September 26, 2024

Small caps have bounced around this week, taking a break from the rally that began on September 11 and continued through the 19^th.

Behind the scenes, analysts have been increasing their earnings expectations for the asset class. This is largely because rates are falling, but also because the economy is holding up.

Lower rates are disproportionately good for small cap stocks because of their relatively high exposure to variable-rate debt, the costs of which go down immediately as rates fall.

A week ago, analysts expected small-cap EPS growth of 17.6% in 2025. Today, they expect small-cap EPS to grow by 18.3%. That’s good for the asset class.

That’s also faster than large-cap earnings, which are seen growing 15% next year.

Looking at a couple areas of the small-cap landscape, I continue to see opportunities in small-cap software. Our position in Weave Communications (WEAV) is looking good, as is AvePoint (AVPT). And of course, we can’t ignore Zeta (ZETA), which is a freight train.

Stock picking in software is key. While ETFs like CLOU and WCLD will get you some decent exposure, it’s going to be a lot of large and mid-cap exposure. I’m not against those vehicles, but for the risk-tolerant, the individual names are the way to go right now.

I’m also intrigued by opportunities in the infrastructure and energy/electricity space. The big-picture trend toward electrification is massive. And while all the talk about data center demand grabs the headlines there are under-the-radar pure-play opportunities out there that give exposure to really specific areas of the market.

Probably more to come on that later. But for now, on to our portfolio.

Recent Changes
None

Updates

Artivion (AORT) has had a quiet week. The stock is basically unchanged, trading just above 25. BUY

AvePoint (AVPT) hasn’t had any events since management spoke at the Piper Sandler Growth Conference on September 10, just a few days after I added it to our portfolio. The upward trend in shares remains intact. AvePoint is a software company with a data management and governance platform that helps customers control and secure information within their digital systems. BUY

Docebo (DCBO) held its annual user conference, Inspire, two weeks ago. Coming out of the event there appears to be interest in the soon-to-be-released GenAI Authoring tool for content creation. There’s also been some talk of the company eyeing acquisitions given solid cash flow and $82 million in cash in the bank. We will see. The stock’s been hanging out in the mid-40s this week. I’d like to see it get back above 50 as that would be a decisive move away from the messiness of the spring and summer months. BUY

Enovix (ENVX) hasn’t had any news since management participated in a fireside chat with analysts at William Blair two weeks ago. The takeaways from that event are that Enovix is still very much in development mode and spoke about the cadence of ramping up production to meet demand. That is a function of getting battery designs developed, approved and into mass production, all of which takes several quarters. The stock appears a little beat-up at the moment. BUY

FTAI Infrastructure (FIP) hasn’t had much news lately, other than announcing that Q3 earnings will come out on October 30. It is a pure-play infrastructure company with businesses across the transportation, energy, clean energy and industrial products markets. 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. Shares are 39 days into a consolidation phase, which requires a break above 10.5 to trigger a change of character. BUY

Mama’s Creations (MAMA) hasn’t had any news since reporting Q2 results a few weeks ago. The stock has been in a pattern of rallying, then pulling back by about 20%, then rallying again. We are in the midst of one of the dips right now. If the pattern holds (no guarantees), MAMA should break above 8.7 within three or so weeks. 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 had a nice move after the Q2 earnings report in early August but hasn’t done much over the last month. RxSight is going up against some big players in the eye market, including Alcon (ALC) and Johnson & Johnson (JNJ). I know Alcon is working on an adjustable lens, but it’s going to be a while before it becomes commercially available. One has to wonder if RxSight can capture enough market share before competitors come in, or if management is open to a sale. BUY

TransMedics Group (TMDX) stock continues to bounce around between the 134 and 177 levels. Baird recently picked up coverage with an “Outperform” rating and 200 price target. Hold a Quarter

Weave (WEAV) continues to act well and has held above the 12 level all week. It’s a little-known software company that has a communication and payments platform used by a wide variety of medical practices. Revenue should be up about 19% this year and earnings should turn positive in Q4, then continue growing in positive territory through 2025. BUY

Zeta Global (ZETA) stock continues to act extremely well. The company just announced the release of its AI-powered intelligent mobile solutions (early) and appears to be expanding the use of generative AI Agents within its marketing platform. Bank of America likes what it hears. The firm just increased their price target on ZETA by 20%, to 36. 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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