April 11, 2024

The story of the week was yesterday’s slightly hotter-than-expected CPI report, which has shifted the rate cut narrative/speculation to only two cuts this year, down from three, and sent the 10-year yield north of 4.55% (it was below 4.4% last Friday).

While this morning’s better-than-expected PPI number has helped to soften the CPI blow, the debate from here is going to be just how long the Fed is willing to push its luck/try not to rock the boat and keep rates where they are.

I think stocks can hold up fine if two conditions are met. The upcoming earnings season goes OK, and the 10-year yield doesn’t go above 4.7%. We’re already in the orange zone with the current yield, but I think the market can handle it for a bit longer if the economy holds up.

The impact on the small-cap index (S&P 600) has been somewhat dramatic as yields have risen.

Two weeks ago, the index hit 1,350, a roughly two-year high. Today it sits at 1,280.

The high-level take here is that the high proportion of variable rate debt in the small-cap asset class makes it particularly sensitive to interest rate movements. You can see this relationship in the six-month chart below showing the 10-year yield (blue) and S&P 600 Small-Cap Index (green). It’s not perfect, but pretty darn close.

That all said, we’re in a bunch of stocks that often do their own thing (just look at TMDX), so it’s not as if we need the small-cap index to rip higher for our stocks to benefit. But as they say, a rising tide tends to lift all boats.

There’s no doubt we’re facing a little more of a headwind now than we did even a week ago, and one of our names moves to hold today as a result.

We’re now looking to earnings season and/or company-specific updates to get a positive narrative going again. There also seems to be an uptick in M&A action lately, though so far none of our names has been targeted.

Recent Changes
Intapp (INTA) moves to HOLD

Updates

Alphatec (ATEC) held its 2024 Investor Day on March 19, and a few analysts boosted price targets after the event. I covered the highlights from the day (expect average annual revenue growth rate of 20% to get to $1 billion in revenue in 2027 and breakeven in 2025) and the stock has looked stable to slightly positive for the last two weeks. Even yesterday wasn’t a downer for it, an encouraging sign. HOLD

Docebo (DCBO) has been drifting lower for about six weeks during a frustratingly weak period for software stocks (especially little-known ones, like DCBO). Even talk of a HubSpot (HUBS) takeout has failed to ignite the group. In fairness, November through February was very good for software, so some giveback is reasonable, but that backdrop has left names like DCBO adrift. We might get a flurry of activity when management speaks at the William Blair conference in San Diego, CA next week (April 16 & 17). Keeping at buy but will have to move to hold if shares don’t firm up soon. BUY

Enovix (ENVX) has been going in the opposite direction as interest rates and there’s been nothing to talk about with the stock since it was awarded “pioneer status” by the Malaysian Investment Development Authority a couple weeks ago. We’re getting into the time window when we should hear that the company is producing the first samples off the Agility Line (April – June announcement expected). Suffice it to say management better nail this. BUY

EverQuote (EVER) has been in a solid uptrend that has shares poking at the 20 level, where EVER last surged to after the Q4 report in February. The trend of auto insurance costs is up, as evidenced by yesterday’s CPI report showing auto insurance in March up 22.2% year over year. Insurers are getting back into growth mode. BUY

Intapp (INTA) is probing the low-30s, where it hasn’t been since late September. No significant announcements lately. This stock needs to get in gear or management should start looking for offers (I wouldn’t be remotely surprised if INTA is taken out). Barclays reduced its price target to 42 from 47 (stock near 31.8). Moving to hold. HOLD

Liquidity Solutions (LQDT) continues to act OK (yesterday a bit weaker than normal), and the company is out with a few more activity announcements. Its Bid4Assets business will host an online sale for tax-defaulted property in Los Angeles and Riverside County, CA while the GovDeals online marketplace is hosting a sale for 63 underdeveloped lots in Warren County, VA. We also learned that Q2 fiscal 2024 results will come out prior to market open on Thursday, May 9. BUY

Remitly Global (RELY) has slipped below support at the 20 level as all stocks in and adjacent to the financial group (RELY is a fintech) sell off in the wake of yesterday’s CPI report. The carrot here is that the last earnings report showed investor concerns over marketing costs (which sank the stock back in November) were way overblown. Management expects to add more customers this year than last year, reduce transactional and operational expenses (i.e., margin expansion potential) and enjoy higher lifetime value/lower customer acquisition costs. That’s a recipe for success. The catch is that we need to see further proof of these trends in the upcoming earnings report to get more investor buy-in. Also notable in this fintech space is the recent buyout of Nuvei (NVEI) by the PE firm Advent. HOLD HALF

RxSight (RXST) recently announced the launch of its newest lens, the Light Adjustable Lens+ (LAL+). The lens is differentiated from the regular LAL by a slightly higher lens power that extends the depth of focus. Early feedback has been positive, with potential for fewer adjustments after implantation relative to the LAL. Management discussed the benefits of its various solutions last week at the annual meeting of the American Society of Cataract and Refractive Surgery (ASCRS) in Boston. I added the second half of our position on March 28 and RXST is modestly higher since then. BUY

Talkspace (TALK) is our newest position. It’s a small, virtual behavioral health company with licensed therapists, psychologists and psychiatrists across all 50 states. The company has a major initiative to cater to teens and is moving into the senior category as well with a recent Medicare approval. The platform is accessible anytime and anywhere. Costs are relatively low, sometimes costing nothing (insurance). Revenue grew by 25% in 2023 and should be up around 28% ($191 million) in 2024. EPS should turn positive this year too. It’s an unknown story with great potential. BUY HALF

TransMedics Group (TMDX) has been on a tear since the beginning of the month when the company was mentioned in a New York Times piece entitled, “The Organ Is Still Working. But It’s Not in a Body Anymore.” Beyond that, nothing major has changed, though it bears repeating that management put on a good show at the J.P. Morgan conference in late March. They have confidence meeting 2024 guidance (consensus is for 52% revenue growth this year), getting to (and maybe beyond) 10,000 annual organs supported by OCS & NOP, building out the Aviation business and expanding margins. HOLD A QUARTER

Weave (WEAV) is moving sideways without a lot of fanfare as we await the next earnings report. The company offers a platform of customer support software for specialized medical businesses like dental, optometry and veterinary and has a nice growth profile (annual revenue growth around 15% with EPS moving into positive territory this year). Recent press releases have focused on integrations (DrChrono by EverHealth, and Athenahealth). BUY HALF

That’s it for this week. Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

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