Cabot Early Opportunities 107.2

These are harrowing times to be an investor but we’re always on the hunt for emerging opportunities, regardless of market conditions. As always we’re spreading things around this month, with the focus on two defensive names (including one larger company), two beaten and battered names that seem miss-priced (depends on what happens) and one stock that seems to be in high demand, despite the market conditions. Suffice to say, there’s little incentive to place big bets right now. But we’d be remiss not so send some ideas your way. These new names will come with a short leash!

Cabot Early Opportunities 107.2

Stock Name	Market Cap	Price	Investment Type
BellRing Brands (BRBR)	$600 million	15.23	Growth – Packaged Foods
BlackLine (BL)	$2.76 billion	48.98	Rapid Growth – Accounting Software
Kroger (KR)	$26.9 billion	34.19	Steady, Slow Growth – Grocery Store
Survey Monkey (SVMK)	$1.5 billion	10.67	Rapid Growth – Survey Software
Sunnova (NOVA)	$624 million	7.43	Growth – Solar Panels & Storage

Searching for Turnip Shoots on a Scorched Earth
As I mentioned yesterday, today is an attempt to find emerging opportunities in a market that’s been going through a once-in-a-lifetime (we hope) crash, spurred by the trifecta of a health crisis, oil crisis and fear of a financial crisis. Good times!

Suffice to say, ALL stocks carry significant risk right now in the near-term.

On the upside, the Fed, government and Treasury appear to be ready to backstop and/or rescue just about everything under the sun to try and prevent a crisis of confidence in the financial markets.

Also, evidence out of China and South Korea shows that social distancing and isolation does work (no surprise). But mass testing and adherence to the practices are key since asymptomatic people (those that appear totally fine but still carry the virus) can still spread it.

We’re also hearing that a drug that’s been around for a while for treating malaria has been shown effective with COVID-19. A label expansion isn’t on the books yet but seems a forgone conclusion.

Still, it’s hard to know what’s true hope and what’s false hope right now. All I can say is that yesterday had the feeling of a capitulation day given the stress on money market funds and insane selling of everything.

What to Do Now
Stay calm, collected, focused and defensive. Begin to peck away at a few opportunities here and there but cut losses short and don’t get suckered into thinking every up day is the beginning of a big rally. From a health and news flow perspective, it could easily start sounding worse out there before it gets better (owing to more tests being done).
Already, we’re seeing more messaging that younger people are also at risk, something that wasn’t being said a few weeks ago. In my view this is good. All the young and healthy people that think they’re immune to this need to get on board with the big-picture plan.

This month I cover a couple of new ideas, a few ideas that we liked recently and which seem overly punished (but are still high-risk investments) and one rather obvious and conservative stock that will most likely be a shorter-term idea with a time horizon of a few weeks to a few months, depending on how this all plays out.

STOCKS

Bellring Brands (BRBR)
BellRing Brands (BRBR) was spun out from Post Brand (POST) on October 17 and went public at 14. It has a market cap of $630 million. You’re likely familiar with Post, which is the cereal company that makes Raisin Bran, Honey Bunches of Oats, Grape-Nuts, Pebbles, and so on.

BellRing Brands was spun out to hold three main groups of products: ready-to-drink protein shakes (74% of revenue), powders (14% of revenue), and nutrition bars (12% of revenue). After shoppers have loaded up on TP, PT, dried food, canned soup, rice, and pasta, there’s a good chance they will also turn to shakes, powders and bars, if they are properly placed on shelves and websites.

The three brands that you might recognize are Premier Protein, Dymatize and Powerbar. The business is concentrated within Costco (COST) and Walmart (WMT) and their affiliates, which collectively accounted for 70% of sales in 2019. Notably, both Costco’s and Walmart’s stocks are trading within 5% of all-time highs.

Going into this disaster BellRing was getting into roughly 5% of U.S. households , yet 60% of U.S. consumers purchase nutritional and performance drinks. Premier Protein was gaining market share and accounts for roughly 80% of sales. There is risk, however; one co-manufacturer makes 84% of Premier products and 57% is produced in a single plant. If that plant closes without an immediate plan to make up production elsewhere the stock will get hit.

BellRing was expected to grow revenue by around 20% in 2020 then 11% in 2021. All bets are off now, however. Notably, the company has an asset-light business model and roughly 20% EBITDA profit margin. It ended the last quarter with a net debt-to-trailing twelve-month EBITDA ratio of 3.4x, which is a little high but was projected to trend down to around 1.5x by the end of 2022. This is a potential weak spot; however, given the customer concentration (Costco and Walmart) there seems little accounts payable risk here.

The Stock
BRBR went public at 14 last October, steadily climbed to 24 by late December, then got a little wobbly and traded between 20 and 24 through the end of February. Shares began plummeting in March, fell to an intra-day low of 14.5 last Thursday, and have been swinging between 15.5 and 19 since.

BlackLine (BL)

BlackLine (BL) was featured in one of my Special Reports last September. It is a Software-as-a-Service (SaaS) business with products for finance and accounting departments. Companies must complete the financial close, a recurring process that takes raw financial data and turns it into the audited financials that senior management reviews, that gets submitted to the SEC, and that becomes available for investors like us to view.

BlackLine has come up a way to automate the process with a cloud platform that pulls in data from banks, ERPs (SAP, Oracle, NetSuite, etc.), transactional systems and more, then running it through the appropriate BlackLine products, which can be set up with internal controls. The idea is to transform a quarterly, recurring process into a continuous one so that accountants, controllers, managers, auditors and senior managers always can have real-time visibility into the state of a company’s books.

BlackLine was founded by Theresa Tucker, who previously worked as Chief Technology officer for SunGuard Treasury Systems (acquired by FIS in 2015). BlackLine sold on-premise software in the early days, but then made the leap to cloud-based software in 2007. That was the year the first iPhone came out. And it was good timing; companies wanted to move away from expensive software toward software subscriptions, especially when the recession struck.

BlackLine grew revenue by 27% in 2019 and by 29% in the most recent quarter. Adjusted EPS in 2019 was $0.37 and Q4 2019 adjusted EPS was $0.14.

The Stock
BL went public in 2016 at 17 and, despite some pullbacks, rose rather steadily to 45 by late 2018. The stock then corrected and bounced around for most of 2019, ending the year near 50. It rose in the first two months of 2019, including a spike to 75 after a big earnings result. Since then it has fallen as low as 44 but is back up near 50. It looks like a stock that still has significant demand.

Survey Monkey (SVMK)
Survey Monkey (SVMK) was featured in October and has been hit hard during this market crash. But there’s still value in this business. Refer to my October writeup for all the details, but here’s the brief overview.

Survey Monkey is the leading online survey platform for businesses. With 20 million questions answered daily the company owns a database treasure trove of almost 50 billion questions, giving it by far the largest dataset for survey questions out there.

Business users represent 80% of users. There’s sure to be a good number of cancellations given how many businesses are being affected by this. But before long businesses will want to hear from their consumers again and Survey Monkey can help them do that.

The recent trend toward annual billings could help insulate revenue to some degree. A recent doubling of the sales force and focus on enterprise-grade offerings is good long-term, but in the short-term, with sales people forced to work from home, there will likely be some impact. The size is yet unknown.

Still, with Survey Monkey’s price cut in half from when the good big-picture story was getting out there, I think there’s money to be made here. And, this is an attractive acquisition target in my view. Remember all the consumer data that Survey Monkey owns!

The Stock
Survey Monkey went public in September 2018 at 12 and jumped 44% in its first day of trading, then went through a harsh correction. The stock traded mostly between 16 and 20 in 2019, then jumped to a new high of 22.27 after reporting in February. Since then SVMK has fallen by more than 50%.

Sunnova (NOVA)
Sunnova (NOVA) was featured in February and has been demolished during this market crash. Right now, it could be either my best or DUMBEST call in a long time. Before I explain why, here’s a quick reminder on what this company does (refer to the February Issue for more details), followed by my rationale for adding to the position now, if you’re a very risk-tolerant investor.

Sunnova specializes in residential solar and battery storage systems. It is direct beneficiary of the trends the EIA sees accelerating over the next three decades, including a higher mix of renewable energy for solar (13% now to 46% by 2050) and a jump in distributed energy generation, led by customer-owned rooftop solar (under 1% of total electricity generated today, expected to grow to over 3.5% by 2050).

It began in Texas, has grown to 20 states recently, and will grow into more soon. In addition to offering solar panels and battery storage, Sunnova can even install a new roof (currently in California and New Jersey only). The company is differentiated by its regional dealer and installer network, which allows for custom-tailored projects and permits the selling of long-term service plans.

What’s the risk now? First, the project pipeline is likely to take a hit in the very short-term, and then take a while to ramp back up again. Second, oil prices have tanked so the cost-benefit of solar is lower now. Third, the company just raised $150 million in debt and convertible senior notes and has around $1.37 billion in LT debt. If the business falls apart debt could be an issue.

On the other hand, solar is still likely to be a big part of the long-term energy mix and demand for more self-sustaining energy (at the house level) could be a result of this crisis. Also, Sunnova has 25-year contracts that translate to a lot of revenue visibility and cash flow. There will likely be some defaults, but the stock is down 65% from its all-time high. That could be way overdone.

In the near-term, I expect this stock to swing around wildly as the market tries to figure out where reality will be on the bear-case to best-case scenario. Clearly, this is only for risk-tolerant investors.

The Stock
NOVA went public on July 25, 2019 at 12 and after an initial dip traded in the 9 to 12.5 range through 2019. It then rallied as high as 20.87 just before this crisis. It has since plummeted below 9, and currently trades below 8.

Kroger (KR)
Kroger (KR) has been around since 1902 and has a market cap of almost $29 million. Is it an emerging opportunity? Heck yes! Sure, I’m stretching the market cap bounds quite a bit here, but in this market the main thing on my mind is giving ideas with more upside than downside. And this stock is too obvious to pass by.

The main thing on people’s minds right now is food, gas and pharmacy/medicine. Those categories make up 95% of Kroger’s revenue.

The company operates 2,764 supermarkets, convenience stores and jewelry stores under the names Kroger, Ralphs, Fred Meyer, King Soopers, Turkey Hill, Food 4 Less, Dillons and City Market. It also operates 37 food production plants, a valuable asset in the current environment.

Kroger also runs gas stations at 1,537 of its supermarkets, which effectively makes this a one-stop shopping location for everything people need these days. The trend of stocking up on groceries and eating from home won’t be this strong forever, but for at least a few quarters it seems Kroger will benefit from outsized demand.

The Stock
KR has been around for over 100 years and the stock has had both great and ho-hum periods. It last peaked in 2015 at 42.75, but has also retreated sharply at times, including to 20.7 in July of 2019. It’s been trending up since then and has recently jumped out to multi-month highs near 35.

Previously Recommended Stocks
Below you’ll find previously recommended Cabot Early Opportunities stocks. Stocks rated BUY are suitable for purchasing now. In all cases, and especially recent IPOs, I suggest averaging into every stock to spread out your cost basis.

Those rated HOLD are stocks that still look good and are recommended to be kept in a long-term oriented portfolio. Or they’ve pulled back a little and are under consideration for being dropped.

Stocks rated DROPPED didn’t pan out, or the uptrend has run its course for the time being. They should be sold if you own them. DROPPED stocks are listed in one monthly Issue, then they fall off the DROPPED list.

Please use this list to keep up with my latest thinking, and don’t hesitate to call or email with any questions.

This month there are no new stocks being moved from hold to buy.

This month the following stocks are moved from buy to hold; Axonics Modulation (AXNX), Livongo (LVGO) and Y-mAbs Therapeutics (YMAB).

Earlier in the month several stocks were dropped via Special Bulletins. Please reference the DROPPED list in the table.

^Average of high and low price if published intraday, or closing price if published after 4 PM ET

The next issue of Cabot Early Opportunities will be published on April 15, 2020

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