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Small-Cap Confidential
Undiscovered stocks that can make you rich

August 12, 2021

With economic data pouring in amid a slew of earnings reports there is a lot going on out there. The resulting stock price movements often drive a combination of heartache and exhilaration, and that has certainly been the case for us over the last two weeks.

With economic data pouring in amid a slew of earnings reports there is a lot going on out there. The resulting stock price movements often drive a combination of heartache and exhilaration, and that has certainly been the case for us over the last two weeks.

We’ve seen names like Inspire (INSP) shoot higher after reporting only to fall back on reports of higher hospitalizations in southern states, stocks like Arena Pharmaceuticals (ARNA) and Q2 Holdings (QTWO) slide on what amount to delays but no material destruction in the long-term outlook, names like ON24 (ONTF) fall apart on lowered guidance, and names like Repligen (RGEN) and Sprout Social (SPT) pop and remain strong after earnings.

There are no words that can wrap all of this action up and allow for a neat little bow to be tied on. It’s just plain messy when you get down into the weeds of the market, even though the S&P 500 is hitting fresh highs and the S&P 600 Small Cap Index is inching back toward its high water mark (just 5% below right now).

As is often the case, it’s best to take things on a stock by stock basis, so that’s what we’re doing now. So far today we have no ratings changes since those have already been communicated via Special Bulletins.

We do have one new earnings report with Kornit Digital (KRNT).

Finally, a quick reminder that next week Cabot is hosting our annual Conference and I’ll be presenting a number of times throughout the week. Given the time commitment I won’t write a Weekly Update next Thursday. However, as always, if something material happens within our portfolio I’ll send a bulletin.

Recent Changes

Accolade (ACCD) reported back in July and the stock was solid afterward, but has since sold off as Delta-related infections have raised bad feelings about what happened last time employers had to reduce staff (think airlines, especially). A filing for a mixed shelf offering didn’t help. Big picture here, we want a strong environment for large employers so they will have more employees to offer health benefits to. On that front nothing major has changed for the worst, so maintaining at buy. BUY
Earnings: Done

Arena Pharmaceuticals (ARNA) reported last week and maintained the timeline for the Phase 3 ELEVATE trial (Q1 2022 data read out) but pushed things out to Q2 2022 for the Crohn’s Phase 2 (CULTIVATE) and etrasimod in alopecia areata (AA) trials. The rationale makes sense (better data, more patients, yadda yadda yadda), but the investor base was not impressed. As I stated in my Special Bulletin, provided that results from ELEVATE are good (as expected) and the major programs ultimately advance to commercial stage this noise won’t matter. Since that is our expectation I am maintaining at buy. BUY
Earnings: Done

Avalara (AVLR) reported last week and results beat expectations and management gave a good outlook for the rest of the year. Shares initially responded well then sold off on news of a convertible note offering for $850 million (net proceeds of $960 million if purchaser options exercised). We’ve seen this game unfold before. Companies posting good growth numbers tap the market with a secondary stock or convertible note offering, the stock dips, then it goes on to great things since the value created with the money raised more than offsets the resulting shareholder dilution. No guarantees that scenario plays out again here but I’m guessing it does. Keeping at buy. BUY
Earnings: Done

Cerence (CRNC) reported this week with results that beat on the top and bottom lines. Revenue grew 29.4% to $96.8 million (beating by $840,000) while adjusted EPS of $0.62 beat by $0.08. Management increased its revenue target for 2024 by 17% ($100 million) to $700 million. I put out a Special Bulletin saying we’re keeping at buy. BUY
Earnings: Done

Everbridge (EVBG) reported better-than-expected results this week and shares have remained stable afterwards. The trends in CEM bookings are great and portend good things for the future as these are the high-value bookings. Keeping at buy. BUY
Earnings: Done

Fiverr (FVRR) reported last week and the numbers were good but management lowered forward guidance, saying, “… reduced online activity translates into more modest new customer cohorts and less activity for older cohorts.” We moved to hold given the weakness but are still not ready to jump ship as guidance seems to imply some conservatism and the infection trends could easily drive an uptick in online activity, especially as we move into the cooler months. The company just launched Seller Plus, a subscription-based loyalty program for freelancers. Maintaining at hold. HOLD
Earnings: Done

Inspire Medical Systems (INSP) reported early last week and the stock gapped up on a major Q2 earnings beat. Since then, calls for hospitals to postpone elective procedures in U.S. southern states (especially Texas, but also Florida, Mississippi, Louisiana trends look troubling) due to rising COVID-19 hospitalizations have hurt MedTech stocks in general. INSP has not been spared. These trends are concerning on a number of different levels, but thinking through the situation the reality is everyone has learned a lot through this pandemic and given the infection surge is somewhat localized to a few regions the Q3 and/or Q4 impact on Inspire seems likely to be modest, at this stage. There are options to keep patient volumes going even while ICU beds fill up. I’m not saying we ignore the risk here, just that it’s not time to bail as a result. If you’re feeling queasy INSP should be a hold. If you’re feeling a little more aggressive it’s a buy. MedTech investor conferences happen in September so we should get some incremental clarity on trends from management next month. BUY
Earnings: Done

JOANN (JOAN) is last week’s new addition and the share price hasn’t changed much. It is one of the largest U.S. retail chains in the $40 billion arts and crafts category and recently came public with a reduced debt load and stronger omnichannel growth strategy than the company had after a previous leveraged buyout. The business benefited from a surge in sewing and crafting activities and while the growth rate this year won’t touch that of last (revenue was up 23%) JOANN’s customer base should easily stabilize at a much higher rate than it otherwise would have and these customers will be making repeat purchases over the years. Higher past sales of sewing and Cricut machines will help. This is a value stock that trades at far too big of a discount as compared to peers. As reference, competitor Michaels was recently acquired at a valuation that implies around 75% upside to JOAN’s current share price. BUY

Kornit Digital (KRNT) reported Q2 results that surpassed expectations. Revenue grew 118.4% to $81.7 million (beating by $4.3 million) while adjusted EPS of $0.22 beat by a penny. The company also announced it is acquiring Massachusetts-based Voxel8, a company that develops digital manufacturing systems for footwear and other products. Voxel8 was founded in 2014 by a team of scientists and engineers from Harvard and adding the technology (3D print on part, design software, high-performance elastomer spraying, etc.) to Kornit’s portfolio should help the combined entity create new functional textile applications, including waterproofing, anti-slip, cushioning and impact resistance and much more. Voxel8’s current clients include Wolverine World Wide (WWW).

Beyond the acquisition management said Kornit began shipments of Atlas Max and demand is strong, that overall demand and the pipeline into next year has never been stronger. Third-quarter revenue guidance calls for $88 - $92 million, ahead of consensus estimates. The stock has held up well despite a market that has its fair share of potholes. Maintaining at buy. BUY
Earnings: Done

On24 (ONTF) reported yesterday and the quarter was fine but full-year guidance fell short of expectations and the stock slumped 30%. Suffice to say this is a huge disappointment, especially since it seemed we were getting into a good story at a great price when we jumped on board in July. The plan now is to give ONTF a couple of days to digest this move and go from there. I’m not opposed to stepping aside, just want to see if this selloff – which even with the lowered guidance seems extreme – is going to be followed by a decent bounce. HOLD
Earnings: Done

Porch Group (PRCH) should report earnings next week but I have yet to see a formal announcement date. Analysts expect revenue to grow 144% to $47.1 million and for adjusted EPS loss of -$0.18. We’ll be interested to hear how the newly acquired insurance business is ramping. Keeping at buy, but reminding that earnings reactions are a toss-up. BUY
Earnings: No date announced but expected next week

Q2 Holdings (QTWO) has been sliding since the Q2 report came out though I suspect the stock should stabilize soon. Recall that management said deal activity remains a little low but is getting better and should improve in the second half of this year, theoretically driving revenue growth in the second half of 2022. Management also believes that all the new products (built and acquired) added in recent years means Q2 is a much stronger company now than the last time a revenue gap occurred. This should mean a longer and stronger revenue ramp and share price gains, once things turn. In short, investors will have to be patient, but should be justly rewarded. I moved to hold, saying we want to see evidence of a pick-up in deal flow before we start buying again. HOLD
Earnings: Done

Revolve (RVLV) reported last Wednesday and beat expectations, though the stock sold off as there was some concern that this is as good as it gets. We kept at hold and shares of RVLV have begun to bounce back, now up almost 10% from its closing price the day after reporting (when shares fell 15%). We’re sticking with RVLV. HOLD
Earnings: Done

Repligen (RGEN) reported terrific earnings a couple weeks ago and news flow has dried up since. The stock rallied after earnings and seems to be consolidating around the 250 area. I kept at buy after the report but given the recent rally to all-time highs it’s time to sit on current positions until the next buying opportunity. We are up around 320% on this position. Moving to hold. HOLD
Earnings: Done

Sprout Social (SPT) reported a couple of weeks ago, delivering revenue growth of 42.4% to $44.7 million (beating by $1.9 million) and adjusted EPS of $0.00, beating by $0.10. The numbers were great and show this business is starting to grow faster. Updated full-year guidance implies growth of 37%, to $182 - $182.6 million, above consensus estimates for $180 million. I upgraded to buy and am sticking with that rating now. BUY
Earnings: Done

Thunderbird Entertainment (THBRF, TBRD.CA) hasn’t revealed an earnings date yet but management will be presenting at a number of conferences in August, including:

Thunderbird is a media production and distribution company that creates content for major streamers, including Netflix, Disney+, Apple TV+ and Discovery. It is known for producing content for kids, which is of strategic importance for streamers given that families tend to stick with platforms that keep kids happy. BUY

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

Stock NameDate BoughtPrice BoughtPrice on 8/12/21ProfitRating
Accolade (ACCD)8/6/20404615%Buy
Arena Pharmaceuticals (ARNA)2/2/18395028%Buy
Avalara (AVLR)2/1/1940164309%Buy
Cerence (CRNC)10/1/2050121143%Buy
Everbridge (EVBG)12/2/1616142812%Buy
Fiverr Intl (FVRR)3/5/2032173434%Hold
Inspire Medical (INSP)10/4/1959190225%Buy
JOANN (JOAN)8/6/211515-1%Buy
Kornit Digital (KRNT)3/4/2110212422%Buy
On24 (ONTF)7/1/213821-44%Hold
Porch Group (PRCH)1/7/21131944%Buy
Q2 Holdings (QTWO)4/1/162482245%Hold
Repligen (RGEN)11/2/18 and 12/31/1859252326%Hold
Revolve Group, Inc. (RVLV)4/1/21466645%Hold
Sprout Social (SPT)9/3/2036107193%Buy
Thunderbird Entertainment