Seeking “Clear and Convincing” Data
After trading as low as 1139 on May 12 the S&P 600 Small Cap Index has staged a modest recovery, crossing back above the January and February lows of around 1230 two weeks ago. While more progress to the upside would certainly be welcome, this is a relative victory right now. It may be that 1230 is the level that needs to hold through the early months of QT (10-year has moved higher from 2.74% since QT began last week, now at 3.05%) and the major upcoming data releases for the index to truly firm up and behave better into the end of the year.
But there’s a lot of critical data we need to get through for that to happen.
Some of that includes tomorrow’s release of Consumer Price Index (CPI) data for May. We would really, really like to see some easing in the inflation data, but there are some challenges to overcome.
Specifically, gas prices, rent prices and grocery prices may overpower what seems like easing prices on consumer durable goods and used cars. The Fed needs to cool down the housing market. It looks to be succeeding so far (higher mortgage rates and still-high prices have crushed housing affordability) but it will take some time for the “benefit” to show up in the data.
Oil/gas prices are another problem. That’s a whole conversation right there. At a high level, the Russia-Ukraine conflict clearly isn’t helping. But there is also some question as to the political will of the Biden administration to really enact programs that could drive down gas prices when high prices may help spur EV sales. Again, a whole conversation. I’ll leave it there today as the bottom line is $5/gallon gas isn’t going to help CPI.
Next week (June 14 – 15) the FOMC meets. A 50 bps hike is expected. The next meeting is July 26 – 27. Another 50 bps hike is expected. There is no meeting in August.
On July 28 we get the first reading of Q2 GDP. Estimates from GDPNow have been trending lower. A few weeks ago the growth estimate was 2.4%, then it went to 1.8%. This week it went to 0.9%. Next update is next Wednesday. Recall that Q1 GDP fell, so if Q2 is negative then that’s recession. Maybe it’s already priced in?
The S&P 600 Small Cap Index is now trading with a forward PE of 12.3. While that’s up from around 11.7 from a few weeks ago it’s still very inexpensive relative to history.
We’ll continue to monitor all this data while looking for diamonds in the rough that we can buy at a discount.
Recent Changes
Inspire Therapy (INSP) upgraded from HOLD to BUY
Updates
Avalara (AVLR) is down modestly from last Thursday’s close but up over 6% from last Wednesday’s close thanks to an 8.6% rally last Thursday. The stock is now up in five of the last six weeks and is among the group of software stocks that is making a sneaky run from what seem like very depressed levels in May. There’s no new news. Avalara should deliver revenue growth in the low- to mid-20% range this year and next, and 2022 should be its last year of negative EPS (-$0.06 expected this year, $0.21 expected in 2023). AVLR’s trailing EV/Revenue multiple is currently 9.7. It dipped below 8 in May. This is as “cheap” as the stock has been since 2019 (even cheaper than during the 2020 market crash). HOLD a Quarter Position
CS DISCO (LAW) presented at Bank of America’s Global Technology Conference yesterday. I wasn’t able to catch the presentation and haven’t seen any notes on it yet but will relay talking point once I have them. The firm has remained bullish on LAW and currently has a 41 price target on shares. Recall that highlights from the Q1 earnings report included revenue growth of +63%, international grew nearly 2x (U.K. up the most), robust hiring trends (hopefully not overpaying on salaries) and the Congruity360 acquisition, which could speed up enterprise adoption (that would be very nice). This week we learned DISCO has a new Chief Marketing Officer (Tom Furr) and a new VP of Product Strategy (Katie DeBord). The stock hasn’t done much over the last week and isn’t making the same progress as some other software stocks. This could be due to the consumption-based business model, which is a little tougher to model. That said, DISCO management has a tendency to under-promise and over-deliver. BUY
DigitalOcean Holdings (DOCN) is our newest addition. It’s like a smaller version of the cloud services provided by the mega-tech companies. We’ve started with a half-sized position. DigitalOcean offers a cloud computing platform with on-demand infrastructure and platform tools for developers, start-ups and small-to-medium-sized businesses (SMBs). It has over 620,000 customers. Users include software engineers, researchers, data scientists, system administrators, students and hobbyists. These customers use DigitalOcean’s platform across many industries and for a wide range of use cases, including web and mobile applications, website hosting, e-commerce, media and gaming, personal web projects and managed services. Management sees DigitalOcean as being able to grow revenue above 30% for years while generating 20% free cash flow margins. The term “cash machine” has been uttered! Anticipated cash flow will be used to invest in the business, product development, M&A and (possibly) share buybacks (as we’ve seen lately). In my report I forgot to mention that DOCN recently acquired CSS-Tricks (March 15, 2022) which will add considerably to monthly website visitors. The company generates a lot of new customers from its web properties, and over time they tend to grow spend with DOCN. DOCN is a story that many investors have likely tuned out of given the pressure on higher growth names. While timing a rebound is impossible a half position now seems sensible. Management hosts an investor day today at 1 pm ET (link here). BUY A HALF
Ingles Markets (IMKTA) was added in early May and is down around 7% from our entry point. Thanks WMT and TGT. The stock took a hit after those two mega-retailers delivered downbeat commentary on consumer spending, inventory levels, etc. back in mid-May. But as I said then, and maintain now, Ingles doesn’t sell all the stuff mega-retailers do. It’s a grocery store and is ramping up offerings of prepared food, store brands, pharmacy items and other more basic supplies. These are exactly the types of items that continue to sell well at WMT, TGT and other retailers. I like it. BUY A HALF
Inspire Medical Systems (INSP) cracked below support in the 190-195 range in early May and appears to have bottomed near 142 after that four-day selloff. With the stock having since recovered back to 190 and making relatively consistent upside progress, I’m upgrading to buy. It may be that a fund needed to reduce their INSP position in May and that drove the extreme weakness, though I don’t have the hard data to support that theory. In any event, INSP is up 9% from last Wednesday’s close and 2.5% from last Thursday’s close. The annual SLEEP conference passed this weekend and management now moves on to the Goldman Sachs Global Healthcare Conference next week (June 14). Upgrading to buy. BUY
Procept BioRobotics (PRCT) is about flat over the last week but down roughly 10% from last Thursday’s close given that the stock rallied about 10% last Thursday. We’re continuing to hold half after taking a profit of 46% on our first half just two months after buying in. One bit of incremental good news this week is that five new regional private insurance plans have issued positive coverage policies of Aquablation therapy. These include three BCB Association healthcare plans, Medical Mutual (Ohio) and Presbyterian Healthcare Services (New Mexico). Total new lives covered is 8.5 million. HOLD HALF
Rani Therapeutics (RANI) is in a downtrend as there’s no catalyst on the immediate horizon. This isn’t atypical for a microcap biotech stock. They tend to move much more when something significant happens and sort of waffle the rest of the time. 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). Recall that early preclinical results showed RaniPill HC administered daily had similar pharmacokinetics to injected biosimilar Humira over five days. 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. This is a higher risk/higher potential reward investment. BUY HALF
Revolve (RVLV) could have bottomed on May 24. The stock’s action over the last three weeks has been encouraging and shares are up 13% since last Wednesday’s close. This is in the context of a weird retail environment where – if we boil it down – it’s sounding like more affluent consumers continue to spend while lower income consumers are pulling way back. That’s not remotely surprising given gas prices and the end of direct cash deposits from the federal government. How long this bifurcated spending environment will persist is the big question. We’ll maintain RVLV at hold for now. HOLD
Repligen (RGEN) continues to look like a bargain below 200. Shares moved back above their 50-day moving average line two weeks ago and have held above since. At that time they also moved back above 162, which is a consolidation base that lasted from last February through almost the end of last July. If RGEN can continue to hold above 162 for another week or so, I’ll likely move back to buy. HOLD
Earnings: Done
Sprout Social (SPT) has put together a couple of decent weeks and hopefully we’re looking at 38 as the low and 48 as a new support zone (stock near 55 now). Still, there’s not really enough of a trend here to warrant moving back to buy right now. Continue to hold. Management spoke/will speak at a number of conferences this week including William Blair (Tuesday), Baird (Wednesday) and Stifel (today). HOLD HALF
Xometry (XMTR) is behaving about like our other software stocks. We saw a potential bottom in early May and a couple of more encouraging weeks since. But the stock is still relatively week. We’re hanging in there because XMTR has the potential to be a big winner when things turn up. It’s a disruptive on-demand marketplace for sourcing manufacturing parts/materials/services (CNC machining, sheet metal, casting, injection molding, 3D printing, etc.). Revenue should be up over 80% this year then around 38% in 2023. HOLD
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 6/9/22 | Profit | Rating |
| Avalara (AVLR) | 2/1/19 | 40 | 86 | 115% | Hold Quarter |
| CS Disco (LAW) | 9/2/21 | 57 | 21 | -63% | Buy |
| DigitalOcean Holdings (DOCN) | 6/2/22 | 49 | 46 | -6% | Buy Half |
| Ingles Markets (IMKTA) | 5/5/22 | 95 | 87 | -9% | Buy Half |
| Inspire Medical (INSP) | 10/4/19 | 59 | 188 | 221% | Buy |
| Procept BioRobotics (PRCT) | 3/3/22 | 25 | 40 | 58% | Hold Half |
| Rani Therapeutics (RANI) | 10/7/21 | 17 | 10 | -44% | Buy Half |
| Repligen (RGEN) | 11/2/18 and 12/31/18 | 59 | 161 | 173% | Hold |
| Revolve Group, Inc. (RVLV) | 4/1/21 | 46 | 33 | -28% | Hold |
| Sprout Social (SPT) | 9/3/20 | 36 | 55 | 50% | Hold Half |
| Xometry (XMTR) | 1/6/22 | 53 | 34 | -36% | Hold |