July 27, 2023

Earnings season is now in full swing, but central bankers stole the show this week.

On Wednesday the FOMC hiked by another 25bps (as expected) and Fed Chair Jerome Powell gave the market just enough for the bulls to remain in control, for now.

The highlights: First, he said he thinks the Fed can get inflation down to 2% by 2025 while avoiding a recession. The Fed’s staff no longer predicts a recession.

Second, he said he thinks next Monday’s release of senior loan officer opinion data will show “pretty tight credit conditions,” and that may mean the Fed doesn’t need to raise rates again. While the Fed isn’t projecting a rate cut this year and remained non-commital for September (two CPI prints to come before the next FOMC meeting) it might cut next year, while continuing to shrink its balance sheet.

As of early this morning, the CME’s Fed Watch tool is showing the odds strongly favoring the federal funds rate holding steady at the current level of 5.25% to 5.5% until next March, when the odds start to skew toward a 25bps rate cut.

Projections for the end of 2024 imply 100-125bps of cuts in total.

That’s likely why stock market futures are up in pre-market action. A slew of decent earnings reports (META included) is helping.

Of course, the market can be fickle in the days after FOMC meetings, and especially during earnings season. So nothing is set in stone.

But still, I continue to think the setup for small caps is extremely attractive (lower recession risk, banking crisis abating, small-cap financials getting in the game, peak rates of this cycle, investors looking for pullbacks to buy, valuation much lower than large caps, etc.).

The next two weeks will be big for us as most of our positions will report. We also have a new Issue coming out next Thursday.

Recent Changes: None

Updates

Alphatec (ATEC) reports next Thursday, August 3. No news this week and we’re still 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. BUY

Earnings: Wednesday, July 26

Duolingo (DUOL) reports a week from Tuesday. Consensus is calling for Q2 revenue of $124 (+40%) million and EPS of -$0.18. Neither Duo MAX nor Math are factored into forward revenue guidance but progress on new solutions is sure to be a major focus for analysts and investors. Full-year revenue is expected to be up about 38%, then grow by 27% in 2024. Shares are trading around their 50-day line and about 12% below June’s multi-month high of 168. BUY HALF

Earnings: Tuesday, August 8

Enovix (ENVX) management continues to deliver. The Q2 report came out yesterday with management saying the Gen2 Autoline equipment is on track for factory acceptance testing (FAT) in August with delivery and site acceptance testing in Malaysia to follow later in the year. This should set up sample production next April. The other big news is that Enovix’s manufacturing partner YBS has committed to $70 million in non-dilutive financing as well as facilities and labor in Malaysia. In concert with that announcement Enovix management lowered its 2023 capex guide by $50 million (to $70 million). Back to Q2, Enovix produced 22,500 cells at Fab1, well ahead of guidance for 18,000 (probably a low bar and we’re not talking commercial production quantities, but still more is better). Fab1 will supply first shipments to fill the U.S. Army order. Full-year production guidance of 180,000 cells is unchanged. No doubt, the real attraction here in the next couple of years is to see manufacturing ramp up in Malaysia and commercial quantities of batteries ship out to customers in a variety of form factors. On that note management dropped a few names, saying it is working closely with Xiaomi, Vivo and Lenovo (Motorola) to place batteries in foldable and flip phones, which are staging a massive comeback. This story continues to evolve for the better and ENVX shares are indicated nicely higher in pre-market trading. HOLD

Earnings: Done

Flywire (FLYW) made a new recent high on Tuesday, a notable achievement after shares faltered earlier in July. No news to report and earnings are out a week from Tuesday. Analysts are looking for revenue of $73.5 million (+30%) and EPS of -$0.15. For the full year revenue is seen up 28% to $370 million while EPS should come in around -$0.15. BUY

Earnings: Tuesday, August 8

Inspire Medical Systems (INSP) came under pressure over the last week and is now trading 13% off its all-time high from two weeks ago. The biggest risk lurking out there is likely the potential for new weight loss drugs (Ozempic, Mounjaro, Saxenda) to reduce demand for Inspire therapy. We are sure to learn more on the Q2 call. Revenue should be around $136.7 million (+49.6%) and EPS should come in near -$0.57. Full-year consensus is for revenue of $589 million (+44.4%) and EPS of -$1.28 (an almost 20% improvement from last year). HOLD TWO THIRDS

Earnings: Tuesday, August 1

Intapp (INTA) looks to be consolidating just above the 36.5 level (stock closed at 38 yesterday) that held in early May (just before the earnings report) and again in mid-May (after INTA announced a secondary offering priced at 36.5). No earnings date announced yet, but I’m expecting the event will be in the first week of September. On the list of analyst questions will be how the company manages the transition as CFO Steve Robertson steps down and David Morton steps up. BUY

Repligen (RGEN) reports next Wednesday and we’ve seen a little more enthusiasm creep into the stock over the last two weeks. Credit goes to European competitor Sartorius’s earnings report, which despite being mostly a nothingburger included commentary that Q2 may mark a bottom for bioprocessing. That report was followed up by the Danaher (DHR) and Thermo-Fisher (TMO) reports this week. Those management teams cut guidance again, saying inventory destocking in bioprocessing and a slowdown in China continues to pressure growth. Even though DHR and TMO’s reports were far from bullish the stocks acted just fine afterward, suggesting investors are looking to buy (or at least hold) at depressed levels as better days will eventually arrive (probably later in 2024). Back to Repligen, we’ll know more next Wednesday when Q2 results come out. Revenue is seen declining 20% Q2 and another 11% in Q3, implying a full-year revenue decline of 10%. Things improve in 2024 with 17% revenue growth expected. HOLD A QUARTER

Earnings: Wednesday, August 2

R1 RCM (RCM) pulled back below its 50-day line this week before getting a little pop yesterday. The stock is well-liked by analysts and is somewhat of an undercover AI stock. RCM is using the technology internally to automate many of the time-consuming and repetitive processes faced by healthcare providers as they manage their revenue cycles. Earnings come out next Wednesday. We’re looking for revenue of $562 million (+43%) and EPS of $0.06. Full-year 2023 guidance calls for revenue of $2.3 billion at the midpoint (+28%) and adjusted EBITDA of $595 - 630M. The consensus 2023 EPS estimate is $0.29 (versus a -$0.16 loss last year). BUY

Earnings: Wednesday, August 2

Si-Bone (SIBN) has pulled back to its early-June level near 25, a roughly 14% drawdown. Earnings are out a week from Monday. 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. BUY HALF

Earnings: Monday, August 7

Terex (TEX) was sold mid-week last week for a modest gain. In the short term the sale appears to have been a good decision as TEX has traded lower every day since. SOLD

TransMedics Group (TMDX) continues to tick along nicely near all-time highs. Earnings come out next Thursday then management will present at the Canaccord Growth Conference the following Wednesday. 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

Earnings: Thursday, August 3

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