See-sawing—that’s what these markets bring to mind. And I think we can expect more of the same, due to three factors:
- 1. The war in Ukraine2. Rising inflation—up about 8.4% last month3. Increasing interest rates. Economists now expect the Federal Reserve to raise rates by one-half a percent, in both May and June
- The war in Ukraine
- Rising inflation—up about 8.4% last month
- Increasing interest rates. Economists now expect the Federal Reserve to raise rates by one-half a percent, in both May and June.
- Ease of use
- Better collaboration
- Safer code (more testing, baked earlier into the process, means improved security)
- Tighter feedback loops make troubleshooting easier
- Fewer compliance headaches
- Less technical debt
- Save time, save money
Market Overview
See-sawing—that’s what these markets bring to mind. And I think we can expect more of the same, due to three factors:
I can’t guess how the war in Ukraine is going to end. But I do know that uncertainty is boosting commodity prices (especially oil, which has declined a bit to around $100/bbl). And it is also making conservative industries, such as Industrials and Consumer Defensive attractive to investors.There’s not much we can do about inflation right now. March’s CPI rose by 8.5% from a year ago, the fastest annual gain since December 1981, and higher than estimated, helped along by big price increases in food, energy and home prices.The real estate market is still inventory-short, and prices continue to rise, although on a local level—here in Tennessee—the price increases seemed to have narrowed a bit. I’m giving this market another six months or so, before it becomes more equally weighted between sellers and buyers.There’s still good news on the unemployment front, as the March unemployment rate dropped 0.2% to 3.6%. That’s pretty healthy, and there are still “Now Hiring” signs on virtually every street.The only stock sectors that are up in 2022 are Energy, Utilities, and Consumer Staples, which have gained 39%, 6%, and 1.7%, respectively.Yet, earnings continue to be healthy. According to FactSet, 20 of the companies in the S&P 500 Index that have reported results for the first quarter have seen a 4.5% rise in income. Positive EPS surprises were noted for 14 companies and 16 have reported a positive revenue surprise.The Technology sector has dropped more than any other sector this year, down around 14.8%. There are some great tech companies that are now trading at very buyable levels—through no fault of their own. And that scenario is what has led me to my recommendation this month—a company whose shares have declined about 64% over the past 52 weeks. Sure, it’s a cutting-edge company; and maybe it’s shares got too far ahead of themselves. But today, it looks very buyable. So, let’s take a look at it.
Featured Recommendation
GitLab Inc. (GTLB): Making Collaboration Better and More Efficient
This month, I am recommending a technology company that was initially picked by Tyler Laundon, Chief Analyst of Cabot Early Opportunities. The company is GitLab Inc. (GTLB), and it develops software for the software development lifecycle in the United States, Europe, and the Asia Pacific. This San Francisco-based business’ prime focus is on GitLab, a DevOps platform, which combines the ability to develop, secure, and operate software in a single application. That efficiency leads to faster cycle time and better control over various stages of the DevOps lifecycle.Here’s Tyler’s take on GitLab:
As the digital economy grows and businesses prioritize digital transformation, teams of developers are constantly creating and tweaking software applications. This is done through a process called DevOps. And at the center of DevOps is creating, reviewing and deploying code.To keep all this work organized, software developers need a myriad of tools to collaborate, share, track changes and resolve code conflicts. In short, they need a source code management (SCM) platform.That’s where GitLab (GTLB) comes in.GitLab provides an end-to-end DevOps platform that functions as a system of records for source code. The platform has tools that software developers across all industries can use to develop and deploy applications quickly, efficiently and at scale.Over time, GitLab’s strategic importance to its users is growing. This is happening for a few reasons. For starters, as developers create and manage more code on GitLab’s platform, their reliance on the company grows and their incentive to use disparate solutions from other providers decreases. It’s far easier to use one platform that does everything they need.Moreover, as the market evolves, GitLab is creating more DevOps tools to meet the needs of its growing user base.This is the same type of trend that evolved in the early days of other software categories. We saw it in customer relationship management (CRM) where Salesforce (CRM) emerged as the winner (market cap has expanded from $1.1 billion to $203 billion since 2004) and with human capital management (HCM) and enterprise resource planning (ERP) markets where Workday (WDAY) has risen to the top (market cap of $7.7 billion has expanded to $58 billion since 2012).In the SCM market, the stakes are high. The quality and stability of an organization/application’s source code is everything in the digital economy. No application exists without source code. And having a platform that permits near-instantaneous changes can mean success or failure for users that rely on that application.While there are other solutions out there, including GitHub from Microsoft (MSFT) and BitBucket from Atlassian (TEAM), GitLab is seen as being led by a visionary management team, having a great culture, and having the best platform in the SCM industry, which is growing toward $50 billion by 2025.In short, while it is in the early days, GitHub has the potential to be the “winner” in this market.Revenue is expected to grow by 52% to $70.3 million in Q4 fiscal 2022 (no date set yet) while EPS is seen around -$0.25. That result would mean fiscal 2022 revenue growth of 64% ($250 million) and EPS of -$1.40.In fiscal 2023, revenue is seen up 36% to $340 million while EPS is seen improving 26% to -$0.04.GTLB came public at 77 on October 14, 2021, and jumped 35% the first day. Shares advanced as high as 137 by November 9 before going on a multiweek slide that ended at 70 in mid-December. After a brief relief rally that carried GTLB back to 98, shares retreated again, ultimately landing at 53 on January 24.Just recently, Tyler updated his recommendation on GTLB:I am maintaining the stock at buy following this week’s earnings report. While shares have continued to slide (except for March 15 and 16) we have lockup expiration this week and the earnings report was terrific. If investors come back to higher-growth software names even a little GitLab should be one of the names that sees inflows. That said, it is on a tight leash.Nancy’s notes on GitLab’s earnings:As Tyler mentioned, GitLab reported a great fiscal 2022 fourth quarter, ending January 31. Revenue climbed 69% year over to $77.8 million, due primarily to GitLab’s dollar-based net retention rate, which measures sales to existing customers during a 12-month period compared to the prior year, which came in at more than 152%. The company said that its customers generating more than $5,000, $100,000, and $1 million grew 67%, 74% and 95%, respectively, compared to the year-ago quarter.However, the company is not yet profitable, but did report that its adjusted loss per share narrowed to $0.16 from $0.46 in the prior-year period.Going forward, GitLab now expects its revenue to rise 54%, to between $385.5 million and $390.5 million in fiscal 2023.Now trading at a very discounted level, and with rising market share, GitLab looks like a good entrée into a bargain-priced tech stock in a rapidly growing industry.
GitLab Inc. (GTLB) 52-Week Low/High: $30.74 - 137.00 https://about.gitlab.com | Why GitLab: Open-source software is the sweet spot in the source code management business Significant boosts in business from major customers Double-digit revenue increases Undervalued |
About the Analyst
Tyler Laundon focuses primarily on growth stocks in his Cabot Small-Cap Confidential and Cabot Early Opportunities newsletter. I’ve known Tyler for many years—including his career prior to joining Cabot. He is one of the most thorough researchers I have known in this industry and also enjoys a sterling track record for choosing market winners.I know that sometimes, growth investing can seem a little scary to many investors. But if well-researched and monitored, growth stocks can greatly enhance your portfolio returns. And Tyler has proven that.To help you better understand the risks and rewards of Tyler’s brand of growth investing, I recently asked him to share a little of his strategy. Here’s our interview:Nancy: I note that the majority of the stocks in your Cabot Early Opportunities portfolio are large-cap stocks. And when I think of large caps, I normally wouldn’t consider them “early opportunities.” Would you explain what types of “early opportunities” you specifically look for in determining your stock recommendations?Tyler: Generally speaking, I look for companies that are either early in their life cycle, early in pursuing a major growth opportunity, new market, etc., in the early stages of a major transformational change or new to the public market. I do think the portfolio skews smaller than you may see at first glance. Eight of the 15 stocks currently in the portfolio have market caps under $10 billion, so I’d still consider many of those to be relatively small companies. Some of the positions were mid-caps when we got into them but have grown significantly. For example, NET is up over 200% and CRWD up 340%.Nancy: Large caps ruled the market last year, but I know you also have a keen interest in the small-cap sector, as evidenced by your Cabot Small-Cap Confidential advisory. The stock markets have been very challenging so far this year for all market capitalizations. With that in mind, do you have a favorite market cap for 2022? Why or why not? Tyler: I think small caps are set up for strong performance relative to large caps because of relative valuation (small caps are “cheap”) so if I were investing in a market cap ETF, I’d choose the S&P 600 ETF (IJR) over the S&P 500 ETF (SPY). I don’t prefer the Russell 2000 index ETFs because they are lower quality than the S&P 600. But honestly, I think performance in 2022 is going to come down more to stock selection than market cap given all the crosscurrents out there.Nancy: Which sub-sectors of the market are the most appealing to you at this time, and why? I see that you have quite a few tech companies in your portfolio; are you still finding some nice opportunities in that sector?Tyler: I like healthcare because it offers a mix of defense and growth, and demographic trends are supportive of the sector. Within healthcare I tend to skew toward medical device manufacturers and biotech/drug manufacturers. Biotech is in the dumps but has the potential to do very well. And yes, I do still like tech a lot, especially software, though we need to be selective there because it’s no longer an “everything in the tech space works” market. In some respects, I see now as a time to accumulate select tech stocks while they’re out of favor in anticipation of significant gains looking out 1-3 years.Nancy: In your guide to Cabot Early Opportunities, you mention that your original, proprietary research “focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.” Would you give me some examples of each of these parameters from past stocks that you have recommended?Tyler: Crowdstrike (CRWD) provides a good, high-level example. It’s a security software stock, specifically for protecting endpoints (desktops, laptops, etc.). The company built a platform, Falcon, and on that it has continued to develop additional solutions that meet the specific and evolving needs of its customers. Each new solution represents a milestone and market expansion opportunity. This trend has not only increased the size of the company’s addressable market, but Crowdstrike’s sales teams have had a captive audience within which to sell these solutions, thereby driving up revenue per customer. That type of dynamic is something we look for in all sorts of stocks but it’s particularly attractive in software stocks.Nancy: Will you speak to the risks that you see in your targeted markets now and throughout the rest of the year?Tyler: Risks are everywhere. Rising interest rates, inflation, consumer spending, war, quantitative tightening, risk in the housing market. There’s no sugarcoating it—it’s a messed-up time that doesn’t have any good historical comparisons. As investors we just need to be on our toes and be realistic about what we expect in terms of market returns over the next 12 months.Nancy: How do you consider and mitigate risk in your recommendations? For example, do you keep your positions small, set price targets, and/or stop losses?Tyler: Diversify across market cap, sector, and time. That last one implies averaging into and out of positions since timing does matter. I don’t bother with price targets because they always move depending on trends within a company and the broader market.Nancy: What are the 3-5 most critical challenges to growth of the stocks in your portfolio right now?Tyler: For the stocks themselves, number one is probably rising interest rates, which tend to put pressure on valuations. The second is investor confidence (low) and recession risk (becoming more consensus). In terms of the companies behind the stocks, the biggest challenge is just the uncertainty and disruptions in their markets, like supply chain issues, making an inconsistent operating environment. When everybody has to be on their toes, its easier for small slip-ups to turn into something bigger. But as investors, we don’t learn exactly what’s working or not working (in most cases) until there is a quarterly report and conference call. So, a lot of waiting and guessing in between.
Portfolio and Industry Update
Portfolio Updates
In its most recent quarter, Archaea Energy (LFG) reported revenue of $58.4 million and net equity investment income of $4.8 million. Net income was $3.7 million ($0.15 per share) and adjusted EBITDA came in at $16.4 million. Both revenues and income were higher than forecast. For full-year 2022, the company expects RNG production of 11.1–11.7 million MMBtu, electricity production of 850–950 thousand MWh, adjusted EBITDA8 of $125–$145 million, and capital expenditures of $255–$285. Hold
As for iPath Series B Bloomberg Tin Subindex Total Return ETN (JJT), the tin market continues to look promising. Tin futures were trading above $44,000 per tonne in April, approaching a record high of $49,500 hit on March 8th, supported by rising demand from the electronics sector, where tin is used for circuit board manufacturing. Hold
| Stock of the Month Portfolio | ||||||||
| Company | Symbol | Date Bought | Price Bought | Price on 4/12/22 | Dividends YTD | Div Freq. | Gain/ Loss % | Rating |
| Archaea Energy Inc. | LFG | 2/11/22 | 16.27 | 18.95 | N/A | N/A | 16.47% | Hold |
| iPath Series B Bloomberg Tin Subindex Total Return | JJT | 3/3/22 | 140.60 | 131.08 | N/A | N/A | -6.77% | Hold |
| GitLab Inc. | GTLB | NEW | -- | 50.04 | -- | N/A | -- | Hold |
Our new recommendation, GitLab Inc. (GTLB), operates in the Source Code Management Industry. The industry is fragmented globally, with 66,304 companies, and 37 companies producing Source Code Management technologies.As Tyler remarked in his recommendation, GitLab is one of the up-and-comers, and is gathering market share.The company specializes in DevOps, which makes software delivery more efficient by combining the ability to develop, secure, and operate software in a single application.Three are many advantages of a DevOps platform, including:
The following diagram gives you a fun look at the evolution of DevOps:
Source Code Management (SCM) is a DevOps automation tool that maintains a track of versions (revisions) made to the program. The global version control system market size was valued at USD 897.2 million in 2019 and is expected to grow at a compound annual growth rate (CAGR) of 12.6% from 2020 to 2026.By using Version control systems, companies have access to a log of each change in the software products, so that they can immediately see where the software is on the development scale. This is increasingly important, as demand for digitalization and automation in the software development process is rapidly escalating, and the growing adoption of tablets and smartphones is boosting it even further.With version control systems, software developers can keep track of all modifications and make comparisons with previous files. The systems also eliminate the need for manually tracking and managing changes in the data and file, which streamlines the overall software development process. And as you can see by the following chart, these catalysts are expected to keep the market accelerating over the next few years.
The next Cabot Money Club Stock of the Month issue will be published on May 12, 2021.