February 24, 2022

It’s been another wild week as we’ve had four companies report quarterly results (two more are on deck tonight) and have seen the situation in Ukraine deteriorate as Russia has invaded the country. We’ve also had the S&P 500 Index officially slip into correction territory (-10% or more).

Stepping back, we see a lot of stocks retesting their January lows. This is not surprising given the still-murky outlook for stocks in the near term and the invasion. If they can hold the line that would be a positive.

On the flip side, we’ve seen a lot of names that began to recover in February give much or all of those gains back, and there have been some fresh breakdowns as well.

In short, it continues to be a very messy market that’s dominated by macro factors, even though it’s still earnings season. While the details are different every time we go through one of these phases, the big picture is pretty much the same. That is to say, markets go through corrections from time to time, and when there are a lot of transitions going on (such as monetary and fiscal policy) there is more uncertainty than normal. The market doesn’t love uncertainty.

Back to Ukraine/Russia, it’s worth noting that, historically, conflicts have been a buy the dip-typeopportunity. Jacob Mintz (Cabot’s Options Guru) sent me the image of the charts below, which he sourced from @thebearablebull. It’s self-explanatory.

As always, there are no guarantees here. But maybe there is a silver lining to this situation, as far as the market is concerned anyway.

Moving on to small caps, the S&P 600 Index has pulled back along with the other major market indices. At the moment this is just a retest of the January low.

With small caps continuing to trade at an attractive valuation relative to large caps, and money continuing to flow into small and mid-cap stocks for the eighth straight week (according to data from Bank of America), the evidence continues to suggest brighter days ahead for our asset class.

On that note, we have another Issue coming up next Thursday. I have plenty of ideas of my own, but if there’s something – a stock, sector, whatever – that you’re particularly interested in please shoot me an email. My address is tyler@cabotwealth.com. It’s always helpful to know what you’re looking at.

Recent Changes
SiTime (SITM) moved to SELL on Wednesday, 2/23/22
Sprout Social (SPT) moved to Sell a Quarter, Hold Half on Wednesday, 2/23/22
Avalara (AVLR) moves to HOLD today
Thunderbird Entertainment (THBRF, TBRD.CA) moves to SELL today

Updates
Arena Pharmaceuticals (ARNA) reported Q4 results yesterday in what was a non-event given the pending acquisition by Pfizer (PFE), which is expected to close by March 31, for 100 a share. At the current share price near 94 ARNA has 6% upside to the acquisition price. While that seems like a “guaranteed” return, the discount reflects the risk that the deal could fall apart. Of significant importance is the upcoming Phase 3 ELEVATE UC 51 and 12 topline data readouts (etrasimod in UC), which management said are on track to be delivered in Q1 (i.e., by March 31). The implications here are clear – if the data is OK to good, the deal should go through. If the data is a disaster, it’s more likely Pfizer would walk away and pay the breakup fee. Continue to hold half. SOLD HALF, HOLD HALF
Earnings: Done

Avalara (AVLR) reported Q4 results last Thursday and has dipped into the 95 – 100 zone over the last week. I previously stated this would be a zone of concern, so moving to hold today. While there is potential that this is a double dip to the January lows brought on by the broader market weakness and Ukraine invasion, I suspect you’ve already bought if you wanted to. HOLD
Earnings: Done

CS DISCO (LAW) reports after the close today. Revenue is expected to grow 49% to $28.5 million while adjusted EPS is seen near -$0.17. That implies 2021 revenue growth of 61% to $110 million and adjusted EPS of -$0.67. Current consensus for 2022 calls for 27% revenue growth (to $140 million) and adjusted EPS of -$0.60. As a disruptive software story, shares of LAW – especially in this market – have the potential to trade up or down significantly based on the actual results and 2022 guidance. With shares in the 27 – 31 range now LAW is retesting the January lows. BUY
Earnings: Thursday, February 24

Everbridge (EVBG) will report after the close today. This one is going to be very interesting given the stock’s major selloff following the surprise departure of CEO David Meredith in December. As I mentioned last week, investors need more information on the reasons for that resignation as well as trends in Europe before any sustained recovery in EVBG can occur. Current Q4 consensus calls for revenue growth of 35% to $102 million and adjusted EPS of -$0.19. Of more importance will be 2022 guidance (if we get it). The market is looking for revenue growth of 22% to $450 million and adjusted EPS of -$0.10. Actual results and the stock’s reaction will likely determine what we do next. HOLD
Earnings: Thursday, February 24

Inspire Medical Systems (INSP) announced Q4 results two weeks ago and is trading roughly at the same level today (around 220). The numbers were good, as was 2022 sales guidance (up 36% - 40%, better than $313 million consensus). No new news. HOLD
Earnings: Done

JOANN (JOAN) has pulled back into the 10 – 11 range on no news. With the yield back near 4% and no change to the story I suspect investors will continue to accumulate shares. BUY

Nova LTD (NVMI) reported Q4 results this morning. Revenue of $121.5 million grew by 59% and beat by $3.2 million while adjusted EPS of $1.08 grew 96% and beat by $0.03. Management guided for Q1 2022 revenue of $122 - $132 million (above $119 million consensus) and adjusted EPS of $0.96 - $1.14 (straddles $1.09 consensus). There are a lot of details from the call that we can touch on later. For now, the most pressing topic is the market reaction to the stock and our rating. At the open today NVMI sold off with the market (and the SOXX ETF) and briefly fell below its January low of 104 (today’s low was 100.5). As of midday the stock is back near 104 (SOXX back near yesterday’s close). We will keep at buy through today and evaluate tomorrow’s action. BUY
Earnings: Done

Rani Therapeutics (RANI) continues to move around on no new news. We don’t yet have an earnings date. Given that catalysts (trial updates) will drive this stock, the best thing to do is sit back and let it do its thing. BUY

Revolve (RVLV) reported Q4 results after the close yesterday. In the face of Omicron, inflation and global supply chain issues, Revolve put up an impressive Q4 result. Consensus estimates called for mid-60% revenue growth but Revolve delivered 70% ($240 million). Sales of the higher-end FORWARD brand led with 83% growth as dresses and other pricier going-out items flew out the door. These items also helped average order value (AOV) jump 14% to $292. Adjusted EPS of $0.39 was up 50% and beat by $0.21. Shipping costs are a challenge (same for all retailers) and pressured gross margins a little (down 1.9% to 54.8%). Analysts are factoring in more gross margin pressure and see Revolve gross margins in the 52% to 53% range in the near future (higher-margin FORWARD sales should help offset some shipping costs). So far sales in Q1 2022 remain very strong (up close to 70%), though analysts are likely to factor in significant post-pandemic deceleration. Revolve now becomes a “show me” story as upside to management’s long-term 20%+ growth target may depend on seasonal factors, and noise in the near-term earnings trend may cloud the big-picture story. Still, Revolve remains one of the best ways to gain exposure to fashion-forward younger consumers, which are increasingly leaning into e-commerce brands with influencer-based marketing. Shares have been volatile today but there’s a lot of macro stuff going on. Maintaining at hold. HOLD
Earnings: Done

Repligen (RGEN) reported Q4 results last week. Revenue of $186.5 million (+72%) beat by $8.3 million while adjusted EPS of $0.81 (+56%) beat by $0.16. Gross profit margin ticked up a fraction of a percent. Initial 2022 guidance calls for revenue of $800 - $830 million (19% to 24%), implying upside to consensus of $800 million. Adjusted EPS is seen in the range of $3.21 to $3.30 (5% to 8%), roughly twice the expected 3% growth rate (consensus was $3.15). Repligen continues to operate in a very strong bioprocessing market, and at current levels (RGEN back to where it was in the first half of 2021) there has been something of a reset in the share price that factors in a lower steady-stage growth rate. The stock is currently retesting the January lows (RGEN at 179 now, January low was 172) so we’ll keep at hold. HOLD
Earnings: Done

SiTime (SITM) was moved to SELL yesterday after the stock broke below 180. I’ll continue to monitor the stock for potential inclusion in the future. SOLD
Earnings: Done

Shutterstock (SSTK) reported a couple weeks ago, and the stock has been moving mostly sideways since, though after two days of selling and a weak open today SSTK is retesting (for a third time) 2022 lows near 83. Will keep at buy for now but should SSTK dip into the 80 – 82 zone will have to reconsider. No new news. BUY
Earnings: Done

Sprout Social (SPT) reported on Tuesday and I detailed the results in yesterday’s Special Bulletin when I also suggested selling another quarter position (leaving us with a half position). The reason for the partial sale was market conditions and investor appetite for pure growth stocks, not because there is anything wrong with Sprout Social. Q4 revenue was up 43% to $53.3 million (beating by $2 million) while adjusted EPS of -$0.05 improved by a penny (and beat by $0.02). Management issued preliminary 2022 revenue guidance of roughly $250 million (+33%), comfortably ahead of $240 million consensus (+28%). Bottom line – the company is doing great, and the future looks bright. But … it’s a tough market, especially in high growth, so we took our stake down to a half position. SOLD SECOND QUARTER, HOLD HALF
Earnings: Done

Thunderbird Entertainment (THBRF, TBRD.CA) announced Q2 fiscal 2022 results this morning. Revenue was up 18% to $33 million, driven by growth in production service projects. Adjusted EBITDA of $5 million was consistent with the comparable quarter and free cash flow increased $12 million to $16.4 million. The company has 26 shows in various stages of production for Netflix (NFLX), Disney+ (DIS), Corus Entertainment, Bell Media’s Discovery, Sony (SNE) and others. Twelve of these projects are the Company’s intellectual property (“IP”) which the Company owns outright, or partner-managed service productions where the Company receives a percentage of certain revenue streams. There hasn’t been much of a reaction in the stock today and shares haven’t done much since we’ve owned them. At times the relative stability in shares has been welcome. However, my patience has run out. SELL
Earnings: Done

Xometry (XMTR) reported preliminary results on January 31 (revenue within the expected range and above Q4 guidance) and will release official results on March 17. There has been no new news this week. Shares are retesting their early-February lows in the 40 - 42 range. BUY
Earnings: Thursday, March 17

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.