September 19, 2024

Finally! The Fed met yesterday and, as expected, began a rate cutting cycle. The market, and small caps, love it.

The magnitude of the September cut, 50 bps, is a bit of a surprise. Despite what Fed Chair Jerome Powell said during the press conference yesterday, this is partially a make-up cut. Since there was no meeting in August, and the Fed didn’t cut in July, it was time to make a statement.

Also, there is no meeting in October. The next meeting, November 6 – 7, is right after the U.S. presidential election. Cutting 50 bps now gives room for a more modest 25-bps point cut at that meeting.

The Fed’s Summary of Economic Projections (SEP), which isn’t a forecast but just a summary of Fed member current estimates, suggests we’ll get one or two more cuts this year, then a total of 100 bps in 2025.

That trajectory should provide a nice tailwind for the economy, and especially for small caps. Small caps have a lot more variable rate debt than large caps, so lower financing costs will have an outsized positive impact on margins and profits.

In fact, in 2025 small-cap earnings have been projected to grow faster than large-cap earnings (17.6% vs. 15%). Analysts are sharpening their pencils right now, factoring in the latest SEP. My hunch is that small-cap earnings estimates will go up (large-cap estimates may go up as well).

The market seems to agree. Both the Russell 2000 and S&P 600 SmallCap Index closed in positive territory yesterday (the S&P 500 was down) and are on track to close roughly 2% higher today.

Let’s move on to our portfolio.

Recent Changes
None

Updates

Artivion (AORT) received a price target increase from Stifel last Friday (from 28 to 30, stock closed at 25 yesterday). While the trend this year is up AORT hasn’t made any upside progress since late June. That’s a bit frustrating given the potential but likely signals that this story just isn’t well known yet. The company only has a market cap of $1 billion. BUY

AvePoint (AVPT) is our latest addition in the small-cap software space and is a play on both data quality and AI (which relies on data quality). AvePoint has a data management and governance platform that helps customers control and secure information within their digital systems. AvePoint does most of its work within the Microsoft (MSFT) environment currently, but its solutions also work within Google (GOOG), Amazon (AMZN) and other cloud platform providers. The company should grow revenue by around 18.7% this year and EPS by about 66%, to $0.14. BUY

Docebo (DCBO) held its annual user conference, Inspire, last week. Following the event National Bank analyst Richard Tse said, “What we learned reinforced our view that this remains one of the highest quality companies in our technology coverage universe ...” Morgan Stanley analysts talked about significant customer interest in the soon-to-be-released GenAI Authoring tool for content creation, competitive advantages in security and compliance, focus on profitable growth and customer feedback that Docebo is a consolidator within the learning and development market. The company could be eyeing acquisitions given solid cash flow and $82 million in cash in the bank. Analysts at CIBC just raised their price target from 44 to 52. Seems like momentum here is building. BUY

Enovix (ENVX) participated in a fireside chat with analysts at William Blair last week. I listened to the event. The company is still very much in development mode, talking about the cadence of ramping up production to meet demand, which is a function of getting battery designs developed, approved and into mass production, all of which takes several quarters. It’s just not a fast process, and I think the stock’s volatility reflects that there are peaks and valleys in investor sentiment as “deals” are released to the market but time to revenue remains foggy. One tidbit, it was interesting to hear management talk candidly about how they’re not in a position to release the names of companies that they are in talks and negotiations with given that these companies have working relationships with other battery vendors and Enovix is still a very small player without a lot of clout. Expecting that to change, eventually. Shares should get a boost as financing costs/rates begin to fall. BUY

FTAI Infrastructure (FIP) is a pure-play infrastructure company with businesses across the transportation, energy, clean energy and industrial products markets. The company owns six freight railroads and a switching company (Transtar), a multi-modal crude oil and refining terminal (Jefferson Terminal), a deep-water port with multipurpose dock and underground storage (Repauno), an equity interest in a power plant (Long Ridge) and an equity interest in clean tech companies that recycle batteries (Aleon) and metal (Gladieux). Expansion projects are going on at most of these businesses, with current projects at Jefferson Terminal (including for clean fuel), Long Ridge (data center demand part of the potential) and Repauno (natural gas capacity set to quadruple) particularly significant. Without going into details, the company would benefit if the Nippon deal to acquire U.S. Steel (X) goes through, partly because it would help increase third-party business at Transtar, which was 95% U.S. Steel business when FTAI bought it. Revenue should grow by almost 60% between 2024 (estimated revenue of $365 million) and 2026 (estimated revenue of $575 million). Adjusted EBITDA profitability should expand even more, by nearly 90%, from $150 million to $284 million. BUY

Mama’s Creations (MAMA) reported Q2 results last Tuesday (same day CPI came out), and I reviewed the results in a Special Bulletin. The big-picture story here remains very good, even though the stock, which is trading 12% below its all-time high from August 26, hasn’t done much lately. BUY

RxSight (RXST) is disrupting the cataract surgery market with the first, and only, FDA-approved intraocular lens (IOL) technology that lets doctors customize a patient’s vision after cataract surgery. The stock hasn’t done much lately. BUY

TransMedics Group (TMDX) stock continues to recover from that dip to the 136 price level a couple of weeks ago. No new news after management announced it purchased another plane last week (total fleet up to 18 aircraft). Hold a Quarter

Weave (WEAV) has great momentum this week and, after pulling back to the 10 level last week, is trying to break out above resistance at 11.5. I said last week that software tends to do well when rate cut talk gets into the headlines and that the FOMC meeting result should be a positive for WEAV. That scenario is playing out, so far. BUY

Zeta Global (ZETA) just announced that Yahoo will move its email marketing to the Zeta Marketing Platform (ZMP) and that Zeta’s Data Cloud is now interoperable with Yahoo ConnectID, enabling Yahoo DSP users to seamlessly activate audiences to deliver higher returns on investment. The stock is making new highs (again) today. 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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