Cabot Early Opportunities Issue: August 17, 2022

Stocks in This Issue

Stock Name	Market Cap	Price	Investment Type	Current Rating
Caribou Biosciences (CRBU)	$654 million	11.8	Development Stage Biotech	Buy 1/2
Mission Produce (AVO)	$1.13 billion	16.0	Growth: Avocado Prod. & Dist.	Watch
Paya Holdings (PAYA)	$959 million	7.26	Growth – Fintech/Payments	Watch
SentinelOne (S)	$7.98 billion	28.6	Rapid Growth – Security Software	Buy
Toast (TOST)	$10.7 billion	20.6	Rapid Growth – Payments	Buy

A New Bull, or Just a Bear Market Rally?

With inflation data showing progress in the right direction (i.e., down), U.S. GDP growth not looking awful (Atlanta Fed model now saying Q3 GDP growth of 1.8%) and expectations for the Fed’s target interest rate topping out at 3.5% to 3.75% (end of this year/beginning of 2023), the market appears to be a firm believer in the “bad to better” trend.
That’s exactly what was needed for investors to move back into stocks. And it just may have kicked off a new bull market.

That said, the market is near a critical point. The S&P 500 is just about at its 200-day moving average line (at 4,326). Market technicians will tell you a break above this is needed for the new bull market (if that’s what it is) to stretch its legs whereas failure to break out could send the market lower.

On the economic calendar next week, we get the second estimate of Q2 GDP on Thursday.

The Fed is taking a break this month but will be back in September with the next meeting and likely hike (market 60%/40% on 275-300 bps / 300-325 bps).

And we’ll also get the August CPI date in September. All of these economic events could move the market one way or the other.

But for now, the bad-to-better thesis appears intact so we’re not going to change our strategy in any significant way.

What to Do Now

Lean bullish, but don’t go crazy.

Lacking a fully functioning crystal ball we’ll take the current evidence at face value. Investors have clearly begun to feel that stocks were oversold this summer and are playing catch-up now. But things could turn quickly.

If there are stocks you have wanted to get out of this may be time to do so. And if you’re feeling a little overexposed don’t be afraid to trim and take incremental profits too.

Caribou Biosciences (CRBU)

I added Caribou Biosciences (CRBU) to our Watch List in May, and it has had a wild ride since. With a few trial updates, confidence in the pipeline is growing, and the stock is acting well (maybe too well). We’ll take a stab at this speculative biotech stock today with a half-sized position.

The backstory is that Caribou is a clinical-stage company developing genome-edited allogeneic cell therapies for hematologic malignancies and solid tumors.

The special sauce is a proprietary CRISPR hybrid RNA-DNA gene editing technology, called chRDNA. It was developed by Nobel Prize laureate Dr. Jennifer Doudna and Dr. Rachel Haurwitz (current CEO). This technology is expected to be more efficient, easier to use and allow more edits than first-generation gene-editing technologies.

Caribou’s path to commercial success hinges on adoption of allogeneic cell therapies. Allogeneic means stem cells are collected from a donor and then used to create a master cell bank, in essence creating an “off the shelf” therapy. This approach simplifies manufacturing and yields consistent therapies.

It is believed to be an easier path to eventual approvals and/or market adoption than the autologous approaches pursued by other players. Autologous means sourcing stem cells from a patient’s own body. That approach is complex and can yield highly variable therapies in terms of potency.

Caribou has four candidates in its pipeline, led by CB-010 for relapsed/refractory B Cell non-Hodgkin lymphoma (B-NHL), which is in the Phase 1 ANTLER trial.

Results were released on June 10 and initially showed a complete response (albeit in a small sample size of six) that faded for four of the six patients after six months. While far from perfect, this performance is better than many previously approved therapies and inspired enough confidence for Caribou to move on to a higher dose, which may have longer durability. We expect another update on both the lower dose and higher dose groups before the end of the year.

Caribou has more in the pipeline too.

Earlier-stage candidates include CB-011 for relapsed/refractory multiple myeloma (MM), CB-012 for relapsed or refractory acute myeloid leukemia and CB-020 for solid tumors.

The company expects to submit an IND application for CB-011 in Q4 of this year and for CB-012 in 2023. It also expects to announce target selection for CB-020 in Q4 of this year.

All of this means potential catalysts in the near term. Caribou has $366 million in cash. That should get the company into 2024.

The Stock
CRBU came public on July 23, 2021, at 16 and trended higher, ultimately peaking at 32.7 on September 7. The stock pulled back in October and then traded in the 20 – 25 range through November 19. Then the market fell apart and CRBU went with it. The stock enjoyed a pop in May after initial ANTLER results came out then fell back near 5 in June when more detailed data was released. CRBU began climbing steadily in July and was trading near 10 before yesterday’s big day sent shares as high as 12.2. With the stock clearly attracting attention we’ll wade in with a half-sized position. BUY A HALF

Mission Produce (AVO)

Mission Produce (AVO) is all about avocadoes. The vertically integrated produce company just came public in 2020 but has been in business for over three decades building out a global avocado network. It is now the largest global supplier of the alligator pear.
The company sources, produces and distributes fresh avocadoes to retail, wholesale and foodservice customers in over 25 countries.

With ownership of over 12,000 acres in different regions of the world (mostly in Peru), Mission leverages different growing seasons and reduces the risk of drought and other challenges inherent to avocado growing. The company also sources avocados and mangoes from Chile, Colombia, Dominican Republic, Guatemala, New Zealand and South Africa.

To get product where it needs to go and in the right packaging, Mission has packing facilities and distribution centers across North America, Peru, Mexico, China and Europe. These facilities take care of ripening, bagging, packing and managing logistics.

Mission’s fiscal year ends in October. The company is recovering after a couple of tough years. Revenue shrank by 2% in fiscal 2020 (global pandemic not great for avocado distribution) to $862 million then grew at a modest 3% clip in fiscal 2021. Despite the slow growth, the company was profitable in both years, delivering EPS of $0.78 in 2020 and $0.74 in 2021.

The company implemented a new ERP system in 2021-early 2022 and that was a little disruptive, as was a smaller than expected Mexico crop. Both drove below-expected results in the first half of the year.

However, Mission is now transitioning to the California and Peruvian crops and that should help supply pick up, then it moves back into a new Mexico crop. With per-box profit margins back at the high end of the normal range in Q2 (reported in June), it appears Mission is moving on from some operational challenges.

The company is now expected to grow fiscal 2022 revenue in the mid to high teens ($1.04 billion expected) while EPS shrinks 32% from last year to just $0.50. But remember the fiscal year ends in October. Looking into fiscal 2023, revenue normalizes a little to around 8% growth while EPS jumps by 70% or so, to $0.85.

We’ll add it to our Watch List today.

The Stock
AVO came public at 12 on October 1, 2020, and started slow, but by February 2021 shares were trading near 22. The stock traded between 17 and 20 through most of December then the rough quarters hit investor confidence. In March AVO hit a low near 11. The stock has been climbing steadily since, and the June earnings report was well received. AVO crossed back above its 200-day moving average line on August 4. WATCH

Paya Holdings (PAYA)

Paya Holdings (PAYA) is a Georgia-based fintech company offering integrated payment and other commerce solutions that help middle-market customers accept and make payments, expedite receipt of money and boost operating efficiencies.

If you like analogies, Paya is like a super-tiny version of Visa (V) and Mastercard (MA).

The company’s platform supports card, ACH and check payments. It integrates with client software so that payment acceptance, invoice reconciliation and all relevant information flows directly into their core accounting system.

Paya is primarily focused on the healthcare, education, non-profit, government, utility and other business-to-business (B2B) markets.

The company’s roots date back to 2006 when Sage Payment Solutions started. Sage was acquired in 2017 and, the following year, the Paya brand launched. The company came public through a SPAC IPO in October 2020.

Paya operates in a fragmented market of payment processors. As such, acquisitions are a key part of the growth story. Past acquisitions include First Billing Services (2019, government and utility markets), The Payment Group (2020, government and utility markets), Paragon Payment Solutions (2021, non-profit and healthcare) and VelocIT Business Solutions (2022, helps with accounting and ERP system integrations).

Paya is a relatively steady grower. It generates over 90% of revenue from fees on transactions while the remaining amount comes from service fees and sales of payment terminals.

In short, it’s a volume and efficiency game. Hence the M&A-led growth strategy (fastest way to build scale, etc.). In addition to M&A, investors will be looking for operating leverage (has been light so far) to drive higher EPS in 2023 and beyond.

Revenue in 2021 grew 21% to $249.4 million while EPS of $0.32 dipped from $0.49 in 2020. In 2022 analysts are looking for revenue to grow 12% to $280 million and for EPS to expand 19% to $0.38.

Second-quarter results were slightly better than expected. Payment volume grew 14.7% to $12.3 billion, driving revenue growth of 13.5% ($72.5 million). EPS of $0.10 beat expectations by a penny. We’ll add it to our Watch List today.

The Stock
PAYA came public via SPAC IPO in October 2020 at around 10 and enjoyed a 50% rally by the end of the year. Things cooled off in 2021. While PAYA enjoyed a little momentum in May, the big-picture trend for the first half of the year was down, and the selling accelerated into the end of 2021. PAYA continued to trade lower in the first half of 2022 and seems to have bottomed at 4.5 on May 11. The stock has done a decent job of clawing its way back above 7 over the last three months and is now back above both its 50- and 200-day moving average lines. WATCH

SentinelOne (S)

We took a swing at SentinelOne (S) last year and it didn’t work out. With the stock price considerably lower now than where we exited and investors more constructive on growth stocks – especially those in resilient markets – we’ll step up to the plate again.

The company specializes in cloud-based endpoint protection (EPP) solutions for enterprise clients. That’s a fancy way of saying SentinelOne protects Internet-connected devices from the attacks of bad actors.

The company has a market cap just shy of $8 billion and plays in the mid-market enterprise segment. Larger peer CrowdStrike (CRWD) is more focused on large enterprises.

SentinelOne is winning business because its Singularity platform offers the necessary protection companies need now that workforces are more distributed. The company offers a cloud-based, fully autonomous, AI-powered Extended Detection and Response (XDR) platform. Singularity boasts faster fix times than legacy vendors and some next-gen SaaS providers too.

At the end of the day, the big thing to remember is that SentinelOne offers automated endpoint protection for both large and small companies. With three main products (Singularity Core, Control and Complete), as well as eight additional modules, there are ample upsell and cross-sell opportunities for the sales team to grow revenue share once customers are on the platform.

They’ve been doing just that. In Q1 fiscal 2023 (reported in June) net retention was 131%. SentinelOne is also benefitting from the recent acquisition of Attivo Networks (March 2022), which is seen adding $30 million in revenue this fiscal year.

Stepping back, Q1 revenue growth of 109% (to $78.2 million) marked a slight deceleration from fiscal 2022 revenue growth of 120% ($204.8 million). But SentinelOne is still seen growing by 100% this year (to $410 million).

While the company isn’t profitable (estimated EPS this year is -$0.83), triple-digit growth is extremely hard to come by. With shares down over 60% from their highs and management likely more focused on boosting the bottom line, we could easily see S go on a fantastic run into 2023.

SentinelOne is expected to report Q2 2022 results on Wednesday, August 31.

The Stock
S came public at 35 on June 20, 2021, and jumped 21% the first day. The stock went on a couple of runs before the end of the year that saw it trade well above 70. But the trend in the first half of 2022 was down and to the right. S seems to have found a bottom of 18.6 on May 12. Shares have been relatively calm since then and S has clawed back a little (but not much) of the lost ground. Three times the stock has bumped up against resistance at 28. That’s become the new battleground. We’ll jump in now and look for S to break through in the coming weeks. BUY

Toast (TOST)

If you’re anything like the rest of us you’ve likely been out to eat a lot this summer. You may have noticed some of the restaurants using a payment platform from a company called Toast (TOST).

Toast built a payment platform specifically for the restaurant industry. It includes software-as-a-service (SaaS) solutions, point of sale terminals, payment process/financial technology and other bells and whistles to give restaurants everything they need to handle operations across dine-in, takeout and delivery channels.

More specifically, Toast sells the hardware required to take cash and card payments and the software tools to handle digital ordering and delivery, marketing and loyalty programs and team management (tips management, HR, payroll, scheduling, etc.).

Big picture, the company helps simplify and streamline operations while also driving revenue opportunities for businesses and making things more convenient for guests.

Toast is growing very quickly. In 2021 revenue was up 107% to $1.71 billion. After posting a convincing Q2 report last Thursday, management is upbeat on this year too, saying revenue should grow another 55% to $2.64 billion (at the midpoint of guidance).

Most of Toast’s Q2 metrics surpassed expectations.

Annualized recurring revenue grew 59% to $787 million; gross payment volume grew by 62% to $23.3 billion. The company added over 6,000 new locations for the first time in its history (impressive considering that competitor Lightspeed (LSPD) only added 3,000). Total locations are now around 68,000.

Toast also added 40 more locations with existing customer Jamba Juice and signed a regional hotel chain (10+ locations). It will be interesting to see how deep it tries to go into this category of restaurants (it makes sense).

Toast is not profitable and will likely deliver an EPS loss of -$0.30 this year. That said, management seems to recognize that investors want bottom-line improvement and has spoken recently about attainable initiatives to improve profitability. We’ll see where this goes. As it stands now, Toast is several years away from turning a profit.

The Stock
TOST came public last September at 40 and popped 56% the first day. It stayed above 50 through the first earnings report on November 9 but then began to trend lower. Shares were trading near 20 in early March when lockup expiration passed. After a quick run to 25, TOST fell to a low of 11.9 on May 12. That happened to be the date of the Q1 earnings report, which helped propel the stock to 17.7 within a couple weeks. Another dip into the 12 range drew in buyers. Over the last five weeks, TOST has climbed back up near 20. BUY

Previously Recommended Stocks

Since the July Issue we sold Grocery Outlet (GO), our 1/2 position in Aris Water Solutions (ARIS) and out final 1/2 position in Sprout Social (SPT). On August 4 we added the second half of our position in Airbnb (ABNB).

Today Axonics (AXNX) moves to HOLD.

An updated table of all stocks rated BUY, HOLD and WATCH as well as recent stocks SOLD, is included below.

Please note that stocks rated BUY are suitable for purchasing now. In all cases, and especially recent IPOs, I suggest averaging into every stock to spread out your cost basis.

For stocks rated BUY A HALF, you should average into a position size that’s roughly half the dollar value of your typical position. We may do this when stocks have little trading history (for instance, IPOs), when there is more uncertainty in the market or with a stock than normal, or if a stock has recently jumped higher.

Those rated HOLD are stocks that still look good and are recommended to be kept in a long-term oriented portfolio. Or they’ve pulled back a little and are under consideration for being dropped.

Stocks rated SOLD didn’t pan out, or the uptrend has run its course for the time being. They should be sold if you own them. SOLD stocks are listed in one monthly Issue, then they fall off the SOLD list.

Please use this list to keep up with my latest thinking, and don’t hesitate to email with any questions.

^ Average of high and low price if published intraday, or closing price if published after 4 PM ET

^Average of high and low price if published intraday, or closing price if published after 4 PM ET

The next issue of Cabot Early Opportunities will be published on September 21, 2022.