December 19, 2024

Note: Due to the Christmas holiday, there will be no Cabot Small-Cap Confidential update next week. Happy holidays!

In last week’s update I spoke about the potential for a market retreat early in 2025 given that investors are sitting on sizeable paper profits, and selling after December 31 would allow them to postpone capital gains taxes.

My projection may have been off by a week and a half.

Stocks threw a hissy fit yesterday because, for months, the market had gotten just about everything it wanted and then … it didn’t.

Yes, the Fed delivered the 25bps rate cut that was so widely expected. But lower projections for future rate cuts and a slightly higher inflation outlook drove the S&P 500 to have its worst day since August, the Russell 2000 to have its worst day since June 2022, and a VIX spike of 74%, the second largest one-day spike in its history.

The Fed’s Summary of Economic Projections (SEP) now calls for only two rate cuts next year, down from previous expectations of three or four. There’s already some speculation there might not be any cuts. And the Fed increased its core PCE inflation forecast for 2025 from 2.2% to 2.5%, indicating stickier inflation and a harder path to get to the 2.0% target.

To add insult to injury, the recent batch of news out of Washington errs toward the dysfunctional end of the spectrum.

There is a continuing resolution (CR) that Congress needs to approve by Friday or the government will shut down. But the funding measure came up against a brick wall after it was rolled out Tuesday night because, what seems like a simple spending bill that allows government funds to flow through mid-March, also includes $100 billion in disaster aid and dozens of other unrelated policies.

That’s kicked off a ton of conservative Republican resistance, led by President-elect Trump, Elon Musk and Vivek Ramaswamy.

Toss in the uncertainty about what the tariff picture will look like when Trump steps into office, whether or not there will be a longshoreman’s strike in January, a stock market that had been sailing smoothly to new high after new high, and a healthy dash of investor complacency and, well, you get yesterday.

In other words, the table was set for investors to freak out a little. And, somewhat not surprisingly, they did.

The S&P 500 dropped almost 3% to close just below its 50-day moving average line and 3.6% off its all-time high from last week.

The Nasdaq fell 3.6% and closed right on its 25-day moving average line.

And the S&P 600 SmallCap index fell 4%, falling through its 50-day moving average line and back into the trading range that existed from August 23 through the breakout through 1,465 to new all-time highs on November 6.

The yield on the 10-year jumped 2.5% (11bps) to close at 4.49% yesterday.

So where does this leave us?

My hope for the very short term is that the market can stabilize and avoid a nasty end-of-year correction at a time when so many people want to be spending time with their family and friends, not stressing about whether they should be rebalancing into the end of the year.

But I do think we’ll see more grinding and/or weakness before the end of January. Maybe it will be quick and painful. Or maybe more drawn out.

There is a bright side to this vaguely defined weakness I’m describing, however. Barring a series of out-of-left-field negative catalysts, I think the market bounces back in good shape and goes on to have a very good 2025.

Trump is going to extend tax cuts, and maybe add a few more. The situation in the Middle East appears to be improving. U.S. GDP growth is solid (Q3 just revised up to 3.1% vs. expectations of 2.8%) and could very well get better.

The U.S. job market has cooled but unemployment hasn’t soared. The Fed’s current target range (4.25% to 4.5%) is already 100bps lower than it was in September and could be another 25bps or 50bps lower in a few more quarters. That takes a lot of pressure off the economy.

And earnings projections are good.

In other words, a lot of the underlying conditions that have pushed the market higher still exist. That didn’t all change yesterday. And in fact, it’s not like a more hawkish Fed came as a surprise to many.

The market just got ahead of itself, which is something most of us were feeling was the case.

That all said, I am pulling back a little today by selling one position that has too much drama around it.

Recent Changes
Willdan (WLDN) was sold last Friday, 12/13, for a 2% loss.
Zeta (ZETA) moves from HOLD to SELL

Updates

Artivion (AORT) hasn’t had any news since last week’s announcement that its AMDS Hybrid Prosthesis, which is not yet approved in the U.S., was granted a Humanitarian Device Exemption (HDE) from the FDA. If and when fully approved, AMDS represents about a $150 million annual U.S. market opportunity, which is significant. Artivion is currently working with facilities and physicians to obtain hospital IRB approvals so patients will have access to the medical device. A broader Premarket Approval is still expected by the end of 2025. The stock was trading above its 25-day line until yesterday when it sold off 3.8% to close on its 50-day line and 8.7% below its recent high. BUY

AvePoint (AVPT) has looked absolutely fantastic but wasn’t immune to yesterday’s selling pressure. Shares gave back 3.5% and closed on their 25-day moving average line. The stock is still within a few percentage points of its recent all-time high and hasn’t cracked below its one-month trading range. No fundamental news. I will be watching closely as a break lower might trigger taking partial profits. HOLD

Docebo (DCBO) gave back 5.2% yesterday to dip below its 50-day line. As with most of our stocks, this was a significant pullback but doesn’t (yet) change anything. DCBO traded at this level just over a month ago. The company, which is still not well known in the investment community but is gaining more recognition in the software industry, was just awarded nine Brandon Hall Group Excellence in Technology Awards. BUY

Enovix (ENVX) surprised the market on Monday when it announced that CFO Farhan Ahmad has left the company and that it is searching for a new CFO. The press release seemed like a reversion to some of the rambling statements of the “old Enovix,” with Executive Chairman T.J. Rogers saying, “… I deeply appreciate the numerous emails I have received from our investors that typically start with ‘I like Enovix, but...’ and then continue with thoughtful positive suggestions on how to improve our communications. In some cases the emails even contained an improved re-written version of one of our press releases and, in one case, an offer from a shareholder who is a professional consultant to help us for free… I have always been completely open with investors, even on the details of problems, as demonstrated in my two-hour presentation on January 3, 2023, which was Raj Talluri’s first day as our new CEO. And I will institutionalize that standard in our IR group over time. Investors should also understand that our employees are afraid of appearing to let investors down and therefore, while never dishonest, they sometimes play their cards too close to the vest.” This seems more like commentary one would give at an investor conference, not a press release announcing a surprise CFO departure. On the other hand, it may be that T.J. is speaking more specifically to investors who are frustrated with the $100 million equity raise on November 5, which came the day after an earnings release, and statements that the company had no immediate need for capital. In short, some internal disruption here. That said, with roughly $250 million in cash Enovix is probably all set with money for quite some time and has potential to “upgrade” their CFO. BUY

FTAI Infrastructure (FIP) is a U.S.-focused infrastructure company with businesses ranging from rail lines to deepwater ports and terminals to data centers. The stock just dipped below support at the 8.0 level, which I attribute to broader market weakness. There’s also been discussion about how unlikely Nippon’s proposed takeover of U.S. Steel (X) is. FIP management has said that the deal would be a slight positive but that no deal is neutral. It would only affect one area of the company’s operations, so I don’t think this is a major factor in terms of the stock’s performance, but it’s still something I’m keeping tabs on. BUY

Mama’s Creations (MAMA) reported after the close on Monday and I put out a Special Bulletin with my thoughts Tuesday morning. It was a decent quarter and the future sounds very bright too. I think the stock just needs to digest what seems like a meh earnings report because construction-related costs in Q3 drove an earnings miss. Investors who aren’t paying attention to the details might think this signals a new normal, which it doesn’t. MAMA stock has pulled back to the 8.0 level, which is where it was a month ago. BUY

Peloton (PTON) gave in to selling pressure yesterday, but the stock has held above support near 9.45, which has been very solid since November 22. There’s no new news to report. BUY HALF

Perpetua Resources (PPTA) gave back a little yesterday but was relatively resilient, holding above 11.5 and closing at about the same price that shares traded at last Friday. We still don’t have a final decision from the U.S. Forest Service regarding the Stibnite Gold Project. There was an interesting mining-related story put out this week though. Apparently, advisers to Trump are asking that he waive environmental reviews for federally funded critical minerals projects to boost domestic production of materials used in EVs, electronics and weapons. Trump hasn’t yet weighed in. I can’t say I necessarily agree with this idea. Even though I’m sure a lot of the process could be streamlined, I think a system of checks and balances is a good thing when it comes to natural resources, the environment and the communities around these types of projects. BUY HALF

Weave (WEAV) dipped ever so slightly yesterday but still looks great. No news is good news, at the moment. BUY

Willdan Group (WLDN) was sold last Friday within a couple percentage points of our entry point. SOLD

Zeta Global (ZETA) has been in damage control mode since the short report came out and the news that two of its larger customers, Omnicon and Interpublic Group of Companies (IPG), will join forces has added another layer of uncertainty. While I think management has done a good job managing through this situation, the bottom line is Zeta has turned into a drama stock. And I hate drama. The burden of proof is now on ZETA, and the company will have to perform flawlessly for the stock to really work in the short term. I’d rather take our profit of around 55% right now and watch the story evolve from the sidelines. SELL

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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