October 10, 2024

The small-cap indices (Russell 2000 and S&P 600) have been totally uninspiring over the last three weeks, which is sort of odd given that the Fed cut interest rates by 50 basis points almost exactly three weeks ago.

Theoretically, lower rates should benefit small caps given higher exposure to variable rate debt, which requires lower interest payments as rates decline.

But it’s not that odd when you look at what real-world yields have done.

When the Fed cut on September 18, the 10-year yield was at about 3.7%. It has since moved up to almost 4.3%.

This is mainly because economic data has been good, especially when it comes to jobs (which will likely look worse soon, temporarily, in the wake of recent hurricanes).

Strong economic data has increased the odds that the Fed will be “one and done” when it comes to rate cuts this year. That’s a different scenario than the market was betting on at the time of the September FOMC meeting.

These shifting expectations have helped the S&P 500 do better, where, at the index level, small-cap performance has been a non-event.

Whether or not the recent trend extends into the final months of the year remains very much up in the air. The overseas conflicts, U.S. presidential election on November 5, FOMC meeting on November 7 and constant barrage of FOMC member commentary (just to flag four variables) mean there’s a decent amount of uncertainty for at least the next five weeks.

That all said, we don’t care too much about how the small-cap index does on a week-to-week basis.

In my view, we have a nice mix of stocks in our portfolio, which frankly doesn’t represent the small-cap indices at all in terms of sector weights!

For instance, we have nowhere close to a 25% weighting to financials, as the S&P 600 does (BTW, financials begin to report tomorrow).

So, while we are small-cap focused, we march to the beat of our own small-cap drum. Which (hopefully) has us exposed to stocks that vastly outperform the small-cap index, on average.

On to our portfolio.

Recent Changes
None

Updates

Artivion (AORT) hasn’t been our best performer lately. But then again, the entire MedTech space has been relatively quiet. The iShares U.S. Medical Devices ETF (IHI) isn’t doing much at all. Looking for this to change soon. BUY

AvePoint (AVPT) broke out to fresh highs above 12.1 this week. There have been no major developments lately. The only sort of recent news is that the company has paid $4 million to buy back around 9% (1.6 million) of its outstanding warrants. BUY

Docebo (DCBO) stock hasn’t done much over the last week. As I mentioned a couple of weeks ago, there’s been some talk of the company eyeing acquisitions given solid cash flow and $82 million in cash in the bank. More recently, Docebo announced a partnership with TEDAI Vienna, a European TED conference (first one ever) dedicated to AI. Docebo will serve as the official business learning partner for the conference, which runs from October 17 – 19. Should be some good visibility. BUY

Enovix (ENVX) stock has done much better over the last two weeks since management announced it has begun shipping EX-1M battery cell samples from its Agility Line in Malaysia. Management says this sets Enovix up to begin high-volume production in 2025. The next milestone is Site Acceptance Testing (SAT) of the high-volume line. BUY

FTAI Infrastructure (FIP) stock is 49 days into a consolidation phase, which requires a break above 10.5 to trigger a change of character. The most recent event was management’s participation at the Three Part Advisors Midwest IDEAS Conference on August 28. One of the really interesting topics discussed there was how FIP acquired a granite cavern from DuPont (DD) a while back. DuPont apparently invented dynamite there and then stored ammonia. Dupont didn’t want it, and neither did FIP. But they got $1 million to take it. Then FIP found out these types of caverns were being used by others to store natural gas. Turns out FIP had one of the largest, purest granite formations in the world. Thank you, DuPont! Fast forward to the numbers, it sounds like FIP could generate $50 million to $60 million in annual EBITDA if they get to the point of storing 1 million barrels in the cavern. Management spent 18 months working on an application and is hoping New Jersey will give them approval by the end of the year. Seemingly random, but not if you own one of the four sites on the East Coast permitted to ship out natural gas liquids. BUY

Mama’s Creations (MAMA) rallied up to resistance at 8.7 this week then fell back to 8 over the last two days. There’s nothing big to report, just looking for MAMA to break out here. BUY

TransMedics Group (TMDX) has pulled back to support around the 134 area, derisking the stock significantly as it approaches the Q3 earnings report (around November 6). I reviewed notes from Morgan Stanley detailing a recent conversation with a surgeon who oversees clinical transplant activities at the University of Pittsburgh Medical Center. There was a lot to digest, but the bottom line is the surgeon seemed to think TMDX’s OCS system would lose market share to competing systems (from companies like privately held Bridge-to-Life and Swedish firm XVIVO Perfusion AB (XVIPY)). Part of the reason is the potential benefits of systems like the normothermic regional profusion (NRP), which competitors offer. There are a lot of variables that determine which technology a medical center will use (transport time, surgery time, price, etc.), and I can’t get into all that today. But big picture, this expert’s view was that market dynamics are shifting. This may explain some of why TMDX stock has been cooling off lately. Interestingly, Morgan Stanley said TMDX reached out to them to debunk some of what this expert said. Specifically, TMDX said Pittsburgh Medical Center is a good customer, but not “influential” enough to be a major driver of the business. And that the center is on pace to grow use of TMDX OCS this year. There’s clearly a lot more to this story, but for now, the message to investors is ... mixed. Hold a Quarter

Weave (WEAV) is putting together a nice run, which is going to get challenged at the 13.8 level (stock at about 13.1). A break above that level would be fantastic. Shares may get a little lift from news that the company, which offers a customer experience and payments platform for healthcare practices, has just launched its AI-powered Call Intelligence solution. Weave says it will analyze and leverage call data so providers can offer better patient experiences, operate more efficiently and find new revenue streams. BUY

Willdan Group (WLDN) is our newest addition and came out of the gates with a nice jump, though shares traded down today. It is a micro-cap engineering and energy solutions company that helps communities make the transition to clean energy and a sustainable future. Most of its business comes from government/public sector and utilities customers (49% and 44%, respectively), while commercial customers make up the remaining 7%. I’m expecting Willdan to continue growing through a mix of M&A, data center-related work and expanding its commercial customer base (with clients like META). More analyst coverage should come in time and help spread the story. By the way, Willdan got its name from its founders, William Stookey (Will) and Dan Heil (Dan). The company’s website says the duo’s first office was in a trailer in a cow field behind City Hall in what is now the City of Cerritos, CA. BUY

Zeta Global (ZETA) stock has pulled back a little from yesterday’s high, which was catalyzed by news that the company will acquire LiveIntent. I detailed that acquisition, and the upside benefits, in yesterday’s Special Bulletin so I don’t repeat them here. BUY

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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