Cabot Early Opportunities 110

Investor received a well-deserved wake-up call last week but the big-picture trends are still positive and growth stocks continue to be where the action is. In this month’s Issue of Cabot Early Opportunities, we take a look at a diverse mix of fresh opportunities that are all linked by one commonality – they give investors exposure to some of the most interesting and durable growth trends out there.

Cabot Early Opportunities 110

Stock Name	Market Cap	Price	Investment Type
Bill.com (BILL)	$5.69 billion	76.57	Rapid Growth – Software
OneWater Marine (ONEW)	$312 million	21.43	Growth – Boats
Purple Innovations (PRPL)	$935 million	17.34	Rapid Growth – Mattresses
SelectQuote (SLQT)	$4.52 billion	27.26	Rapid Growth – Insurance Broker
Tela Bio (TELA)	$219 million	19.18	Rapid Growth – MedTech

Keep An Open Mind
If this year has taught us anything it is that the market is a wily beast that catches even the most experienced investor off guard.

Come to think of it … that’s a lesson the market tries to teach us over and over again. Have we absorbed it yet?

If you are the type of person that has a hard time taking action when you don’t fully understand what’s going on, this has been an incredibly difficult time.

But if you’re the type to embrace the unknown, keep an open mind and be willing to accept that there are forces out there that you don’t need to fully understand in order to benefit from, then you’ve likely seen your investment account balances swell, even beyond where they were prior to the market crash.

Of course, one thing we do know is that a good deal of the market’s rebound is due to the various actions of the Fed and Treasury and the implication that they will do everything in their power to get the economy cranking again.

Even if you don’t dig into the details of what’s been done, or fully grasp where the money is flowing and how the mechanics of everything are working, the old adage of “don’t fight the Fed” has never been more true.

As I wrote back in mid-April, “Thinking big picture, what we know is that massive crises require government intervention. This is often the best time to put money to work.”

Since then the market has rallied, even sending the Nasdaq to a fresh high. Clearly, the stakes now are higher than they were a couple months ago.

There is no dearth of concerning headlines giving investors pause about what to do next. How much of the market’s strength is due to the rising influence of retail investors? Will institutional investors play a bigger role moving forward? Will a second wave cause another round of shutdowns? What will employment trends look like in three months, and after? Will we get more stimulus? What about the upcoming presidential election?

The bottom line is we don’t know the answers to these questions. They will come to us over time in a messy and confusing manner. That’s just the way it goes, which means we need to maintain a flexible attitude and not paint ourselves into any corners based on overly firm beliefs that may or may not be accurate, or even relevant to the stock market.

We are living through a period of rapid change. Embrace it.

What to Do Now
Keep an open mind.

Don’t be afraid to do some buying here and there, and also don’t be afraid to take partial profits on stocks that have run. Diversification among stocks, and over time, is a good thing.

Continue to take incremental steps both on the buy and sell side. As always, the goal isn’t to perfectly time market tops and bottoms but to participate in the big trends and maintain positions in the stocks that will become outliers to the upside.

In terms of last month’s additions, DraftKings (DKNG) is the clear outperformer, having rallied 32% since we added it. The stock is currently rated hold and has just announced a secondary (I would too if I were management). Let’s see how the market digests it before revisiting our rating.

We’ve also seen both Formula One Group (FWONK) and GFL Environmental (GFL) move above our entry points even after sharp corrections last week.

Both Enphase (ENPH) and Viela Bio (VIE) are underperforming. VIE remains in the portfolio while ENPH is being sold today.

This month’s Issue of Cabot Early Opportunities features a fresh group of stocks that all have their own merits, but which have remained reasonably strong through the recent volatility.

We have a newly public company selling health insurance directly to consumers, a rapid growth software company enabling automation for small businesses, a way to invest in the bed-in-a-box trend (it’s not a fad), an emerging MedTech innovator and a company benefitting from surging demand for boats.

Enjoy!

STOCKS

Bill.com (BILL)
Bill.com (BILL) is no stranger to Cabot subscribers. We’ve discussed the $5.7 billion market cap cloud software company in various publications since it came public last December at 22.

That coverage shouldn’t mask the still early opportunity the company represents. Bill.com is a true innovator in back office automation, which is a big-picture trend that’s likely to endure regardless of what happens in the economy. Sure, there will be ups and downs but the world is moving at a blistering pace toward software solutions that speed things up, relieve people from doing repetitive, manual tasks, and which free up resources to pursue higher value initiatives.

Automating back office financial operations checks all the boxes. This is why Bill.com has been growing at a supernormal growth rate since the company was founded in 2006.

The company’s solutions digitize tasks such as generating and processing invoices, sending and receiving payments, and managing accounts receivable and accounts payable. Most operations can be run remotely, and the software integrates with all the major accounting systems out there.

Bill.com’s sweet spot is small- to medium-sized businesses. And it has about 91,000 customers. On the one hand this market is somewhat more at risk than larger enterprises due to Covid-19 related disruptions; however, there are far more small businesses out there and efficiency tools that permit remote work are strategically important.

Financial performance is impressive. Bill.com grew revenue by 79% to $102 million in 2019 and by 46% to $41.2 million in its third quarter of fiscal 2020, which ended on March 31. In Q3 transactions jumped 23% to over six million and the company processed $24.2 billion in total payment volume, up 35%. Management also announced that the platform would be integrated into Wells Fargo’s electronic banking platform.

Profitability has been elusive, but that’s not uncommon for a company at this stage of growth. Adjusted EPS came in at -$0.07 in 2019 and -$0.04 in Q3 fiscal 2020.

Management took a number of steps to help existing customers affected by Covid-19, such as some flexibility on subscription fees, and it offered new customers 90-day free subscriptions to help them get started, which had a positive impact on new customer growth. Retention in the quarter was in line with historical trends, although there will likely be some slippage in revenue retention from customers in hard-hit industries.

Taking it all in, management guided for revenue growth of around 50% in the current quarter and analysts expect revenue to rise by around 47% this fiscal year. That growth is likely to keep attracting investors, even if adjusted EPS is seen dipping to around -$0.26 this year.

The Stock
BILL came public at 22 on December 22, jumped 61% its first day, then ran up to 64 by mid-February. The market crash pulled the stock back down to 24, but it remained above the IPO price and shares recovered quickly, peaking at 97.84 during intraday trade on May 8. BILL then pulled back to 62 in what looks like a sensible response to an overheated stock. The stock then absorbed the IPO lockup expiration and a secondary offering, priced at 74.25.

OneWater Marine (ONEW)
One of the surprising trends of this pandemic, and a weird twist of the shutdown, has been the surge in sales of certain discretionary goods, even high-priced ones. Everybody with financial resources, and that includes a surprising number of people due in no small part to economic stimulus, has been gearing up for a summer of recreation!

Bikes and recreational vehicles are selling like hotcakes. So are boats.

OneWater Marine (ONEW), which has a market cap of $312 million, offers a compelling way to play the strength on the latter. The company is a recreational boat retailer selling both new and used boats (88% of revenue, 69% of gross profit), as well as related marine products, parts, and accessories.

Boat sales are tilted toward saltwater fishing, runabout and pontoon boats, with wake/ski boats and other varieties contributing incremental sales. As you’d expect repair, maintenance, storage, marina and rentals are part of the picture too, as is boat financing and insurance.

OneWater Marine is growing through acquisitions and organically. You may easily have a dealership in your area and not know it, however, as acquired dealerships retain their own name. One of the company’s strategic advantages is the technology infrastructure that it brings to all acquired companies, which helps streamline operations and facilitates real-time monitoring, marketing, sales and training programs, as well as access to key performance indicators (KPIs).

The company has roots dating back to 1987 when Austin Singleton first started in the marine businesses with Singleton Marine, but the formal founding date for OneWater Marine Holdings was in 2014, when it had 15 locations and four dealer groups.

Since then the business has grown to 63 locations and 21 dealer groups, spread across coastal and inland states from Texas to Maine. Florida, Texas, Georgia, Alabama, and Ohio account for 85% of revenue.

Despite relatively brisk growth OneWater has captured less than 2% of the 4,000 boat dealerships spread across the country. MarineMax, the next-largest player, has about 1.5% (59 stores). Still, there is plenty of room to grow. Total U.S. marine sales top $40 billion, and $10 billion just in the states where OneWater has a presence.

In 2019 sales totaled $769 million, an increase of 27%. Some of that was related to acquisitions, but same-store sales growth of 12% shows relatively strong organic growth too. In Q2 2019, ended February 28, revenue was up just 4%. But in Q3, which ended on May 31, business soared with revenue surging 30% as same-store sales jumped 25%, even though several locations were impacted by shelter-in-place orders.

Moving into June management reports that inbound interest remains strong. With acquisitions likely paused analysts are looking for around 10% revenue growth and adjusted EPS of $1.11 in 2020. That would mark a deceleration in the topline growth rate but clearly market dynamics are shifting in the short term and demand is through the roof.

The Stock
ONEW went public in February 2020 at 12 and initially jumped 26%, then ran to 18 a couple weeks later. Then the market crashed and the stock plummeted, falling below 5 at the worst of the selloff. After six weeks recovering in the 5 to 7 range ONEW’s recovery began, then accelerated after the May 7 earnings report. It has since walked up to just above 20. The stock’s pattern of higher highs and higher lows has been largely without pause, even as it surpassed the post-IPO high.

Purple Innovations (PRPL)

Purple Innovations (PRPL) is one of several emerging bed-in-a-box companies. While the product and marketing pitch may seem a bit gimmicky to consumers who are reluctant to give up their traditional mattress the rest of the world is voting with their wallets and the evidence is crystal clear – bed-in-a-box mattresses are winning.

For the most part, people love this type of product. Sure, there will be some that haven’t found the right firmness, but most issues are not unique to this type of mattress – they’re just part of picking the right mattress in general.

The positives are undeniably attractive. Pick out your mattress online and get it a few days later. Carry it past whatever obstacles were previously difficult to navigate with a huge mattress (who hasn’t taco-ed a king or queen mattress at some point in their lives to get it up the stairs or through the doorway?), cut open the box and voila! You’re good to go.

Of course, you don’t need to buy a mattress from Purple to enjoy all the benefits. You can order from Lull or Casper (CSPR), buy from Costco, IKEA, Walmart and other big retailers, or pick from a huge number of small players selling foam, latex and other varieties online.

But Purple stands out because it has a proprietary material and manufacturing process for its “purple grid,” a temperature-neutral gel grid that adapts to the body and retains its shape year after year.

The concept was created by Tony and Terry Pearce, who developed the first iteration for wheelchair cushions. Further innovations drove usage in industries from medical beds to footwear to ankle braces. More versions were created and licensed by companies including Stryker Medical, Dr Scholl’s, Nickelodeon and more.

In 2013 the Pearce brothers decided to try and slash manufacturing costs so they could make an economical mattress. That meant developing the Mattress Max manufacturing machine. Sales started in 2016, grew 200% to $197 million in 2017, and have continued at 45% to 50% since.

Along the way Purple expand mattress offerings and developed other products too, including pillows, seat cushions, bedding, mattress covers, pet beds, bed frames and, most recently, face masks. They have recently begun ramping up production of the seventh Max machine to accommodate rising demand.

The company even turned a profit in 2019, when it delivered adjusted EPS of $1.71, up from a loss of -$0.04 the year before. In Q1, which ended on March 31, revenue was up 46%.

The coronavirus pandemic has had an impact, but not necessarily a bad one. Initially, the company furloughed employees and began to focus on the direct-to-consumer (DTC) channel (Purple mattresses are available in 1,800 retail outlets too). In April DTC orders surged 170% and the furlough was quickly reversed.

On June 9 management said May DTC sales were up 125% to roughly $71 million, while wholesale orders fell less than 2%. The company’s cash balance improved 54%, to $96 million. It’s moving ahead with manufacturing expansion, including a new facility in the Southeast U.S.

The current rate of growth is no doubt a factor of more people being stuck at home, and possibly by some stimulus money helping consumers justify a new mattress purchase. But bigger picture, the bed-in-a-box concept is more than just a fad. With a market cap just under $1 billion and expected revenue growth of 42% this year, Purple Innovations looks like the real deal.

The Stock
PRPL came public in February 2018 when it merged with Global Partner Acquisition, a special purpose acquisition company. Shares began trading around 10 but struggled for several quarters and traded at half their initial offering price in April 2019. PRPL began to advance slowly, going through two extended consolidation phases below the 10 level, then broke higher in January 2020 and ran to 16. The stock crashed back near 5 during the early days of the pandemic. The recovery was almost as swift as the crash and PRPL was back near 15 by the end of May. Shares look ready to make a convincing break above 16 now.

SelectQuote (SLQT)
Direct to consumer (DTC) insurance brokers have been nabbing market share from their offline peers for years now, and the trend is likely to continue. With technology-enabled platforms that employ data science and skilled agents, consumers are able to go online and comparison shop to find just the right policy for their situation, regardless of carrier. Add in a pandemic and the pitch to shop online for insurance only gets stronger.

SelectQuote (SLQT), which has a market cap of $4.5 billion, is arguably the best DTC insurance broker in the healthcare space. It derives roughly two-thirds of revenue from Medicare Advantage (MA) and Medicare Supplement (MS) plans, which fall into the SelectQuote Senior segment, and which collectively represent an $18 billion addressable market.

The structural trends are strong here given that 10,000 people are aging into Medicare every day as they cross the 65-age threshold, and they are increasingly turning to private plans over public options. Just like everybody else, this segment of the population is also increasingly comfortable shopping online or over the phone. Analysts think these factors could help DTC brokers grab 25% of the Medicare market within three years, up from the current market share near 10%.

SelectQuote sells more than just Medicare insurance, however. SelectQuote Life and SelectQuote Auto & Home are smaller segments but play important strategic rolls as cash is collected more quickly and there isn’t the seasonality found in the senior business. This allows SelectQuote to shift internal resources between segments as needed.

Given the current growth trajectory analysts see Medicare products contributing roughly 80% of growth in the coming years, until they account for three quarters of total revenue. Life could grow at around 20% a year and make up around 24% of revenue while the Auto & Home will dwindle to roughly 1% as management prioritizes faster growth segments.

Astute investors will wonder how SelectQuote shapes up against the other publicly-traded major DTC player, Ehealth (EHTH). As it stands now Ehealth has slightly larger market share, but there is room for both to grow as the overall market is expanding. SelectQuote arguably has a better customer service business model as an agent is required to help consumers enroll. SelectQuote also pulls in leads from a wider variety of sources, and its other product (Life, Auto & Home) further differentiate it from Ehealth, who offers under 65 health plans.

SelectQuote also offers superior growth. Revenue was up 44% last year and should grow by around 50% this year and next. Ehealth’s growth rate is about half that. SelectQuote also sports higher margins, albeit on a smaller revenue base, but has lower cash flow than Ehealth.

Taking it all in SelectQuote is an expensive stock (valuation roughly 50% higher than EHTH) and having just gone public there’s not a lot of trading history to go on. But we’ve seen investors pile into stocks like this so we’ll step up to the table.

The Stock
SLQT came public on May 21 at 20 and jumped 35% the first day. As expected, shares have been volatile since with no real trading pattern emerging (it’s been less than a month). So far the high has been 29 and the low has been 25.28.

Tela Bio (TELA)
Tela Bio (TELA) is a $219 million market cap MedTech company that has introduced a new category of tissue reinforcement materials for soft tissue reconstruction. The company is currently pursuing markets worth roughly $2 billion.

The main product is OviTex, which addresses the $1.5 billion hernia market. Hernias occur when an internal part of the body pushes through a hole in muscle or surrounding tissue. In most cases the solution is surgery and insertion of mesh, which reinforces the area and can allow for tissue to regrow and further strengthen the defect.

Traditional options on the market include permanent or resorbable synthetic mesh, or a biologic mesh, depending on the type of hernia. Unfortunately, no solutions are perfect as the weakened area doesn’t always fully heal. This can mean additional surgery is seen in 10% to 30% of cases, depending on a wide variety of factors.

Tela Bio’s solution aims to do better. It is a blended matrix including 5% polymer fibers interwoven through layers of biologic material, which is derived from sheep from New Zealand. The evidence to date suggests this solution provides the benefits of both biologic and synthetic repairs at a lower cost, with fewer complications and improved outcomes.

Tela Bio’s second product is OviTex PRS, which is designed specifically for the $500 million plastic and reconstructive surgery market. This product only accounts for 9% of sales now, but it will be much more meaningful over the coming quarters. The company is currently ramping up the launch of this product.

As expected Tela was affected by the Covid-19 shutdowns when procedures came to a halt. However, the team ramped up Zoom calls with surgeons who were more easily accessible given they weren’t at hospitals. That education effort could pay dividends and help Tela break deeper into the competitive market for tissue reinforcement materials.

Sales growth is rapid, not surprising for a young company just launching products. Revenue was up 87% in 2019, to $15.4 million, and was up 100% in Q4 2019. Growth slowed materially in the first quarter of 2020 due to the pandemic. Revenue was up a modest 13% through March 31, and management believes sales will contract in Q2 due to delays in getting procedures going again.

However, while analysts see revenue up a relatively modest 30% this year, sales are expected to double in 2021 to $100 million provided things get back to normal. Naturally, with such a small revenue base a few things going right or wrong could change that growth rate significantly.

The company is not profitable and will likely lose around $2.21 million this year. It has just over $41 million in cash in the bank, which should last for several quarters. However, it’s wise to expect secondary offerings from a company at this stage of growth.

The Stock
TELA went public at 13 on November 8, 2019 and didn’t do much for the first two months. It then turned north and moved up near 19 just before the market crashed, pulling shares down to a low of 5.25. The stock jumped back to 8 right away and has been making a series of higher highs and higher lows ever since. There was virtually no pause at the IPO price and the stock spiked to an intra-day all time high yesterday. The current pattern suggests TELA could continue to run higher.

Previously Recommended Stocks

Today we are making the following ratings changes in our portfolio:

10x Genomics (TXG) is upgraded to BUY.

Chewy (CHWY) is upgraded to BUY.

Smartsheet (SMAR) is upgraded to BUY.

Sprout Social (SPT) is upgraded to BUY.

Enphase Energy (ENPH) is downgraded to SELL. The stock has been a poor performer over the last month and is down more than 20% from our entry point so it’s time to let it go.

Also, we made a few changes since the May Issue, all of which were communicated through Special Bulletins and which were reflected in the updated portfolio published on June 5.

On May 25 we took partial profits by selling one quarter position in CrowdStrike (CRWD), Datadog (DDOG) and Dynatrace (DT) to lock in gains of 52%, 71% and 72%, respectively. Those stocks remain on hold now and hall have move materially higher since those partial sales, with both CRWD and DDOG up over 100% from our entry point and DT up 95%. On June 5 we sold Kroger (KR) just below our breakeven point due to lackluster performance.

On June 5 we added the second half of our position in Virgin Galactic (SPCE) and upgraded Viela Bio (VIE) to buy. We also moved three stocks to hold, including DraftKings (DKNG), Enphase (ENPH), and Smartsheet (SMAR). DKNG remains at hold now, while ENPH is moved to SELL and SMAR is upgraded back to BUY.

An updated table of all stocks rated BUY and HOLD, 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.

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 call or email with any questions.

^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 July 15, 2020

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