The world is still a mess with crosscurrents galore. But we will soon have something somewhat concrete to focus our attention on.
Yes, I’m talking about first-quarter earnings season.
The big banks kicked things off this week. Thus far they haven’t quite delivered the results and/or commentary to ease investor concerns about a slowing economy. In sympathy, shares of our newest addition, Silvergate Capital (SI), have been weak.
However, in contrast to the bigger banks that have more diversified businesses, Silvergate’s outlook is largely tied to digital currencies (lending, stablecoin rollout, etc.) and short-term interest rates. It’s a different enough business that I don’t see a direct read-through from bank earnings. We will know more next week as Silvergate is on deck to report on Tuesday. We want to hear that the stablecoin offering is working its way through the murky regulatory environment and that management is putting deposits to work.
One area of the market that remains relatively strong is MedTech. We jumped into Procept BioRobotics (PRCT) in March and shares have responded by rallying over 50% since. Strength has also been seen in Inspire Medical Systems (INSP). I move PRCT to hold this week.
Lastly, turning to software – which was a big driver of portfolio returns in 2020 and 2021 – we’re still in the soup as rising interest rates and diminishing investor enthusiasm has pulled the group down by around 25% year to date.
I’m not pounding the table on software right now, but I’m getting closer. The returns in this space have been so far above and beyond other areas of the market at many points in the past decade that we’re sure as heck not turning our backs on it. We have exposure with some older names (SPT, AVLR) and have also jumped into two fresher names that have disruptive potential (XMTR and LAW).
Earnings for these companies are still out a few weeks. Stepping back, we now see that software stocks are trading just below five-year average valuations for both the broad group as well as the high-growth names. That doesn’t mean valuations can’t go lower. But it’s certainly worth pointing out that valuations have been slashed in half (or more). I think we’ll start to see more investors begin to nibble on some of the more compelling software names in the coming months.
Recent Changes
Procept BioRobotics (PRCT) moves to HOLD
Nova LTD (NVMI) moves to SELL
Updates
Avalara (AVLR) is kicking around in the 90 – 100 range on no major new news. We’re maintaining a hold rating until more momentum builds in the name. Big picture, Avalara should deliver revenue growth of around 23% this year and next. HOLD
CS DISCO (LAW) is a young, disruptive software company with a legal cloud platform that is gaining scale. We don’t yet have an earnings date, and I’m not expecting LAW to shoot to the moon overnight given the way the market is acting these days. But this is a stock I want to maintain exposure to because I think the longer-term potential will prove to make the wait worthwhile. Both Q4 earnings and 2022 guidance exceeded expectations. BUY
Inspire Medical Systems (INSP) has been chopping its way higher lately and now trades roughly 10% off its all-time high. Truist recently initiated with a 315 price target (INSP trading near 255) in what is yet another signal of the support analysts are throwing behind select high-growth MedTech names. HOLD
Earnings Date: Tuesday, May 3
Procept BioRobotics (PRCT) was the May addition to the portfolio and is up approximately 55% since I added it. Suffice to say the performance has exceeded my expectations. With a relatively quick sales cycle and potential to double the installed base this year, Procept is a rapid grower. Revenue is seen up 74% this year (to $60 million). With the big move yesterday, we’ll step back a little and let PRCT cool off. Moving to hold. HOLD
Earnings Date: Thursday, May 5
Nova LTD (NVMI) fell back near support around 100 earlier this week on no new company-specific news. The stock’s action mirrors that of the broader semiconductors space (SOXX back near support this week as well). With our position down 13% and NVMI inching below support at 100 we’re going to take evasive action and sell today. This could be premature. But I’m not seeing enough signs of strength within semi stocks to justify risking a deeper loss now. We can always come back to NVMI if things start to improve. SELL
Earnings Date: Thursday, May 12
Rani Therapeutics (RANI) gave a Q4 update a couple weeks ago that had few surprises. The company is advancing both the original RaniPill as well as the high-capacity version, which will be suitable for larger biologics. More study results should be forthcoming in the second half of this year as Rani looks to offer an alternative to injectables for biologics like Humira, Forteo and insulin. BUY
Revolve (RVLV) dipped last week but has recovered some of the lost ground over the last couple of days. There’s no new news here and I expect RVLV will continue to bounce around until we (1) get a better picture of consumer spending and (2) hear from management regarding early trends in 2022 (were strong in Q4, especially with the FORWARD brand, cosmetics and international). No earnings date announced yet. HOLD
Repligen (RGEN) slid back to the early-March lows near 155 this week (this was also the stock’s launch point back in May of 2021 after which it rallied to 327). Earnings on April 27 will be a welcome event as I think investors are keen to hear about the trends with COVID-related revenue, and possibly more importantly, the broader outlook for bioprocessing. Recall when management issued 2022 guidance back in February they indicated total revenue would be around $800 - $830 million (+19% – 24%), with roughly one-quarter of that COVID. They also indicated a strong bioprocessing market and Repligen’s goal of hitting $1 billion in revenue by 2024, even if/as COVID-related sales decline. HOLD
Earnings Date: Wednesday, April 27
Shutterstock (SSTK) retreated back to support (82 – 88 range) two weeks ago, setting shares up for what could be nice buying opportunity into earnings, which are scheduled to be released in just under two weeks. As a modest grower that’s very profitable, pays a dividend (yield is 1.1%) and is reducing share count through stock buybacks SSTK should fit the bill for an “attractive” tech stock right now. In the last quarter, management talked about solid trends across image, video and music, while acknowledging some foreign exchange margin pressure and acquisition costs. There’s been a little more chatter lately about companies building out the metaverse, a market that Shutterstock is poised to benefit from. BUY
Earnings Date: Tuesday, April 26
Silvergate Capital (SI) is our most recent addition and was featured in last week’s Issue. It is a commercial bank that serves the digital currency industry with financial infrastructure, including a global payments platform, stablecoin and collateralized loans. The stock offers investors a way to gain leverage to both rising interest rates and growth in the crypto economy. Roughly 90% of assets are in securities and/or cash that can be redeployed quickly as rates rise. At the same time, nearly all deposits are in non-interest-bearing accounts (crypto customers use deposits for trading, not earning income). Given Silvergate’s exposure to short-term rates, forward estimates are necessarily a rough guess. That said (assuming seven rate hikes this year) analysts see 2022 revenue up 71% to $300 million and EPS rising by around 15% to $3.33. EPS is seen jumping by 85% (to $6.17) in 2023. We’ll learn a more about the current state of the business next week when Silvergate management reports Q1 2022 earnings. BUY
Earnings Date: Tuesday, April 19
Sprout Social (SPT) worked its way back into the mid-80s in March then gave up a little over the last two weeks. But shares have firmed up in the high-70s this week and we have an earnings report coming up in early May to look forward to. Sprout has beaten revenue estimates by an average of 8% over the last two years and is seen growing Q1 2022 revenue by 38%. HOLD HALF
Earnings Date: Tuesday, May 3
Xometry (XMTR) continues to bounce around in the 33 – 42 range despite great growth numbers. Full-year 2022 revenue guide is $390 - $400 million (+83% at the high end). Xometry was just approved to expand the breadth of medical device manufacturing on its marketplace. And this week it announced the Xometry Instant Pricing app is available for PTC’s Onshape platform. BUY
Earnings Date: Wednesday, May 11
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
| Stock Name | Date Bought | Price Bought | Price on 4/14/22 | Profit | Rating |
| Avalara (AVLR) | 2/1/19 | 40 | 92 | 130% | Hold |
| CS Disco (LAW) | 9/2/21 | 57 | 33 | -42% | Buy |
| Inspire Medical (INSP) | 10/4/19 | 59 | 251 | 330% | Hold |
| Nova LTD (NVMI) | 2/3/22 | 113 | 98 | -13% | Sell |
| Procept BioRobotics (PRCT) | 3/3/22 | 25 | 38 | 50% | Hold |
| Rani Therapeutics (RANI) | 10/7/21 | 17 | 13 | -24% | Buy |
| Repligen (RGEN) | 11/2/18 and 12/31/18 | 59 | 158 | 166% | Hold |
| Revolve Group, Inc. (RVLV) | 4/1/21 | 46 | 54 | 18% | Hold |
| Shutterstock (SSTK) | 11/4/21 | 121 | 83 | -31% | Buy |
| Silvergate Capital (SI) | 4/7/22 | 133 | 118 | -11% | Buy |
| Sprout Social (SPT) | 9/3/20 | 36 | 73 | 99% | Hold Half |
| Xometry (XMTR) | 1/6/22 | 53 | 38 | -28% | Buy |