A couple of weeks ago the S&P 600 SmallCap Index was trading at a greater than 25% discount to the S&P 500 on a forward PE basis. This was partially because of the persistent premium of the MegaCap-8 (MSFT, GOOG, AMZN, AAPL, TSLA, NFLX, META, NVDA) which collectively account for well over 20% of S&P 500 Index weighting.
While valuations have crept up a little, as of yesterday small caps were still trading at a steep discount, with a forward PE near 11.7 versus 16.3 for large caps.
After this week the influence of the MegaCap-8 on S&P 500 valuation may be somewhat diminished. That’s because of the harsh pullbacks in MSFT, GOOG and META following their earnings reports. We will have to see how AMZN and AAPL fare tonight, then give things a week or so to marinate before evaluating relative valuations again.
Either way, on both a stand-alone and relative basis, small-cap stocks continue to look cheap.
That’s good for us. And the market is starting to take notice.
Over the last five weeks, small caps are up 8% versus a 3.7% rise in large caps. Over the last five days, small caps are up 6% versus a 4.5% rise in large caps.
Turning to interest rates, next week the FOMC meets again. The hands-down favorite odds are for another 75bps hike. But over the last week or so the odds of a 50bps hike in December have shot up. Just last Thursday in my Weekly Update I described how the odds of a 75bps hike in December had risen to 77% from 64% the week prior.
Now? The odds of a 75bps hike in December are just 30%. Odds of a 50bps hike are 63%.
Let’s not sugarcoat it. If the Fed doesn’t leave the door WIDE open for a 50bps hike in December, the market is in trouble next week.
I think they will leave that door open. Regardless, it’s going to be a nerve-wracking week. Especially since we have a bunch of portfolio positions reporting and a new portfolio addition coming on the heels of the FOMC meeting. As if I need another reason to sweat!
Recent Changes
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Updates
Enovix (ENVX) reports next week. This is mostly a manufacturing ramp-up story as it sounds like demand outpaces 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. Looking out into December and January (CES) there are multiple events to provide more updates to investors. BUY
Earnings: Tuesday, November 1
Evolent Health (EVH) is bouncing around just above its 50-day line with no new news (other than that regarding the reduction in revenue from BHG discussed over the last two weeks). 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). BUY
Earnings: Wednesday, November 2
Flywire (FLYW) reports a week from Tuesday. 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. BUY HALF
Earnings: Tuesday, November 8
Inspire Medical Systems (INSP) continues to flounder, but next Tuesday’s earnings report could breathe new life back into the stock. 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) popped on Tuesday on no news. Earnings are next Thursday. We’re looking for revenue/EPS of $17.2 million (+99%)/-$0.48 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) gave an update this week, confirming that repeat-dose data for Phase 1 RT-102 will come in Q4 and that it expects to initiate a Phase 2 for RT 102 in 2023. It also said it has begun preclinical development of RT-111, a RaniPill GO capsule to deliver STELARA which is used for the treatment of moderate to severe plaque psoriasis, active psoriatic arthritis, moderate to severe Crohn’s disease and moderate to severe ulcerative colitis. Also, in 2023, management expects to start Phase 1 studies for two additional pipeline molecules, RT-105 and RT-110. Finally, the company has decided not to continue with development of RT-109 (human growth formula). The stock hasn’t responded well to the update and has been bleeding lower this week. Keeping at hold and considering next steps here. HOLD
Repligen (RGEN) was under pressure last week based on concerns about inventory reductions discussed by German peer Sartorius AG (SRTOY) and, to some degree, Danaher (DHR). However, Danaher management also spoke about high demand in their non-Covid bioprocessing business. I discussed this all at length last week. The bottom line now is that I think Repligen management already reset expectations and it would seem unlikely a ton would have changed in the few weeks since the recent Analyst Day (though anything is possible these days). While acknowledging there are a lot of moving parts and Repligen has more exposure to certain trends and less to others than DHR and TMO, on balance it seems the stock is “cheap” and positioned for a nice run over the next couple of years. Sticking with a hold rating into next week’s earnings report. HOLD
Earnings: Tuesday, November 1
Sprout Social (SPT) reports next Thursday. 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. HOLD HALF
Earnings: Thursday, November 3
TransMedics Group (TMDX) has given us a report date of next Thursday. As mentioned last week, I’m expecting some headwinds with 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). 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 THREE QUARTERS
Earnings: Thursday, November 3
Xometry (XMTR) reports the week after next. 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 at $550 million (+38%)/-$0.31. HOLD
Earnings: Thursday, November 10
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
