April 20, 2023

The market continues to act “fine” as we get a little deeper into earnings season this week.

At the index level, small-cap stocks are unremarkable. But I continue to attribute the underperformance to the high weight of rate-sensitive sectors (financials, energy, industrials, materials).

If we look closer at the types of stocks we cover, technology, medical technology, fintech, etc., things are looking OK.

There wasn’t a lot of big economic data over the last week. But one under-the-radar data dump I quickly reviewed over the weekend suggests that the latest banking crisis eased significantly in early April.

The data showed that bank credit increased (reversing a two-week down trend) and bank deposits rose (reversing a five-week down trend).

If you’re having a hard time sleeping some night you can find this data in the Fed’s weekly H.8 report (Assets and Liabilities of the Commercial Banks in the U.S.).

That’s it for macro stuff this week. Things are going to heat up a little next week then the week after a ton of our positions report, and there will be a new Issue coming out.

Rest up! It’s about to get interesting.

Recent Changes: None

Updates

Alphatec (ATEC) is our newest portfolio addition and there’s already something significant to report. After the close yesterday the company announced a meaningful acquisition and it pre-announced Q1 2023 results (hint: they were good).

First, the acquisition. The target is the REMI Robotic Navigation System, which was owned by Fusion Robotics (privately held). The purchase price was $55 million. REMI stands for “Robotic-Enabled Minimally Invasive” system. The platform brings deep navigation and robotics to spine procedures using a 3D image scan or a 2d fluoroscopic image of the patient. In terms of the tools/hardware, REMI is a table-mounted navigation system that guides instrumentation and implants into their precise destination during surgery. Based on the company’s presentation detailing the technology and the strategic rationale for the acquisition I believe some hardware will need to be developed to make REMI mount to Alphatec’s table system. REMI is also not able to be controlled by hand yet (I don’t think), so adding that capability is on the list too.

Big picture, this seems like a major positive development that helps Alphatec compete with bigger MedTech firms in the spine space and also have another opportunity to differentiate their platform in areas like superior outcomes, repeatability/consistency, cost, etc.

Alphatec needed to tap the market for $60 million to complete the acquisition. The terms are 4.285 million shares offered at $14. The stock closed at 16.4 yesterday and is up a little today. The implication is that the market believes the value added here surpasses the cost/shareholder dilution.

Of course, the pre-released Q1 results and forward guidance are also helping the stock. We had thought Alphatec would grow 2023 revenue by 25% (to $440 million) and EPS loss would be around -$0.64. But with Q1 coming in better than expected (52% revenue growth to $108 million), full-year 2023 guidance has been raised to $450 million. Management also reaffirmed expectations for break-even adjusted EBITDA this year and cash flow break-even in 2025.

Bottom line, this is all good news. BUY

Enovix (ENVX) tapped the market this week to raise around $150 million in debt financing. Management says that, combined with the previously announced $70 million in financing, this will be enough to fund four production lines in Malaysia, at roughly 7% dilution to shareholders. That’s not bad. This debt financing is 3% convertible senior notes due 2028. The Chairman T.J. Rodgers has stepped in to buy around $10 million, as has John Doerr, a previous co-investor and Chairman of Kleiner Perkins. While dilution is never great we’ve known Enovix will need to raise capital to build out production and it seems like things are really starting to fall into place. The stock hasn’t been impacted too much by the news. We’ll hear a lot more details next Wednesday when the Q1 update is due. HOLD
Earnings: Wednesday, April 26

Expensify (EXFY) has been working its way just a little higher. There’s no report date yet, but Bill.com (BILL) will be out with results on May 4 and that may provide an early look at trends in this space. HOLD

Flywire (FLYW) is still battling to break above the February 2 high of 29.3 and keep running. I expect we need to get the earnings update before that can happen. That’ll come on May 9. BUY
Earnings: Tuesday, May 9

Huron Consulting (HURN) will be out with Q1 results a week from Tuesday, on May 2. Recall that in Q1 revenue in the Digital capability (44% of total revenue) rose 37% to $130.1 million. Management said healthcare (+18%) and education (+44%) were very strong markets as well. HOLD
Earnings: Tuesday, May 2

Inspire Medical Systems (INSP) enjoyed a little pop last Friday after Mizuho initiated with a buy rating and 300 price target. The stock closed just below 264 yesterday. Earnings are out on May 2. HOLD TWO THIRDS
Earnings: Tuesday, May 2

Intapp (INTA) continues to look fantastic, if not a little overextended to the upside (hence my hold rating). We don’t have an earnings date yet. But when it comes I’m expecting yet another beat-and-raise quarter. HOLD

Rani Therapeutics (RANI) is moving sideways (still). In the coming quarters we’re looking for a Phase 2 trial for RT-102 in the second half of 2023 as well as three additional Phase 1 studies at some point this year. Those include RT-111 (partnered with Celltrion), a RaniPill Go capsule containing a biosimilar of STELARA (ustekinumab), RT-105 (adalimumab biosimilar) and RT-110 (PTH for hypo-parathyroidism). HOLD

Repligen (RGEN) announced the acquisition of FlexBiosys for an undisclosed amount of cash and equity last week. I’ve seen little coverage from analysts on the purchase, though RBC trimmed its price target from 172 to 170 after the news broke. They are not in the bullish camp. Other firms, including JPMorgan, are closer to 250. RGEN continues to trade in its established trading range. HOLD THREE QUARTERS

Sprout Social (SPT) took a hit last week on a short report from Akram’s Razor. The stock has stabilized in the low 50s but hasn’t done much to get overly excited about. Earnings will be out a week from Tuesday. HOLD HALF
Earnings: Tuesday, May 2

Terex (TEX) has given us an earnings date of May 2. There have been a host of price target cuts in the last couple of weeks. This week it was Citigroup (from 63 to 50) and JPMorgan (from 55 to 50). TEX closed yesterday at 45.8. These moves reflect growing concern that the broader machinery group will see downward earnings expectations moving through the year. A slowdown in residential construction spending and higher recession risks are mostly to blame. Specific to Terex, the company’s Materials Processing segment has been a real bright spot (highly profitable) and there are margin improvement initiatives in the works (moving some manufacturing to Mexico). It’s not an expensive stock in terms of valuation. The company’s backlog has also been very strong. The question is whether or not the positives will outweigh the potential negatives. We started with a half-sized position and will stick with that for now as there is some uncertainty as to how Q1 and forward guidance will go. BUY HALF
Earnings: Tuesday, May 2

TransMedics Group (TMDX) pulled back last week to dip below its 50-day line for the first time since early January. That move seems to have attracted buyers as TMDX popped right back to the 50-day line yesterday. A nice move in the broader MedTech space probably helped. There’s no news as we’re looking to the Q1 update a week from Monday. HOLD THREE QUARTERS
Earnings: Monday, May 1

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.