October 19, 2023

After a very difficult September during which the S&P 600 SmallCap Index fell back to the May lows, things have finally stabilized in small-cap land over the last two weeks.

Energy stocks have been one of the main contributors lately, as have consumer staples and discretionary stocks. These guys have helped offset weakness in small-cap healthcare and tech.

We don’t have any stocks reporting this week, or next for that matter. So it’s been a week of monitoring earnings around the rest of the market and keeping tabs on the macro data where, for the most part, good economic news continues to be bad news for the market.

Perhaps the biggest news of the week is the continued surge in longer-term bond yields. The 10-year yield is up to around 4.97% as of midday today.

During Jerome Powell’s speech on monetary policy today at the Economic Club of New York, the Fed Chair talked about how that move likely has more to do with cash demands from the government and the term premium (a fuzzy number that essentially reflects what investors think they should get for holding longer-duration bonds instead of shorter-term ones) than anything the Fed has been hinting at.

Google it, if you want to go down the rabbit hole.

As of now, the market is pricing in a single-digit percentage chance that the Fed hikes rates again on November 1. There have been so many Fed officials talking over the last week about being patient, etc., that it would be a huge shock to the market if they did hike.

Theoretically, a pause at the upcoming meeting will allow investors to focus on earnings season and any guidance we can get that hints toward how the first half of 2024 should shake out.

It shouldn’t take much to go right to ignite the year-end rally we’ve all been hoping for. On the other hand, it won’t take much for that 10-year yield to plow through the 5% level either.

I think that potential is going to keep investors on edge, even if earnings reports continue to signal that Q3 and/or Q4 will represent a new record.

In short, continue to tread carefully.

Recent Changes

None

Updates

Alphatec (ATEC) pre-released Q3 results Monday morning, and I reviewed them in a Special Bulletin that day. The short version is it was another beat-and-raise quarter driven by surgical revenue. I reviewed the transcript of yesterday’s investor meeting at NAAS. Management talked about how it has just hired 30 new salespeople, then they got into where technology is going in spine. Specifically, they talked about their EOS machines and how the high-quality images they generate make it so much easier to get accurate measurements and alignment. And that, when combined with positioning equipment, will help Alphatec create custom surgical plans for each patient. All that data will be fed into an AI engine so, over time, procedures should get even better and faster to complete. That’s the real high-level review. It’s interesting stuff, and while the stock is down from the summer highs, the momentum in the business continues to snowball. HOLD

Braze (BRZE) held its annual customer conference earlier this week at which it announced the release of Feature Flags, a feature management tool that’s intended to help marketing and product teams work better together to speed up customer messaging and conversion campaigns. The company also launched Landing Pages, a low-code visual editor that will help customers build landing pages to capture first-party data. Other products and enhancements to the Sage AI by Braze product suite were also discussed. Following the event, Needham reiterated its buy rating and 60 price target on BRZE (stock at 46). BUY

Build-A-Bear (BBW) will release its holiday-themed movie, Glisten and the Merry Mission, on November 3 in partnership with Cinemark Holdings (CNK). Families can get a free ticket if they buy a stuffed animal at a Build-A-Bear Workshop. A collection of plush stuffies based on the movie’s storyline is coming out as well. Revenue growth is modest (5% to 7% expected this year) but profit is expected to grow at about twice the rate of revenue (+15% to $3.63). The company has also delivered a few sizeable special dividends in the last couple of years (last one was equal to a 7% yield). BUY

Duolingo (DUOL) had a tough day last Friday but has firmed up a bit since and remains close to two-year highs. After getting picked up by Barclays and receiving a price target increase from Evercore ISI last week, DUOL was reinstated under coverage at Bank of America this morning (188 price target). The analyst talked about “high expectations” and “competition” as primary concerns (both valid points). But they also note how Duolingo’s AI investments are directly targeted at monetizing the userbase, and therefore could pay dividends relatively quickly. Earnings are due on November 8, three weeks from yesterday. BUY HALF

Earnings Date: November 8

Enovix (ENVX) seems to have found support just above the 10 level after a significant drawdown in August and September. Earnings are out on November 7. Management has talked about how it should begin ramping up production in Malaysia in April 2024 and be near full output in Q3. They have also talked about why producing batteries for smartphones is such a big opportunity. It’s because Enovix might be able to get a battery to last 30% longer, and that’s a huge value add for a smartphone manufacturer. Especially as displays get more powerful and consume more power. HOLD

Earnings Date: November 7

Flywire (FLYW) reports two weeks from Tuesday. No major news. Still watching the dollar’s strength, which could be a very slight headwind to Q3 and Q4 profitability. BUY

Earnings Date: November 7

Intapp (INTA) continues to look better than it did a month ago, and with earnings having come out so recently (September 6), there’s not much news to digest. Shares are trading near 36, above their 50- and 20-day moving average lines, and eyeing the 200-day line (at 38). BUY

R1 RCM (RCM) is now looking very oversold with the stock having fallen through both short- and longer-term moving average lines and selling volume well above the average daily volume for the last six sessions (five of which saw RCM trade lower). The decline comes among a horrid period for hospital and digital health stocks, some of which is being driven by labor disputes (Kaiser Permanente strike and rumors of same at Tenet Healthcare (THC)), which if arise in customers within RCM’s network would hurt hospital revenues and therefore net patient revenue (NPR) and cash collections, which is the main driver of RCM revenue. Tenet is set to report on October 30, a few days before RCM’s scheduled report on November 2. A topic of discussion will be RCM’s floating-rate debt (about $1.26 billion, or 70% of total debt), which will drive higher interest expenses if interest rates don’t cool it. Adding more fuel to the dumpster fire was a report this week from short seller Jehoshaphat Research talking about “accounting gimmickry” surrounding the Cloudmed acquisition and other governance issues. In most cases doing a deep dive into short reports isn’t worth the effort and this one appears to be well-timed with the general weakness in hospital stocks (and the market in general). Rising to RCM’s defense have been analysts at Citi (Daniel Grosslight and Luismario Higuera) who see this as a buying opportunity, as well as analysts at Truist. Really, what we need is to get to the Q3 earnings report and see if the operational improvements the team at RCM has put in place in recent quarters are continuing to play out, if AI investments are driving efficiencies both within the company and in customer-facing solutions, and if management still sees hitting its target of signing $4 billion in NPR in the second half of the year. There is an awful lot of noise around the stock lately, so I moved to hold last week. Sticking with that rating now but also looking for an opportunity to catch a quick updraft, should it materialize. HOLD

Remitly Global (RELY) continues to trend in the right direction and has hit a new high for 2023 today. The company just announced it is teaming up with Mastercard (MA) to integrate Mastercard’s Send and Cross-Border Services so customers have more options for how they move money with the Remitly app. BUY

Repligen (RGEN) hasn’t seen a change in character for many months. Shares are going sideways in the 135 – 181 range, albeit with some significant daily moves. Today is one of those days as shares are up more than 5%, potentially because bioprocessing stocks are an area of the life sciences market where a lot of bad news is already priced in. It could also be that new treatments (GLP-1s, Alzheimer’s) represent upside that’s just beginning to be recognized. HOLD A QUARTER

SI-Bone (SIBN) was sold after it broke below 20 last week. No new news. SOLD

TransMedics Group (TMDX) continues to act poorly and we’re down to a half-sized position. It’s a period of transition at the company, which grew revenue by over 200% last year, due to the addition of the aviation business. Revenue is seen rising about 108% this year and earnings should be close to breakeven next year. That said, there is a lot of uncertainty given that we don’t have a quarter of the aviation business to consider yet. Suffice to say the next earnings report will be important. HOLD HALF

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