June 30, 2022

There are a lot of negatives out there these days. The AAII Sentiment Survey shows optimism is in the tank while pessimism is through the roof.

Over in Europe, this week’s reading of June’s Economic Sentiment Indicator (ESI) showed the same thing – people are not at all happy.

A lot of this is, of course, tied to worries about inflation and eroding purchasing power, not being able to buy the things we need/want (i.e., supply chain issues), fuel prices, the war in Ukraine and a general sense that it could take a while to sort all these things out. In the meantime, interest rates are going up, as is recession risk.

It would be much better if we could just rip the band-aid off, take the medicine and move on!

But complex issues aren’t solved overnight. And without a real sense of when things can improve, the market continues to waffle.

There are, however, some positives too. For now, consumers continue to spend on certain things, like travel. Maybe they have the savings stashed away to keep the economy afloat until enough of the aforementioned issues are resolved.

Also, there are signs that supply chain pressures are much less prevalent than a year ago. What we don’t yet know is if the improvement is due to lower demand or better supply. That’s because unfilled orders and delivery times have fallen, but prices paid and received are still high.

Supply chain issues are one of the reasons inflation is a problem. And since the Fed can’t really do a ton about the supply chain it would be great if they could “self-correct.”

Finally, small caps are cheap! The forward PE of the S&P 600 Index is approaching 11. We’re talking 2008 and early-2020 type cheap.

Granted, if forward earnings estimates plummet that changes the ratio. And analysts are notoriously bad at reining in forward estimates heading into recession (if that’s indeed where we’re going).

But let’s not dwell on details.

As we close out the first half of 2022 (good riddance) and look toward a long holiday weekend and (let’s hope) brighter days in the second half of the year, small caps are beaten up but priced very attractively for those with a longer investing timeline.

On a stock-specific basis, not a heck of a lot has changed since last Thursday.

We have an analyst day to review from Avalara (AVLR) and a few outsized moves from Friday and Monday (probably influenced by Russell Index rebalancing). But for the most part – up until this morning’s declines – it’s been a relatively quiet week.

Last but not least, in addition to kicking off the third quarter, July will bring several highly anticipated data releases and events. Three of the big ones are June CPI (released July 17), the July FOMC meeting (July 26-27) and the first read of Q2 GDP (July 28).

Recent Changes
None

Updates
Avalara (AVLR) hosted an analyst day earlier this week during which management reiterated the company’s goal to grow annual revenue at a 20% to 25% clip through 2025. The company cited ongoing compliance and automation demand, higher average selling prices and strong cross-selling of the expanded product suite as helping to make the growth target achievable. On the downside management said growth in Europe has slowed and that now, at 8% of revenue, more work is needed to build out a partner network that’s more similar to what Avalara has in the U.S. On the bottom line, management sees a lot of room for operating efficiencies to drive operating margin into the 10% to 15% range (versus 1% in 2021). That would be good for the stock, but investors need to see evidence of it in the coming quarters before they’ll give AVLR credit. Finally, management shared insights on the customer base. Wholesale & distribution, manufacturing, retail and software now represent 20%, 19%,

18%, and 11% of revenues, respectively. It was a helpful session and I think there’s plenty of opportunity ahead for AVLR (which is why we’re trying to hold our remaining stake) but clearly market conditions need to improve for the stock to make meaningful upside progress. HOLD A QUARTER

CS DISCO (LAW) enjoyed a little bump last week but that evaporated over the last three sessions. There’s no new news. This year (and likely next) is going to be largely about how DISCO’s growing sales force (should roughly double in 2022) executes. HOLD HALF

DigitalOcean Holdings (DOCN) held an investor day a few weeks ago so there’s been no news to break following that event. Recall that management reiterated its goal to get to $1 billion in revenue by fiscal 2024 (estimated 2022 revenue is $570 million). Shares are trading around their 50-day line and we’re continuing to bide our time before filling the second half of our position. BUY HALF

Ingles Market (IMKTA) declared the next dividend ($0.165) to be payable on July 14 to stockholders of record as of July 7. The stock has been stable and moving mostly sideways above its 200-day line (and 15% off the high of 102 from April). Revenue through the first two quarters of the fiscal year has grown 16.6% while EPS is $7.10, up 35%. BUY A HALF

Inspire Medical Systems (INSP) worked its way up to 200 last week – a nice move from the May low of 143 and above the 189 – 198 zone that served as support from December through March. Shares are back into the low-to-mid-180s now and right on their 50-day line. I moved to buy a few weeks ago and will stick with that rating now. The trends here have been very strong and, provided no slip ups, an even slightly more constructive market in the back half of the year could mean material upside in INSP. BUY

Procept BioRobotics (PRCT) has been sliding over the last four sessions – sort of surprising performance given B. Riley initiated coverage last Thursday with a “buy” rating and 53 price target (almost 70% upside implied). Recall that Aquablation awareness and procedure volumes are ramping up. It’s not out of the realm of possibilities that the procedure captures twice the benign prostate hyperplasia (BPH) case mix in two years that it captures today (from roughly 9% to 18%). HOLD HALF

Rani Therapeutics (RANI) is trading back around 10 after a fierce rally last week that, at one point, had the stock up more than 50% from its low of 8 on June 13. The move isn’t all that noticeable on the chart, which is illustrative of how much stocks could explode when the market turns around. No new news on RANI since Wedbush initiated coverage on 6/13. That coverage is almost certainly a major factor in the stock’s rally. BUY HALF

Revolve (RVLV) was sold two weeks ago and hasn’t done anything notable since. SOLD

Repligen (RGEN) had a nice day last Thursday (+7.8%) and has added a little more since. A move through the 170 – 175 zone (stock near 162 today) would be significant and might even earn RGEN an upgrade to buy. But we’ll stick with hold for now. HOLD

Sprout Social (SPT) made a quick run to near 70 on Friday (+13%) but has since given that back. We’re looking for Sprout to grow revenue in the 32% to 36% range over each of the next two years and come close to non-GAAP profits in 2023 (2021 adjusted EPS was -$0.13). HOLD HALF

Xometry (XMTR) is still moving sideways in the 30 – 40 range and 26.6 (struck on May 12) continues to look like a low (at least for now). This week the company announced more progress integrating the Xometry marketplace and Thomasnet.com Platform (acquired last year) and upgrades to improve workflow and user experience for both enterprise buyers and for suppliers. HOLD

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