January 20, 2022

In the January Issue of Cabot Early Opportunities I highlight five standout growth stocks that should have meaningful upside from current levels. Recognizing that the current risk-off environment has these types of stocks acting erratically (probably an understatement) I’ve focused first and foremost on companies I like rather than getting hung up on their recent share price performance. In terms of buying, we’ll start very, very slow. The three smaller companies I feature go straight to the Watch List as we’ll try to be opportunistic buyers when things feel more secure. Even with the two larger companies we start with half positions.

Enjoy!

Previously Recommended Stocks

We’ve trimmed a number of positions since the December Issue of Cabot Early Opportunities.

On January 3 we locked in a 25% gain on HubSpot (HUBS) and a 14% gain (in just a few weeks) in MP Materials (MP). On January 13 we took partial gains of 246% and 51% in Sprout Social (SPT) and Kornit Digital (KRNT), respectively. On January 14 we took a partial gain of 50% in Altair Engineering (ALTR) and a loss of -13% in Bath & Body Works (BBWI).

Today, we take our medicine by selling Rivian (RIVN), down around 39%, and by selling half our position in Global-E Online (GLBE), for a roughly 45% loss.

Those last two positions sting. But we did extremely well in 2021 (average gain of 41% on 85 full and partial positions sold, with 18 generating a greater than 100% gain).

Today we also move DLocal (DLO) 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 February 16, 2022.

Stock Summaries

Airbnb (ABNB)

Airbnb (ABNB) is now a household given the astounding success the company has had blazing a path in the global marketplace for alternative accommodations and experiences.

While shares have come down 30% from their recent high, they’re still trading well above their IPO price (157 now versus 68 at IPO), but also comfortably above their post-IPO low (130 from last summer). We’ll take a stab at the stock now because it’s another rare growth asset (like SNOW, also featured this month) that has the potential to deliver revenue beats in 2022, as well as its first profits since coming public.

If you have never dug into the company, the backstory is that Airbnb’s platform connects over 54 million active bookers to over 5.5 million listings from over 4 million hosts. The company has massive brand recognition in the alternative accommodations market and a very easy to use platform.

Factoring in both short and long-term stays, as well as experiences, management says the company is going after a roughly $3.4 trillion market. I’m not sure how the experiences market is calculated exactly or where that trend will go, but I see the company has having massive long-term growth potential, while also having optionality to add services that are not factoring into the model these days.

The last couple of years have been a crazy journey for Airbnb. From the depths of the pandemic when demand cratered to a massive rebound as travelers sought out alternatives to busier hotels, motels, resorts, etc., Airbnb has done a remarkable job navigating the pandemic. I think that holds true for both travelers as well as hosts.

In Q3 2021, revenue of $2.24 billion came in ahead of consensus ($2 billion). Travel was rebounding nicely from the depressed levels of 2020, though at +23% bookings were a little light as compared to analyst expectations (closer to 30% expected). However, margins were very strong, and Airbnb delivered adjusted EPS of $1.00 in the quarter.

It’s hard to gauge how Omicron has affected travel for Airbnb since the company seemingly does better with local, non-air travel, which could benefit from less international travel in Q4. Current consensus estimates point toward Q4 revenue growth of 70% ($1.46 billion). That implies full-year 2021 revenue near $5.9 billion (+75%) and adjusted EPS of -$0.59.

Looking out into a (possibly?) more normal 2022, Airbnb should grow revenue by around 24% to $7.4 billion and deliver adjusted EPS of $1.00.

I don’t think those numbers will send the stock into the stratosphere overnight. But as I step back and look at the world, the state of the market and where this stock could go in the coming decade, I think it’s worth taking a stab at ABNB at these levels. We’ll dip our toe into a half-sized position to give ourselves the flexibility to average down if there’s another selloff. BUY A HALF

The Stock
ABNB came public at 68 on December 10, 2020 and rose 113% that day. By mid-February the stock was trading above 200, but it was moving in a wide range. Shares sold off in the spring of 2021 and ABNB was back to 130 by mid-May, then again in mid-July. ABNB began climbing into the fall and shares shot back above 200 following the Q3 report on November 4. Since then, ABNB has been on a choppy downtrend with a December 2021 low of 149.4 holding (so far). With shares at 156 now we’ll buy half a position and keep a close eye on that 149 level.

Portillo’s (PTLO)
Portillo’s (PTLO) is a fast-casual restaurant chain that began in 1963 when Dick Portillo opened the first Portillo’s hot dog stand in Villa Park, IL. He invested $1,100 in the stand, which he called “The Dog House.”

Over the years Portillo’s has become a well-known restaurant brand in the Chicago area. Success has led the company to expand into nearly 70 locations across nine states and to take the company public (IPO was in October). Most locations are in the upper Midwest, with a few scattered across Florida, Arizona and California. Portillo’s has a market cap of just under $1 billion.

The restaurant is knowns for famous Chicago-style hot dogs, Italian beef sandwiches, chopped salad, cheese fries, homemade chocolate cake and chocolate cake shakes. I’ve never been to one but according to the website the Italian beef is “… slow-roasted for four hours, thinly sliced, and served on freshly baked French bread. Then, it’s dipped in hot gravy made with our homemade blend of seasonings that we’ve been perfecting for 50 years.”

That sounds pretty good to me!

The average per-person spend at Portillo’s is less than $10. That’s much lower than other, high-volume, fast-casual restaurants. But this is a very efficient business with diners coming in across weekends, different times of the days and through both drive-in and lobby locations. The average works out to roughly 50-50 lunch/dinner.

Average daily guests per restaurant surpasses 2,500. That’s more than McDonalds (MCD), which pulls in around 1,600 a day!

Investments in technology are part of the reason Portillo’s can keep costs down and customer turnover quick. The company has drive-thrus (53% of revenue), delivery (6% of revenue) and dine-in (41% of revenue), all supported by online ordering and mobile app capabilities. Around 20% of orders come through digital channels.

Food costs are higher than is typical in fast casual, while labor costs are lower. All in, Portillo’s unit-level returns hover around 30%, which is higher than the industry average.

This is the type of business that could explode over the next decade. It’s been in business for over 50 years, so that brand recognition and story is authentic and time-tested, should consumers want to embrace it. It’s also in the fastest growing area of the restaurant industry. And Portillo’s has an aggressive expansion strategy to grow to 600 locations by 2039, implying average annual growth of 13%.

While stores around the Chicago area tend to have higher sales volume (up to $9 million versus $6 million outside of that area), there is room for those locations to turn up the dial as brand awareness and restaurant density spreads. Expect management to focus on growing store count in current geographic areas before it spreads out to new states.

In 2022 we should see seven new stores open. That should mean Portillo’s grows revenue by around 10% next year, to $590 million. That’s somewhat slower than the 19% growth rate expected when 2021 is in the books. But there’s likely some upside room to consensus estimates. As a final sweetener, Portillo’s is expected to turn profitable this year and deliver adjusted EPS of $0.32.

All this said, the stock has been in freefall lately, so we’re not going to try to play the hero right now. We’ll look for signs of stability and a more encouraging investing environment before we pounce. WATCH

The Stock
PTLO came public on October 21, 2021, at 20 and jumped 46% the first day. While there were a few down days in the weeks afterward, the stock basically went vertical, peaking at 57.7 on November 17. The slide has been equally impressive. One month after the peak PTLO had fallen by 48% and closed at 31.7 (intraday low was 29.8). A brief end-of-year rally carried the stock back to 40.5, but the downward slide resumed in January. PTLO is currently trading near 27, which is roughly in line with the intra-day low on the day PTLO came public. We’ll keep a close eye on this price level as we ponder when to get in.

Snowflake (SNOW)
We jumped into Snowflake (SNOW) last September but jumped back out after the stock’s trend started to look a little iffy. With shares now trading 30% off their high and Snowflake continuing to look like a scarce software asset (exactly what we want during questionable periods for growth stocks) we’ll take another swing.

The story hasn’t changed since we first covered it. Snowflake is a hyper-growth stock that has brought the benefits of public clouds (scalable, flexible, etc.) to data management so customers can better understand their data.

The company should post average revenue growth of 40%+ for at least the next seven years. Given investor focus on revenue growth coming out of software stock corrections, this could be the only reason you need to buy SNOW right now.

In 2022 (just one quarter left as Q3 was reported in December) Snowflake is seen growing revenue by 104% to $1.21 billion.

The business is doing so well because Snowflake has developed a disruptive, cloud-native data warehouse solution that is becoming part of nearly every cloud data warehousing discussion, included with offerings from Microsoft (MSFT), Alphabet (GOOG) and Amazon (AMZN).

The technology is cloud agnostic, hugely scalable, very flexible, easy to use, and different from other options in the market, so much so that Snowflake has the potential to create its own market, currently referred to as the Data Cloud.

Should this vision materialize, we would see a network of data providers and consumers all sharing and analyzing data across clouds and across the world. Those not in the network would want in as the value of being “inside” grows exponentially, thereby fueling significant long-term growth. Some of that growth may not even be factored in today.

That future is becoming reality as some of Snowflake’s sales partners say it’s not so much about selling Snowflake – because customers know they need it – it’s more about selling the data warehousing environment that surrounds the solution.

In Q3 fiscal 2022 (reported December 1) revenue grew by 110% to $334 million. There may have been some intense platform use from a few customers that contributed to the 9% revenue beat (management said a 5% to 7% beat would be “big”) that won’t repeat in Q4.

Looking past quarter-to-quarter fluctuations it appears clear that Snowflake is tracking toward $2 billion in revenue in fiscal 2023 (the upcoming year), when adjusted EPS should turn positive for the first time.

While valuation is still a potential issue – especially in the current risk-off environment – I expect SNOW will continue to justify a premium valuation in any environment due to its long-term revenue, cash flow and earnings growth potential. BUY A HALF

The Stock
SNOW came public at 120 in September 2020 and jumped 112% the first day. After chopping around in the 200 to 300 range for a few months, shares rocketed up to 429 in December. That was the peak, and SNOW came back to earth in the following months, ultimately falling as low as 185 on May 13. It then went on a six-month tear that carried shares back to 405 by mid-November. SNOW has been in a choppy downtrend since and is currently looking for support around its 200-day moving average line at 285. We’ll take a half position right here.

Solo Brands (DTC)
Solo Brands (DTC) is a direct-to-consumer company that sells outdoor-oriented products under a number of different and well-recognized brands.

The best-known brand, Solo Stove, drives roughly 65% of revenue. These smokeless, stainless steel fire pits, camp stoves and grills have been popping up all over the country and the company continues to roll out accessories that increase the functionality of the core product. This is the product the company was formed around in 2011.

Solo Brands also owns Chubbies, a manufacturer of shorts, swim trunks, shirts, hoodies, jackets and other casual and athletic apparel. Chubbies generates around 20% of revenue and was acquired in 2021.

Solo Brands also owns Oru Kayaks (acquired May, 2021), which makes a line of foldable and packable origami kayaks (6% of revenue) and ISLE (acquired August 2021), which makes a line of inflatable paddleboards (10% of revenue).

All of the company’s products are aimed at people that want to get outdoors and enjoy either some solitude, or activities with friends and family. That’s made them a hit during the pandemic. And that trend is likely to persist well into the future given Solo Brands’ marketing tilt (and popularity) with the millennial crowd, which is beginning to make up a larger portion of the homeowner and consumer spending pie.

Solo Brands is also a relatively high-margin business given its direct-to-consumer distribution focus (10% greater gross margin than wholesale channel) and intentional strategy to run discounts on its own website to keep prices below that of retailers, who must abide by the Minimum Advertised Price (MAP) policy. That said, the company is likely to begin ramping up its wholesale channel with partners like Dicks (DKS), REI, Ace Hardware and more as shopper traffic picks up in retail locations.

My biggest concern with this business is that it becomes another flash in the pan growth story but demand cools if consumer enthusiasm to spring for “the next cool thing” fades. Also, given that many of Solo Brands’ products are somewhat higher ticket items (with the exception of Chubbies) and last several years, there isn’t going to be a big replacement cycle for things like stoves and kayaks.

However, the company’s products are very functional and definitely create a buzz. It continues to introduce both new and accessory products (such as cooktops, heat deflectors, shelters, and a new Pizza Oven for Stove, paddles, drybags, pumps, etc. for watercraft brands). There are also new brand acquisitions (none formally announced) and international expansion opportunities (Germany, Europe, Australia). All this means there’s probably a lot of gas left in the growth tank if management plays its cards right.

Solo Brands recently pre-announced Q4 2021 results that came in way ahead of expectations. Analysts were looking for around $125 million in revenue, but the actual number should be closer to $174 million. That’s a big beat which was likely driven by 170% growth in the Solo Stove brand (60% growth in other brands expected).

Now, we’re looking at roughly 200% revenue growth (to $400 million) in 2021 and something in the neighborhood of 45% revenue growth in 2022 (to $570 million). Moreover, Solo Brands is profitable. Adjusted EPS should double to around $1.00 this year then grow another 15% or so in 2022.

We will add DTC to our Watch List as it could be one of the leading consumer stocks once we get through this rough patch. WATCH

The Stock
DTC came public at 17 on October 28, 2021, and closed slightly higher that day. Shares moved as high as 21.6 over the next two and a half weeks then fell back to trade in the 15 to 17 range through the first week of December. After the Q3 earnings report on December 8, DTC lost a little more ground, then bounced at 13.5 on December 20 and gained a little altitude, finally closing at 16.7 on January 13. That was the most recent high. Since then, DTC has been tanking. This isn’t a stock I want to buy now, but it’s starting to look really interesting.

TaskUs (TASK)
TaskUs (TASK) is a founder-led company that provides customer support and customer experience (CX) services to “new economy” companies. This client base features high-growth, digital-first business models and includes Zoom (ZM), Uber (UBER), Netflix (NFLX), Coinbase (COIN), DoorDash (DASH) and Meta Platform’s (META) Instagram, among others.

The company is focused on delivering services around customer care, content moderation/security, and data labeling and annotation services. This is a mix of basic services and quite sophisticated work that, in aggregate, allows TaskUs to grow with clients by taking on incremental work volumes as their businesses scale up.

Clients are attracted to TaskUs because, like them, the company was born on the web and has grown up in the cloud. There is no legacy software code to work around, and that cultural similarity is a large part of what sets TaskUs apart from other providers of IT services.

The company is also differentiated by its ability to get new projects going quickly. This ties back to the efficiency of modern technology solutions. Management says that TASK employees are very quick to get integrated and start working on customer accounts (roughly three-times faster than the competition).

As a leader in the industry, TaskUs has a hiring advantage as well. The company is able to charge a higher rate than competitors, which can mean more flexibility when looking to bring more staff on board.

One challenge has been geographic reach, which has impacted win rates in recent quarters (though the 56% win rate in 2020 was still high). On that note, management announced late in 2021 that TaskUs would expand into Poland, Romania and Malaysia. This is expected to help the company win business with both existing and new clients as there is something of an offshoring trend going on in tech.

Finally, there is potential TaskUs could juice the company’s growth rate through tactical acquisitions. With a pullback in valuations, I suspect the M&A team has probably dialed up their work. On the flipside, I wouldn’t rule out tie-up that sees TaskUs going with a larger company that’s executed well over the years. Accenture (ACN) comes to mind.

That’s all speculation though. For now, we should plan on TaskUs delivering organic revenue growth of around 56% ($216 million) in Q4 2021, bringing full-year 2021 revenue to $750 million (up 57%). Adjusted EPS should be around $1.24 (up 103%).

Looking into 2022 analysts expect that revenue will rise 28% to $960 million and adjusted EPS will be up modestly, to $1.30. However, analysts are being slow to update forward-looking numbers given that management has not yet provided any guidance.

Lockup expiration for TASK was two days ago (January 18). Prior to lockup expiration the public float was around 27 million shares. Now, with 82 million shares eligible for sale, the public float goes up considerably, to around 109 million.

As a final note, this morning Spruce Point Capital published a short attack on TASK, saying the stock has 50% downside. This may create an epic buying opportunity for us in the near future, but not right now.

Given all the factors, at this time TASK is going on our Watch List. I like the revenue growth and profit profile but am also wary of trying to catch a falling knife, especially given the short attack. Let’s keep an eye on TASK and see how the stock acts for a spell before takin the next step. WATCH

The Stock
TASK came public on June 11, 2021 and closed up 35% that day. The stock went sideways for a couple months then exploded higher, racing from 30 to 85.5 from the beginning of August through September 24. The trend got a little choppy after that as TASK bounced around in the 53 to 74 range through mid-November, then shares cratered, trading as low as 35.2 by December 6. A little rally carried TASK back to 56.6 by the end of 2021, but the stock has been sliding since and the recent short report has sent it back near 30. We’ll keep an eye on TASK as we consider jumping in.

Market Overview

Stock Name	Market Cap	Price	Investment Type
Airbnb (ABNB) –Buy Half	$103 billion	163	Rapid Growth – Accommodations
Portillo’s (PTLO) – Watch	$969 million	27.1	Growth – Restaurant
Snowflake (SNOW) – Buy Half	$89.0 billion	290	Rapid Growth – Software
Solo Brands (DTC) – Watch	$780 million	12.3	Rapid Growth – Consumer Products
TaskUs (TASK) – Watch	$2.84 billion	29.2	Rapid Growth – Services

* Watch List Addition

Perspective
Don’t Poke The Bear
We’re officially in a bear market in growth.

Stocks of good companies have consistently failed to hold at expected support zones and trading patterns have completely disconnected from company-specific factors. It’s all about Omicron/Covid, interest rates, inflation and the potential market impacts of a dozen other risks.

From a policy perspective it’s about the end of life support at the hands of doctors at the Fed, Treasury and U.S. government. And those docs are saying it’s now up to corporations and consumers to keep the economy’s heart beating. I think that’s probably a healthy thing in the long run.

The bad news is that storm clouds have started to come together and some models predict a pretty ugly forecast. Should inflation persist, Omicron (and other variants) continue to cause supply chain and economic disruptions, businesses and consumers fail to pick up the baton and interest rates surge we could be in for a nasty 2022. Higher rates and lower productivity isn’t exactly a recipe for economic success.

On the other hand, EVERYTHING looks grey when storm clouds are overhead. At these times it’s easy to play the Eeyore card and think, as the world’s most pessimistic grey donkey said, “The sky has finally fallen. Always knew it would.”

But that’s a pretty dismal way to go through life. And when it comes to the market there is always a silver lining somewhere.

Right now, with the Nasdaq having just fallen 10% from its high and growth stocks having been under consistent and considerable pressure, it’s wise to take stock of where we are, and where we could go.

For starters, software stocks have been some of the very worst performers. Depending on how you slice the space the net result is that the broad software universe is down roughly 25% from the November peak.

That’s bad, but it’s not out of the norm for software corrections. They were down 20% in February 2021. After that, software stocks ran 30% higher.

Some of the more resilient companies during corrections are the larger, more profitable ones. Today we try to take advantage of the pullback, and provide some downside protection, by adding half stakes in two such stocks.

Many of the very hardest hit companies are exactly the type we follow. Namely, stocks that are high growth, highly valued, often not profitable, often on the smaller side of things, and often not having been public for too long.

These are also the stocks that rally the furthest and the fastest when things turn around. Today we send three of these companies straight to our Watch List.

What should we expect in the next couple of months?

Looking back in time, the one factor that has overwhelmingly led to upside performance coming out of corrections is revenue growth and revenue beats.

This plays directly into our hands given the types of companies we follow. But in order for these stocks to begin working again investors will need to refocus on the factors that contribute to sustained revenue growth, namely demand, market expansion, sales execution, etc.

I suspect this will begin to happen as we get deeper into Q4 earnings season. We’ll need management teams to provide good 2022 revenue guidance for many of these stocks to work.

On the other hand, we could continue to see multiple compressions among high growth names if the aforementioned storm clouds intensify and/or when the Fed rate hike cycle finally begins.

Given all the factors, we’re going to move forward carefully.

What to Do Now
Expect anything. During periods when macro factors take over in lieu of company-specific factors it is equally likely we’ll see rip-your-face-off rallies as we’ll see intense bouts of selling.

The idea isn’t to time a market bottom perfectly, but to have the capital, the backbone and the clarity of mind to gradually increase stock specific exposure as the market calls us back in. There is no bell that will go off to signal the all-clear, and mistakes will be made.

Think more about playing the long game than trying to do things perfectly over the coming months.

At this precise moment I believe it’s worth taking a stab at a few opportunities, namely the ones in this Issue. We’re also likely to decrease our exposure to certain names in the coming days/weeks, depending on how things go. These moves will be communicated via Special Bulletins.