May 19, 2022

The volatility continues but we’ve seen most of our stocks hold above previous lows (so far). The S&P 600 Small Cap Index is also holding above its lows from last week.

A bottoming of sorts?

Not calling it yet. But there are some rays of light among an otherwise very gloomy market.

A few notes from the week, and for the upcoming weeks as well.

As of yesterday, the S&P 500 is off 18.2% from its record high. A close below 3,837.3 would mark the official beginning of a bear market (index around 3,918 at time of writing).

Recession fears are also mounting, spurred by the giant misses from both Walmart (WMT) and Target (TGT) yesterday. They are being pinched by higher costs and lower consumer spending in some categories. Remember that last spring people received stimulus checks, which they’re not getting this year.

Despite retail sales rising in both March and April the double whammy of WMT and TGT played a significant role in the market’s collapse yesterday.

There might be a bright side, however. If retailers are getting pushback from consumers they’ll be less likely to hike prices further, and may be forced to discount some items. That would be good for inflation (i.e. lower prices), which is the primary concern at the moment. That said, supply-chain costs may still persist, meaning retailers don’t have tons of wiggle room with all SKUs. What’s good for inflation readings might not necessarily be good for WMT and TGT.

As I mentioned last week, valuations have come way down, especially for high-growth software stocks. Many of these stocks have leveled off this week. That doesn’t mean they can’t go lower, but let’s not look at every glass as half empty right now. More work to be done in software, but one week without things exploding everywhere is “good.”

In terms of next week …

We’ll get a Q1 GDP reading on Thursday. That will be worth watching. The Atlanta Fed’s GDPNow tracking model says we should expect 2.5% growth.

Then in June, the Fed begins the quantitative tightening (QT) process. A key concern here is it propels interest rates higher than just rate hikes otherwise would.

Remember, the Fed will let $30 billion of Treasuries run off each month in June, July and August and do the same with $17.5 billion of agency debt and mortgage-backed securities. Those amounts double starting in September. When it ends is undetermined.

Boring, high-level stuff. But look at how much rate hikes have influenced the market. There will be a lot of headlines about QE tightening after Memorial Day. I’m a bit dubious that the market can put together any sort of sustained rally until we’re well into the QT process and can evaluate what the rate impact is.

We’ll just have to wait and see. In the meantime, we’ll continue to tread carefully, carry lower market exposure than we normally do, diversify into stocks that align with current market conditions and take a few shots here and there at higher growth ideas that should be leaders on the other side of all this.

Recent Changes
None

Updates
Avalara (AVLR) is moving sideways in the 70 – 80 range. The company announced this week the availability of a few new solutions, Avalara Transfer Pricing Reports for Accountants and Avalara Exemption Certificate Management Pro. EV/Forward Revenue multiple of 7 is not demanding. HOLD A QUARTER POSITION

CS DISCO (LAW) enjoyed a pop after earnings last week and has held on to some of the gain. That said, shares are looking about like those in the broader software space (not strong). The company announced the opening of its New York City office. Should be a good stock for us, just needs a better market. EV/Forward Revenue multiple of 7.3 is attractive. BUY

Ingles Market (IMKTA) is our most recent addition and is a small but growing grocery chain based out of North Carolina. Ingles sells groceries and non-food items across a wide array of categories. Second-quarter results were reported a couple weeks ago and revenue was up 16% to $1.38 billion while EPS was up 40% to $3.61. These results mean that at the halfway point in 2022 revenue is up 16.6% to $2.77 billion and EPS is up 35% to $7.10. Shares took a hit yesterday as the news from Walmart (WMT) and Target (TGT) rocked the retail space. But Ingles isn’t WMT or TGT. It’s a grocery store without all the other stuff and is selling more prepared foods, organics, gas and pharmacy items. I’ve had at buy a half and will keep it there. I recommend adding on this pullback, but not up to a full position just yet. BUY A HALF

Inspire Medical Systems (INSP) has continued to come off its lows over the last week. No major news. Management will be speaking at the UBS Global Healthcare Conference on May 25. As I mentioned last week, I’m looking for stability above 150 before moving back to buy. We’ve made some progress but are not there yet. HOLD

Procept BioRobotics (PRCT) traded up to its April high early this week and did a decent job holding up in yesterday’s market rout. Despite the very strong Q1 and forward guidance, which now sits at $58 - $62 million (+68% - 80%), we’ve taken partial profits since they’re so challenging to come by in this market. Continue to hold the remaining half. HOLD A HALF

Rani Therapeutics (RANI) delivered a Q1 update last week that held no surprises. We now turn to trial updates. The Phase 1 clinical trial of RT-102 for treatment of osteoporosis is ongoing and we should get an update in the second half of the year. We should also see a second Phase 1 clinical trial start in the second half of 2022. Rani has $107.8 million in cash, which should get it through the end of 2023. BUY A HALF

Revolve (RVLV) has slipped further this week and the WMT/TGT action yesterday hasn’t helped retail stocks at all. The high-level deal from those mega-retailers is higher costs and consumers being more careful with their dollars. This scenario is likely exacerbated by higher costs for gas, groceries, etc. In terms of Revolve, it’s logical to think demand may be waning if consumers are pulling back. However, are the millennials that shop Revolve the same as those pulling back at WMT and TGT? Not sure that theory holds water with me. We also saw The TJX Companies (TJX), operator of TJ Maxx and Marshalls, deliver a good quarter, further muddying the retail waters. Lastly, I just reviewed notes from an investor meeting with Bank Of America and Revolve management. The gist is that Revolve is saying sales are ticking up, as is frequency of purchase per customer. The kids (OK, some older shoppers too) want to get back out there! Full-price selling remains in the record high 80% range. It should come as no surprise that more affluent consumers have an easier time absorbing higher food and energy costs, and maybe there will be a breaking point for them. But it doesn’t sound like we’re there yet. Giving RVLV a little more rope, though I’m admittedly losing patience. HOLD

Repligen (RGEN) is up modestly from its lows from last week (it had hit 140 for the second time after previously touching that level on April 26). Suffice to say holding that line is important as we look for RGEN to build a base off which it can climb. HOLD
Earnings: Done

Silvergate Capital (SI) was sold before the stock dove last week. SOLD

Sprout Social (SPT) is flat over the last week on no news. Shares are trading with an EV/Forward Revenue multiple of 8.2. That’s quite low, despite the fact that the company is likely to post three consecutive years of 30% revenue growth and be nearly break-even in 2023. HOLD HALF

Xometry (XMTR) delivered a good quarter last week with revenue of $83.7 million (+91% and beat by $2 million) while adjusted EPS of -$0.27 beat by $0.09. Active buyers are up 44% to 30,683. Marketplace accounts with spend over $50K over the last 12 months are up 92% to 790. Cash at end of quarter was $369 million. Shares trade with an EV/Forward multiple of 3.5. That is a very low multiple. Management will be at the JP Morgan Global Tech, Media and Communications Conference on May 23. HOLD
Earnings: Done

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