Up, Up and Away?
The subject heading of my last Weekly Update was “The Weirdest Recession Ever (Maybe)”.
We’re starting to see why. Because it may not be a recession at all.
On Tuesday the Atlanta Fed’s GDPNow tracking model estimated that Q3 2022 GDP would be up 1.4%. Yesterday that estimate was updated and increased to 2.5%.
Some economists, including Ed Yardeni, think Q1 and Q2 GDP will ultimately be revised upward, possibly into positive territory. The second estimate of Q2 GDP will be released in two weeks, on August 25.
Yesterday morning we received July CPI (inflation) data. Both the headline and core CPI inflation rates were lower than expected. Headline fell to “just” 8.5% in July from the peak of 9.1% in June and core fell to 5.9% from the peak of 6.5% in March.
Lower energy prices helped a lot (in the headline number). Airfare, vehicles, communication and apparel also fell. But shelter, medical care and furnishing were up.
The market has interpreted all of this as evidence that the selling was overdone. It’s looking increasingly likely that the market bottomed in mid-June. Adding fuel to that sentiment has been relatively subdued action in yields. The 10-year finished yesterday at 2.78%, well off the peak of 3.48% from – no coincidence – mid-June.
If the market did indeed bottom in June (we won’t know for a while) then the S&P 600 index would have bottomed at 1,082 on June 16. That would mark a 27% decline from the November 11, 2021 all-time high.
Over the last (roughly) two months small caps have risen 16%. But they’re still 15% below the high.
Because analysts have recently been lowering forward earnings estimates small caps are still “cheap.” The S&P 600 carries a forward P/E just near 12.4. That compares to around 17.5 for large caps.
What did my Magic Eight Ball say when I asked this morning if stocks can keep going up from here?
“Better not tell you now.”
I never liked the Magic Eight Ball anyway. We’ll continue to lean bullish because that’s what the actual evidence is telling us.
Recent Changes
Repligen (RGEN) Moves to HOLD
Updates
Avalara (AVLR) announced a buyout from Vista Equity Partners for a price that was slightly lower than the previous closing price. While this likely puts the Board of Directors in the hotseat we went ahead and exited the position (we had a quarter position left) believing that a better deal could materialize, but that AVLR would be “dead money” in the meantime and thus the opportunity cost of holding might not be worth it, even if a higher price was ultimately reached. We recorded a gain of 130% on that partial position. SOLD
Earnings Date: DONE
CS DISCO (LAW) reports after the close today. The stock has been acting well and is making a run at 30, a key level that it fell below in early May. I expect a good result; however, buying just hours before an earnings release is a speculative move. So we’ll stick with a HOLD rating through the event and then evaluate afterward. We’re looking for Q2 revenue of $33.4 million (+13%) and EPS of -$0.27. We want management to guide for 2022 revenue of at least $150 million (+31%) and EPS of -$0.82 or better. With a consumption-based pricing model there’s room for some variability in the company’s growth. HOLD HALF
Earnings Date: Thursday, August 11
DigitalOcean Holdings (DOCN) delivered Q2 results on Monday. Revenue was up 29% to $134 million (missed by $600K) while EPS of $0.20 beat by $0.10. Full-year revenue outlook was left unchanged but profit outlook was raised as management has, and will continue to, rein in spending. Some customers have slowed their pace of spending on the platform, especially in Asia and Europe (no surprise there). Net dollar retention (NDR) was down 5%, to 112%. Management thinks NDR will improve in the back half of the year. They saw lower-than-expected churn as a result of the recent price increases. This is good. This was a decent quarter for a company that is receiving mixed coverage. Goldman and Morgan Stanley are a little bearish on it while JPMorgan, KeyBanc and Piper Sandler are a bit more bullish. In my view the story could go from “fine” to “good” and maybe to “great” in 2023. BUY HALF
Earnings: Done
Flywire (FLYW) was just added last Thursday and is a digital payment company focused on the education, healthcare travel and business-to-business (B2B) markets. Management reported earnings on Tuesday after the close. Revenue of $57 million grew 53% and beat by $9 million. EPS of $0.22 missed by $0.06. Revenue less ancillary services (marketing fees from credit card service providers and printing and mailing services) grew 56% to $52 million. Payment volume grew 49% to $2.9 billion. Foreign exchange and higher credit card usage (due to more travel mix) have had a slight negative impact on margins. The company added 140 new clients (2,800 total now) and revenue retention is trending above the three-year average. Management gave full-year revenue guidance of $283 - $294 million (an increase of $14.5 million and more than the Q2 beat, and also reflects some contribution from Cohort acquisition) and revenue less ancillary services guidance of $260 - $269 million (an increase of $11.5 million). Full-year adjusted EBITDA guidance is $13 - $17 million (an increase of $3 million). Management says the pipeline is still growing twice as fast as last year at this time. They also talked about how both education and healthcare (the two biggest verticals) tend to be resilient in a slowing/recessionary environment. Travel is continuing to rebound after the pandemic all but shut it down. Management is investing in growth, salesforce, etc. Short version: it was a good quarter and confidence in the business remains high. BUY HALF
Ingles Market (IMKTA) reported Q3 fiscal 2022 results last Thursday. Revenue rose 14% to $1.46 billion and diluted EPS dipped 6% to $3.57. Management citied rising fuel and food costs, as well as supply chain issues and labor costs as crimping gross margin. Gross profit in the quarter was 24.1% versus 26.4% a year ago. With signs that inflation pressures are easing and some price increases have already been passed on we could see gross margin expansion in fiscal 2023. Shares of IMKTA continue to work. Keeping at buy. BUY
Earnings: Done
Inspire Medical Systems (INSP) reported last Tuesday. The company beat Q2 expectations with revenue rising 73% to $91.4 million (beating by $13.34 million) and EPS of -$0.53 beating by $0.07. Full-year guidance range was raised by $10 - $18 million to a range of $354 - $362 million (+52% to +55%) while gross margin guidance dipped a few percentage points to 83% to 85% due to rising costs and possible inventory obsolescence as Inspire releases newer technologies. All signals still point to “go” as management is working on improved tech (like Inspire V) and is steadily growing new centers and utilization. I had at BUY for several weeks prior to the report and while shares have been stable since the report we’ll continue to let this one marinate before considering another upgrade to buy. HOLD
Earnings Date: Done
Procept BioRobotics (PRCT) reported earnings last Thursday and beat expectations. Revenue of $16.7 million was up 97% and full-year guidance increased by $7 million to a range of $66 - $68 million. This continues a steady string of beat and raise quarters (this was a 16% beat). The story continues to be about solid utilization (in the mid-fives), which is actually held back by new center additions (21 new in the quarter) which take a bit to get up to speed. Hiring sales reps is a top priority as handpiece revenue is up 250% (wow) and units sold is up 176%. New systems sold in the quarter totaled 23, bringing the total installed base up to 114 (+56% over a year ago). BUY
Earnings Date: DONE
Rani Therapeutics (RANI) has been busy. On Monday the company announced up to $45 million in debt funding from Avenue Venture Opportunities Fund to help finance continued development of the RaniPill platform and drug pipeline. Then yesterday afternoon the company reported Q2 results and announced topline Phase 1 results of RT-102 for treatment of osteoporosis. In the study (which began in March in Australia) RT-102 was generally well-tolerated with no adverse events, showed high oral bioavailability of human parathyroid hormone (PTH) and RaniPill showed a high drug delivery success rate. The study showed bioavailability of PTH with RaniPill was between 300% and 400% greater than with subcutaneous (i.e. injected) Forteo. There were 39 women in the study and three were excluded from results. Management expects to take the results to the FDA and get to work on a U.S.-based Phase 2 trial in Q3 of next year. We should get an update by the end of this year. Looking forward we should expect results of the repeat-dose portion of the RT-102 study in Q4 of this year, the beginning of another Phase 1 clinical trial by the end of the year. Finally, management announced it is launching a secondary offering (hasn’t priced yet). At the end of June Rani had $97.2 million in cash. Add in up to $45 million from the Avenue Venture loan and management says the company has cash to get into mid-2024. This proposed equity raise should add to that. In the pre-market shares of RANI are about flat (this may be meaningless with a stock like this). We really need pricing for the equity raise before we’ll have a good sense of how all this will affect the stock. Officially, I’m keeping at BUY because I think this is all net positive. However, I suggest holding off on any purchases until we get pricing and can assess the stock’s reaction. BUY
Earnings: Done
Repligen (RGEN) reported last Tuesday and exploded higher, then continued to move up over the last week. Revenue of $207.6 million grew by 27.4% and beat by $18.6 million while EPS of $0.91 beat by $0.20. Full-year revenue guidance went up $20 million at the low end to a range of $790 - $810 million (from $770 - $800 million) while EPS goes up about $0.06 to a range of $3.13 - $3.20. Helping the stock is news that the base business accounted for 80% of revenue while Covid-related sales were just 17% of revenue (the other 3% came from acquisitions). And management sees growth in the base business picking up to 31% to 33% this year, up from previous guidance of 24% to 31% growth. This significantly helps reduce concerns that Repligen’s business has become overdependent on Covid. I moved to buy prior to the report and have kept it there since. However, with such a big move (RGEN +20% since the day before the report) I’ll move back to hold now. HOLD
Earnings Date: Done
Sprout Social (SPT) reported last Tuesday. Revenue grew 37.4% to $61.4 million (beat by $1.09 million) while EPS of -$0.04 beat by $0.02. Full-year guidance of $253.9 - $254 million is slightly above consensus of $252.7 million and implies growth of over 35%. Management did a good job on the conference call of explaining how social media management is different than paid advertising (which is currently VERY lumpy) and often represents a channel where companies have more of a mission-critical view since managing social encompasses a lot of organic user traffic/growth. This was another good quarter and helps confirm that the business is doing well. Still maintaining at Hold but considering an upgrade pending stock price momentum. HOLD HALF
Earnings: Done
TransMedics Group (TMDX) reported last Monday. Revenue rose 150% to $20.5 million (beating by $4.2 million) while GAAP EPS of -$0.41 missed by $0.06. Big picture, this was a good quarter and adds to the positive momentum the company showed last quarter. Management was cautious on the conference call due to risks around inventory depletion (it’s trying to triple manufacturing capacity) and air transport fulfillment challenges. But still raised full-year guidance by $8 million on the low end (roughly twice the Q2 beat) to a range of $67 - $75 million (up from $59 - $65 million). Should TransMedics be able to execute (management did go on to say they see the high end of guidance as achievable) and continue to ramp up the NOP program we should see revenue growth top 150% this year and 50% next year. TransMedics launched an equity offering a few days after the report and raised roughly $130 million at 40 a share (stock closed at 46 yesterday). This is a very strong showing. Love the momentum and the demand for shares. Keeping at Buy Half for now as we look for a pullback before buying larger positions. BUY HALF
Earnings: Done
Xometry (XMTR) reported yesterday morning that revenue grew 89% to $95.6 million (beating by $2.5 million). Adjusted EPS was -$0.18 and beat by $0.14. Marketplace revenue was $75.6 million while supplier services revenue was $20 million. Marketplace active buyers grew 40% to 23,942 and accounts with at least $50,000 in spend grew by 76% to 894. Management updated full-year revenue guidance to a range of $395-$400 million (+81% to +83%). Management is seeing significant increase in active buyers and suppliers and believes new supplier services and the Thomas acquisition will help drive top-line growth as well as gross profit improvements such that adjusted EBITDA will be positive next year (will be -$31 million to -$33 million this year). The report was very well-received and sent shares up 18.5% (XMTR was up 30% at one point). Contrary to many companies Xometry is doing well in Europe. More broadly, the company sees strength in auto, electronics and semi. Looking to upgrade to BUY but want to see a little more price stability first. HOLD
Earnings: Done
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 8/11/22 | Profit | Rating |
| Avalara (AVLR) | - | - | - | - | Sold |
| CS Disco (LAW) | 9/2/21 | 57 | 29 | -49% | Hold Half |
| DigitalOcean Holdings (DOCN) | 6/2/22 | 49 | 52 | 7% | Buy Half |
| Flywire (FLYW) | 8/4/22 | 25 | 26 | 5% | Buy Half |
| Ingles Markets (IMKTA) | 5/5/22 | 95 | 96 | 1% | Buy |
| Inspire Medical (INSP) | 10/4/19 | 59 | 227 | 287% | Hold |
| Procept BioRobotics (PRCT) | 3/3/22 | 25 | 45 | 80% | Buy |
| Rani Therapeutics (RANI) | 10/7/21 | 17 | 10 | -44% | Buy |
| Repligen (RGEN) | 11/2/18 and 12/31/18 | 59 | 258 | 335% | Hold |
| Sprout Social (SPT) | 9/3/20 | 36 | 68 | 86% | Hold Half |
| TransMedics Group (TMDX) | 7/7/22 | 34 | 48 | 39% | Buy Half |
| Xometry (XMTR) | 1/6/22 | 53 | 52 | 0% | Hold |