October 13, 2022

We’re entering a period where macro factors are going to fade slightly as investors refocus on company specifics. That’s because earnings season kicks off tomorrow with financials.

Reporting action in our portfolio is still a few weeks away. But there is no shortage of news flow out there to keep us engaged until it arrives.

On that note, and back to the macro, this morning’s CPI report slapped futures around after the market was indicated to open higher. The Nasdaq opened down more than 3%. But in an abrupt about face around 10 a.m. ET the market bounced back and is 1% to 2% as of early afternoon.

How can this be when CPI was worse than expected?

There are no simple answers. But maybe the pendulum has finally swung too far to the negative.

Let’s take a look at a few data points.

First up is this chart from Yardeni Research showing the Investors Intelligence Bulls/Bear Ratio. It’s in the toilet, dropping for the fourth consecutive week, to 0.57 (lowest since March 2009). This is a great contrarian indicator.

Next, and this is very short-term (Mike Cintolo shared this chart from SentimenTrader just this afternoon), but this morning’s panic buying suggests a lot of short covering. SentimenTrader’s chart (below) indicates this morning over 45% of all NYSE securities traded on an uptick. That’s the second highest amount in at least 25 years on the day after the S&P 500 set a 52-week low.

Next, and specific to small-cap stocks, they are cheap. The forward P/E for the S&P 600 Small Cap Index is currently around 10.9. It has been as low as 10.6 in the last two weeks. This valuation multiple is roughly on par with that seen during previous recessions. The S&P 500 remains at a slightly higher multiple just above 15.

If you prefer the Russell 2000 over the S&P 600 you see the same thing. The Russell 2000 forward P/E under 11 is as low as it’s been since 1990 and 30% below its long-term average since 1985. Recent data from Bank Of America suggest roughly 13% annualized returns over the next decade for the Russell 2000. This is relative to roughly 10% projected returns for the Russell 1000 Large Cap Index.

Lastly, and sticking with small-cap stocks, while they’ve been weak lately they are actually holding up better than large caps. Whereas the S&P 500 recently hit a new low the S&P 600 did not. The chart below is as of mid-day today, showing the rebound from this morning.

I’m not saying it’s time to go heavy into the market. There is still much work to be done. But there are mounting signals that we may be entering a “bad to less bad period.” That should keep risk-tolerant investors snapping up a few shares of the most appealing companies.

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Updates

Enovix (ENVX) is our latest addition and while it’s been a bit of a shaky first week the long-term potential here is significant. The company is a California-based battery architecture company developing a 100% silicon anode battery for consumer electronics (now) and electric vehicle (EV) markets (down the road). There has been some speculation that Enovix has a battery in Facebook/Meta’s (META) new VR headset, the Meta Quest Pro. But nothing was divulged during Meta’s launch event this week. BUY

Evolent Health (EVH) sold off this week after partner Bright Health Group (BHG) announced it is getting out of individual and family plans for 2023. Evolent had expected $70 million in growth (700K new members in addition to the 340K currently on Evolent’s platform) from BHG next year. Rough math suggests Evolent will miss out on that $70 million next year, then around $34 million in 2024, although without knowing contractual details it’s hard to quantify it perfectly. We also don’t yet know where these members are going. To put this in context, prior to this announcement Evolent was expected to generate $1.71 billion in 2023 revenue, or growth of 27%. Current estimates now suggest $1.68 billion, or 24% growth, but if we take off a full $100 million it’s closer to 19% growth. Again, the brunt of this hit isn’t expected until 2024 and management is saying its long-term growth trajectory is unchanged. With EVH now 23% off the high and down to the 200-day line near 30 from around 37 last week, it’s a buy. BUY

Flywire (FLYW) has retreated with the market over the last week but has found support near 20 today. There’s no new news and we’re sticking with our buy a half rating for now. Flywire offers industry-specific digital payment solutions for the education, healthcare, travel and business-to-business (B2B) markets that make it easier for clients to get paid and for their customers to make secure, efficient electronic payments. BUY HALF

Inspire Medical Systems (INSP) is back near its late-September level near 165 on no company-specific news. Earnings are due out on November 1. HOLD
Earnings: Tuesday, November 1

Procept BioRobotics (PRCT) has been holding its own lately as we march toward the Q3 earnings date of November 3. The trend with the company has been very strong with Q2 marking the fourth consecutive beat and raise quarter since going public late in 2021. HOLD
Earnings: Thursday, November 3

Rani Therapeutics (RANI) was back to some of its old form this week as the stock popped 14% on Tuesday on the highest daily volume we’ve seen in over two months. We can likely credit a new buy rating from UBS (15 price target, stock closed at 8 yesterday) for the move. The next potential stock-moving events will be data of the repeat-dose portion of the phase 1 RT-102 study (due in Q4), initiation of the third phase 1 study to further develop the high capacity RaniPill and/or the pre-IND meeting with FDA for the phase 2 RT-102 study (also in Q4). HOLD

Repligen (RGEN) was enjoying a nice little rally a couple weeks ago but that came to a screeching halt last Thursday at about 222 and the stock has slid back to 200 since. A lot of noise here despite the long-term potential being extremely bright. Repligen will report on November 1. Recall that a couple weeks ago during the company’s Analyst Day management bumped up long-term financial guidance to $2 billion in revenue by 2027-28. That suggests average growth of 20% a year, which is slightly above expectations. HOLD
Earnings: Tuesday, November 1

Sprout Social (SPT) had been holding up well prior to last Friday when the stock dipped back below its 200-day line. It has slipped further since and is now back around the 52 to 55 level, which is where it was in early August. This move is not due to company-specific factors but rather broad-based selling in software stocks. Earnings are scheduled for November 3. HOLD HALF
Earnings: Thursday, November 3

TransMedics Group (TMDX) fell back near the 40 level a few weeks ago and has hovered just above there since (at 42 today). Earnings should be out in the second week of November. We’re expecting some headwinds to scaling up the NOP program in the second half of 2022 due to transportation challenges and summer seasonality (even though management raised full-year guidance by $9 million in Q2). HOLD 3/4

Xometry (XMTR) continues to hold up as well as any tech stock. There’s no news. Recall that on the Q3 call management boosted fiscal 2022 revenue guidance modestly to $398 million and cited modest foreign exchange headwinds and strong active buyer growth (+40% in Q2). HOLD

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.