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Small-Cap Confidential
Undiscovered stocks that can make you rich

May 23, 2024

The S&P 600 Small Cap Index has drifted a little lower this week but made a nice move over the last month as interest rates declined. The S&P 600 iShares ETF (IJR) is up 7% over the last five weeks.

The chart inside shows how clear the inverse relationship between the IJR (green line) and the 10-year yield (blue line) is.

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The S&P 600 SmallCap Index has drifted a little lower this week but made a nice move over the last month as interest rates declined. The S&P 600 iShares ETF (IJR) is up 7% over the last five weeks.

The chart below shows how clear the inverse relationship between the IJR (green line) and the 10-year yield (blue line) is.


The main reason for this is that smaller companies have a good amount of leverage and floating-rate debt. Higher interest rates mean higher interest payments.

Theoretically, the small-cap asset class should get a boost as interest rates come down. While we’re not expecting a return to the good old days of super low rates any time soon, even a 50-basis point reduction in the Federal Funds rate (which is what the market expects by the end of the year) would offer some relief.

Another part of the bull case for small caps is valuation. The S&P 600 forward PE is just 14.7. That’s up from the super-depressed valuations of 2022 and 2023 but is low compared to the last 25 years, as the chart below from Yardeni Research shows (small cap is the green line). Small-cap valuation is also low compared to large caps, which have a forward PE north of 20.


One of the reasons for this dislocation is that small caps just don’t have the upward pull of higher valuation mega caps. Sure, there are a lot of “expensive” small-cap stocks, but at the index level, there is no equivalent to the combined power of Microsoft (MSFT), Nvidia (NVDA), Alphabet (GOOG), etc.

Not only have those stocks pulled valuations higher for large caps, they’ve also been churning out revenue and profits. That’s helped to justify their valuations.

As a whole, small caps have had a tougher time growing profits than large caps. This is seen in yet another chart (below) from Yardeni. The red line shows small-cap expected profit margins of 6.2% versus large caps (red line) with an expected profit margin of 13.1%.

In other words, large caps should be “expensive” and small caps should be “cheap.”


That all said, the silver lining is that interest rates have likely peaked and should fall back a little into 2025, helping to give broad-based small-cap indices and ETFs a boost. Lower rates combined with a decent economy and cheap valuation are a good backdrop for small-cap performance.

Still, I continue to think it’s particularly important to focus on individual companies right now. There will come a time when the average investor gets excited about small-cap ETFs and mutual funds again. But it won’t be until they finally break higher and the big-picture trends support a sustained small-cap move.

On that note, let’s move on to portfolio updates.

Recent Changes:
Zeta Global (ZETA) moves to HOLD


Alphatec (ATEC) continues to bounce around in the 10 – 11 range following the Q1 report on May 8. The quarter was good in terms of revenue growth and surgeon adoption. The challenge here continues to be profitability. Management says operating expenses should grow at about half the rate of revenue. With about 25% revenue growth expected this year, EPS loss should be around -$0.43. That loss drops to -$0.25 next year when revenue is seen up about 20%. I think investors might be a little impatient, wanting the trajectory toward profitability to be a little quicker. Alphatec is investing in its sales team to grab market share and keep revenue growth strong. That’s good longer term, but does put some pressure on profitability. This push-pull is one of the main reasons I’m keeping the stock at hold. HOLD

Docebo (DCBO) has no news to share this week and the stock is about flat compared to where it was last Thursday. Continuing to bide our time here and pick up shares on the cheap while keeping an eye on the 35.5 level. A break below that likely means we cut DCBO loose. BUY

Enovix (ENVX) spoke at the J.P. Morgan Global Technology, Media and Communications conference on Tuesday. It was good. A few tidbits. The CFO said they have no intention of doing an equity raise “anytime soon” and that the company expects to reach profitability in “late 2026.” This assumes they reach a 50% gross margin on larger batteries priced in the $13 - $14 range with eight lines running. Sounds like four lines get them close to profitability, but not quite all the way. Management also said they continue to expect some cells to roll off the Agility Line in the current quarter (ends June 30) with production on the high-volume Gen2 line to start shortly thereafter. Expect improved versions of batteries every year to match customer demand. BUY

EverQuote (EVER) continues to look good, and management spoke at the J.P. Morgan Global Technology, Media and Communications earlier this week. Management talked about being well into the market recovery with expectations that it will continue into 2025 given more carriers are increasing advertising spend. EverQuote does most of its work with captive carriers like Allstate (ALL) and State Farm (about 50% of the industry and 70% of EVER revenue is captive) but sees the independent agency (the other 50% of the market and about 30% of EVER revenue) as a big opportunity that could accelerate through the rest of the year and into 2025. With management sounding a bit conservative on the Q1 call, likely due to a huge upside move in the stock (as high as it’s been since August 2021), we’ll keep EVER at hold. HOLD THREE QUARTERS

Intapp (INTA) was moved to buy two weeks ago following earnings and, in my view, more optimism around the company’s AI strategy and marketing efforts. Management spoke at the J.P. Morgan Technology, Media and Communications Conference on Tuesday and did a good job. There were no earth-shattering revelations, but management reiterated how Intapp is purpose-built for very specific markets (accounting, law, investment banking, etc.) and how the pandemic woke up demand from many clients who had been dragging their feet moving to cloud-based solutions. Given INTA’s growth profile (profitable, revenue growing north of 20%) and multiple levers to pull to keep growth going, I think the stock should draw in more investors. BUY

RxSight (RXST) continues to trade near all-time highs in the wake of the recent $115 million equity offering (priced at 56, stock closed at 62 yesterday). No major news to share. BUY

Talkspace (TALK) was sold on May 7. No update. SOLD

TransMedics Group (TMDX) hit another all-time high this week, pushing the gain on our remaining position to over 300%. Keeping at hold. HOLD A QUARTER

Weave (WEAV) is still a buy as shares seem stable in the 8 to 9.2 range. No news to report. BUY SECOND HALF

Zeta Global (ZETA) management has been on the road speaking at a B. Riley conference yesterday and a Needham conference last week. Next up is Craig-Hallum (May 29), Jefferies (May 30), Bank of America (June 4), William Blair (June 5), Mizuho (June 12) and ROTH (June 26). Roth decided to get a jump on things and increased their price target on ZETA from 21 to 33 on Tuesday (stock closed at 18.5 that day). Shares have run more than 45% since we jumped in three weeks ago so moving to hold now. HOLD

That’s it for this week. Please email me at with any questions or comments about any of our stocks, or anything else on your mind.

Currently Open

TickerStock NameDate BoughtPrice Bought5/23/24ProfitRating
EVEREverQuote2/1/2413.724.276%Sold 1/4, Hold 3/4
RXSTRxSight3/7/24 & 3/28/2452.761.817%Buy
TMDXTransMedics Group7/7/2234.1138.1306%Hold a Quarter
WEAVWeave Communications1/4/24 & 5/9/2410.18.7-14%Buy Second Half
ZETAZeta Global5/2/2412.617.136%Hold

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Tyler Laundon is chief analyst of the limited-subscription advisory, Cabot Small-Cap Confidential and grand slam advisory Cabot Early Opportunities. He has spent his entire career managing, consulting and analyzing start-up and small-cap companies. His hands-on experience has taught Tyler that the development of a superior business model is the biggest factor in determining a company’s long-term success. Accordingly, his research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.