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Small-Cap Confidential
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October 26, 2023

It’s said that the market climbs a wall of worry. It’s been a slippery wall lately, and this was the week when the bear case for the stock market really seemed to gather momentum.

The short list of bear case arguments includes the following:

The war between Israel and Hamas could easily expand into a broader conflict and draw the U.S. (and Iran, among others) deeper into a situation with no clear exit ...

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It’s said that the market climbs a wall of worry. It’s been a slippery wall lately, and this was the week when the bear case for the stock market really seemed to gather momentum.

The short list of bear case arguments includes the following:

The war between Israel and Hamas could easily expand into a broader conflict and draw the U.S. (and Iran, among others) deeper into a situation with no clear exit.

The aforementioned conflict could be inflationary, just like the Russia-Ukraine war. In any case, inflation, even absent this conflict, could be stickier than expected and remains above the Fed’s target.

The Fed has a long way to go to shrink its balance sheet. America’s debt burden is out of control. And the U.S. government is somewhat dysfunctional (debt ceiling, GOP speaker drama, etc.).

Interest rates and bond yields are going to crush the economy and splinter current cracks in the credit system into crevasses.

The Q3 earnings season hasn’t been that great.

There is an “on the other hand,” though the bull case has certainly faded lately and recession risks have gone up. But let’s not let the bears run the show. The short list of the bull case is:

Crises in the Middle East have historically proven to be buying opportunities. That could be the case this time as well.

Investor sentiment is bearish, which often means it’s a good time to buy.

The major market indices are at or near clear areas of support or long-term trend lines, which are typically good times to buy.

Macroeconomic data continues to largely surprise to the upside. The economy is proving VERY difficult to kill (just in today, Q3 GDP is up 4.9% vs. consensus calls for 3.8%).

The Q3 earnings season isn’t that bad when you dig deeper. According to FactSet, the blended earnings growth rate stands at +1.7%, better the -0.3% expected at the end of the quarter. Roughly 78% of reporters have exceeded consensus EPS expectations, ahead of the five-year average of 77%. In aggregate, companies are reporting earnings that are 7.7% above expectations, better than the 4.4% one-year average positive surprise rate (but a bit below the five-year average of 8.5%).

Taking it all in, and stating the obvious, it’s a risk-off period. Somewhat ironically, the small-cap index doesn’t look nearly as ugly as the S&P 500 or Nasdaq this week – partially because it was beat-up to begin with. But specific to today, it’s been flat to up while the others are off a percentage point or more.

I could go on with macro-talk, but the bottom line is that it all translates into a few adjustments to reduce our exposure. So today we’re selling one stock that’s held up reasonably well and still has a 20%+ gain while trimming a couple MedTech/HealthTech names that continue to act poorly.

Keep in mind we have a new Issue coming out next week, so some of this re-positioning factors in a new holding in the near future.

Recent Changes

Build-A-Bear (BBW) moves to Hold
Flywire (FLYW) moves to Sell
R1 RCM (RCM) moves to Sell Half, Hold Half
TransMedics (TMDX) moves to Sell a Quarter, Hold a Quarter


Alphatec (ATEC) announced a secondary offering and pricing on Tuesday evening that sent shares down to around the offer price (10.5) yesterday. I sent out a Special Bulletin detailing the offer, as well as newly disclosed adjusted EBITDA guidance for the year (well ahead of consensus). ATEC is still in the doghouse. But I think the trend before the offering and the confidence in the business accompanying the pre-released figures will help shares snap back relatively quickly (assuming the broad market doesn’t totally melt). Thinking about moving to buy but looking for more stability out there. Late last week Roth picked up coverage of ATEC with a 22 price target. HOLD

Earnings Date: November 6

Braze (BRZE) isn’t likely to report until December. The only news is that DA Davidson upgraded BRZE to buy with a 53 price target on Monday. Other than that, recall that management held its annual customer conference the week before last and announced a few new features (Feature Flags, Landing Pages, enhancements to the Sage AI by Braze product suite). The stock has come down with the market over the last week but still looks far stronger than most. BUY

Build-A-Bear (BBW) has traded down for seven straight days, trending to its 200-day moving average line (at 23.8) like it’s a magnet. Should shares break that, and the broad market not find support, we may easily step aside. Given that the stock fell below the lower end of my buy range (26) this week, I’m moving to hold today. HOLD

Duolingo (DUOL) was whacked on Friday on news that Alphabet (GOOG) is launching a new interactive English-speaking experience for Android devices in Argentina, Colombia, India, Indonesia, Mexico and Venezuela. It’s expected to launch in more countries in the future. Duolingo generates about half of revenue from people who speak English, and has recently discussed the growth potential in non-English speaking countries. Alphabet appears to have seen the same thing. For the record, in 2022 Duolingo generated 9% of revenue from its English Speaking Test. Whether or not Alphabet’s move is a real competitive threat remains to be seen. On the one hand, yes, another player (and one with major resources) could mean some lost opportunities for Duolingo. On the other hand, there are already several pure-play language apps out there and Duolingo is a leader in the pack, not just another company with a mediocre product. It does what it does very well, has very high engagement, structures courses to help learners progress, etc. Additionally, Duolingo is branching out into adjacent markets (math, music) and rolling out more premium products that could move the needle. In short, Alphabet’s move is something to watch. But knowing what we know now, it’s not a reason to flee from DUOL stock. BUY HALF

Earnings Date: November 8

Enovix (ENVX) doesn’t have any news to share. Earnings are out on November 7. HOLD

Earnings Date: November 7

Flywire (FLYW) reports a week from Tuesday, but we’re going to sell the stock today to protect our 20%+ gain. Shares had held above 27 until today, when they snapped lower. The stock is still doing far better than many of the other specialty financial stocks (FOUR, TOST, SQ, MQ, etc.) and has a resilient business model, modern platform, etc. But in this market, the chances of a really special earnings release that sends the stock soaring seem low. And I’d rather book a gain now, even if it means we could miss some upside, than risk watching it evaporate. FLYW will definitely be on my list of stocks to consider adding back when things calm down. SELL

Earnings Date: November 7

Intapp (INTA) is holding up OK so far and has announced its Q1 fiscal 2024 earnings date is November 7 (a week from next Tuesday), after the close. Shares have been mostly trading sideways around the 50- and 200-day moving average lines over the last two weeks. BUY

Earnings Date: November 7

R1 RCM (RCM) continues to look very oversold, along with many other hospital and digital health stocks. As I discussed last week, some of the pressure has come about because of labor disputes. One player, Tenet Healthcare (THC), is set to report on October 30, a few days before RCM’s scheduled report on November 2. We’ll pay attention. What we need from RCM is for the Q3 earnings report to show operational improvements and evidence AI investments are driving efficiencies both within the company and in customer-facing solutions. We also need assurance management can hit the target of signing $4 billion in NPR in the second half of the year. RCM was upgraded to buy from hold at Truist last week. A board member, Janie Wade, departed the company last Friday. The stock’s next directional move is a toss-up, largely based on the earnings report. With only modest confidence given all the noise, I’m taking our position down by a half today. SELL HALF, HOLD HALF

Earnings Date: November 2

Remitly Global (RELY) continues to be one of the stronger stocks in our portfolio, hitting a new 2023 high last week. The company is teaming up with Mastercard (MC) to integrate Mastercard’s Send and Cross-Border Services so customers have more options for how they move money with the Remitly app. Remitly has announced its Q3 fiscal 2023 earnings date is November 1 (next Wednesday), after the close. BUY

Earnings Date: November 1

Repligen (RGEN) took a hit yesterday after Thermo-Fisher (TMO), a larger peer with bioprocessing exposure, reported a mixed Q3 and worse-than-expected outlook for 2024 due to China weakness and continued COVID headwinds. This is a sharp reversal for a group that was drawing a little more attention last week since a lot of bad news is already priced and upside potential from new treatments (GLP-1s, Alzheimer’s) are just beginning to be recognized. It’s worth mentioning that most bioprocessing stocks (TMO, DHR, AVTR) are flat to up today, possibly reflecting that the group is oversold. We’ll hold our remining small stake in RGEN for now. Earnings are out next Tuesday, October 31. HOLD A QUARTER

Earnings Date: October 31

SI-Bone (SIBN) was sold a couple of weeks ago. No new news. SOLD

TransMedics Group (TMDX) has announced its Q3 fiscal 2023 earnings date is November 6 (a week from next Monday), after the close. This is a tough one as shares could make a significant move one way or the other depending on what management has to say about the integration of the aviation business. We’ve taken partial profits already and will let go of another quarter of the position today at a modest gain, then hold the rest through the event. SELL A QUARTER, HOLD A QUARTER

Earnings Date: November 6

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

Currently Open

Stock NameDate BoughtPrice BoughtPrice on 10/26/23ProfitRating
Alphatec (ATEC)4/10/231610-37%Hold
Braze (BRZE)8/3/234242-1%Buy
Build-A-Bear Workshop (BBW)10/5/2327.8724-12%Hold
Duolingo (DUOL)6/1/23152142-7%Buy 1/2
Enovix (ENVX)10/6/22209-56%Hold
Flywire (FLYW)8/4/22 & 11/9/2221.622723%Sell
Intapp (INTA)1/4/23263434%Buy
R1 RCM (RCM)7/6/231811-37%Sell 1/2, Hold 1/2
Remitly (RELY)9/7/2325264%Buy
Repligen (RGEN)11/2/18 & 12/31/1859123107%Sold 3/4, Hold 1/4
Si-Bone (SIBN)5/4/23 & 8/24/2322.8517-26%SOLD
TransMedics Group (TMDX)7/7/22343813%Sold 3/4, Hold 1/4
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.