September 28, 2023

The market has been on edge since the Fed’s hawkish tone and updated Summary of Economic Projections (SEP) last week (contemplating another 25bps hike in November, projecting just two rate cuts in 2024 rather than the four implied in the June projections).

Last Friday I suggested that the Fed is trying to set these 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.

Today, Austan Goolsbee (Chicago Fed) touched on that strategy, saying he’s “Still trying to process why long-end interest rates are increasing” and “If long rates continue increasing Fed will have to take account of that as a form of tightening.”

It’s probably not a coincidence that the market is up today.

Since last week’s meeting, we’ve seen a significant rise in the 10-year Treasury note yield (green line, left scale in chart below), which blasted through the 4.3% area (previously the highest level since 2007) and is now above 4.62%. That’s a heck of a move. As you can see, this rally in yields has sent small-cap stocks (blue line, right scale) lower. Large caps are down too.

Beyond the rise in longer-dated yields, we’re also watching the price of oil which has become something of a problem now that it’s well above $90 a barrel. Two months ago, the price of oil was $70. This oil rally is going to throw a wrench in inflation numbers if it doesn’t back off soon.

On the flip side, data out of the housing market has been weak lately (August pending home sales fell 7.1% versus expectations for a 0.2% drop) and that could help, given that housing costs have been one of the key inflation issues.

We’re also moving into October, a stronger seasonal period for the market, and we have Q3 earnings season firing up in a couple weeks.

It’s unlikely that all the stars will align to send the market racing higher right away. But if we can get oil and rates to back off a little and some stock-specific catalysts during the Q3 earnings season maybe we can take our macroeconomist hats off and get back to doing what we’d rather do. Which is talk about some of the great small growth stories out there!

Recent Changes

None

Updates

Alphatec (ATEC) is up in four of the last five sessions (though today is still an open question) after finding support just above 12 at the end of last week. There’s no news since management just gave an update at the Morgan Stanley Healthcare Conference a couple weeks ago. Remember that we’ll get an update on the company’s plans for new spine hardware at NASS (October 18-21) and also should get more info on the robotic offerings (REMI) expected to come in late 2024. HOLD

Braze (BRZE) bounced off its 50-day line last Thursday and has been inching higher over the last week. There’s no news to report. Just a reminder that management 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). The company’s customer engagement solutions appear to be leading the market, and I’m interested to learn more about the three AI solutions Braze is releasing under the Sage AI umbrella. BUY

Duolingo (DUOL) pulled back into the 150 area last week (from resistance around 168 the week before) and has looked steady there. Today shares are getting a boost from new coverage from UBS, which slapped a “buy” rating on the stock and a 195 price target. BUY HALF

Enovix (ENVX) is out with more news this week. Management announced the company’s standard-sized wearable battery was chosen by a MedTech firm, Accurate Meditech, for use in a blood pressure monitor. The device was recently approved by the FDA and should hit the U.S. market in just under a year. We don’t know the financial aspects of the deal, but I expect it’s not a ton of volume. Still, this type of product – a standard-sized battery pack – could turn into a nice business line, albeit at lower margins than more custom solutions, over time. Also, remember last week that Enovix is set to acquire Routejade, a privately held Korean battery company that serves military and IoT customers with electrode coating and battery pack manufacturing. This deal brings coating capability in-house, reduces costs, increases yields, speeds up battery development cycles, and opens doors in the Korean market. HOLD

Flywire (FLYW) slipped back to support around the 30 level last week but has traded higher in five of the last six sessions (including today). The stock is now battling to move back above both its 50- and 25-day moving average lines. BTIG initiated coverage today with a “buy” rating and 37 price target (stock at 31.9). BUY

Intapp (INTA) seems to have stabilized around 32 for the time being and I continue to keep a close eye on it. No news to report. BUY

Repligen (RGEN) snapped up a fluid management specialist, Metenova, this week. Metenova is a Swedish company with single-use magnetic impellers and drivetrains. It was a $170 million deal and should generate around $26 million in revenue next year (+5% to 10%) then be back on track to grow above 20% into 2025 and beyond. Speaking on the acquisition, management said this deal will effectively replace the $40 million in COVID-related revenue that won’t exist next year. Apparently, gross margins are better than Repligen and this will add to EPS next year. I’m sure we’ll learn more later in October when Q3 earnings are out, but this looks like a good move to help build the business back up. HOLD A QUARTER

R1 RCM (RCM) is still trading around the stock’s 200-day line. There was an interesting note out of Morgan Stanley in which the analysts theorize new management is prioritizing margin expansion over landing new, large deals. Citi came out with a “buy” rating and 20 price target late last week (stock at 15.2). BUY

Remitly Global (RELY) experienced a little dip last week but has firmed over the last three sessions and looks better than most stocks in this market. There’s no recent news. Analysts still see revenue up well above 20% next year while EPS should roughly double (from $0.20 to $0.40). That’s part of why JMP Securities just increased its price target from 26 to 32 (stock at 25.2). BUY

SI-Bone (SIBN) has appeared to stabilize in the low 20s, where it’s been trading for seven weeks after a swift decline in August. The big question here is why management’s guidance implies 10% growth in Q3 but analysts see almost 23%, and management hasn’t given any indication that analysts are wrong OR been willing to boost guidance. This was discussed at the Morgan Stanley conference a couple of weeks ago. Cantor Fitzgerald doesn’t seem concerned. The firm just reiterated its “overweight” rating and 30 price target (stock at 21.4). BUY

TransMedics Group (TMDX) has, like a lot of our stocks, firmed up recently. There’s been no news since the Morgan Stanley Healthcare Conference (three transportation contracts with transplant centers disclosed, a good start). As I’ve been saying this is now a “show me” story as investors await 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.