June 15, 2023

The big news this week was, of course, that the FOMC decided to pause and not hike interest rates at the June meeting. But as expected they suggested that a couple more 25-basis point hikes are in the cards throughout the rest of the year.

It feels like this “we want to keep you guessing” messaging is partly due to wanting to see how more data comes in and partly to keep investor expectations in check. The latter seems especially relevant given the S&P 500 just moved into a new bull market and AI enthusiasm has pushed a number of the MegaCap stocks to new highs.

The interesting thing is that, while large caps are trading at a relatively rich valuation (forward P/E of around 18.7 thanks to a forward P/E of 30 for the MegaCap 8), both small- and mid-cap stocks are pretty cheap, trading with forward P/Es of around 13.5.

I discussed some of the dynamics behind the performance gap between large and small caps last week so I won’t repeat myself today. Bottom line is there’s a lot of catch-up potential for small caps, even if large caps give back some of their recent gains.

Turning to the MedTech space there was an interesting development earlier this week when management at UnitedHealth Group (UNH), the bellwether of the healthcare group, commented on higher-than-expected Medicare outpatient activity carrying over from Q1 into April, May and early June. The underlying reason appears to be seniors going in for procedures as they become more comfortable tapping into the healthcare system after the pandemic.

The implication is that, while this may be a negative for managed care organizations (UNH stock was down 6.4% yesterday on very high volume), higher procedure volumes will be good for hospitals and MedTech stocks. Granted, not all MedTech stocks benefit from the exact same trends and there are different forces in each market.

But the takeaway is that, on balance, our small-cap MedTech stocks should continue to perform well on the back of solid procedure volumes in Q2.

Recent Changes:
Expensify (EXFY) moves to sell
Repligen (RGEN): Sell another quarter, hold remaining quarter

Updates

Alphatec (ATEC) is holding up well and management spoke at the Goldman Sachs Global Healthcare Conference yesterday. I haven’t seen any notes yet. But the comments from UNH management I noted earlier suggest industry tailwinds should continue for ATEC, especially given positive company-specific trends and a well-executed growth strategy. BUY

Duolingo (DUOL) peaked at 167 on June 6 then pulled back 8.8% the following day. That retreat and the subsequent actions have kept DUOL in the 150 to 160 trading range. We’re up a couple of percentage points over the two weeks we’ve held the stock. The next upside catalyst will likely be an update on how the new products (Duo MAX and Math) are doing and what the monetization path looks like for those. The all critical daily average user (DAU) number update matters as well (20 million right now with an additional 50 million users on a monthly basis). Expectations are set for full-year 2023 revenue of $510 million (+38%) and EPS of -$0.56 (a 63% improvement). We’ll need to see evidence of upside to those numbers for DUOL to live up to expectations. Bigger picture, shares will likely move some based on AI enthusiasm/hype/etc. BUY HALF

Enovix (ENVX) took the week off from meaningful announcements after last week’s disclosure that it had signed agreements with both a Japanese and a South Korean distributor to help support shipping, distribution and market expansion across Asia. The trend of steady progress and hitting milestones is a welcome positive. HOLD

Expensify (EXFY) has been on my list of stocks to let go soon but I have postponed the decision given the recent strength in technology and software stocks. However, on Monday Morgan Stanley put out a note in which they downgraded EXFY to underperform, saying, “While we think these issues may be at least in part related to challenged macro, we’re also concerned that EXFY has not been able to improve monetization of the company’s significant outstanding free user base via paid conversion. From our perspective, these conversion challenges are structural in nature related to EXFY’s core product offering/go-to-market motion, and until we see meaningful trend reversion, we think it will be difficult for investors to turn incrementally constructive on the company’s core trajectory.” That pretty much sums up my concerns as well. Until we see really strong evidence that this business is poised to deliver meaningful and sustainable growth the stock is likely to underperform. We’ll cut it loose today. SELL

Flywire (FLYW) shares pushed up to a new 13-month high earlier this week then gave a little back yesterday. No news to report. Still a steady grower, a resilient business and one with potential for margin expansion. BUY

Inspire Medical Systems (INSP) continues to act well trading near all-time highs above 300. Early this week the company announced FDA approval to expand Inspire’s Indication to include the upper limit of the Apnea Hypopnea Index (AHI) to 100 events per hour from 65 and to raise the Body Mass Index (BMI) warning on the labeling to 490 from 32. This isn’t a surprise, but it’s a positive development nonetheless as it means more patients are now able to benefit from Inspire Therapy. HOLD TWO THIRDS

Intapp (INTA) was at the Bank of America Global Tech Conference last Tuesday (June 6). The question a lot of investors have was asked, which is how the company sees itself using AI. CEO John Hall’s answer was that the company sees it playing out much like mobile tech, where everybody ended up with a mobile component to their business. Given that Intapp makes applications that is where it will leverage AI technology, to improve efficiency for users and to leverage data to improve solutions in areas like compliance and risk management. Intapp has an agreement with Microsoft that gives it access to Microsoft’s existing and roadmap technology. So Intapp is looking at information in Office 365, Teams and SharePoint and seeing how it can be leveraged in Intapp solutions. The bottom line here is that AI is part of the technology mix for Intapp (as it has been for years) and they seem on top of it, but it’s not going to change how it brings rich and valuable information to law firms, lawyers, private equity folks, etc., etc. overnight. In other news, this week Intapp announced M&A data from a Moody’s Analytics is now available in DealCloud. HOLD

Repligen (RGEN) still isn’t doing a heck of a lot. Given the mediocre trends in the bioprocessing space we’re going to sell another quarter of our position today at a gain of around 173%. SELL A QUARTER, HOLD REMANING QUARTER

Si-Bone (SIBN) has made a series of new highs over the last week and looks terrific. No major news to report. BUY HALF

Terex (TEX) has had another good week as investors consider the significant demand for new U.S.-based manufacturing plants. There are a lot of factories planned that can access funding by tapping into trillions of dollars in incentives from the CHIPS and Science ACT, the Inflation Reduction Act (IRA) and the Infrastructure Investment and Jobs Act. They will make things like semiconductors, batteries, EV, solar equipment and more. These projects could be one of the reasons management raised full-year guidance when Q1 results were reported. BUY HALF

TransMedics Group (TMDX) has had another decent week on no company-specific news. We’re continuing to wait for an announcement on how the aviation business will be built out. 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.