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Small-Cap Confidential
Undiscovered stocks that can make you rich

October 20, 2022

Small caps are still trading at a very steep discount that implies very attractive returns in the coming year. The Wall Street Journal had a so-so piece on this earlier in the week.

I have some high-level market data to look at first then we’re jumping into updates, with an in-depth review of Repligen (RGEN) and possible reasons behind that stock’s recent retreat, plus thoughts on what to do now.

Small caps are still trading at a very steep discount that implies very attractive returns in the coming year. The Wall Street Journal had a so-so piece on this earlier in the week.

The “on the other hand” to this potential is that, as we all know, stocks can remain cheap and/or get cheaper for longer than we expect. So we want to see some more improvement at the index level before getting much more bullish.

Repeat what I just said for software stocks too. Cheap pretty much across the board.

A couple of other data points for those feeling squeamish.

September was awful, again. Historically it has the worst performance of any month, with the S&P 500 falling by an average of 1.1% since 1928.

It gets better. Since 1928, in October, November, and December the market was up 0.5%, 0.6%, and 1.4%, on average.

Also, since 1942, the market has been solid following mid-term elections. Yardeni Research says that, “… during each of the 3-month, 6-month, and 12-month periods following each of the 20 mid-term elections the S&P 500 was up on average by 7.6%, 14.1%, and 14.9%. Of the 60 data sets over this period, only three were negative.”

Turing to interest rates, there are signs the Fed may be getting close.

Last Friday St. Louis Fed President James Bullard said he’s in favor of frontloading interest rate hikes, then hitting the brakes in 2023 (not his words exactly, but same point).

He basically suggested the Fed hike by 75bps at the November 1-2 meeting (current odds of this are 95%) then do another 75bps at the December 13-14 meeting (current odds of this are climbing, now at 77%, up from 64% earlier in the week and much higher than a few weeks ago).

This scenario would take us into the holiday season with a federal funds rate of 4.5% to 4.75%. The market odds are wavering on whether we get one or two 25bps hikes in 2023 (in February and March), meaning a federal funds rate peak of 4.75% to 5.25% is currently on the table for this cycle.

As I wrote in this week’s Cabot Early Opportunities Issue, I’m honestly not sure if that scenario would have investors wearing “Happy Holidays” or “We’re Scrooged” sweaters at New Year’s parties.

But my inclination is that it would be the former. The market doesn’t like uncertainty and if we can just get past this intense hiking cycle there might just be less of it.

Earnings season is proving to be not so bad so far. I reserve the right to change that wording at any moment!

The week after next action in our portfolio heats up. The FOMC meeting is Nov. 1-2 and we’ll likely get the 75bps hike so that first week of the month is going to pretty darn intense.

Recent Changes


Enovix (ENVX) 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 is no doubt this is a somewhat speculative play, but with what sounds like massive demand ENVX has the potential to do very well even if a recession/blah market continues into 2023. Big picture there is huge demand for more powerful, longer-lasting, more durable batteries for wearables, computers, mobile devices and vehicles, and especially if they are manufactured here in the U.S. (as ENVX is doing now and with one of its second and third plants). This is, for now, largely a manufacturing ramp-up story as it sounds like demand will outpace supply for the foreseeable future. When Q3 results come in revenue will be slight, but again it will be about the capacity expansion trajectory. Guidance for 2023 may come in lower than expected, but provided management is tweaking their process/equipment/etc. to improve yields and delivers on bigger story themes, like building a pipeline of contracts, the stock should do well. BUY
Earnings: Tuesday, November 1

Evolent Health (EVH) sold off last week (the stock began falling the previous Friday) following news that partner Bright Health Group (BHG) said it would get out of some plans and not add the expected 700K new members to Evolent’s platform (in addition to the 340K already on it). This is likely to pull revenue growth down a few percentage points. EVH has since bounced off its 200-day line at 30 as the market digests the news. Forward estimates are starting to reflect it too (not near-term, but out into 2023). With Evolent set to report Q3 results on November 2 we’ll have more details soon. In Q3, revenue/EPS is expected to be $356 million (+60%)/$0.12 and for all of 2022 should be $1.35 billion (+49%)/$0.45 (up from just $0.02 in 2021). In 2023, revenue/EPS should be $1.68 billion (+24%)/$0.71 (+58%). Following this announcement Canaccord cut their price target to 48 from 55, BTIG trimmed theirs to 45 from 55 and JP Morgan kept theirs at 52 (so far). Note that EVH’s 2022 high is 39.8 and the stock, at 32 now, has considerable upside to these price targets (not that they should be given too much credence as analysts are always changing them). Keeping at buy. BUY
Earnings: Wednesday, November 2

Flywire (FLYW) pulled back two weeks ago, landed at 20 and has begun to climb a little from there. With a half-sized position I’m watching it closely and considering our next move. Will likely wait until after Q3 results come out on November 8 to decide. We’re looking for Q3 revenue/EPS of $88.1 million (+30%)/$0.04 and for the full year $260 million (+29%)/-$0.37. In 2023, Flywire should deliver $350 million (+35%)/-$0.11. It’s that year-over-year revenue acceleration with a big jump (70% improvement) toward profitability that I really want to hear management talk with confidence about on the Q3 call. My hunch is we’ll hear them say foreign exchange (thanks, strong dollar) will trim revenue growth by 1-2%. That said, the dollar could easily weaken from record highs relative to other currencies so this is far from a given. BUY HALF
Earnings: Tuesday, November 8

Inspire Medical Systems (INSP) has been weak lately, which is surprising given the strength in Q2 product improvement and market expansion initiatives (Inspire V, new stimulation and sensing silicone leads, label expansion to increase Apnea Hypopnea Index (AHI) and Body Mass Index (BMI) warning, etc.). The latter could add 100,000 patients (+20%). In Q3 look for revenue/EPS of $94.3 million (+53%)/-$0.76 and for the full year $360 million (+54%)/-$2.58. We’d like 2023 guidance of at least $480 million (+33%)/-$2.23. Given the environment I’d like to hear more about Inspire’s path to profitability too. HOLD
Earnings: Tuesday, November 1

Procept BioRobotics (PRCT) continues to move sideways in the low 40s area on no new news. Third quarter earnings come out November 3. We’re looking for revenue/EPS of $17.2 million (+99%)/-$0.49 and for the full year $70 million (+103%)/-$1.48. In 2023, Procept should deliver $120 million (+71%)/-$1.48. HOLD
Earnings: Thursday, November 3

Rani Therapeutics (RANI) is bouncing around near its 2022 low having given up the gains following new coverage from UBS (15 price target). Now that we’re solidly into Q4 we should be on the lookout for a press release detailing the repeat-dose portion of the phase 1 RT-102 study, 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. All are expected in Q4. Management has not yet announced a Q4 earnings date; however, last year it was on November 15 so that’s a fair estimate. HOLD

Repligen (RGEN) sold off hard yesterday (-13%) and it took me a while to figure out why. Finally, I discovered it was because German peer Sartorius AG (SRTOY), which isn’t on my peer watch list for Repligen, was less than bullish on its bioprocessing commentary. They referenced the massive boost the pandemic gave this business then said order flow has declined.

However, this morning larger peer Danaher (DHR) released Q3 results that came in ahead of expectations on both the top and bottom lines. Specific to bioprocessing, management said this segment did better than expected and they see high-singl- digit growth for the year. In their non-Covid bioprocessing, DHR also sees strong demand (20%+) and, so far, no customer order pattern changes. I checked into DHR’s conference call this morning and the first question came from BofA on bioprocessing. Management said the strength in non-Covid bioprocessing is due to solid funding and the acceleration of clinical trials moving into commercial production. Pricing is also strong. They also said customers are indeed moving on from Covid-related bioprocessing (not surprising, we’ve been expecting this) and going back to the projects they previously had on hold. For Danaher the non-Covid business is much larger than the Covid business. In short, no major surprises there. It may be that Sartorius just isn’t as “good” in bioprocessing as the competition.

Turning back to Repligen, recall that in late September management held an Analyst Day during which they modestly increased long-term financial guidance that implies average annual growth of 20% over the next five years. Following that day JP Morgan analyst stated, “It’s becoming increasingly evident that the industry’s strong fundamentals and RGEN’s continued outperformance as a best-in-class player is not likely to be impacted by transient noise around COVID roll-off, inventory adjustments, and biotech funding.”

When you step back and look at what’s going on in the market—over 1,500 biosimilar trials, 3,600 cell and gene therapies in the pipeline, and 37 mRNA clinical trials started last year (+37 more that are Covid-related)—and considering the attractiveness of Repligen to any larger peer (potential acquisition target) it’s very difficult to not see a decline of this magnitude as a buying opportunity. The flip side to that is that, yes, we are in a bear market and, yes, it’s possible that the roll-off of Covid will be bumpier than investors really want to deal with.

I think there is a buying opportunity here for those that want to pursue it. RGEN fell below its 200-day line and that likely added to the selling. That said, I know some subscribers have been holding RGEN for a while and have sizeable gains they’re trying to protect, even after the stock’s sizeable retreat this year. So, as always, strategy depends on positioning. We have continued to hold a full-size position in RGEN and that’s the stance I’m sticking with into Q3 earnings. I would, however, not argue with anybody that has a sizeable gain and wants to protect it by selling a few shares (can pick more up after things are de-risked following the Q3 report). Nor would I argue with anybody that has no position and wants to start building one here and increase/decrease following the Q3 report. Again, so much depends on positioning.

I’ll continue to follow the story as it evolves. TMO reports next Wednesday, October 26 and we’ll get another look at the bioprocessing market from their perspective then. HOLD
Earnings: Tuesday, November 1

Sprout Social (SPT) gained a little altitude this week to flirt with crossing back above the 50- and 200-day moving average lines, both of which have converged around 62. The company will report in two weeks, on November 3. The market is looking for revenue of $65 million (+22%) and EPS of -$0.04. Full-year 2022 expected revenue/EPS is $250 million (+39%)/-$0.11 while 2023 expected revenue/EPS is $330 million (+32%)/-$0.04. This week Barenberg moved their price target from 77 to 72 (still at buy) while Barclays moved theirs from 66 to 70 (also at buy/overweight). HOLD HALF
Earnings: Thursday, November 3

TransMedics Group (TMDX) has been bouncing around between 39 and 42 this week on no news. Earnings are expected in the second week of November, though we don’t have a specific date yet. 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). This should just be mild growing pains and not a reason to sell the stock (we hope) as the opportunity remains very large. Last week Morgan Stanley increased their price target from 37 to 45. In Q3 analysts expect revenue/EPS of $18.9 million (+252%)/-$0.41 and for the full year $80 million (+164%)/-$1.59. Estimates for 2023 will likely change but right now revenue/EPS is at $120 million (+50%)/-$1.08. We locked in partial gains before TMDX pulled back. HOLD 3/4

Xometry (XMTR) has had a little pullback (16% of high) lately and trades near its 50-day line. Not sweating at the moment but certainly would like to see the stock hold up here. Management has given us an earnings date of November 10. In Q3 analysts expect revenue/EPS of $103 million (+82%)/-$0.22 and for the full year $400 million (+83%)/-$0.92. For 2023 we’re looking for revenue/EPS is at $550 million (+38%)/-$0.31. HOLD
Earnings: Thursday, November 10

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

Stock NameDate BoughtPrice BoughtPrice on 10/20/22ProfitRating
Enovix (ENVX)10/6/2220.416.3-20%Buy
Evolent Health (EVH)9/2/2236.732.3-12%Buy
Flywire (FLYW)8/4/2224.621.3-14%Buy Half
Inspire Medical (INSP)10/4/1958.5178204%Hold
Procept BioRobotics (PRCT)3/3/2225.041.767%Hold Half
Rani Therapeutics (RANI)10/7/21 & 7/28/2214.26.90-51%Hold
Repligen (RGEN)11/2/18 & 12/31/1859.2173.1192%Hold
Sprout Social (SPT)9/3/2036.559.062%Hold Half
TransMedics Group (TMDX)7/7/2234.144.029%Hold 3/4
Xometry (XMTR)1/6/2251.954.45%Hold
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.