November 30, 2023

With the market on track to post a very nice gain in November, it’s been a good time to just sit back and let most stocks do their thing. Much of this move has been driven by lower yields and peak Fed chatter, with inflation and economic data largely supporting the disinflation and soft-landing scenario.

Whether or not the Fed will ultimately begin to cut rates next spring/early summer remains to be seen, but that’s what the market is currently expecting. We’ll now look to the December 12/13 FOMC meeting (last of the year) for Jerome Powell to repeat his “not thinking about thinking about cuts” shtick.

On to small caps, the asset class is up 7.3% since the beginning of the month. That’s almost exactly the same performance as the S&P 500, which is pretty impressive given how heavy the weight of financials (19%) is in the small-cap index.

This sector, which has been a lead weight for much of the year, has been one of the top three performing small-cap sectors this month (consumer discretionary and real estate being the other two).

With small caps continuing to trade at a cheap valuation (forward PE 12.6), yielding 2% and having a lot of “catch-up” potential relative to other areas of the market, I wouldn’t be remotely surprised to see the index continue to act well into the end of the year.

That potential is especially real when considering that S&P 600 earnings are set to fall 15% this year then rebound to grow almost 10% in 2024 (S&P 500 earnings expected to grow by about 11.6%). The market, which is forward-looking, will appreciate that.

On to our portfolio, we have an earnings report to dig into as well as a few notes from recent conferences. Two stocks are set to report next week, so don’t get too relaxed!

Recent Changes

Braze (BRZE) Moves to HOLD

Updates

Alphatec (ATEC) has been inching higher for the last two weeks. Management presented at the Piper Sandler Healthcare Conference yesterday. One of the more interesting comments related to the upcoming release of EOS 2.0 and how it will deliver on the big need in spinal surgery, which is understanding alignment. EOS 2.0 will take all the measurements and create an automated 3D surgical plan, which can then be used during operations to make sure things are tracking as they should. HOLD

Braze (BRZE) has become a hot stock as we run into the Q3 fiscal 2024 earnings report next Wednesday. Shares blasted through overhead resistance at 50 without blinking. In the upcoming report, we’re looking for revenue to have grown by at least 26% to $117.3 million and for EPS to be around -$0.13. Full-year revenue guidance should be at least $454 million (+27.8%) and, for next fiscal year, any hints toward $556 million (+22.4%) or more would be welcome. On the profitability front, we’re looking for first profits in Q4 of next year – earlier would be better. There has been some buzz about Braze grabbing market share from larger players, like Salesforce.com (CRM). I think the earnings report will be good, but with the stock having run straight up (we’re +30%) let’s sit back and watch. Move to hold. HOLD

Earnings: Wednesday, December 6

Build-A-Bear (BBW) reported this morning with results that were a tad light on revenue but beat on the bottom line. Management talked about how consumer spending trends were softening toward the end of the quarter (which ended October 31) and into November but began to improve over the last couple of weeks (which fall in Q4). They said Black Friday was “good, not great.” The company has been building out its digital strategy and, with the slower months of September and October falling in Q3 and some implementation issues popping up, e-commerce fell short of expectations. Business in the U.K. was also a little slow, but the U.S. was good. That all adds up to a “meh” quarter, though to be fair this isn’t a hypergrowth-type company. We’re looking for growth initiatives to keep revenue trending up in the mid-single digits but for profits to grow faster, and for continued dividends, buybacks and special dividends to add a sweetener to total returns (they’ve added about 20% over the last two years). In terms of the numbers, Q3 revenue grew 2.9% to $107.6 million ($1.3 million below expectations) while EPS grew 3.9% to $0.53 ($0.02 ahead of consensus). The softness exiting Q3 and into early Q4 drove management to take down full-year revenue guidance, which now implies about 3% growth vs. previous expectations just north of 6%. It’s tough to tell if they’re being overly conservative, or not. This holiday season is a big one for the company and, with a lot of holiday season shopping not really known yet, plus the movie launch (Glisten and the Merry Mission) and other marketing initiatives, actual results could easily come in better than expected. It’s notable that the company plans to end the year with 30 new locations open, and a similar number to open in 2024. Zooming out, it’s been interesting to see how many retail stocks have had a tough reaction to earnings (AEO, URBN, GES, among others), then bounce back. I’m going to give BBW a little rope here (stock down 3% early afternoon) since it is more value than growth and that thesis is intact. All stores operate at a profit so if we think of 60 new stores in 2023 and 2024 there’s a good underlying trend there. That said, if BBW begins to slip over the coming days we may easily move on. BUY

Earnings: Done

Duolingo (DUOL) was sold a few weeks ago at about the current level due to valuation concerns. Love the company and watching and waiting for an attractive re-entry point. SOLD

Enovix (ENVX) hasn’t had any major news to share over the last week and shares have been moving sideways around the 200-day line. HOLD

Intapp (INTA) is moving sideways around its short, intermediate and long-term moving average lines. The company put out a press release this week saying its solutions are available in the Microsoft (MSFT) Azure marketplace. That’s significant, but also not news to us – management talked about this on the earnings call. BUY

Liquidity Solutions (LQDT) hit overhead resistance near 21 last week and shares failed to break higher. The stock has pulled back this week and is now back to our entry point. A bit discouraging, though there’s no material news to explain the dip so we’ll keep at buy. Earnings are due out next Thursday.

Current consensus is that Q4 revenue should grow by 10% to $82.7 million and EPS should grow 26.3% to $0.24. Looking out to 2024, revenue is currently seen growing by 8.3% to $343.6 million while EPS is seen up 7.6% to $0.99. BUY

Earnings Date: December 7

Repligen (RGEN) management presented at the Stephens Conference on November 16 and the big-picture takeaway is that management continues to see 2024 as a recovery year and then back to normal growth in 2025. The CEO Tony Hunt said that he thinks the big swing factors are CDMO’s bouncing back (these are contract development and manufacturing organizations), gene therapy approvals and then China recovery. China is probably the biggest wildcard and it’s about 6% to 7% of revenue. That will likely be lower in 2024. While I think RGEN will be good over the next one to three years, it’s also not a “high-growth small cap” in the traditional sense anymore (market cap almost $9 billion), nor is it a small-cap value play. It’s more of a smaller mid-cap recovery story, with takeout potential. We have just a quarter of our original position size left. There is a part of me that would like to book the gain and focus my attention on fresher opportunities that have more near-term upside. Feel free to share your thoughts on this at tyler@cabotwealth.com. For now, hold. HOLD A QUARTER

Remitly Global (RELY) continues to trade below its short (25-day) and intermediate (50-day) moving average lines after the Q3 report-fueled pullback (higher spending on advertising and customer acquisition) but found support at its long-term (200-day) moving average line and remains above that key level. On the Q3 earnings call, management pushed back on suggestions that elevated spending was cause for concern. They said they are going on “offense” not “defense.” Subtle, but important distinction. Recent notes from a meeting with JPMorgan analysts show management singing the same tune this week, saying marketing investments are expected to drive high returns and improve both lifetime value (LTV) and customer acquisition cost (CAC) efficiency. In other words, they’ll deliver positive return on investment (ROI). Management sees more than ten international markets with high immigrant populations across the U.S., Canada, Europe and Australia where it can direct investments and generate returns. Expecting shares to keep making upside progress, so keeping at buy. BUY

TransMedics Group (TMDX) continues to act well with shares popping back above the 200-day moving average line yesterday (the stock’s post-Q3 report gap higher sent it above the short and mid-term lines). Recall that the Q3 beat was massive. And it seems to me that, while analysts were very impressed, they’re also being a little slow to get over-enthusiastic on the name (though most are generally positive). This is likely because of the uncertainty associated with the new aviation business and how it could track. Stepping back, a few of the positive big-picture trends emerging from the Q3 call were: (1) heart revenue was 20% ahead of expectations and management will speak further on the benefits of TMDX’s OCS method vs. NRP at the ISHLT conference in April 2024, (2) aviation added just over $2 million in Q3 and the company has nine planes, scaling to 20 by the second half of 2024 to cover entire U.S., and (3) company delivered operating income if we take out acquisition-related expenses. Bottom line – the trends are good. Management presented at the Piper Sandler Conference on Tuesday, November 28. One interesting note is the international opportunity, especially Europe, once reimbursement is secured. That’s a longer-term initiative as TransMedics will need to go country by country to get reimbursement. HOLD A QUARTER

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

The next Cabot Small-Cap Confidential issue is scheduled for

December 7, 2023.