February 17, 2022

This has been a relatively quiet week for us in terms of quarterly reports as Repligen (RGEN), which reported this morning (details to follow), was the only portfolio company on the schedule.

That changes next week as we currently have six companies stepping up to the plate.

Generally speaking, what I’ve been noticing out there among reporting companies is management teams that deliver a modest beat and solid 2022 guidance are fine. Those saying anything that helps to confirm investor concerns see their stocks get pummeled. And those that deliver a big beat with major upside to 2022 estimates get a nice pop.

We’re not seeing many stocks break out to all-time highs in the higher growth software and MedTech spaces. But some of these rallies are material (10% to 30% range).

The reality is it’s really a mixed bag, even within specific markets, as company-specific factors seem to determine how a company is doing. As a few examples – and this is very big picture looking at companies of all sizes – in e-commerce we see Amazon (AMZN) reacted just fine while Shopify (SHOP) was slaughtered. In payments GlobalE (GLBE) is good while PayPal (PYPL) and Block (SQ) are in a world of pain. Meanwhile, Visa (V) and Mastercard (MA), which were suffering late in 2021, are doing just fine now.

Obviously, none of these companies are small-cap stocks and this is just surface-level research. But these reactions to earnings reports illustrate just how unpredictable this earnings season is. And that’s part of why I’ve been pulling back on buy recommendations as companies approach their reporting dates.

Stepping back from the stock-specific stuff, the market continues to move around on macro news. Specifically, the Russia/Ukraine situation, interest rates, Fed rate hike projections and inflation.

It’s going to take time to work through these things so it’s best to sit back and watch the show while positioning your portfolio accordingly (i.e., have cash available, don’t take huge positions, etc.).

As a final note, I continue to be impressed by the resilience of the S&P 600 SmallCap Index (chart below). It’s not shooting higher or anything. But I believe that the data showing small caps trading at a near-record discount to large caps is permeating deeper into investor groups.

On that note, recent data from Bank of America shows that over the last six weeks retail investors have been buying small and mid-cap stocks, and they’ve been joined by institutional investors over the last three weeks (hedge funds still slow to join).

That doesn’t mean all small-cap stocks are going to start to rally next week. But it is an encouraging sign for our asset class as we move closer to the end of the third quarter and the first expected rate hike of 2022.

Recent Changes
None

Updates
Arena Pharmaceuticals (ARNA) remains near all-time highs as we move closer to the expected sale of the company to Pfizer (PFE) (expected to close by March 31) for 100 a share. Arena management will give a business update and release Q4 results this coming Wednesday. We’re holding half of our position as we expect to get the full 100 a share if we wait a bit longer. SOLD HALF, HOLD HALF
Earnings: Wednesday, February 23

Avalara (AVLR) reported Q4 results last Thursday. Revenue grew by 35% to $195 million (beating by $10.8 million) while adjusted EPS of -$0.06 beat by a penny. For full-year 2021, revenue grew 40% to $699 million while adjusted EPS dipped to -$0.15 from $0.11 a year earlier. Management’s first stab at 2022 guidance includes revenue of $856.5 million (+23%) which is ahead of consensus of around $850 million (+22%). There is certainly some conservatism baked into that figure. Shares have given back some of their recent gains over the last few days and are back around the 101 level now. As I mentioned in my earnings review a dip into the 95 – 100 zone would be concerning (not there yet). Today management announced the release of 20 more certified integrations with accounting, ERP, e-commerce, POS, mobile commerce and CRM software apps. BUY
Earnings: Done

CS DISCO (LAW) will report Q4 results next Thursday. Revenue is expected to grow 49% to $28.5 million while adjusted EPS is seen near -$0.17. That implies 2021 revenue growth of 61% to $110 million and adjusted EPS of -$0.67. Current consensus for 2022 calls for 27% revenue growth (to $140 million) and adjusted EPS of -$0.60. As a disruptive software story, shares of LAW have the potential to trade up or down significantly based on the actual results and 2022 guidance. Investors will be looking for adoption trends on solutions beyond the core e-discovery solution as well as insights into consumption (remember the company has a consumption-based business model so it’s harder to forecast revenue than a straight subscription model). BUY
Earnings: Thursday, February 24

Everbridge (EVBG) will report next Thursday. Investors need more information on the reasons for CEO David Meredith’s resignation as well as trends in Europe before any sustained recovery in EVBG can occur. At the moment, Q4 consensus calls for revenue growth of 35% to $102 million and adjusted EPS of -$0.19. Of more importance will be 2022 guidance (if we get it). The market is looking for revenue growth of 22% to $450 million and adjusted EPS of -$0.10. Actual results and the stock’s reaction will likely determine what we do next. We learned this morning Everbridge will collaborate with Brown & Brown on a P&C insurance solution to help insurers try to get in front of potentially damaging events so they can take actions to minimize impacts. HOLD
Earnings: Thursday, February 24

Inspire Medical Systems (INSP) announced Q4 results early last week in what was a non-event given they pre-released numbers four weeks ago at the J.P. Morgan Healthcare Conference (I detailed at the time). The numbers were good, as was 2022 sales guidance (up 36% - 40%, better than $313 million consensus). Inspire tends to beat, and there’s no reason to think they’re not positioning guidance with this in mind. HOLD

JOANN (JOAN) traded in a wide range this week but overall continues to look better than it has since September. No new news. I expect the story and the 3.5% yield will continue to pull in buyers. Earnings aren’t likely to be released for several weeks. BUY

Nova LTD (NVMI) is our latest addition and continues to hold steady around the 110 – 122 zone. Bigger picture, the directional action in the stock is relatively consistent with that of the broader semiconductor space as measured by the iShares Semiconductor ETF (SOXX). Management will report Q4 results on Thursday, and the market is expecting Q4 revenue will have grown 55% to $118.3 million and adjusted EPS will have grown 91% to $1.05. For the full year 2021, consensus calls for revenue growth of 52% ($410 million) and adjusted EPS growth of 85% ($3.81). Looking forward into 2022 analysts are currently looking for revenue growth of 17% ($480 million) and adjusted EPS growth of 14% ($4.35). This is looking to be a strong year for cloud server capex growth so it would be surprising if Nova didn’t have good things to say. BUY
Earnings: Thursday, February 24

Rani Therapeutics (RANI) continues to move around on no new news. We don’t yet have an earnings date. Given that catalysts (trial updates) will drive this stock, the best thing to do is sit back and let it do its thing. BUY

Revolve (RVLV) will report next Wednesday. I moved the stock to hold last week given the recent move higher and general uncertainty around the current consumer spending environment, especially for e-commerce-heavy retailers (like Revolve). That said, recent data suggests Revolve had record-low discounting activity in Q4 so it should be holding steady on the profit margin front. Analyst are expecting Q4 revenue of $220.7 million (+57%) and adjusted EPS of $0.18. That implies 2021 revenue of $870 million (+50%) and adjusted EPS of $1.13 (+43%). For the stock to keep working, management will need to guide for 2022 revenue of at least $1.08 billion (+24%) and adjusted EPS of $1.24 (+10%). HOLD
Earnings: Wednesday, February 23

Repligen (RGEN) reported Q4 results early this morning and they exceeded expectations, as did initial 2022 guidance. Revenue of $186.5 million (+72%) beat by $8.3 million while adjusted EPS of $0.81 (+56%) beat by $0.16. Gross profit margin ticked up a fraction of a percent. Initial 2022 guidance calls for revenue of $800 - $830 million (19% to 24%) implying upside to consensus of $800 million. Adjusted EPS is seen in the range of $3.21 to $3.30 (5% to 8%), roughly twice the expected 3% growth rate (consensus was $3.15). This all assumes a modest foreign exchange headwind and no acquisitions (it’s almost certain Repligen will acquire at least one or two companies).

I listened to the call this morning and there was a lot of talk about all the moving parts in the various aspects of the business. The bottom line is Repligen continues to operate in a very strong bioprocessing market. The big-picture question is what exactly the industry will look like when COVID-related revenues start to trail off. Will it be a cliff, or will it reset lower to a more steady-state situation? And will the recent investments in cell and gene therapies lead to a big jump in vaccine and treatment approvals for which Repligen (and TMO, DHR, AVTR, etc.) will provide solutions?

While I’m no expert, I lean toward the latter scenario. And at current levels (RGEN back to where it was in the first half of 2021) there has already been something of a reset in the share price that factors in a lower steady-state growth rate. After the report shares are stable in the face of a generally weak market. Let’s continue to hold our current position and see how the next week goes. HOLD
Earnings: Done

SiTime (SITM) reported Q4 results a couple weeks ago and has been down and then back up since. As with portfolio position NVMI, the stock has, at least directionally, been tracking relatively consistently with the broader semiconductor space (i.e., SOXX ETF). There’s no new news to share. I moved to hold after the earnings report to see how SITM would handle itself and so far, it’s been shaping up OK. We’ll stay at hold for now. HOLD
Earnings: Done

Shutterstock (SSTK) is posting disappointing and somewhat surprising performance given that investors are increasingly focused on companies that are profitable and are in a position to return cash to shareholders (i.e., dividends and buybacks). While Shutterstock’s Q4 results and initial 2022 guidance implies flattish to slightly down profit margins and modestly decelerating revenue growth, those can be explained by potentially elevated M&A-related costs and foreign exchange conversions. Both could end up being less consequential as the year progresses, and there is likely room for management to outperform what seems like conservative guidance. Shares of SSTK sold off after last week’s report but made up most of the lost ground over the following three sessions. I’ll keep at buy for now but should SSTK dip much below 85 we may change course. BUY
Earnings: Done

Sprout Social (SPT) reports on Tuesday. We’re looking for Q4 revenue growth of 37% ($51.3 million) and adjusted EPS of -$0.07. In 2022 we’re expecting revenue growth of 26% ($240 million) and adjusted EPS of -$0.15 (flat year over year). As mentioned last week, there should be upside to these numbers. Sprout has beaten revenue expectations in all of the last eight quarters (average beat of 3%) as well as its own quarterly guidance (average beat of 2.7%). No guarantees the trend holds, but the company has been hiring and appears to be in a strong position. SOLD A QUARTER, HOLD REST
Earnings: Tuesday, February 22

Thunderbird Entertainment (THBRF, TBRD.CA) will announce Q2 fiscal 2022 results next Thursday. I moved to hold last week given the lackluster momentum in shares. As mentioned last week, we need an update on progress in the gaming and consumer products division to get investors re-engaged in the story. HOLD
Earnings: Thursday, February 24

Xometry (XMTR) reported preliminary results on January 31 (revenue within the expected range and above Q4 guidance) and will release official results on March 17. The company just released an upgrade to its European website, including versions for Android and iOS mobile devices. No major change in the stock’s trajectory. BUY
Earnings: Thursday, March 17

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