March 9, 2023

The big events so far this week have been Fed Chair Jerome Powell’s testimony before the Senate Banking Committee (Tuesday) and the House Financial Services panel (Wednesday).

He sounded more hawkish than he did during his February 1 press conference.

The highlights (or lowlights, depending on your perspective) were that he said the process of getting inflation back down to 2% has a ways to go and will likely be bumpy, that the latest economic data have been stronger than expected, which means interest rates will probably go higher than previously expected, and that the Fed is open to increasing the pace of rate hikes if the data show faster tightening is warranted.

The bottom line is that the market had been pricing in just one or two more 25bps (basis point) hikes. Now it’s looking for a 50bps hike later this month followed by two more 25bps hikes (May and June).

While the end of the hiking cycle is still in sight (we think) the market is interpreting all of this as having increased the odds of a recession. It’s not helping that crypto bank Silvergate Capital (SI) is shutting down and returning deposits.

Granted, it’s a crypto bank so maybe best not to read into that too much. However, either out of sympathy or greater concerns, financials across the full market cap spectrum are weak. That’s not a great sign and it’s hurting the Russell 2000 Small Cap Index (down 8% since February 2), which has a pretty good allocation to the financial sector.

The next big macro event will be tomorrow, when the February payroll employment report comes out. The consensus is for about half of January’s 517,000 job gain. The Fed will be looking closely at this report, which means the market will be too.

To sum things up, the market is facing a stiffening headwind. While in the big picture the data has been showing that inflation has peaked, the continued strength in the job market is raising eyebrows.

That’s disappointing as earnings amongst our portfolio companies were quite good, as were most stock reactions.

This week we continue to lean conservative and, heeding the macro picture, trim just a little.

Recent Changes:
Repligen (RGEN): Sell a Quarter
Expensify (EXFY): Move to Hold

Updates

Enovix (ENVX) has been making progress lately and there could be a potential catalyst next week. Management is speaking at the J.P. Morgan Industrials Conference on Wednesday, March 15. Management needs to confirm that the timeline it laid out in the Q4 report is still intact. HOLD

Expensify (EXFY) continues to face a mediocre business climate for its customer base of small businesses. We knew that going in, but it’s a profitable business, has a share buyback program still going and has an undemanding valuation. Big picture, it’s likely to do well when small business activity picks up, and there are some self-help initiatives going on that should help in the meantime, such as a new Card program and an effort to get more pay-per-use customers to switch back over to subscription. In 2023, analysts expect Expensify to grow revenue by 12% to $190 million and for EPS to be up about 14% to $0.32. On the Q4 call management reaffirmed its expectations for long-term growth of 25% to 35%. The stock is down a little over 25% since we jumped in, triggering a move to hold today. HOLD

Flywire (FLYW) has held up well since its earnings report on February 28. Revenue was up 42% to $73 million (beat by $7.55 million) while GAAP EPS of -$0.01 beat by $0.11. The company sees 2023 revenue of $353 - $364 million (+34% at the midpoint) versus consensus of $349 million. Wells Fargo, J.P. Morgan and Citigroup all bumped up price targets after the report. Management will attend the Loop Capital conference next Monday and the Wolfe Research Forum on Tuesday. BUY

Huron Consulting (HURN) had a fantastic report on February 28. Revenue of $313.7 million (+26.3%) beat by $31.3 million while adjusted EPS of $1.12 beat by $0.13. Guidance for 2023 revenue of $1.22 - $1.28 billion (+10% at the midpoint) is also ahead of expectations for $1.21 billion. EPS guidance of $3.75 to $4.25 straddles consensus of $3.98. The company doesn’t have much coverage but right after the report Benchmark increased its price target from 90 to 95. Late last week Barrington Research raised theirs from 89 to 105. HURN gained about 18% in the two sessions following the report. It’s given back about 7% since. I’d like to see a little more follow-through here. BUY

Inspire Medical Systems (INSP) reported a great quarter in early February and enjoyed a little rally, which has faded since Fed members began squawking about higher for longer (again). With shares trading around 250 the stock remains a hold. Management will present at the KeyBanc conference a week from Tuesday. HOLD TWO THIRDS

Intapp (INTA) reported a great quarter in early February and has been on fire since. There’s no new news. Continue to hold. HOLD

Rani Therapeutics (RANI) is back above its 50-day line and should be providing us with an update relatively soon. HOLD

Repligen (RGEN) is hardly changed since the company’s Q4 report a couple of weeks ago. Fourth-quarter results beat expectations but management guided for 2023 revenue that fell short due to resin supply issues in the chromatography business. I recently mentioned I would consider selling a quarter of our position if RGEN didn’t perk up. We will do so today. SELL A QUARTER, HOLD REST

Sprout Social (SPT) remains locked in a trading range. The stock enjoyed a little rally on the strong Salesforce.com (CRM) report last Thursday, but the general malaise of the broad market has held SPT back (along with most software stocks). HOLD HALF

Terex (TEX) is our newest position and continues to look good. We started with a half stake. Terex makes capital equipment that’s used in construction, maintenance, manufacturing, energy, recycling, minerals and materials management applications. The stock offers exposure to massive investments being made in global energy and infrastructure markets as companies and countries jockey for competitive advantage and try to get on a path of more efficient and sustainable development. Management has guided for 2023 revenue of $4.6 billion to $4.8 billion (+6.4% at the midpoint), operating margin of 10% to 10.4% (up from 9.5% in 2022), EPS of $4.60 to $5.00 (up 12.3% at the midpoint) and free cash flow of $225 million to $275 million (+65% at the midpoint). BUY HALF

TransMedics Group (TMDX) has remained strong in the face of an iffy market following the fantastic Q4 earnings report a couple weeks ago. We’ll continue to stick with a hold rating. HOLD THREE QUARTERS

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