Cabot Early Opportunities 126

In the October Issue of Cabot Early Opportunities we continue to snap up shares of high-growth software stocks, while adding a couple of consistent growers in the landscaping and waste management arenas to round out our market exposure.

Enjoy!

Cabot Early Opportunities 126

Stock Name	Market Cap	Price	Investment Type
AppLovin’ (APP)	$35.6 billion	95.7	Rapid Growth - Software
Dynatrace (DT)	$21.9 billion	77.0	Rapid Growth – Software
GFL Environmental (GFL)	$14.5 billion	40.1	Rapid Growth – Waste Management
SiteOne Landscape (SITE)	$9.53 billion	214	Growth – Landscape Supply
ZoomInfo (ZI)	$27.3 billion	69.6	Rapid Growth – Software

It’s All About Earnings

There are a lot of things investors could focus on these days, ranging from potential impacts of supply chain disruptions and labor shortages to the big-picture economic effects of inflation and rising interest rates.

But really, for the coming weeks it’s going to be all about earnings season. We’re all looking for insights into how individual companies are being impacted by the aforementioned challenges (and more) and what opportunities they’re successfully chasing down.

Because our focus in the near-term is going to be so zeroed in on individual companies, I want to use this part of the October Issue to try and get ahead of the game with a few company-specific updates. Below are comments on stocks that have already announced (or pre-announced) quarterly results, and/or are noteworthy for stock performance (or lack thereof) or business development reasons.

So, let’s get right into it.
First up is Academy Sports (ASO). Academy Sports has been recovering from the aftereffects of a secondary offering in September that came on the heels of the company’s Q2 earnings report. Though we’ve been in the position for around four months, the retreat means we’re only modestly above our breakeven price. While supply chain issues are a concern with any retailer, we think a strong consumer, store growth and digital strategies can help move ASO back near 50 in the near future. At the same time if we see retail names begin to slip again we’ll probably step aside quickly. BUY

Avantor (AVTR) pre-announced Q3 earnings last week and has also recently announced a senior notes offering to help finance the acquisition of Masterflex. The results were mostly in line with expectations (revenue up 14.3% to $1.83 billion) but didn’t beat by the wide margins that investors have come to expect given the financial performance in previous quarters. With more details to come on the quarterly conference call (10/29) and AVTR trading near our entry point we’re sticking with a buy rating, for now. However, I’m also watching the stock closely for any signs of further weakness as I’ll be less inclined to stick with it should AVTR begin to slip. BUY

DLocal (DLO) released preliminary Q3 results yesterday with total processed volume (TPV) up 213% to around $1.79 billion and revenue up 118% to around $67.9 million. Both figures were ahead of analyst estimates (Q3 estimated revenue was $64.7 million). Concurrently, the company announced a non-dilutive secondary offering of 16 million shares (with an option for 2.4 million more) from certain selling shareholders. The net effect was that shares closed down nearly 10% yesterday. For now, this does not change my opinion of the stock. It’s “normal” that an early-stage stock will see early investors liquidate some portion of their holding soon after the company goes public, and in this case these shares will help diversify the investor base. Pricing will be interesting to see, as always. As far as the financial results, the high-level numbers suggest the growth story remains very much intact. We’ll look forward to more details on the conference call. BUY

iHeartMedia (IHRT) shares have slipped back toward the low end of their summer trading range, despite a second-quarter report back in August that showed revenue from all segments (Multiplatform, Digital/Podcasting and Media & Audio) doing slightly better than expected. Concerns over the spread of the Delta variant curbing live events (and related media spending) are likely to blame for the stock’s lackluster performance this summer. But big picture we see a return of media spending and especially growth in digital/podcasting as supporting a significantly higher share price for IHRT. With quarterly results not expected for a few weeks and the stock at the lower end of its trading range we’ll stick with IHRT for now. However, should shares slip below 20 we will likely exit the position. Moving to hold. HOLD

LightSpeed Commerce (LSPD) has recovered some of the ground it lost when a short report came out in late September. As is typical, the report was so long it gave the impression this company is a sham. I’m not convinced. Still, companies that come under such vicious attacks are subject to further declines if things don’t go perfectly in the wake of the report. LightSpeed management has the opportunity to share the latest on November 4 when they report Q2 results. I expect we’ll stick with LSPD until after the event, then go from there. We are up 7%. HOLD

Maravai Lifesciences (MRVI) isn’t the only biotech stock that’s been weak lately (IBB is -10% from September highs) but I’d be remiss not to point out some of what’s driving the recent selloff. High level, MRVI has come under pressure because of concerns that Covid-19 vaccine volume will wither in 2022 and beyond. Part of that concern rests in the relative success of treatments (such as Merck’s (MRK) molnupiravir) in combating Covid-related hospitalization and death, and the potential for such treatments to reduce dependence on vaccines. While I think that logic is fundamentally flawed, I also recognize that some investors may simply conclude that we’re exiting the pandemic and therefore it’s time to move on from MRVI (whose CleanCap tech is a cornerstone of the Pfizer (PFE)/BioNTech (BNTX) vaccine, as well as other mRNA vaccines). Admittedly, that reasoning made more sense when MRVI was trading north of 60. Now, nearly 40% lower I’m not so sure. Here’s why. PFE/BNTX plans to increase Covid-19 vaccine production by 25%, to four billion doses, in 2022. Many developed countries (U.S., EU, Israel, etc.) are beginning to offer booster shots, vaccine uptake in much of the rest of the world is dismal (yes, mRNA comes with supply chain challenges, but still), applications are in for PFE/BNTX vaccine approval in children ages 5 – 11, the next generation of Covid vaccines are currently in development (variants aren’t going away until global vaccination rates improve) and there are many applications for CleanCap in vaccines beyond Covid. I have to believe some of this will resonate with investors before long. We are filling the second half of our position in anticipation of a near-term uptick in the stock. BUY SECOND HALF

Upstart Holdings (UPST) has been on a tear since we entered the position three months ago (our position was up 208% as of yesterday’s close). After such a furious rally analysts and investors are wondering how much good news is priced in. It’s hard to go wrong making 200%+ in three months, so we’ll take this opportunity to sell another quarter of our position and head into earnings with our remaining half. SELL A QUARTER, HOLD HALF

What to Do Now
Lean bullish but recognize that trends can change quickly during earnings season.

On the buy side, gradually build positions in those stocks you have conviction in for 2022. If conviction only comes with time, that’s fine (and you’re not alone). Just take a starter position in a company to feel it out, then increase the size of your position as you get a better feel for the stock’s action.

On the sell side, try to keep the size of your portfolio under control by trimming names that don’t resonate any longer (we’ve suggested selling several over the last month) or which are tying up capital that you’d much prefer to allocate to other names. I expect we will exit more positions during earnings season, with those decisions based on reports, forward guidance and stock price performance.

STOCKS

AppLovin’ (APP)
We made a little money on AppLovin’ (APP) this spring but only held the stock for a few months as it started to act a bit shaky heading into the summer. With more time in the public market and a fundamental story that appears to be improving now, along with increased analyst support/coverage, we’re going to step back up to the plate now.

The backstory is that that AppLovin’ offers exposure to the large and growing mobile app market. Mobile apps generate roughly $200 billion in global revenue a year. With developer times falling and more games and apps out there, there is rising demand for tools that improve their visibility and monetization opportunities. This is where AppLovin’ comes in.

The company has a vertically integrated technology platform for mobile app marketing, monetization, and measurement. There are a number of tools on the platform, but the two that are catching the most attention right now are AXON and MAX.

AXON is a machine learning engine that matches users with ad content based on first-party engagement and transactional data. Analysts are increasingly bullish on AXON’s growth potential because, among other reasons, the rollout of privacy changes to iOS (including the use of IDFA) is driving demand for solutions that can reach users through alternative ad networks.

The other solution drawing attention these days is MAX, which is AppLovin’s monetization solution. This solution serves around 14,000 apps, however a few weeks ago AppLovin’ announced it will acquire MoPub from Twitter for $1.05 billion. MoPub is primarily an app monetization platform as well, and it serves roughly 45,000 apps.

Adding MoPub into the mix will mean more app inventory for both current MoPub and MAX customers. It also means a new pool of customers for AppLovin’ to sell its other solutions too. MoPub could add $250 million in annual revenue.

Stepping back, we expect 2021 revenue will grow by roughly 90% to $2.75 billion then grow by another 30% to $3.58 billion in 2022. Adjusted EPS should be around $0.33 this year, then $0.88 in 2022. These numbers will change once the MoPub acquisition closes.

The Stock
APP came public at 80 on April 15, fell 19% the first day, then went down from there. Shares finally bottomed near 49.5 on May 13, the day after Q1 earnings were reported. APP then went on a fierce rally that carried the stock to 90 by June 18. Software stocks then sold off and APP went with them, eventually finding firm ground near 55 on August 16. Shares have acted much better since then. APP rallied back above 70 in late August and traded in the 67 to 80 range through October 6. News of the MoPub acquisition sent APP above 80 and it has since rallied to a new all-time high above 95.

Dynatrace (DT)

As software adoption grows and companies become more digitized there is a growing need to monitor the performance of all the new applications they’re running.

This is where Dynatrace (DT) comes in. The $22 billion market cap company was founded in 2005 with on-premise solutions then was reborn in 2016 when it released a new, cloud-based platform for application performance monitoring (APM).

The pitch then was that the new platform was needed to better address the needs of customers who were working with a wide variety of on-premise, private cloud and public cloud solutions.

It was the right call.

With the transition to the cloud now behind it Dynatrace is off and running and growing customer count quickly. Moreover, the company has successfully moved beyond APM and has added solutions for infrastructure monitoring, log management and security.

More specifically, Dynatrace’s solutions help clients monitor applications and the underlying infrastructure, develop and release software more quickly, and improve the performance and user experience of client applications across mobile, web, IoT, etc.

Dynatrace can now cover a wide swath of client needs in a rapidly growing market worth more than $30 billion.

The business is doing extremely well. Revenue grew by 29% to $703.5 million in fiscal 2021 (ended in March) and is on track to grow by 30% this fiscal year and for several years thereafter. Adjusted EPS will could easy stay flat at $0.63 this year as Dynatrace is investing in sales and marketing and R&D.

Those investments will cap profit growth in the near term, but management believes they’re necessary to pursue the meaningful opportunity in front of them. Given that the company grew new customers by more than 50% (135 new additions) in the first quarter of the fiscal year, with multiple blue-chip customers from a variety of industries, it’s hard to argue that these investments aren’t bearing fruit.

Putting it all together, plus factoring in that we’ve owned DT before and done very well (over 70% return) and that the chart looks fantastic, this stock is high on my list of contenders for a big 2022.

Second-quarter results will come out next Wednesday, October 27, before the market opens.

The Stock
DT came public in August 2019 at 16 and popped almost 50% the first day. It traded as high as 37 before the pandemic-induced market crash cut it in half. But DT was back near all-time highs by June 2020. The stock then traded mostly in the 35 to 45 range through January 2021, then rallied and traded in mostly the 45 to 56 range through June 2021. A more consistent uptrend has since taken shape and DT has made a series of higher highs and higher lows above its 50-day line since the June breakout.

GFL Environmental (GFL)
My mom’s father passed away more than 40 years ago but one of the funny memories my dad has from his years as a son-in-law was how satisfied “Pops” was after a trip to the dump.

“He just felt like a huge weight had been lifted off his shoulders,” my dad recalls. “That guy sure loved getting rid of stuff.”

I’m pretty sure that’s not my grandfather’s most distinguishing character trait, but I think it’s a sentiment shared by a lot of us. Garbage day represents an opportunity to lighten the emotional load we bear because of all the stuff that builds up around the house.

GFL Environmental (GFL) represents a way for impassioned cleaners to put their money where their hearts are, whether they’re looking for a swing trade or a longer-term investment. The Canadian waste management company is the hands-down fastest-growing public company in its space. And has a cool story too.

Years ago, entrepreneur Patrick Dovigi invested in a small transfer station near Toronto, Canada. He grew this small company little by little, mostly by buying other transfer stations and refuse collection operations. Since 2007 he’s made roughly 150 acquisitions, including some significant ones such as Waste Industries, which had a 50-year operating history.

The pace of acquisitions hasn’t slowed. Since July 1 GFL has closed 16 acquisitions, bringing the year-to-date total to 31. The most recent one was Peoria, a vertically integrated network in Central Illinois and eastern Missouri that provides solid waste hauling and recycling services to commercial, residential and industrial customers. Peoria has 350 vehicles and 400 employees and operated for 90 years under the Coulter family, many of whom will join GFL.

The deals completed this year represent a huge increase over management’s guidance. At the beginning of the year, management indicated a desire to add C$280 million in revenue through M&A. With one more significant acquisition expected to close any day now (Terrapure Environmental for C$340 million) the company is on track to acquire C$715 million.

That’s a huge number, and it clearly illustrates the strategy behind this company, namely, to gain efficiencies and scale by joining forces with many of the smaller operators in the fragmented solid waste management industry.

Turning to the numbers, GFL grew 2020 revenue by 25% to C$4.19 billion. Adjusted EPS was C$0.17. This year, analysts expect the company to grow revenue by at least 25%, to around C$5.28 billion. Adjusted EPS should be around C$0.48.

A final sweetener to this business is the renewable opportunity. GFL has identified 18 landfills where gas projects could be added, both to sell gas as well as to use in the company’s CNG-fueled trucks.

We’ll enter this position with a swing trade perspective targeting a 10% to 20% return within a few months.

Third-quarter results will come out Wednesday, November 3.

The Stock
GFL went public at 19 in early March 2020, right before the pandemic struck and the market tanked. Shares bounced back quickly and by November 2020 GFL was off and running back above its IPO price. The stock entered 2021 near 29 and ran as high as 36.7 by mid-April. Shares then pulled back by nearly 20% at the low but held firm at 30 multiple times as they traded in the 30 to 33.8 range through most of the summer. After a brief trip above the previous all-time high of 36.7 in early-September, GFL finally made a convincing upside move on October 6 when it stepped out above 38.

SiteOne Landscape Supply (SITE)
SiteOne Landscape Supply (SITE) isn’t as early-stage a company as I typically look for (IPO was in 2016) but the stock’s recent consistency and the market exposure that’s a world away from software makes it an attractive ballast in our portfolio right now. We will enter this position with the intent hold it for a short while (several weeks to a few months) and try to capture a modest gain in the 10% to 20% range.

The story is simple. SiteOne sells landscape supplies to residential and commercial landscapers in North America through roughly 590 stores.

Products cover the spectrum of exactly what you’d expect: irrigation supplies, fertilizers, pesticides, herbicides, pavers, stone, nursery goods, lighting and all manner of other landscaping and outside property maintenance accessories. Beyond products, SiteOne also offers consultation services.

It should come as no surprise to investors that the new-home construction and renovation markets are alive and well. SiteOne is benefiting from that, and it also enjoys steady revenue from all the ongoing maintenance that well-cared-for properties require.

Management has been supplementing organic growth with acquisitions. The latest four include Green Brothers Earth Works (Atlanta, GA), Rock & Block Hardscape Supply (Southern California), Melrose Irrigation Supply (Florida) and Timberwall Landscape & Masonry Products (Minnesota).

In terms of growth, 2021 is expected to be a big year with revenues seen up 24% to $3.35 billion and adjusted EPS up 60% to $4.36. Current consensus calls for the pace of revenue growth to moderate in 2022 to around 7%, but that will likely change given that SiteOne typically makes several acquisitions a year.

Third-quarter results will come out Wednesday, November 3.

The Stock
SITE came public at 21 back in the middle of 2016 and has been a terrific long-term performer, albeit with a few significant corrections along the way. The most notable of these were two pullbacks of around 55%, one in the second half of 2018 and the other during the market crash in March 2020. In both cases SITE recovered fine, and the uptrend has been especially consistent since the depths of the pandemic. The one notable pullback of late was a 24% retreat from the then all-time high of 206 following an earnings report in early May. That slide didn’t end until mid-June when SITE traded as low as 156. Since then, SITE has made a series of higher highs and higher lows and recently broke out to fresh highs above 210.

ZoomInfo (ZI)
ZoomInfo (ZI) has developed a cloud-based go-to-market intelligence system that helps sales and marketing people identify and manage contacts so they can better target their sales efforts.

The company’s dynamic contact database is continuously updated by leveraging the most current artificial intelligence (AI) and machine learning (ML) technologies. There is also a team of research analysts and data scientists working to grow and improve the quality of the data.

Beyond this contact database, ZoomInfo also offers solutions to help teams research prospects that are ready to buy, analyze conversations and relationships, automate sales motions (i.e., emails and phone calls), screen website leads based on quality, and build and maintain their own database to help drive sales and marketing initiatives.

Big picture, ZoomInfo’s efficiency solutions help sales and marketing people do their work more efficiently. But these products offer more than just mere convenience – they’ve become must-have solutions for many clients since time spent messing around looking for contact information, calling dead leads and randomly reaching out to hundreds of inbound chat inquiries give the competition a window of opportunity to swoop in and make the sale.

It’s far more effective to let ZoomInfo’s AI and ML tech process billions of pieces of data in real time and relay insights on 15 million companies and 100 million industry contacts every day.

That’s why the company has over 20,000 customers and is enjoying rapid growth, especially in enterprise and international markets.

On the company’s Q2 2021 earnings call back in early August, management said customers spending over $100,000 a year grew by 69% and topped 1,100, while international customers grew by 75% and reached 11% of total revenue.

Management said it was the best second quarter ever in terms of new customer additions and that customer engagement and retention were at record highs.

Behind the scenes ZoomInfo is investing in R&D (spending nearly tripled in Q2) and integrations and partnerships, including one with Snowflake (SNOW), to round out the platform. Acquisitions, including Chorus (Conversation Intelligence solutions, growing around 100%), which closed in July, add further depth to the platform.

Add it all up and ZoomInfo has the look of a rare growth asset in software, with a clear path to $1 billion in revenue by 2023 (look for sales to grow 50% to $710 million this year) and enviable profit margins that should spit out adjusted EPS of $0.51 this year (up 46%) and $0.68 in 2022 (up 33%), even with significant investments.

Third-quarter results will come out Monday, November 1.

The Stock
ZI came public on June 4, 2020 at 21 and rallied into the low 50s before pulling back as the summer got underway. The low of 30.8 was hit in mid-September. ZI then spent the next ten months chopping around between 35 and 60, teasing investors with some quick rallies but never really getting its act together to mount a sustained run higher. The Q2 earnings report on August 2 appears to have changed that. ZI was trading just below 55 heading into the event and since then the stock has run up to nearly 70. There was a pullback to 59 a couple weeks ago, but ZI’s quick return to all-time highs since suggests an extended uptrend might be upon us.

Previously Recommended Stocks
We’ve trimmed a number of positions since the September Issue of Cabot Early Opportunities came out.

On September 22 we elected to exit half our position in Endava (DAVA) for a gain of 51% as we were concerned about the surprise announcement that the earnings date had been pushed back. As it turns out there was no need for concern and following the earnings report Endava is back to all-time highs. We continue to hold our remaining half stake.

On October 4 we exited Bentley Systems (BSY), Goeasy (GSY.CA), and Snowflake (SNOW) for gains of 18%, 29% and -7%, respectively. We also locked in significant partial profits by selling quarter positions in Upstart (UPST) and Bill.com (BILL) for gains of 142% and 239%, respectively.

On October 8 we exited our position in BellRing Brands (BRBR) for a modest loss of -9%.

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

The next issue of Cabot Early Opportunities will be published on November 17, 2021.

Cabot Wealth Network
Publishing independent investment advice since 1970.

President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
Cabot Heritage Corporation, doing business as Cabot Wealth Network
176 North Street, PO Box 2049, Salem, MA 01970 USA
800-326-8826 | support@cabotwealth.com | CabotWealth.com

Copyright © 2021. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website.

Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.