September 21, 2023

The highlight of my week so far just might be waking up this morning and realizing I can count the remaining days in September just using my fingers.

That’s not because the weather hasn’t mostly been beautiful in Rhode Island. It has.

It’s because, as you know, the market has struggled this month.

It helps somewhat to step back and realize that this is not atypical. History shows that in years where first half performance has been solid there’s usually a dip in August and September. Then the market picks back up heading into the final months of the year.

Having said that, we had the FOMC meeting wrap up yesterday. While there weren’t any really big surprises, new projections from FOMC members show that the Fed is still contemplating another 25-basis point hike in November and that it projects only two cuts next year, rather than the four cuts implied in the June projections. This has driven another bout of market volatility over the last two days.

Ahhh, September.

In a twisted sort of way, a lot of what the Fed is doing is trying to set expectations in the hope that markets will adjust to what they could do, so they don’t actually have to follow through with another rate hike.

Beyond the Fed, there’s this potential government shutdown looming at the end of the month. That wouldn’t be great.

The interesting thing is that, even with all the noise, analysts are raising forward earnings estimates for 2024!

Yes, there is still a tricky path for the Fed to navigate to try and steer the economy toward a soft landing. But the data is more or less heading in the right direction. And absent any major shocks, we are within spitting distance of peak rates.

In short, I continue to think the odds favor a more constructive market heading into the last few months of the year and into 2024.

That might not help much yesterday or today. But it does suggest that these dips are opening up opportunities in some really attractive stocks – several of which we currently have in our portfolio – that might otherwise be trading at higher prices.

Now that I think about it, that might actually be the highlight of the week.

Recent Changes

Alphatec (ATEC) moves to Hold

Updates

Alphatec (ATEC) has continued its slide over the last week, forcing me to move to hold today. The broader MedTech space has been weak lately (the IHI ETF has been a disaster since late July). Recall last week that I reviewed ATEC’s presentation at the Morgan Stanley Healthcare Conference. While management didn’t change guidance, they think consensus is reasonable (3Q revenue +25%). They also said the main drivers of the business – surgeon and utilization growth – continue to trend in the right direction. And M&A in the spine space is creating opportunities for Alphatec to attract surgeons. Management will discuss new spine hardware at NASS (October 18-21), new EOS applications in the second half of 2024 and into 2025, and the introduction of robotic offerings (REMI) in late 2024 (starting with freehand). HOLD

Braze (BRZE) has come off its recent high near 50, where it ran into resistance just like it did last August. Shares have been resilient since the Q2 report two weeks ago showed revenue grew 33.6% to $115.1 million while EPS of -$0.04 was up from -$0.16 in Q2 last year. Full-year revenue is now seen up around 28% (22.3% in 2024) and breakeven may come in Q4 of next year. Braze will host its ninth annual customer conference October 16-17 in New York with a long list of notable speakers, including keynote speakers Guy Raz (NPR), Leslie Odom Jr. (actor, singer, author) and Omar Johnson (former CMO for Beats by Dre). BUY

Duolingo (DUOL) stayed out of the mud in September but is having a roll in it today. Shares are down more than 4%, the most they’ve been down since August 15. Nothing new to report, other than the company will be committing $1 million per year to expand access to quality child care in the Pittsburgh, PA area. BUY HALF

Enovix (ENVX) announced yesterday that it will acquire Routejade in Q4, a privately-held Korean battery company that serves military and IoT customers with electrode coating and battery pack manufacturing. The company has already been qualified as a supplier of coated rolls of electrodes for Enovix batteries and has capacity to support the Fab2 scale-up that begins next year. The rationale for the acquisition, which will be paid for with 6.2 million shares of ENVX stock and $16.5 million in cash, is that it will bring coating capability in-house, reduce costs, increase yields, speed up battery development cycles, and open doors in the Korean market, both for manufacturing and sales and with existing customers. Routejade generates about $18 million in annualized revenue, likely with around 20% gross margin, and is profitable. It has two factories, four automated production lines and two electrode coating lines in Korea. Having in-house coating capabilities puts Enovix on par with most major battery makers. This seems like a very good step, which is probably why ENVX has been holding up better than the broad market today. HOLD

Flywire (FLYW) has slipped back to support around the 30 level over the last three weeks on no major news. The company added former Fidelity, Google and Robinhood executive Gretchen Howard to its Board. And Bank of America added the stock to its Endeavor List today. Endeavor is a list of small-cap stocks BofA’s Global Research fundamental analysts see as compelling based on either growth or value models. BUY

Intapp (INTA) was hovering around the 35 level for most of the last six weeks then got caught up in the selling yesterday. Shares closed near 32. The stock is holding up better than most today, but naturally, we want to see a quick rebound to a more comfortable trading range. Keeping at buy but if INTA can’t mount a quick recovery will likely downgrade. BUY

Repligen (RGEN) is still in a holding pattern, not having done much for the last 10 months. We’re holding a quarter of our original position and looking forward to a better bioprocessing market in 2024 to get the stock moving again. RGEN is also a potential acquisition target, if shareholders are offered enough. HOLD A QUARTER

R1 RCM (RCM) has pulled back to the stock’s 200-day line this week on no company-specific news. Despite the lack of performance lately this back-office AI healthcare company is an underfollowed growth story. Revenue should be up 25% or more this year, with EPS flipping to positive (from -$0.16 in 2022 to $0.29 in 2023). Then another high-teens to 20% revenue growth next year and EPS growth near 80%. BUY

Remitly Global (RELY) is doing a great job so far of shrugging off this week’s iffy market. Part of that is because revenue grew by almost 50% in the most recent quarter, the company delivered its third consecutive quarter of profits, and revenue is seen up well above 20% next year while EPS should roughly double (from $0.20 to $0.40). It’s a great growth story. BUY

SI-Bone (SIBN) didn’t raise Q3 guidance at the Morgan Stanley conference last week even though it implies way below trend growth of roughly 10%. Analyst consensus implies 22.5% growth. There is some seasonality in Q3, but even the analysts at Morgan Stanley seem to think guidance is overly conservative since there isn’t anything specific to flag as a concern. With the stock trading well below its highs for the year and (for now) stable near the 200-day line, it looks like a buy. BUY

TransMedics Group (TMDX) has flatlined this week. Recall that management spoke at the Morgan Stanley Healthcare Conference last Monday. Management said the company has already won three transportation contracts with transplant centers and believes the TransMedics Aviation “pitch” to transplant centers (streamlined, less risky logistics, competitive pricing) will drive a lot of new customers their way. This remains a show-me story as investors want more details on how the business model and financial profile will adjust once the aviation business is off and flying. HOLD THREE QUARTERS

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