July 13, 2023

With the 4^th of July holiday last Tuesday it felt like 75% of the country was on vacation for the week and whatever happened in the market was a mirage.

This week things came into sharper focus. And the bull argument firmed up with the better-than-expected June CPI reading yesterday morning. The annualized 3.0% CPI inflation rate is the lowest in more than two years and came in below estimates of 3.1%.

That report helped the S&P 600 Small Cap Index, as represented by the iShares Core S&P Small-Cap ETF (IJR), jump up to its highest level since March 10 and move convincingly through the 100 level.

With the index now trading with a forward P/E of 13.8, well below a relatively stable valuation of around 17 in the quarters prior to the pandemic, it’s hard to argue against the asset class’s attractiveness right now, especially when compared to a forward P/E of 19 for large caps.

We’re about to get into earnings season with the financials firing up over the next two days. In small-cap financial land I’m watching the PSCF (thinly traded small-cap financial ETF) approach its June 7 level near 44.4 but still look very beaten down.

It’ll be interesting to see how this ETF trades through the bank earnings reports. It carries a heavy weight in the small-cap index (16% weight, second only to industrials at 17.6%) so I’m not crazy to say that for small caps to really come back we need PSCF to get its rear in gear.

Fed officials aren’t backing down from saying another 25bps is coming down the pike on July 26. Current market odds of the target rate going from 500-525bps to 525-550bps after that meeting is 90%. And the odds favor it staying there through March 2024.

We’ll see. I know there is “more work to be done.” But the inflation trend is good (unless you just loaded up on iBonds). And summarizing the movement in the equity and bond markets, it seems we’re near peak rates for this cycle.

Recent Changes: Intapp (INTA) Moves from Hold to Buy

Updates

Alphatec (ATEC) is expected to report on August 3. We’re currently looking for revenue to be up about 30% to $109.9 million and for EPS of around -$0.19. The hurdle for full-year guidance will be revenue of $451 million (+28.6%) and EPS of -$0.75. No news since Lake Street boosted their price target from 20 to 32 a few weeks ago. BUY

Earnings: Thursday, August 3

Enovix (ENVX) continues to look good and has climbed a little higher since my last update two weeks ago. We have new coverage at EF Hutton (21 price target) as of July 3. We also have a new CFO, Farhan Ahmad, as of July 9. Ahmad comes from Micron (MU) where he was VP of investor relations and finance strategy (i.e. he should know what will and won’t sound good to shareholders and the media). Earnings are coming out on July 26 (two weeks from yesterday). HOLD

Earnings: Wednesday, July 26

Flywire (FLYW) recently confirmed earnings will be out on August 8. Consensus is for revenue of $73.3 million (+42.4%) and EPS of -$0.15. We’re looking for full-year revenue guidance of $366.6 million (+37.2%) and EPS of -$0.15. Shares pulled back below their 50-day line last week but have bounced back over the last three sessions. BUY

Earnings: Tuesday, August 8

Duolingo (DUOL) dipped below 150 a few weeks ago (June 21) but a couple of good sessions this week and shares are right back near where we jumped in. There’s no major news other than an official earnings date of August 8. There was also a piece in Benzinga that had positive notes on DUOL. One of the data points was that, based on Apptopia data, Duolingo is downloaded more than 10 times as often as competitor apps like Babbel. As far as earnings expectations we’re looking for Q2 revenue of $124 (+40%) million and EPS of -$0.18. Duo MAX and Math are not factored into forward guidance, so we’ll be looking for any insights into how those launches have gone. BUY HALF

Earnings: Tuesday, August 8

Inspire Medical Systems (INSP) is expected to deliver revenue of $136.7 million (+49.6%) and EPS of -$0.57 when the company reports on August 1. Full-year consensus is for revenue of $589 million (+44.4%) and EPS of -$1.28 (an almost 20% improvement from last year). Bank Of America is a fan. The bank just boosted its price target from 310 to 355 on July 5. After a little dip INSP is back near all-time highs. HOLD TWO THIRDS

Earnings: Tuesday, August 1

Intapp (INTA) hasn’t released an official earnings date yet but we’re looking at September 6. And remember this will be Intapp’s Q4 fiscal 2023 report (fiscal year ends in June). The stock traded up near 50 in June then fell back rather harshly to the 40 level on June 26. BTIG says buy that dip! They slapped a 55 price target on INTA on Monday. I agree. Moving back to buy. Move from HOLD to BUY

Repligen (RGEN) is doing a little better over the last two weeks. Restating what I said in late June, the issues aren’t overly specific to the company and are being seen across the bioprocessing industry. Specifically, orders are down as inventory is taking some time to burn through. At the same time small- and mid-cap biotech customers are trying to save cash so orders from that group are soft. Revenue is seen declining 19% in Q2 and -10% in Q3 before bouncing back to grow 7% in Q4. That suggests sales will shrink 8.7% this year, but then grow around 16% in 2024. Looking for management to confirm these are reasonable expectations on the Q2 call, estimated to be on July 25. HOLD A QUARTER

R1 RCM (RCM) is our newest addition and is an automation/AI play on streamlining payment collections for healthcare providers. Nobody opens up a conversation with, “Hey, I’ve got a hot stock for you. It’s in the Revenue Cycle Management space.” But we don’t care as much about sparking conversations as generating returns. R1 is arguably the best player in its specialized market and with the one-two punch of higher healthcare utilization (i.e. more procedures) and a major automation/AI push (helped by the Cloudmed acquisition) that can both reduce expenses and pull in new customers, the future looks pretty darn interesting here. On the Q1 conference call management reiterated full-year 2023 guidance, which calls for revenue of $2.28 billion to $2.33 billion (+28%) and adjusted EBITDA of $595- 630M. The consensus 2023 EPS estimate is $0.29 (versus a -$0.16 loss last year). Earnings will be out on August 2. BUY

Earnings: Wednesday, August 2

Si-Bone (SIBN) got an endorsement from Needham yesterday when the firm upped its price target to 32 from 27. No official report date yet. But when it comes analysts see revenue of $31 million (+21.3%) and EPS of -0.40. For the full year we need revenue of at least $130 million (+22%) and EPS of -$1.45. SIBN slipped to 25 last week after topping out near 30 in the end of June. We’re moving back into the high 20s now. BUY HALF

Terex (TEX) broke out to the stock’s highest levels in about 15 years yesterday on a convincing move through the early-March high of 60.9. That move came after the board approved a 13% increase in its quarterly dividend, to $0.17. That’s the second dividend hike this year. Earnings expected around August 1. BUY HALF

TransMedics Group (TMDX) is right back near all-time highs near 90 with no significant recent news. Earnings are expected around August 9. Revenue should be around $42.6 million (+108%) and EPS should be about -$0.14. Management is sure to talk about their plans to get into the aviation business to address supply chain challenges in the organ transplant market (and hopefully not create any for the company). HOLD THREE QUARTERS

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