July 28, 2022

The Weirdest Recession Ever (Maybe)

With this morning’s first read of Q2 GDP coming in at -0.9% and marking the second consecutive quarter of negative growth (Q1 GDP was -1.6%), many are claiming (or soon will claim) the U.S. is in a recession.

But the official call needs to come from the National Bureau of Economic Research. Their definition is more nuanced than two quarters of negative growth. They need to see a significant decline in economic activity, spread across the economy for more than a few months. With a second estimate (which is likely more accurate) of Q2 GDP coming on August 25 I doubt they’re in a hurry to draw a line in the sand now.

GDP is down. But people are still employed and still spending (albeit at a slower pace). Corporate America may be reining it in but has yet to stomp on the brakes in a “significant” way.

I know Apple (AAPL) shook up the market last week by saying it was slowing the pace of hiring (and it wasn’t alone). But slower hiring is still hiring. It would be different if Apple had said it’s slashing 10% of its workforce.

I’m not trying to say there are no warning signs and that the economy is booming. There are, and it’s not. But slowing down from 100 MPH to a speed at which the train won’t go off the rails might not be such a bad thing. Like so many things over the last couple of years it’s best to think a little past today’s GDP headline and consider the broader context before losing any sleep over it.

Back to stocks.

Small caps have done well over the last 10 sessions with the S&P 600 Index now up 11% since the July 14 intra-day low.

While analysts have been pulling in forward estimates the index still trades at a steep discount to the S&P 500 (forward P/E of 12.1 vs. 16.8). Another consideration is that, in general, small caps have less exposure to foreign exchange than large caps (a headwind with a strong dollar) and less overseas exposure (also a headwind).

In short, I’m feeling better and better about small caps’ potential to outperform large caps from this point forward.

In terms of our portfolio, it’s been an exceptionally quiet week for stock-specific news. Action heats up next week as we have several of our MedTech companies reporting, including INSP, PRCT, RGEN and TMDX.

Recent Changes
Ingles Market (IMKTA) Moves to BUY SECOND HALF
Repligen (RGEN) Moves to BUY
Rani Therapeutics (RANI) Moves to BUY SECOND HALF

Updates

Avalara (AVLR) is down a little from a week ago, mainly because of the iffy start to earnings season from high-growth software names and e-commerce-heavy retailers. But big picture, nothing has changed with the stock – AVLR remains above its 50-day line. Earnings come out the week after next. Analysts are looking for Q2 revenue to be up 24% to $209.2 million and adjusted EPS of -$0.07. We’d like management to guide toward full-year revenue of at least $870 million (+24%) and EPS of -$0.06 or better. HOLD A QUARTER
Earnings Date: Monday, August 8

CS DISCO (LAW) is acting similar to AVLR, back above its 50-day line for over a week now and seemingly firming up. Management reports Q2 earnings on August 11. 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 A HALF
Earnings Date: Thursday, August 11

DigitalOcean Holdings (DOCN) could move on earnings as analysts are splitting views on the name. A few weeks ago both Morgan Stanley and Goldman slashed price targets, citing risk of slowing software spending heading into a recession and, more specific to DOCN, the company’s consumption-based pricing model. This week I saw a note from JPMorgan citing a DOCN channel partner as saying the company is gaining traction selling its Kubernetes product into the SMB market (small and mid-sized business) for both production and software development. While all the big cloud vendors offer some type of managed Kubernetes service, DOCN’s seems preferred by its target market due to reliability and relative value. This partner also thinks DOCN’s recent price increase is totally fine (i.e. no customer churn) but that there is some creep into the larger end of the SMB market from the big players (GOOG, MSFT, AMZN). Earnings will be reported on Monday, August 8. Analysts are looking for Q2 revenue of $134.6 million (+21%) and EPS of $0.10. We’d like 2022 guidance to come in ahead of $570 million (+36%) with EPS at $0.66 or better. We started with a half position and I’m holding steady with that exposure given that the company will need to beat expectations and/or guide for a very strong back half of the year to meet full-year expectations. HOLD A HALF
Earnings Date: Monday, August 8

Ingles Market (IMKTA) continues to walk higher without drawing too much attention to itself. Through the first half of the year revenue is up 16.6% to $2.77 billion and EPS is $7.10 and I expect the second half to go well too, though growth in gas sales should start to slow as prices there have flattened out recently (but still well above 2021 comparable quarters). Let’s fill the second half of our position. BUY SECOND HALF

Inspire Medical Systems (INSP) continues to act well. There’s been no news since the FDA approved more MRI scan conditions (like full body) for patients with Inspire devices implanted. In Q2 analysts see revenue up 48% to $78.4 million and EPS of -$0.61. Full-year revenue should climb by 46% (hopefully more) to $340 million while EPS will probably be around -$2.02. BUY
Earnings Date: Tuesday, August 2

Procept BioRobotics (PRCT) was very strong last week and cooled off early this week, but still looks strong and is holding above its 50-day line. Earnings are due out next Thursday. We need Q2 revenue of $14.4 million (+70%) and EPS of -$0.48. Guidance for 2022 needs to be $60 million or better (+74%) with EPS of -$1.82, at least. Remember, this is a new-to-the market story. Revenue in 2020 was $7.7 million, ramping up to $34.5 million last year (+347%). Averaged out, 2022 and 2023 should be roughly 80% growth each, meaning $110 million by the end of 2023. In short, it’s supernatural growth. HOLD A HALF
Earnings Date: Thursday, August 4

Rani Therapeutics (RANI) just received a 22 price target from HC Wainwright. With no revenue this is a pipeline/development story. In the second half of the year we should get an update on the Phase 1 clinical trial of RT-102 (treatment of osteoporosis) and also see a second Phase 1 clinical trial start. Management should also provide incremental updates on RaniPill HC (high capacity). With the standard RaniPill and the HC version the company expands the number of potential applications, including larger biologics such as Cosentyx, Keytruda, Herceptin and more. Rani has $107.8 million in cash, which should get it through the end of 2023. With some risk appetite creeping back into them market and potential catalysts on the horizon let’s go ahead and fill the second half of our position. BUY SECOND HALF

Repligen (RGEN) jumped 15% to blast through overhead resistance at 175 last Thursday (RGEN closed at 203.6) after larger peer Danaher (DHR) beat on both the top and bottom lines, maintained full-year guidance and pointed to strength in non-COVID bioprocessing. This is good for Repligen as a major concern is that bioprocessing would slow if/as COVID-related business flatlines/shrinks. Granted, RGEN and DHR aren’t exactly the same (DHR has more exposure to China, more diagnostics, etc.) but one only need look at the moves in RGEN and TMO to see that what DHR says matters. RGEN management gives us the scoop on Q2 results next Tuesday (August 2). We’re looking for revenue of $189.1 million (+16%) and EPS of $0.71. Full-year revenue should be up at least 18% to $790 million while EPS needs to be at $3.10 or more. I expect some headwinds from foreign exchange but think this may be priced in. With earnings right around the corner and RGEN looking good now but bumping up against the next level of overhead resistance near 208 I am calling it a “tentative” buy. That means feel free to add a few shares but don’t overdo it. I’ll revisit that rating after the earnings report next week. BUY
Earnings Date: Tuesday, August 2

Sprout Social (SPT) took a hit last week along with many other software and social-related stocks. Thanks, Snap (SNAP). Management will report on Tuesday, August 2. Look for revenue of $60.3 million (+23%) and EPS of -$0.06. Full-year revenue should be up 36% to $250 million while EPS comes in near -$0.12. HOLD A HALF
Earnings Date: Monday, August 8

TransMedics Group (TMDX) reports next Monday (August 1) then management will present at the Canaccord Genuity conference on August 10. First-quarter 2022 revenue grew by 125% to $15.9 million (85% came from the U.S.). Full-year revenue guidance was raised by $10 million to $59 - $65 million (+95% - 115%) on the Q1 call, however, consensus estimates are calling for full-year revenue of $70 million. Second-quarter estimates are calling for revenue of $16.3 million (+99%) and EPS of -$0.35. This is an early-stage commercial launch story so execution is crucial for the stock to keep working. The risks are also higher at this stage of the game because it’s easier for management, sales, marketing teams to slip up. The stock’s trend continues to look good and yesterday TMDX popped above 2022 overhead resistance at 35 and closed at 38.4. That’s a good sign, but Monday’s earnings report will need to be good to keep the stock working. Sticking with buy half now and we’ll revisit position sizing after the event. BUY A HALF
Earnings Date: Monday, August 1

Xometry (XMTR) is a quiet stock and since bottoming (we think) in May has risen 40%, stringing together a series of higher highs and higher lows. Earnings are due out the week after next. With the Thomasnet.com Platform (acquired last year) factored in Q2 revenue is seen growing 84% to $93.1 million while EPS should be around -$0.32. Full-year revenue should be up 83% to $400 million while EPS should be around -$1.05. HOLD
Earnings Date: Wednesday, August 10

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