Cabot Early Opportunities Issue: February 19, 2025

Stocks in This Issue

State of the IPO Market

A rewarding search for fresh opportunities in the stock market doesn’t always require a healthy IPO market. But it sure does help.

Not only do new issues increase the supply of names to consider buying, they also provide a signal to investors that capital is flowing through the equity markets. A strong IPO market is also often associated with increased M&A activity and spin-outs, which provide additional opportunities for nimble investors.

Year to date there have been 31 IPOs priced. That’s a 63% increase over last year at this time. Of those 30, 17 came public in January (vs. 11 last Jan.) and 14 so far in February (vs. a total of 10 all last Feb.).

Total proceeds are up as well, by 14% to $6.6 billion. I’m a little surprised that increase isn’t larger given the significant increase in the number of IPOs.

Also notable is the number of SPAC IPOs, which has hit a four-year high. Year to date there have been 12 blank-check companies that have priced, significantly more than the three that priced through this point of 2024.

The performance of SPACs isn’t that inspiring, however. According to Renaissance Capital only about 15% of companies that completed a merger through the SPAC process over the past five years trade above the $10 offer price.

The SPAC market continues to be dominated by tech, quantum, crypto, space, satellite, nuclear and alternative energy type names. Exciting for sure, but the data shows it’s best to be somewhat cautious when wading into the SPAC pool.

The easiest way to gauge the broad-based performance of the IPO market is by using the Renaissance Capital IPO (IPO), which is up 8.4% YTD versus 4.3% for the S&P 500. The ETF holds companies that have been public for an average of 1.3 years and there’s only about 0.1% overlap with the S&P 500 (by weight).

Over the years, we’ve had a good deal of success investing in companies that are relatively fresh to the public market. Typically, I’ll wait until a new issue has marinated a bit (waiting until after lockup expiration is usually, but not always, the play).

A few names from the last year or so that come to mind are Cava (CAVA), Vertiv (VRT), FTAI Aviation (FTAI), and going back further I think of CrowdStrike (CRWD), Datadog (DDOG), Dynatrace (DT), Cloudflare (NET), Chewy (CHWY), Bill.com (BILL) and Upstart (UPST). Those names all delivered double-digit returns, with several doubles and a couple triples.

In our current portfolio, our list of relatively recent IPOs includes Astera Labs (ALAB), GE Vernova (GEV) and Reddit (RDDT). Primo Brands (PRMB) gets an honorable mention as the company recently completed a significant merger. We have another half dozen names on our Watch List that came public in the last couple of years either through traditional or SPAC IPO.

In today’s Issue, I pluck one more new name from the IPO list, LandBridge (LB). And we return to one of my favorites, SharkNinja (SN), which is not only an attractive stock but makes a wide variety of innovative appliances worthy of your attention.

What to Do Now

It’s earnings season, and there is a lot of noise out there from the new administration. Focus on what matters to the market, which is trading near all-time highs, not the noise.

For me, that means reviewing a lot of earnings reports and trying to identify names that have the potential to outperform over the coming quarters, while cutting loose any names that have faltered and aren’t likely to recover.

In short, while the broad market is acting well, it feels like a stock picker’s market. That’s somewhat typical during earnings season.

I’m a little concerned that, once earnings season excitement fades, it will be harder to ignore the noise, and that could drive some market volatility.

That’s not a prediction, just something that’s on my mind. And part of why our current strategy should be to add select exposure and not get overly aggressive.

NEW STOCKS

DoorDash (DASH)

When I first heard of kids spending five bucks with DoorDash (DASH) to have $15 worth of donuts delivered I thought that was just about the silliest thing ever.

But I’m the type of person who still drives to get burritos and pizzas. In fairness to the kids, they don’t all have cars or are of legal driving age. If they have the cash, it’s a lot easier to just get the job done with DASH than have the whole donut conversation with mom or dad.

In other words, while I’m a little old-fashioned, I don’t blame them. I probably would have done the same thing.

DoorDash is doing extremely well as people catch on to the convenience of home delivery for a lot of things beyond donuts. While the company’s market value now surpasses $80 billion, there’s still a lot left in the tank here.

The company, which started as a food delivery service in Palo Alto, California back in 2013, has quickly grown across the U.S. (and internationally) to become the largest third-party food delivery platform in the country.

The business revolves around the DoorDash Marketplace, which connects consumers with local restaurants and convenience stores via a network of independent couriers called “Dashers.”

But growth initiatives have diversified the business model as DASH has grown. It now offers a DashPass subscription service (free delivery and discounts), DoorDash Drive (white-label logistics solution for restaurants and retailers to fulfill orders), DoorDash for Work (corporate meal and catering service) and Grocery & Retail Delivery featuring partnerships with major grocery and convenience chains and retailers (my wife uses this and it’s awesome).

Behind the scenes, DASH is using AI to improve logistics and optimize costs. This has helped boost margins and make deliveries more profitable, while advertising monetization has created another high-margin revenue stream.

Of course, the pandemic helped consumers see the benefits of deliveries here in the U.S., but the same trends happened overseas. DoorDash is taking advantage, growing its presence in Canada, Australia, Japan and Europe.

While management doesn’t disclose what percentage of the business is donut delivery for the under-16 crowd, it does report the more conventional metrics. Last week’s Q4 2024 report shows the trends are very strong.

Revenue was up 24.8% to $2.87 billion, beating by almost $31 million, while adjusted EPS grew 53% to $1.02, beating by $0.08. Gross order volume (GOV) of $21.3 billion was slightly ahead as well.

Analysts see DoorDash growing revenue by 21% to almost $13 billion in 2025 and EPS by around 14%, to $4.09.

DoorDash now has 94 of the top 100 restaurants and 44 of the top 100 U.S. retailers on its app, and the grocery channel opportunity looks particularly enticing.

DoorDash also initiated a $5 billion stock buyback, and with enough quarters of profitability, DASH stock is now a candidate to enter the S&P 500. That catalyst could help push shares higher in the coming weeks.

The Stock
DASH came public at 102 in December 2020 and the stock more than doubled within a few weeks. But that was a hot market. At the end of 2021, DASH began to fall from highs above 250 and didn’t stop until it bottomed out below 50 in the beginning of 2023. The trend has been up and to the right since then, albeit with a few extended drawdowns and consolidation periods. The most recent flat period was in the final months of 2024 when DASH retreated from 181 to 164. But the stock got going again in January and is up from 170 to 209 so far this year. Shares moved through the 200 level after the Q4 report last Tuesday. BUY

Freshworks (FRSH)

Freshworks (FRSH) is a software company offering cloud-based customer engagement (CRM) and business software for customers of all sizes.

Founded in 2010 and headquartered in San Mateo, California, Freshworks is known for offering user-friendly, cost-effective alternatives to enterprise software from companies like Salesforce (CRM), Zendesk (private), and ServiceNow (NOW).

The company’s intuitive and affordable software doesn’t mean it’s not capable, however. It has integrated artificial intelligence (AI) and automation features through its Freddy AI assistant that helps with customer support and sales processes.

The product lineup includes Freshdesk (customer support and helpdesk solution with AI-powered ticketing and automation), Freshservice (IT service management platform), Freshsales (CRM tool with AI-powered insights, Freshmarketer (marketing automation platform) and Freshchat (live chat and messaging with AI).

In Q4, which was just reported last Tuesday, Freshworks beat expectations, growing revenue by 21.5% to $195 million (a 2.7% beat) and EPS by 75% to $0.14 (a $0.04 beat).

Management signaled that AI adoption is strong and they see opportunities to better monetize AI tools in 2025. On average, deals are getting larger, though there was a downtick in new customer adds in some of the smaller customer groups.

Guidance for 2025 met Street expectations (+12% to +14%) and profit margin guidance was better than expected. That said, I have heard some grumblings that guidance implies stronger revenue growth in Q1 and Q2 that then slows down in the back half of the year.

This may be why FRSH stock hasn’t done much since the report.

As I survey the landscape of mid-cap software stocks that have the potential to take off based on solid fundamentals and the potential to outperform seemingly low expectations, Freshworks is high on the list. It may well be that management was being overcautious on H2 2025.

We’ll add to our Watch List and keep an eye on it.

The Stock
FRSH came public in September of 2021 at 36 and traded up near 50 before the pandemic-fueled bull market began to fade. The stock slipped into the low teens in 2022 before mounting a comeback, but that was cut short at the beginning of 2024. An ugly gap down after last May’s Q1 earnings report sent FRSH back into the low teens. The tide changed in November when the Q3 report sent FRSH from 13 to 17 overnight. The stock traded in the 15 to 17 range for the next couple of months then rallied to 19.8 in the back half of January. FRSH pulled back into the Q4 report last week and is basically unchanged since. WATCH

Integer Holdings (ITGR)

I would likely add Integer Holdings (ITGR) to our portfolio today if not for the fact that the company is set to report after the market close. I’m not willing to roll the dice with that event just a few hours away, so ITGR will go on our Watch List.

The $4.8 billion market cap company is a leader in advanced medical device design and outsourcing, helping companies get their devices to market more quickly and without sacrificing quality and reliability.

Integer has components and technology in just about every global medical device brand you know. Roughly 45% of sales come from Abbott (ABT), Medtronic (MDT) and Boston Scientific (BSX), down from closer to 80% a few years ago thanks to landing new customer programs.

It’s especially strong in the areas of cardiac rhythm, cardio and vascular health, neuromodulation devices and custom medical battery packs and chargers.

The medical device outsourcing market went bonkers during the pandemic, growing close to 9%. Things have calmed down to a more normal 4% to 6% growth rate since 2023.

Integer is growing slightly faster than the market, which means it’s taking market share from other players. It’s doing so by working with customers to get into their newest, most innovative products that help underserved patient populations.

The best recent example is Integer’s growth in the electrophysiology (EP) market. An EP procedure is a series of tests to evaluate heart activity and diagnose arrhythmias. The company has been working hard to expand its presence here, an initiative helped by the January 2024 acquisition of Pulse Technologies.

Revenue growth was 16% in 2023 thanks to the tail end of pandemic-era strength. Sales growth will likely come in at around 7.5% this year (depends on the Q4 report today), and current consensus is for about a similar pace of growth in 2025.

However, EPS is growing far faster, at about twice the pace of revenue.

As for the earnings call today there are a few things I’ll be looking for clarity on, aside from 2025 revenue and EPS guidance.

First will be an update on the trend of MedTech companies consolidating their suppliers. This has been a tailwind for ITGR and should continue.

Second is any update on if and how much tariffs on Mexico will impact the company. It has three plants in Mexico, but potential tariffs should only apply to the value-added labor portion, which is relatively small.

Finally, I’m interested to hear management talk about their M&A pipeline, which is geared toward tuck-in acquisitions that can bring new capabilities, or add to current capabilities, that help customers get better products to market faster.

Integer will go on our Watch List today.

The Stock
ITGR began trading under its current ticker symbol in 2016 following a significant merger, but the company’s public roots date back to 2000 when it first came public under the name Wilson Greatbach Tech. Most relevant to us is that the stock has been trending higher for the last two years. The biggest drawdown was in mid-2023 (-28%) and there have been a handful of pullbacks of up to -20% over the last year. Most of these are relatively quick, and none has pulled ITGR below its 200-day line. The stock hit a new all-time high of 146 three weeks ago and heads into today’s earnings report looking stable near 142. WATCH

LandBridge (LB) ★ Top Pick ★

LandBridge (LB) is a Houston, Texas-based company specializing in active land management for energy and industrial development. The company focuses on optimizing commercial activity by partnering with operating companies and developers.

Key activities include oil and natural gas development, solar power generation, data centers, power storage, and other industrial operations.

Founded in 2021, LandBridge entered the market with the acquisition of over 71,000 surface acres and 4,000 gross mineral acres in the Permian Basin. Since then, the company has expanded its portfolio across western Texas and southeastern New Mexico. As of Q3 2024, its total land holdings top 220,000 acres.

LandBridge generates revenue from three primary sources:

Oil and Gas Royalties: The company holds a portfolio of oil and gas royalty assets, which contributed 16% of year-to-date (YTD) revenue. In Q3, oil and gas royalties were $2.9 million, 35% lower than in Q2 due to lower production volumes.

Resource Sales and Royalties: Accounting for 29% of YTD revenue, this segment includes the sale of brackish water for well completions, caliche for infrastructure development and royalties from sand and water extraction. In Q3, segment revenue reached $9.1 million, a 29% increase from Q2 thanks to higher brackish water sales.

Surface Use Royalties and Fees: The company’s largest revenue stream (55% of YTD revenue), this segment includes produced water transportation and handling, skim oil recovery, and waste reclamation. It also includes fees for drilling site development, road access, pipeline easements and electric transmission easements. A strategic partnership with WaterBridge, a water-handling infrastructure provider in the energy sector, plays a central role in this segment’s growth. In Q3, segment revenue totaled $16.5 million, a 14% increase over Q2 due to higher produced water royalty volumes.

LandBridge’s royalty-based business model is driven by increased producer activity, rising commodity prices, and the addition of new revenue streams. It is a relatively asset-light model since capital expenditures are largely borne by partners.

Investors should be looking for the company to manage its debt load responsibly (LB management is targeting a net leverage ratio of 2.0 – 2.5x by mid-2025), pay dividends (initial $0.10 quarterly dividend paid on December 19) and add assets to the mix (Q3 acquisitions included 1,280 acres in Texas, 5,800 in New Mexico, and a lease development agreement for a data center in Texas).

Management will report Q4 results on March 6. Current consensus estimates for 2025 call for revenue growth of about 70% to $190 million, and management has guided for adjusted EBITDA (a measure of earnings) growth of roughly 60% ($140 - $160 million).

The Stock
LB came public last June at 17 and got off to a very strong start, trading as high as 43 by late August. A pullback in September drew in new buyers, then shares raced higher through the fall, topping out near 78 a few days after the November 6 earnings report. LB stock has been up and down in the 52 to 85 range since then. The recent all-time high of 84.7 occurred on January 22, and a few days later, LB pulled back into the low 60s after an SEC filing disclosed that existing shareholders may sell some shares (a non-dilutive event that increases liquidity). LB stock has walked up into the low 70s over the last two weeks. We’ll step in here. Earnings are due on March 6. BUY

SharkNinja (SN)

I added SharkNinja (SN) to our Watch List last month. With last week’s solid Q4 report, conservative guidance for 2025 that leaves room for upside and a pipeline of 25 new products slated to hit the market this year, I’ll add the stock to the portfolio today.

SharkNinja is a player in the fragmented small-appliance market where it has a wide variety of innovative products spanning 30+ categories.

The company’s two brands, Shark and Ninja, are widely available at retailers in 25+ markets around the world. Amazon (AMZN), Target (TGT) and Walmart (WMT) drive roughly 40% of total sales.

In 2023 the company grew revenue by 14.4%. Growth exploded by 32% in 2024 as a number of new products came to market.

Revenue in Q4 2024, which was just reported last week, grew by 29.7% to $1.79 billion.

The Food Preparation segment ($342 million in quarterly revenue) led the charge, growing by 89% and now accounting for 19% of sales. The segment added $161 million in incremental growth as compared to Q4 of 2023.

The largest and most mature segment, Cleaning ($648 million in revenue), grew by 19.7% and made up 36% of sales.

Cooking & Beverage, the second-largest segment ($597 million in revenue, 33% of sales) grew by a more than respectable 19%, while Beauty and Home’s growth of 31.1% (to $200 million) was the second fastest in the company and now makes up 11% of the total revenue mix.

While the high-level results were impressive (SharkNinja has beaten in all six quarters since coming public in 2023), a couple of things jumped out at me as particularly noteworthy.

First, management guided for profit margins to expand in 2025 even though it will have moved roughly 90% of China sourcing into the U.S. by the end of Q2. Guidance also accounts for the 10% tariffs on China.

Second, while the U.S. is a relatively mature market for the company (+21% in Q4) it’s still growing very nicely. And international growth (+162% in Q4, excluding the U.K.) is phenomenal. There appears to be plenty of runway to grow across the globe, with Latin America looking like a near-term opportunity as the company takes over distribution in Mexico and expands to Brazil.

Finally, SharkNinja continues to find success with new products. Recent hits include the SLUSHi (frozen beverage maker) and FrostVault (cooler with a dry drawer), which were supply-constrained in Q4. Management continues to think CryoGlow (LED face mask and cooling) could be a $100 million product in 2025.

New products like the Ninja Swirl (extension of the CREAMi) and Ninja FlexFlame (outdoor cooking system, looks pretty cool) are just two of the 25 new product launches planned for 2025.

Looking forward, management noted that a couple timing events in Q1 2025 (late Easter and Mexico distribution shift) could lead to the quarter being softer than is typical. Combined with the typical conservative guidance (2025 revenue growth of 10% - 12% to $6.08 - $6.19 billion, EPS growth of 12% - 15% to $4.80 - $4.90) and we have a stock that hasn’t done much since earnings.

I think that spells opportunity. It might take a few weeks, or the Q1 report to get out of the way, but I believe SN has a very high likelihood of smashing estimates again in 2025. We’ll jump in with a half-sized position now.

The Stock
SN was spun out of JS Global in July 2023. We first jumped into the name last March then stepped aside in November following a negative reaction to the Q3 earnings report, which sent SN from its all-time high near 113 back to the mid-80s. SN advanced in January and reached all-time highs above 113 just prior to last week’s earnings report. The stock spiked to a new intra-day high of 123 the day after the release before settling to close at 114. We can pick up shares today slightly below that level, at around 109. BUY HALF

PORTFOLIO CHANGES SINCE LAST ISSUE

We exited our half stake in AST SpaceMobile (ASTS) for a 59% gain on January 29 and took a modest 4% gain on Amer Sports (AS) on February 10. We also exited OneStream (OS) with a 21% loss on February 10.

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

Stocks rated BUY are suitable for purchasing now. 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.

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.

Active Positions

Recently Sold Positions

The next issue of Cabot Early Opportunities will be published on March 19, 2025.

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