March 10, 2022

It has felt like a horrible week, but the reality is that, despite both the Nasdaq and the Dow both falling into correction territory, all but two of our stocks have held above their previous lows. Only Avalara (AVLR) and Repligen (RGEN) broke ranks to dip a little below support. We have a few stocks - Joann (JOAN) and Procept BioRobotics (PRCT) in particular – with constructive looking charts.

That’s not to say our portfolio is firing right now. We have plenty of stocks that are grinding sideways. But from what I see, most of our names are holding up OK even in a very volatile market.

More broadly speaking, the S&P 600 Small Cap Index is working its way through this tumultuous period relatively unscathed. I think there’s something to be said for maintaining exposure to a more domestic-focused group of stocks, especially when they (i.e., small caps) continue to trade at a discount to their larger market cap peers.

All of that said, let’s not put too much lipstick on this pig. The market is mostly garbage right now, save for areas like energy and other commodities. But corrections are a process, and this too shall pass.

To get more bullish I’d like to see continued strengthening in some of the sectors that investors seem to be wading back into, like MedTech, that are stacked with U.S.-focused small caps that can still grow very rapidly even in the face of rising costs, rising rates and all the other macro issues plaguing the world.

In short, it continues to be a market where we want to be careful, keep plenty of cash on hand and be very patient with new buying. Even though everything seems dire and negative, opportunities are popping up. And spring is right around the corner!

Recent Changes
Arena (ARNA) moved to SELL SECOND HALF on Tuesday, March 8

Updates
Arena Pharmaceuticals (ARNA) jumped over 5% Tuesday to close the gap to Pfizer’s (PFE) proposed 100 takeout price to within 2%. With so little upside remaining (absent a competitive bid) we elected to sell the second half of our stake to lock in a 152% gain. Congrats to those of you that were patient enough to stick with me on this one. It took a while (we first bought ARNA in 2018) but it was worth it. ARNA outperformed the S&P 500 by over 2.5-times since we jumped in. SOLD
Earnings: Done

Avalara (AVLR) remains in the dumps and was caught up in the selling that began early last week. No new news and we’re maintaining at hold. The challenge for the stock now is that rising gas prices have investors concerned about consumer spending, which could limit purchase on clothes, furniture, travel, etc. HOLD
Earnings: Done

CS DISCO (LAW) reported on Feb 24 that revenue was up 76% to $73.8 million (easily beating consensus of $28.5 million) while adjusted EPS of -$0.10 beat by $0.07. Guidance for 2022 calls for 28% - 32% revenue growth ($146.8 - $150.8 million) versus consensus near $140 million. Adjusted EBITDA loss is seen in the range of -$51.5 to -$43.5 million. Revenue guidance is likely very conservative while the EBITDA guidance shows a bigger loss than analysts expected. As I mentioned in my notes on the quarter, the report would likely drive LAW higher in a stronger market. But that’s not what we have at the moment. Still, shares of LAW have held above the 27 low over the last two weeks. Sticking with it. BUY
Earnings: Done

Inspire Medical Systems (INSP) continues to look relatively stable, trading above both its 200-day and 50-day moving average lines a month after reporting. Management seems to have navigated the pandemic extremely well. With almost 40% revenue growth expected this year (likely conservative) we’re sticking with it. HOLD
Earnings: Done

Procept BioRobotics (PRCT) reported Tuesday morning and I detailed the results later in the day. The quarter was great. Revenue of $10.1 million (up 216%) was at the high end of the preliminary range, as was full-year revenue (up 347% to $34.5 million). Management also issued 2021 revenue guidance of $54 - $58 million (up 57% - 68%). This was well ahead of consensus estimates for $50 million. Management said 70% of new systems were for new accounts and they see the pace increasing in early 2022. Adoption seems to be very strong, though the high mix of new accounts will pull utilization down (new accounts do fewer procedures until they ramp up). Q4 utilization was 5.3 bringing the average for 2021 to 3.8. It seems rational to expect around 4 to 4.3 in 2022. Management indicated they think the five-year data from the WATER study could help tip the scales at UnitedHealth and Aetna, which are two of the larger private payers not yet covering Aquablation. Altogether a good quarter. Don’t get thrown off by reports of analysts downgrading their price targets – this is going on across the board as “peer multiples” have come down. BUY

JOANN (JOAN) is one of the few companies we have that still needs to report. The date is next Thursday, March 17 after the market closes. Keeping at buy through the event. JOAN currently yields 3.7% and has closed the gap from the February 22 selloff (shared down 8.5% that day). BUY
Earnings: Thursday March 17

Nova LTD (NVMI) has been trading in roughly the same pattern as the broader semiconductor group. A February note from Bank of America theorized that analysts are far underestimating the cloud server capex growth of the mega-cap tech companies (GOOG, MSFT, AMZN, FB) given their spending trends. That implies upside to Nova expectations as well. The stock is trading modestly above where it was after reporting a few weeks ago. The dip last week and early this week prompted management to announce a $100 million share repurchase program (open market purchases). BUY
Earnings: Done

Rani Therapeutics (RANI) has yet to give us the Q4 earnings report date. When it arrives investors will be looking for updates on three clinical studies: RT-101 (acromegaly), RT-102 (osteoporosis) and RT-109 (growth hormone deficiency). No revenue is expected through 2023, which is about when Rani would need to raise capital. The standard playbook is for management to wait until they have good clinical results to reveal then if/when the stock gets a jolt to follow up with an offering. I suspect we’re a good ways away from that point, both in terms of duration and share price. BUY

Revolve (RVLV) has been on a wild ride lately as investors try to sort out what consumer spending trends will look like this spring and summer against a backdrop of a really messed up macro environment with rising costs (such as gas prices) that could curb consumer spending. I’ve kept at hold following the Q4 report (which was impressive) given all the news out there. RVLV held support at 40 this week. HOLD
Earnings: Done

Repligen (RGEN) dipped below support at 172 on Monday (but has since recovered to around that level) to retest the May 2021 support zone around 162. No new news. HOLD
Earnings: Done

Shutterstock (SSTK) has been more stable that a lot of small-cap names, likely because of its profit profile (EPS in last quarter was $0.77, has room for margin growth in 2022) and 1.1% yield. This week management announced it is donating $1 million to its contributor community in Ukraine (photographers, videographers, 3D artists, illustrators and musicians). BUY
Earnings: Done

Sprout Social (SPT) held above support at 49 this week (it dipped to 53.9 Tuesday morning). This week management announced a collaboration with Salesforce.com (CRM) to make it easier for Salesforce customers to manage their full social media presence – engagement, publishing & scheduling, analytics, listening, advocacy and platform integrations – through Sprout’s industry-leading social suite. HOLD HALF
Earnings: Done

Xometry (XMTR) reported preliminary results on January 31 (revenue within the expected range and above Q4 guidance) and will release official results after the market closes next Thursday, March 17. Analysts are looking for Q4 revenue of $63.3 million (+67%) and adjusted EPS of -$0.30. Revenue guidance for 2022 needs to surpass $390 million (+86%). 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.