June 22, 2023

Small caps are off about one percentage point over the last week while the S&P 500 is almost dead flat.

All things considered, that feels like a win to me – largely because the Fed signaled potential for two more rate hikes throughout the year. The Fed’s rate hike program has been the market’s bogeyman for over a year. The message the market is sending now is that, yeah, you might keep us on our toes, bogeyman, but we’re not scared any more. You can be dealt with.

Of course, that will change if the economy goes to hell or there is another banking crisis.

But the longer we go without either, the more those concerns will fade too. And what we’re left with is an economy that’s ticking along. Yes, with some areas of weakness, but maybe without any of the huge shocks that would have proved the bears right.

Back to small caps, there’s no doubt the asset class has some catch-up potential given the YTD underperformance relative to large caps. Given the persistent weakness in small-cap financials I’m not sure how quickly we can close that gap. I’d like to see this sector bounce back a little more.

That said, while index/sector relative performance is interesting and helpful to frame the big picture, we’re more interested in individual stocks. And in the current environment I think that’s where the biggest potential is.

We have our next portfolio addition coming the week after next. I have a lot of names on my list that look great.

Recent Changes: None

Updates

Alphatec (ATEC) has been moving sideways, seemingly pegged to its flatlined 50-day line for about two months now. That’s not exactly exciting performance, but recall we had the REMI acquisition and a secondary offering (at 14) announced on April 20 and an earnings report (May 4). We’re about six weeks away from the Q2 earnings report. With procedure volumes seemingly trending up and Alphatec putting together a track record of solid execution I’m expecting good things. BUY

Duolingo (DUOL) dipped just below its 50-day line yesterday as some of the growthier stocks out there gave back some recent gains. With a half-sized position now we’re biding our time to buy more shares so some give-back – while not feeling great in the short-term – is actually what we want in the longer term (assuming DUOL lives up to expectations, of course). As I mentioned last week one of the potential upside catalysts is growth in the new products (Duo MAX and Math), which management has not factored into forward guidance. We probably won’t get an update on them until the Q2 earnings report, which means about a month and a half of waiting. BUY HALF

Enovix (ENVX) announced at the end of last week that the company achieved its quarterly production guidance of 18,000 cells two weeks before the end of Q2. These cells are being made in the Fremont, CA facility (Fab1). This isn’t major news, but it’s press release-worthy and shows the team is hitting the targets it has set, which is a welcome relief for a company that sent mixed messages in 2022. I suspect the new management team is also Wall Street wise, meaning they know how to set expectations that are achievable so they can get on to the equivalent of a beat-and-raise type cadence with respect to operational achievements. Note that management did not increase full-year production guidance of 180,000 cells. And this is still not meaningful production in the grand scheme of things – certainly not enough to support any meaningful consumer product production volume. The Penang, Malaysia plant (Fab2) is expected to produce 9 million batteries a year. Let’s get to THAT milestone and see how ENVX is doing! ENVX hit 15.5 on March 31. We have yet to break back above that level but are very close. HOLD

Expensify (EXFY) was let go last week given a questionable near-term outlook. SOLD

Flywire (FLYW) continues to tick along above its 50-day line with very little drama. Can’t complain. No news to share. BUY

Inspire Medical Systems (INSP) continues to be steady as she goes near all-time highs. The only recent news was from early last week when the FDA approved expansion of 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. More patients are now able to benefit from Inspire Therapy. HOLD TWO THIRDS

Intapp (INTA) hit an intra-day all-time high yesterday as shares spiked above 50 before settling back to close the session at 48.4. No news but I’m sure investors continue to digest management commentary from June 6 at the Bank of America Global Tech Conference. To recap, on the subject of AI CEO John Hall sees it playing out much like mobile tech, where everybody ended up with a mobile component to their business (i.e. everyone will have an AI component eventually). 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. We’re up about 90%. HOLD

Repligen (RGEN) has tremendous potential but there’s little doubt the bioprocessing market is going through some challenges after a huge surge in demand during the pandemic. We let go of another quarter of our position (we are left with our final quarter now) last Thursday and RGEN dipped back near multi-month lows near 150 on Friday. HOLD A QUARTER

Si-Bone (SIBN) continues to trade near all-time highs with no news to report. BUY HALF

Terex (TEX) was flat this week as the stock took a break after a two-week rally that began in early June and added roughly 20% through last Tuesday. We’re looking for the company’s aerial lift business to expand margins through manufacturing improvements and drive sales growth as customers replenish aging fleets. The materials handling segment is where a lot of the infrastructure incentive programs should hit. There is margin expansion potential there as well, though probably not as much upside as in the aerial segment. BUY HALF

TransMedics Group (TMDX) continues to perform well as investors look forward to news on the evolution of the business given looming volume limitations due to antiquated supply chains for transplant organs. 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.