including Barclays (BCS), Chase (JPM), HSBC (HSBC) and Wells Fargo (WFC), as well as leading payment processors, such as Visa (V), that give customers options to fund remittances with bank accounts, card-based payments or other alternatives. The stock has struggled since management revealed marketing investments last quarter, which they said signaled Remitly was going on the offensive, not playing defense. Then, yesterday Wells Fargo was out with a report and Underperform rating, which knocked RELY down another notch. We’ll heed the action and take down our position by half today. SELL HALF

TransMedics Group (TMDX) is a small MedTech company addressing the unmet market need for more and healthier organs for transplantation, specifically in the heart, lung and liver markets. The company’s revolutionary technology is called the Organ Care System (OCS). OCS replaces a very old standard of care, cold storage, that is too static to meet the dynamic needs of today’s organ transplant market.

OCS does a better job at preserving organ quality, assessing organ viability prior to transplant, boosting organ utilization and slashing transplant costs. This is good for patients (better access to life-saving transplants and quicker recoveries), hospitals (higher transplant volumes, better procedure economics) and for insurance payers (more cost-effective treatment for end-stage organ failure and lower post-transplant complication costs). The OCS is also the foundation of TransMedics’ National OCS Program (NOP), a turnkey solution for transplant enters that provides outsourced organ retrieval and OCS organ management. The goal of the NOP is to streamline delivery of donor organs from anywhere in the U.S. to a transplant center. Last year, TransMedics acquired an aviation business so it can control even more of the organ transplant supply chain. This is a major initiative and initial uncertainty from investors has become cautious optimism given the most recent quarterly report, and future potential. Not to mention international expansion opportunities. HOLD A QUARTER

Weave (WEAV) 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. 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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