November 21, 2024

Quick Note: Due to the Thanksgiving holiday, you will receive next week’s Small-Cap update a day early, on Wednesday, November 27, 2024.

The S&P 600 SmallCap Index raced higher right after the election, gave a little back last week, found support at the previous all-time high early this week, and is now rallying again.

I think the small-cap story is starting to get out there and driving a wave of interest from investors who haven’t given small caps much thought for a few years. There is so much potential to rally from here that it can be a little hard not to get too bullish.

After all, small caps are cheap on valuation relative to large caps.

They have done “nothing” for three years (meaning no net upside progress).

They tend to benefit more than larger companies when interest rates fall because smaller companies have higher variable debt balances. As soon as rates fall their interest payments follow. Even if the Fed doesn’t cut a lot more, rates are lower now than they were a few months ago.

The IPO market is picking up, which means some fresh names for small-cap investors.

M&A potential is higher under a Trump administration.

A pro-U.S. administration is likely friendly to small caps given their high exposure to the U.S. economy.

There are risks out there too, of course. And it’s entirely possible that the small-cap index does well but isn’t able to keep up with the large-cap index. Though based on recent history, the Magnificent 7 have turned into a drag on large-cap returns.

Stepping back, I think the recent strength in small caps will continue, and that will be a tailwind for us as we pick apart the asset class and pluck names with the potential to significantly outperform both the small and large-cap indices.

Recent Changes

None

Updates

Artivion (AORT) found support, again, at its 50-day line earlier this week and the stock is up slightly versus a week ago. We’re looking for a break above 30 (stock currently at 27.7), which will likely require a breakout of the broader medical device group (I monitor the IHI for this purpose). The company develops solutions that help cardiac and vascular surgeons address diseases of the aorta. It’s growing at a double-digit rate, delivering profits, and has a pipeline with a couple significant growth catalysts (AMDS stent and stent graft system being the biggest one) that could represent the biggest innovations for cardiac surgeons in decades. BUY

AvePoint (AVPT) stock continues to look fantastic a couple of weeks after reporting a very solid Q3. Earlier this week the company released a benchmarking tool that allows customers to see how their AI adoption and usage patterns with Microsoft 365 Copilot compare to others. Management also spoke at a Needham tech conference, where they reviewed the high points from the last quarter and discussed how profit margins should continue to expand. Keeping at hold. HOLD

Docebo (DCBO) has pulled back since reporting earnings but not to a concerning level. The stock found support between its 50- and 25-day moving average lines, which has been the pattern since summer. This week Docebo announced a partnership with Deloitte (the consulting firm) to help mid-size and large organizations build advanced learning systems. Incremental positive. BUY

Enovix (ENVX) management recently met with analysts at J.P. Morgan to talk about the recent capital raise (about $100 million in equity sold) and milestones. Company executives stated that the equity raise helped shore up the balance sheet and show customers the company has the ability to scale production to meet their needs. We should expect more equity raises as this one was relatively small, and they will likely come if/when good news is reported to take advantage of waves of investor interest. Turning to milestones, Enovix should complete Site Acceptance Testing (SAT) for the high-volume line in the current quarter (i.e., by the end of 2024). The next big challenge will be getting a smartphone customer to lock in with Enovix. After that, more should follow. Management is hoping to have samples to customers in Q2 2025, which could set up a production ramp in the back half of the year. It’s worth mentioning that Enovix does not manufacture in China. This could become a significant differentiator, in addition to the company’s technology, given rising geopolitical tensions. 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 as it builds out its businesses, and it’s worth noting that these tend to be longer-duration projects and management doesn’t overdo it with press releases. So, expect extended quiet periods. One of the current stories 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. The company continues to diversify Transtar’s customer base, and this trend could accelerate if Nippon’s proposed acquisition of U.S. Steel goes through in December. This is far from a given (Trump seems against it), and 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) whereas a sale to Nippon is a positive (it would help them further diversify the customer base). Again, this is just one of many side stories with FIP that I’m monitoring. BUY

Mama’s Creations (MAMA) is pushing to the high end of its established trading range of 6.9 to 8.7. There’s likely been an uptick in interest given management’s meetings with Raymond James on Monday and Craig-Hallum on Tuesday. The next stop is with ROTH (December 11-14), which should be right around the earnings report. BUY

Expected Earnings Date: December 10

Peloton (PTON) was added to our portfolio two weeks ago and looks great. As I said last week, PTON stock has mostly been a disaster since the pandemic ended, but we have a turnaround story taking shape, now anchored by an incoming CEO (January 1, 2025 start date) who co-founded Apple Fitness. On the docket are 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. I noticed yesterday that Peloton Bike is available on Amazon. BUY HALF

Weave (WEAV) hit a new high a few days after reporting Q3 results and has been chilling out near the 14 level since (give or take a point). Naturally, I’d love a more convincing breakout to new highs (shares topped out at 13.8 last February, so this 14-ish level marks significant overhead resistance), but given WEAV’s upside move since June, a little pause is entirely reasonable. BUY

Willdan Group (WLDN) hasn’t had any news to share since posting a solid Q3 report a few weeks ago. It’s a play on energy efficiency, electrification and decarbonization. Frankly, that’s not the strongest high-level pitch given the incoming administration. But the facts are that electric load growth is happening and Willdan’s business has done well under both the previous Trump administration and Biden. I think a wave of new contract announcements would help signal to the market that things are still ticking along. On that front, the company just announced this morning that the City of Bellflower, CA awarded it a three-year, $4.5 million contract to deliver in-house building division operations and fire plan inspection review services. More of these would be good. BUY

Zeta Global (ZETA) has been busy since the short report came out last week. The company initially released a rebuttal, then announced a $100 million buyback program (both last week), then, on Monday, announced that leadership and members of the Board intended to purchase around $3 million worth of ZETA stock. Yesterday Zeta released a more detailed rebuttal to debunk the assertions made in the short-seller report, then held a webinar for institutional investors with William Blair yesterday at 3:30.

The bottom line of all this, as it stands now, is that: (1) Zeta’s Board confirmed its confidence in Zeta’s accounting practices and disclosed that the Public Company Accounting Oversight Board (PCAOB) required disclosures (which is not uncommon) for the first time in 2023, and the results did not change the company’s audit committee (Latham & Watkins LLP) opinion. (2) Management disclosed details on the most significant data assets as follows: Zeta DSP (15% - 20%), Zeta SSP (3% - 5%), Zeta MTA (10% - 15%), Disqus (15% - 20%), LiveIntent (20% - 25%) and 3P Sources 10% - 15%). From what I’ve read, analysts still have questions about what data (and from what sources) is more useful for deriving a person’s purchasing intent (remember, this is the main value that Zeta provides to its customers). There are also remaining questions about data collection practices.

At the end of the day, this is still somewhat of a “he said/she said” type situation, and what will really matter is how Zeta executes going forward, if this impacts adoption, customer renewals, etc. In other words, does it hurt business, or not. The next event is the Data Summit on December 9, though there is potential to learn more sooner. Stepping back, while there has been a decent rebound in the stock and bullish options order flow, I’m still not comfortable upgrading ZETA back to buy. 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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