May 18, 2023

No banks imploded this week, and there are rumors that the folks in Washington are making progress on a debt deal. Plus, we think the Fed may just pause for a bit, if not be done hiking rates.

Add it all up and the broad market is inching higher.

So far, the small-cap index is being left behind. That’s because of the high weight of financials and energy, and those two sectors look terrible in small-cap land (charts below).

The thing is, the poor small-cap performance at the index level is masking the constructive behavior of many growth-oriented, small-cap stocks.

That stinks when it comes to drumming up new interest in our asset class. But it also means we’re able to snap up shares of a lot of these stocks when nobody else is really paying attention.

Back to the broad market, the longer we go without anything really breaking the easier it is to feel better about the rest of the year.

I’m not thinking we’re out of the recession woods just yet. But the rolling recession theory, which is far less painful for the market, continues to make the most sense. The longer we move forward without slipping back, the closer we get to an economy where more things are working, which would be good for the stock market.

In short, it’s another week where I’m leaning cautiously optimistic. That’s an overused term, but it really is the best way to summarize things based on what I see happening in our portfolio and with stocks of companies that I’m interested in adding.

We are making one portfolio change this week. Huron Consulting (HURN) goes on the sell block. Details below.

Recent Changes: Huron Consulting (HURN) moves to SELL

Updates

Alphatec (ATEC) is basically unchanged since reporting results a couple weeks ago. Management stuck with its guidance for revenue growth of 28% to $450 million in 2023, break-even adjusted EBITDA this year and cash flow break-even in 2025. In the coming months, we should hear more about how REMI is expected to be integrated, however, it’s not going to contribute to revenue until 2025 so it’ll be some time before the stock will begin to benefit from that acquisition. BUY

Enovix (ENVX) gave us a lot to think about on the Q1 earnings call, and I’ve repeated it all for two weeks so I’ll keep my notes short today. We may get some fresh news next week or the week after given the busy conference schedule. Management is speaking at conferences hosted by J.P. Morgan (May 23), B. Riley (May 25) and Craig-Hallum (May 31). HOLD

Expensify (EXFY) was beaten up after reporting Q1 2023 results two weeks ago. The big-picture issue being that small businesses aren’t spending a lot of money these days. But Expensify has a growing pipeline of paid trials and the company’s invite-only ExpensiCon conference kicked off today. Management has been expected to unveil the new platform and make a bunch of product-related announcements. They dribbled one out last week, which was that employee reimbursements can now be made almost anywhere in the world at no extra cost (in USD, CAD, GBP, EUR and AUD). Shares are getting a lift today, possibly due to some buzz being created at the event. As I said last week, I think the stock reflects a lot of bad news and very little upside recovery in the business, so we’ll give it a little more rope and look for the upcoming media push to give EXFY a little lift. HOLD

Flywire (FLYW) reported Q1 results early last week. Revenue was up 46% and full-year revenue guidance was upgraded to $380 - $398 million (versus $373 - $392 million previously). Management said demand remains strong across all its business segments (education, travel, healthcare, B2B). Shares are trying (again) to make a move above resistance. Let’s go! BUY

Huron Consulting (HURN) has been in the portfolio since December and since then has given me a few heart attacks. It’s one of those stocks that I hired to deliver relatively drama-free, consistent gains that I didn’t expect would blow our socks off but would still do better than the broad market. Well, HURN has performed almost exactly as well as the broad market since December 1. It’s up about 2%. But it’s taken a much more volatile path to get there. And the unexplained 12% fall after the Q1 earnings report a few weeks ago, while largely wiped away since, just seems out of character for this type of stock. Bottom line, performance has been about as one would expect but the road has been too bumpy for this type of stock. I’m going to let HURN go today at a modest gain while the market is acting well and no banks are blowing up. If we’re going to be in a stock this volatile, I want more upside potential. SELL

Inspire Medical Systems (INSP) continues to look great, hitting new all-time highs in the weeks since management reported Q1 revenue growth of 84% and raised full-year guidance by $20 million (more than the Q1 beat) to a range of $580 - $590 million. Company reps were at a BofA conference in Vegas recently. There was some commentary around how demand is greater than ENT physician capacity. The late-2023 to early-2024 launch of the INSP V, which eliminates the sensing lead so procedure time should be cut from about 90 minutes to 60 minutes, could help with this. INSP V is scheduled to be submitted to the FDA in June (180-day window for FDA to respond). With a software update, the INSP V can be upgraded to INSP VI, which will add sleep detection and save a patient from having to turn the device on. Piper Sandler just raised its price target on INSP from 335 to 360. HOLD TWO THIRDS

Intapp (INTA) has been a buzzkill this week given the company just launched a secondary offering priced at 37.5. Somewhat ironic is that that 37.5 offer price is roughly what the consensus price target was prior to the great Q1 report, after which many analysts jacked their targets up closer to 50. News of the offering (pricing wasn’t included at the time) sent INTA from 42.5 to 37 yesterday (-15.7%), probably because the total offering of 6.25 million shares is a little less than 10% of diluted shares outstanding. That said, there are only 2 million new shares being issued, so actual dilution is closer to 3%. The remaining 4.25 million shares are being sold by a larger shareholder. Intapp will net around $70 million in the deal. As is always the case, we won’t know how the stock takes this development until after the fact. The “great” ones bounce right back as the market assumes the cash raised will help the company deliver value in excess of the dilution. But there’s at least a few days to a week of disruption while new/selling shares are distributed into the market. HOLD

Rani Therapeutics (RANI) was sold last week. No new news. SOLD

Repligen (RGEN) has done very little of late, and there’s no news to report. JPMorgan just put out a survey to feel out investor sentiment toward the bioprocessing market, which is where Repligen plays. I should be able to access results ahead of next week’s update and will report back on any interesting findings. HOLD HALF

Si-Bone (SIBN) is our newest addition and, despite a rocky start (secondary offering announced just hours after my report came out), the stock is acting beautifully. It’s up about 7% since we got in and has bounced back from the secondary offering very nicely. Nothing more to say at this point. BUY HALF

Terex (TEX) has come up off recent lows near the stock’s 200-day line in the couple of weeks since reporting Q1 results that beat expectations. Revenue was up 23% and full-year revenue guidance was increased by more than the Q1 beat to a range of $4.8 - $5.0 billion. EPS guidance was also raised (by a full dollar) to a range of $5.60 - $6.00. The current debate on the stock is just how far we are in the machinery cycle. By some measures, we may be getting a tad late. But then there is an expected ramp in public sector spending, commercial construction as businesses come back to the U.S. from overseas and stimulus spending (IRA, CHIPS Act). Also, TEX has a decent aggregates business that is less cyclical than the aerial lifts side. BUY HALF

TransMedics Group (TMDX) has been acting fine since the Q1 report, and more recently, since a $400 million convertible note offering was announced. As discussed last week, this capital raise will likely go to help build out the TransMedics Aviation business. Which is more concept than anything else in the eyes of investors at this point. On the Q1 earnings call, management went into some depth about logistics and why they want to get into the air transport business. It makes sense from a business perspective, however, we don’t know what the economics really look like. I suspect TMDX won’t do a ton until we know more about this so continue to hold. 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.