Well, the market got exactly what it expected yesterday when the Fed hiked by 75bps (the odds were over 80% that’s what they’d do). Fed Chair Jerome Powell’s messaging was consistent with what he said back in August in Jackson Hole.
The short version is they’re going to do whatever they need to do to get inflation under control because not doing so would be worse than the alternative. No change there.
On the surface that makes sense. We can’t have a well-functioning economy when house prices are up double digits month over month, used cars are worth more than they cost brand new just a year before and it costs $100 to fill up an average-sized SUV.
Of course, the market doesn’t really like the idea of higher-for-longer when it comes to interest rates. Especially when the Fed doesn’t exactly have control over global supply chains, what happens in Ukraine, etc.
Stocks were mostly drifting lower into the event, then the selling accelerated afterward.
It is a little strange when something so widely expected comes as a “surprise.” However, drilling down a little there are some changes in the committee’s forecasts (technically called the Summary of Economic Projections) that weren’t exactly positive.
Most notably, the median Fed Funds rate for this year goes from 3.4% to 4.4% and for next year goes from 3.8% to 4.6%. The Fed’s GDP expectations also drift lower next year, to 1.2% from 1.7%.
On inflation (they use PCE) they now expect 5.4% this year and 2.8% next year.
It is awfully easy to listen to this and watch the market’s reaction and think “DOOM!”
But it’s hard to invest with that mentality. Things will get better, and in the meantime, it’s all about keeping new positions on the small side and having plenty of capital on the side ready to deploy when things do improve.
If we want to look at the glass as half full and think the Fed will get this right (I know, I know) here’s something of a playbook that shows we are further through this process than casual observers might think.
The Fed’s current target rate is now 3% to 3.25%. With no meeting in October, we should expect 75bps in November and another 50bps in December (granted we’ll get a lot of new data over this timeframe that could change things, possibly for the better, maybe for the worse). That gets us to 4.25% to 4.5% by New Year’s.
Maybe we get a couple more 25bps hikes in the first part of 2023.
Given that housing is already in a fierce recession (6.3% 30-year mortgage rate, anybody want to be a mortgage broker right now?) and other areas of the economy are sure to follow, it’s hard not to believe the Fed is not on its way to achieving its goals.
Of course, the risk is that they overshoot and the soft landing (i.e., rolling/light/no recession) idea goes out the window and we get a hard landing (i.e., full-blown recession). That risk, which is higher now, is why the market continues to struggle.
There are lots of ways we can interpret all this and second guess the Fed’s approach, but the bottom line is this is the environment we’re in, so we have to deal with it. Don’t expect the broad market to go racing higher unless we get a VERY good inflation report next month, there is a good resolution to the war in Ukraine, or some other really big-picture good event.
More likely is we remain rangebound through the beginning of 2023 (hopefully not making new lows). In this environment, there will be individual stocks that outperform by a wide margin.
When it comes to small caps, the S&P 600 Index is currently approaching its June low (2% below where we are now) and using current forward estimates is trading with a forward PE of 11.2, which is just dreadful.
Most of our stocks were holding up well, until the last day or two. We’re dealing with some selling pressure now. However, given that there weren’t any major surprises from the Fed, I’m not making any big changes today. We’ll continue to give our portfolio a little room to digest the week’s events.
Recent Changes
Xometry (XMTR) moves to HOLD
TransMedics (TMDX): Sold A Quarter on Friday, 9/16
Updates
DigitalOcean Holdings (DOCN) continues to trade in the same 37 to 50 range that has persisted since this spring. The stock is down a little over the last week but not nearly as dramatically as many other tech stocks. DigitalOcean offers a cloud computing platform with on-demand infrastructure and platform tools for developers, start-ups and small-to-medium-sized businesses (SMBs). Its cloud infrastructure products are like a more niche-focused version of those offered by the hyperscalers (GOOG, AMZN, MSFT). BUY HALF
Evolent Health (EVH) is taking its first shot on the chin today (-5.5%) as the stock is down near its 50-day line for the first time since mid-July (it came close a month ago but stayed above the 50-day). All things considered, this is a relatively low-risk play for us, and while a dip of 5% is notable I continue to see EVH as an attractive stock for this environment. 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 the use of clinical and administrative software solutions. Revenue was up 44% in Q2; growth could approach 50% this year, and close to 30% next year. Management will speak next Thursday at the BofA Healthcare Innovation Forum. BUY
Flywire (FLYW) has slipped 5% below our entry point and, at 23, is right around a support level from the beginning of the month. The company is a small fintech player with industry-specific digital payment solutions for the education, healthcare, travel and business-to-business (B2B) markets.
Its solutions make it easier for clients to get paid and for their customers to make secure, efficient electronic payments. The biggest markets – education and healthcare – are pretty resilient and have been strong coming out of the pandemic so I think it’s worth being patient as the stock rolls with the broad market’s punches. We have a half position and are waiting to try and be opportunistic buyers of the other half. BUY HALF
Ingles Market (IMKTA) was sold a few weeks ago and thus far that has been the right call. Still keeping an eye on IMKTA (and other grocery store stocks) but not yet tempted to wade back in. SOLD
Inspire Medical Systems (INSP) has also taken a hit today and fallen below 178 for the first time since it crossed back above that level in late June. Big picture, no change here. This is a sympathy move given the broad market’s weakness. This year, revenue will be more than double what it was in 2020 and we should start to see some leverage on the bottom line heading into next year too (INSP is still not profitable). HOLD
Procept BioRobotics (PRCT) hit a new all-time high a couple of weeks ago but has given that move back since. There may have been some support from new coverage at Wells Fargo during that move. Procept is a surgical robotics company specializing in solutions in urology. It invented the AquaBeam Robotic System (FDA approval in 2017), an advanced, image-guided, surgical robotic system for use in minimally invasive urologic surgery. This week we learned the company has a new contract with a Western U.S.-focused health system (Providence) to supply AquaBeam Robotic Systems. As of the end of June (i.e., end of Q2) seven systems had been installed. The press release didn’t say if this is the total number of systems to be installed (would seem unlikely) or how many the contract was good for. Not yet ready to buy this dip. HOLD
Rani Therapeutics (RANI) is a very early-stage biotech company, so we let these types of stocks bounce around and don’t worry too much about price movement between catalysts (within reason). The next potential stock-moving events 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 the FDA for the phase 2 RT-102 study (also in Q4). HOLD
Repligen (RGEN) is following a number of other medical technology stocks and slipping below a support level today (200). The stock’s drop is being exacerbated by a move below its 200-day line (we saw the same thing back in January) which is probably where sell orders were hovering. I’m not worried about the business. It’s worth noting that Danaher (DHR) talked just a couple of weeks ago about how it’s raising its 2024 growth outlook due to strength in the bioprocessing market (i.e., Repligen’s core market). And just this week, Repligen management held its Analyst Day and gave long-term financial guidance of $2 billion in revenue by 2027-28. That suggests average growth of 20% a year, which is slightly above expectations. And it illustrates the strength of the market even as Covid benefit tails off. I hate to see one of our long-term holdings sell off but am also intrigued as we get into what seems like a “stupid price” range (again). Keep holding. HOLD
Sprout Social (SPT) was holding up well through yesterday but is selling off today in sympathy with the broad market. There is no company-specific bad news. In fact, last week the company announced an expanded partnership with Salesforce.com so Salesforce customers can manage all their social customer care requests directly within Service Cloud. HOLD HALF
TransMedics Group (TMDX) defied gravity in July, August and the first half of September. Last week, on Friday, TMDX slipped below 50 and I elected to sell a quarter of the position to lock in a partial gain of 47%. That has been a good call, at least in the short term. TMDX is now 24% below its high, has fallen below its 50-day line today and is sitting smack on support near 42. We’ll hold our remaining three-quarters position. HOLD 3/4
Xometry (XMTR) has, speaking of defying gravity, been doing just that for several weeks. It’s been an incredibly impressive performance. Given the move and the garbage broad market, I’m moving to hold today. Just not worth buying into this strength right now, no matter how good the story and numbers are. 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 9/22/22 | Profit | Rating |
| DigitalOcean Holdings (DOCN) | 6/2/22 | 48.7 | 38.8 | -20% | Buy Half |
| Evolent Health (EVH) | 9/2/22 | 36.7 | 35.9 | -2% | Buy |
| Flywire (FLYW) | 8/4/22 | 24.6 | 23.9 | -3% | Buy Half |
| Ingles Markets (IMKTA) | 5/5/22 & 7/28/22 | 94.5 | SOLD | - | SOLD |
| Inspire Medical (INSP) | 10/4/19 | 58.5 | 171 | 192% | Hold |
| Procept BioRobotics (PRCT) | 3/3/22 | 25.0 | 38.3 | 54% | Hold |
| Rani Therapeutics (RANI) | 10/7/21 & 7/28/22 | 14.2 | 9.30 | -34% | Hold |
| Repligen (RGEN) | 11/2/18 & 12/31/18 | 59.2 | 189.9 | 221% | Hold |
| Sprout Social (SPT) | 9/3/20 | 36.5 | 59.8 | 64% | Hold Half |
| TransMedics Group (TMDX) | 7/7/22 | 34.1 | 42.8 | 26% | Hold 3/4 |
| Xometry (XMTR) | 1/6/22 | 51.9 | 61.2 | 18% | Hold |