Tuesday’s CPI report served up a 0.02% miss, which sent the market into a tailspin. The Nasdaq fell more than 5%, its worst day since 2020. The S&P 500 Index fell 4.3%. And small caps? The S&P 600 fell 3.9%
Now, a nearly 4% fall for small caps is pretty awful. But it was a relative win and, so far, the index has held above last week’s low.
This may be because investors are waking up to the realization that small caps offer more insulation than larger companies from all the overseas issues and relatively weak foreign currencies.
Or because small caps continue to trade at a steep discount to large caps. The S&P 600 index has a forward P/E of 11.5 whereas the S&P 500 has a forward P/E of 16.6.
Or, maybe there’s no explaining why small caps were a little more resilient on Tuesday. In any event, we continue to enjoy a portfolio that’s doing relatively well in an iffy market. And buying into some names when it seemed like the sky was falling has helped a lot.
One thing on the CPI report before we get into individual stocks.
You won’t hear me saying 8.3% inflation isn’t a big deal. But the report didn’t break the thesis that inflation has peaked and could be getting better in the quarters ahead.
In fact, the Fed’s preferred inflation gauge, the Personal Consumption Expenditures Deflator (PCED) (numbers to be released on September 30), could come in much better than the CPI numbers did.
Credit to Yardeni Research for breaking down the exact reason. It boils down to this: CPI has a 31% weight for shelter (which includes rent and a weird calculation for property owners that tries to estimate some rent equivalent). That weighting is almost 4 times higher than the weight for energy and 2.5 times the weight for food.
Shelter costs have been going up, helping drive up CPI.
In contrast, the shelter weight in the PCED figures is a more normal-seeming 15%. So the PCED reading will be less influenced by rising shelter costs and therefore should enjoy more of the benefit of falling energy prices.
That probably won’t stop the Fed from hiking by 75bps next week. But it might help justify NOT hiking by 100bps. And if that happens we could see the market firm up in the middle of its recent trading range and keep looking toward better days ahead in 2023.
Recent Changes
Ingles Market (IMKTA) moved to SELL on 9/14/2022
Updates
DigitalOcean Holdings (DOCN) hasn’t released any news since the closing of the Cloudways acquisition last week. I saw a note from Morgan Stanley in which the analyst stated the company’s M&A strategy is focused on the three areas of content to drive awareness, products that are complementary and incremental to current products and/or that help accelerate growth in the small business market. Cloudways fits into the third bucket. We have a half position and I’m contemplating adding to it. BUY HALF
Evolent Health (EVH) is our latest addition and continues to hold up well even in an iffy market. The company’s mission is to help transition the healthcare industry to a value-based model from a fee-for-service (FFS) reimbursement model through use of clinical and administrative software solutions. Revenue was up 44% in Q2 growth and could approach 50% this year, and close to 30% next year. BUY
Flywire’s (FLYW) latest deal (announced yesterday) is with Universitas XXI, a university management system focused on higher education in Spain and Latin America. The stock took an intra-day hit during the market selloff on Tuesday but bounced back by the close and traded up modestly yesterday. Today management is speaking at the Autonomous Future of Commerce Symposium. BUY HALF
Ingles Market (IMKTA) dropped below its 200-day line in the beginning of September and despite putting up a little fight fell through it again and sold off again yesterday. Yes, it’s a modest loss for us (less than 10%) but I decided to take it anyway as I’ve seen other grocery store stocks sliding lately. Interestingly, a number of the higher beta/risk stocks have held up more or less fine, even on horrible days like Tuesday. Wary of taking a bigger loss on what should be a low-risk stock I elected to ditch IMKTA yesterday. SOLD
Inspire Medical Systems (INSP) has enjoyed a little rally over the last week that was only slightly dented by Tuesday’s declines. Yesterday the company put out a press release recapping posters and presentations from the International Surgical Sleep Society (ISSS) and American Academy of Otolaryngology (AAO-HNSF) meetings which took place in Philadelphia September 9-14. I won’t repeat it all but bottom line is the data continues to show the robust safety and efficacy of Inspire’s solutions and the improvements of newer technologies. HOLD
Procept BioRobotics (PRCT) hit a new high last Friday and has drifted 11% below that high water market this week. Still, all things considered there’s very little to complain about here. The big rally early last week made PRCT a high tree for sure and it’s a little less exposed now. We’ll stick with a hold rating. HOLD
Rani Therapeutics (RANI) continues to bounce around and will likely keep it up until there’s some sort of catalyst. The most likely catalyst will be data of the repeat-dose portion of the phase 1 RT-102 study (due in Q4), initiation of the third phase 1 study to further develop the high capacity RaniPill, and/or the pre-IND meeting with FDA for the phase 2 RT-102 study (also in Q4). HOLD
Repligen (RGEN) landed at its 50-day line near 210 last week and has been able to gain altitude since. Shares are back to where they were at the start of the week, basically shrugging off Tuesday’s declines. No new news. HOLD
Sprout Social (SPT) hasn’t released any news lately but the stock has shown signs of life over the last week or so. Granted, Tuesday was a small setback but SPT had been poking its head above its 200-day line just prior to that and is back at it again today. Might be looking at this with rose-tinted glasses but still, a long sideways movement followed by flirtation with a long-term trend line isn’t insignificant. HOLD HALF
TransMedics Group (TMDX) continues to trade near all-time highs and is clearly attracting attention. With the trends in the business remaining strong in Q2 the expectation is that momentum is building as TMDX now has three organs approved (liver, heart and lung) and the NOP is seeing higher utilization. This is a tricky spot for investors that want to buy in at this level since continued progress should send TMDX higher but any misstep could knock investor confidence back a notch. Balancing it out we’ll stick with hold. HOLD
Xometry (XMTR) has posted impressive performance over the last two months and while I wasn’t surprised the stock made it back to the 55 level it struck after the Q2 report, I am surprised how quickly XMTR got back there. I upgraded to buy a week ago and with shares looking to move through January’s high of 59.3 we’ll stick with a buy rating for now. BUY
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 9/15/22 | Profit | Rating |
| DigitalOcean Holdings (DOCN) | 6/2/22 | 48.7 | 44.2 | -9% | Buy Half |
| Evolent Health (EVH) | 9/2/22 | 36.7 | 39.1 | 6% | Buy |
| Flywire (FLYW) | 8/4/22 | 24.6 | 25.6 | 4% | Buy Half |
| Ingles Markets (IMKTA) | 5/5/22 & 7/28/22 | 94.5 | SOLD | - | SOLD |
| Inspire Medical (INSP) | 10/4/19 | 58.5 | 198 | 239% | Hold |
| Procept BioRobotics (PRCT) | 3/3/22 | 25.0 | 44.8 | 80% | Hold |
| Rani Therapeutics (RANI) | 10/7/21 & 7/28/22 | 14.2 | 8.86 | -37% | Hold |
| Repligen (RGEN) | 11/2/18 & 12/31/18 | 59.2 | 232.3 | 293% | Hold |
| Sprout Social (SPT) | 9/3/20 | 36.5 | 65.9 | 81% | Hold Half |
| TransMedics Group (TMDX) | 7/7/22 | 34.1 | 52.5 | 54% | Hold Half |
| Xometry (XMTR) | 1/6/22 | 51.9 | 59.8 | 15% | Buy |