November 14, 2024

Trump’s victory has given the S&P 600 SmallCap Index the jolt it needed to break out above this year’s overhead resistance at 1,465.

This is what it looks like on a daily chart going back about a year ...

And this is what it looks like on a weekly chart going back to 2020, showing the index’s all-time high of 1,477 from November 2021 ...

Suffice it to say, an index that hasn’t gone “anywhere” in three years that blasts out to all-time highs is a notable event.

So why is this happening?

Let’s forget for a moment about any concerns whatsoever, put on our raging bull market hats, and consider the positives for the market.

· The election is over, and we have a clear winner. That removes the overhang of uncertainty going into the event and has sparked a relief rally.

· The Trump administration will almost certainly be pro-business and work to cut regulations and taxes. The corporate tax rate could go from 21% to 15%. These are very market-friendly initiatives.

· Trump has a better sense of how government functions now than he did in his first term, which might reduce chaos and streamline action plans (maybe).

· Appointments, like that of Elon Musk, to slow/slash government spending might actually work. Love him or hate him, it’s hard to argue that Musk hasn’t accomplished what many think was impossible, several times. If successful, concerns about a U.S. government debt crisis could prove to be overblown.

· The market reacts favorably to rising revenue and earnings expectations, which are going up on expectations of Trump’s business-friendly agenda.

· The Fed just cut rates, again. And Powell did not sound overly hawkish during his press conference.

Naturally, in the real world, we can’t just consider the positives for the market and ignore the risks, of which there are always plenty.

Chief among them right now are the unknown impacts of potential tariffs, the stubborn yield on the 10-year, and potential that investors are getting too bullish too quickly and could push the market to move too far too fast, sparking a quick reversal. We are already seeing erratic moves in a lot of the “junk” stocks, not to mention more established and respected companies.

To sum things up for now, it’s been a wild ride since the election. I think the result is a more friendly environment for small caps, which I have previously been flagging as ready to break out at any moment.

There are certainly a lot of moving pieces under the hood that will cause certain small-cap sectors, let alone individual stocks, to do better/worse than others as we move forward. But big picture, I think we’re in a good position to generate outsized returns with small caps in the coming quarters and years.

Recent Changes
AvePoint (AVPT) moves to HOLD

Updates

Artivion (AORT) rallied into earnings last week and has given a little back since. The growth story here remains intact as the current portfolio is driving double-digit growth, EBITDA growth at roughly twice the revenue growth rate, and two significant product approvals expected in 2025 (AMDS) and 2026 (NEXUS aortic arch). We should see BioGlue begin to contribute modest revenue from expansion into China over the next two years as well. BUY

AvePoint (AVPT) stock has gone bananas since management reported last Thursday. Revenue grew 22%, EPS was positive and demand for the company’s SaaS products remains incredibly strong, driven by migration from on-prem, gen AI, regulatory compliance and data protection needs. Gross customer retention trends are good, improving to 88% and on target to reach 90% in the coming years. Everything looks good here and we should get 2025 guidance at the time of the Q4 2024 report in February. The company’s progress caused analysts at Goldman to wake up and double their price target, from 7.5 to 15. I’ve had AVPT at buy but given the recent rally, it’s time to be a little conservative. Moving to hold. HOLD

Docebo (DCBO) broke higher after reporting a solid Q3 last Friday. Shares ran up toward resistance in the mid-50s before backing off and have spent the last four days ticking slightly lower. Most analysts raised price targets following the quarterly report. BUY

Enovix (ENVX) gave a good update on the battery maker’s progress on October 29. The stock hasn’t participated in the rally since then, likely because it’s in the clean energy space and isn’t a U.S. manufacturing story, which has kept ENVX out of the Trump Trade momentum. Also, ENVX completed a secondary offering (raising about $100 million), which dented the stock short-term. Enovix remains a believer vs. non-believer story, though clear progress is being made in the right direction. Based on the timeline and milestones given, investors should be looking at mid-2025 for the puzzle pieces to start falling into place and the stock to really start working (my best guess). 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. There are a lot of side stories to FIP, which makes for a time-consuming company to keep on top of, but also a very interesting one. One of these relates to FIP’s Transtar business, which provides rail transport and services across seven locations (Ohio, Michigan, Alabama, Indiana, Texas and Pennsylvania), 285 miles of track, 34 interchanges and 4,000 storage spots. Two of Transtar’s short-line railroads connect U.S. Steel’s (X) largest North American Production facilities. And in fact, FTAI acquired the company from U.S. Steel in July 2021 for $640 million. At that time, it was only used by U.S. Steel and there were virtually no other customers. That’s slowly changing under FTAI’s ownership, and the company continues to diversify Transtar’s customer base. This trend could accelerate if Nippon’s proposed acquisition of U.S. Steel goes through in December, though FIP management has been careful to say that they think a blocked deal is neutral to them (i.e., it just maintains the status quo). Trump had previously said he would block the Nippon acquisition, however, it could happen before he gets into office if Biden and the labor unions sort it out. Again, this is just an interesting side story that won’t likely move the needle short term. But if the acquisition goes through (not necessarily expected) it could grease the wheels for Transtar’s growth over the coming years. BUY

Mama’s Creations (MAMA) remains in its established trading range of 6.9 to 8.7 with a recent push to the high end rejected on Wednesday. Management hasn’t yet announced an earnings date, but it should be in about four weeks. We do have an investor conference scheduled, however, which should help get the word out to institutional investors regarding the company’s growth plans. Chairman and CEO Adam L. Michaels will host one-on-one meetings with Raymond James (November 18), Craig-Hallum (November 19) and ROTH (December 11-14). BUY

Expected Earnings Date: December 10

Peloton (PTON) was added to our portfolio last Thursday. The stock has mostly been a disaster since the pandemic ended, but that began to change in late August and the recovery gained momentum in October. Peloton is now a small-cap turnaround story with a lot of compelling potential, starting with a strong brand. Add to that an incoming CEO who co-founded Apple Fitness and a number of growth initiatives, ranging from a renewed focus on the Tread, men (66% of PTON’s users are women), international expansion, price increases and operating efficiencies and, well, we have our newest pick. We started with a half-sized position because we jumped in right between the election and the November FOMC meeting and because PTON had recently rallied on Q3 results. BUY HALF

Weave (WEAV) reported a very strong quarter at the end of October and since then the stock has been enjoying the broad-based rally in software stocks. On the conference call, management talked about how its partnership with Patterson is boosting the sales funnel, how the specialty medical market (family practice, med spa, plastic surgery, physical therapy) continues to be strong, and how the new Weave Enterprise Platform (with AI) will target small to medium-sized practices, not large hospitals. It also sounds like gross margins should keep climbing, from 72.5% in Q3 into the 75% to 80% range in the future. BUY

Willdan Group (WLDN) hasn’t had any news to share since the Q3 report a couple of weeks ago. The company posted a solid third quarter, smashing both consensus and management’s expectations. Contract revenue grew 19% organically, and adjusted EBITDA jumped 50% year over year. Adjusted EPS doubled, and GAAP EPS soared more than four times. With strong year-to-date results and ongoing momentum WLDN raised full-year financial targets, but keep in mind that it’s unlikely Q4 will be bigger than last year’s, which was off the charts good. Although the future speed and scale of electricity load growth are uncertain, there’s widespread agreement that growth is happening and will continue. Willdan remains a solid and still unknown play on energy efficiency, electrification and decarbonization. Management said business was strong under both the previous Trump and Biden administrations. BUY

Zeta Global (ZETA) has been the center of a lot of drama this week. There is nothing new to report since I sent the Special Bulletin this morning. I continue to monitor the situation and will update you. The stock is about flat on the day as of mid-day. HOLD

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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