Just a quick housekeeping note. With the 4th of July holiday next Thursday, I’m going to send out the July Issue one day earlier than normal. Look for it next Wednesday, July 3.
As the second quarter comes to a close, a quick look at the performance of small caps relative to large caps shows just how important stock picking has been this year, and especially once you step away from the influence of the Magnificent 7, which now make up almost 32% of the S&P 500.
As you can see in the blue bars in the chart below, the S&P 500 is up 14.8% year to date (YTD), trouncing both the Equal Weight S&P 500 (+3.9%) and the S&P 600 Small Cap Index (-2.7%).
Small-cap investors holding index funds have been rowing against the tide whether they’re holding growth or value stocks. Both have significantly underperformed large-cap growth and value, as the orange and green bars in the chart show.
Comparing small versus large across sectors shows the exact same thing. It’s been a slog, with small caps dramatically underperforming across the board.
The obvious question is, when will this change?
As we’ve discussed many times over the last year or so, a lower Federal Funds rate (FFR) should help small caps given their outsized exposure to floating-rate debt. Fed rate cuts are a potential tailwind.
Also, the relatively low valuation of small caps will, eventually, draw in investors that are looking for better values than are available at the large-cap index level. When this will happen is entirely unknown of course, but history shows that the pendulum will eventually swing in favor of small caps.
In the short term, we could see a bit of a small-cap rally heading into July. The data clearly shows they do well in the month, up in seven of the last eight Julys for an average gain of 3.5%.
That all said, it is clearly a stock picker’s market, and especially in small-cap land.
In the chart below I’ve plotted the YTD returns of all the stocks in our current portfolio, as well as three of the Mag. 7. While we haven’t owned all these stocks since January 1 the point should still be clear – there are plenty of small-cap stocks posting terrific performance, and we have a number of them.
Frankly, I’m not expecting a huge rally in the small-cap index any time really soon. While market odds suggest the Fed will cut once or twice this year it’s easy to see a scenario where they decide to wait until 2025. That would likely keep a lid on small-cap performance at the index level.
But I still see plenty of individual small-cap stocks that are extremely attractive. And I’m looking forward to jumping into our next opportunity in just a few days!
Recent Changes
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Updates
Artivion (AORT) is our newest position, and the MedTech stock has been trading mostly flat, but yesterday’s little rally might be the beginning of something. We’re looking for the aortic health company to grow through new approvals here in the U.S. while expanding further overseas. That should help revenue growth accelerate from around 10% into the mid-teens while also establishing Artivion as a consistently profitable company. BUY
Docebo (DCBO) is up every so slightly over the last couple of days as it seems like software stocks are trying to build a base. BUY
Enovix (ENVX) is by far the most exciting of our positions this week given news of a big order for batteries for a mixed-reality headset it received from a California-based company, which could be Meta (META) or Apple (AAPL). Yesterday we also learned the company will outsource the battery pack part of the contract (and likely future ones) to Elentec, a consumer electronic battery pack manufacturer in Asia. This strategic partnership could easily grow over time and is a better scenario than Enovix making its own battery packs at this stage (better to stay focused on batteries). We’re still waiting for confirmation that Enovix will get batteries off the Agility Line by the end of June (this coming Sunday) and have those out to customers for testing in Q3. The next logical question is … when will batteries for the mixed reality headset ship? And also, when will we learn who the customer is? BUY
EverQuote (EVER) dipped below its 200-day line a couple of weeks ago and looks to be trying to firm up around the 20 price level. Absent an update from management, I expect shares to bounce around until the Q2 call (expected in early August). HOLD HALF
Intapp (INTA) announced a customer win this week. Enventure, a private equity firm, will use DealCloud to modernize deal flow management and investor relations. Shares are up over the last week. BUY
RxSight (RXST) continues to move sideways on no news. BUY
TransMedics Group (TMDX) took a break from making new highs to chill out this week. Nothing major to report. HOLD A QUARTER
Weave (WEAV) announced a new platform designed for healthcare practitioners with multiple offices that will help streamline operations. This is a significant development since it helps the company move upmarket to larger customers and allows current customers that are expanding to stay with Weave. The stock hasn’t changed on the news (it’s been flat for several weeks) and this won’t drive a massive wave of revenue overnight, but I think it’s a significantly positive development. We’ll wait to hear more details on the next earnings call. BUY
Zeta Global (ZETA) had a decent week as shares have traded up for four days in a row. Analysts have been updating their numbers and price targets this week, with Bank of America going from 18 to 20, RBC Capital picking up coverage with a price target of 20 and Cannacord Genuity going from 17 to 20. ZETA closed at 16.7 yesterday. Recall that last week Zeta announced a deal with Amazon Bedrock to deliver Gen AI marketing automation services. HOLD
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.
Currently Open
| Ticker | Stock Name | Date Bought | Price Bought | 6/27/24 | Profit | Rating |
| AORT | Artivion | 6/5/24 | 23.3 | 24.4 | 4% | Buy |
| DCBO | Docebo | 12/7/23 | 44.6 | 38.1 | -15% | Buy |
| ENVX | Enovix | 10/6/22 | 20.4 | 15 | -26% | Buy |
| EVER | EverQuote | 2/1/24 | 13.7 | 20 | 46% | Sold 1/2, Hold 1/2 |
| INTA | Intapp | 1/4/23 | 25.7 | 35.1 | 37% | Buy |
| RXST | RxSight | 3/7/24 & 3/28/24 | 52.7 | 57.1 | 8% | Buy |
| TMDX | TransMedics Group | 7/7/22 | 34.1 | 144.7 | 325% | Hold a Quarter |
| WEAV | Weave Communications | 1/4/24 & 5/9/24 | 10.1 | 8.8 | -13% | Buy Second Half |
| ZETA | Zeta Global | 5/2/24 | 12.6 | 16.4 | 31% | Hold |
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