Cabot Early Opportunities 125

In the September Issue of Cabot Early Opportunities we continue to focus on tech stocks, while adding a small-cap biotech stock into the mix. We also review some of our portfolio management musings from last month.

Enjoy!

Cabot Early Opportunities 125

Stock Name	Market Cap	Price	Investment Type
Asana (ASAN) *	$19.4 billion	106.5	Rapid Growth – Software
Bellring Brands (BRBR)	$1.25 billion	31.07	Growth – Consumer
Dlocal Limited (DLO)	$18.5 billion	64.07	Rapid Growth – Payments
Snowflake (SNOW)	$94.3	319.25	Rapid Growth – Software
Travere Therapeutics (TVTX)	$1.45 billion	23.61	Development Stage – Biotech

*Watch List Addition

Growth is Where it’s at
First off, I want to thank everyone who responded to my commentary on portfolio management last month.

The majority of the feedback was supportive of continued efforts to keep our portfolio from swelling too large and to pursue some swing trade opportunities (hold for a few weeks or months to grab relatively quick gains, then move on).

I also received support for adding a stock or two to the Watch List if the stories sound good but we’re just not ready to jump in, either because of share pricing or because of what’s going on elsewhere in our portfolio.

As promised, we’ll continue to refine our portfolio management process as we move forward.

On that note, this month I’ve added two swing trade opportunities, one of which might just be a few days or weeks and the other which may be a few months, as well as one Watch List stock that has a great story but might need to cool off a little before we jump in.

Moving on …

From my perspective growth has been where it’s at lately. I know we all tend to focus on what’s right in front of us, but even when flipping through dozens of charts of other types of stocks lately it seems like those that are working the best are the ones growing the fastest.

In particular, software and rapid growth IPO stocks have been on fire. Case in point is Upstart (UPST), which is up 126% for us in just two months.

There are other examples out there (AFRM, SEMR, DDOG, and a bunch that we own) as well. These types of growth stocks jump out at me not just because I like them and they look good, but also because of just how bad so many other stocks look.

One can always say it’s a stock pickers market. But right now, that seems more accurate than normal. And the data supports it.

Looking over a piece from Bank of America this morning I note that their clients have recently been pulling money out of ETFs and mutual funds and buying individual stocks. This evidence of recent moves from passive to active investing may explain some of the strength in what seems like a narrowing band of stocks, and it may spell trouble for some of those that have gotten a little top heavy lately.

But it also signals the harsh reality of investing during a transition time like this – that investors can’t expect just any old stock to work. For now, we like our current focus on growth. So that’s where we put new money to work in September.

What to Do Now
Continue to focus on fewer stocks and trim positions that you’re not excited about or which you can’t think of a good reason to own for the remainder of the year.
On the flip side, allocate money to stronger positions, but also be aware that some stocks have become a little too hot to handle. That doesn’t mean you need to sell them, but a little restraint is often rewarded when tempted to load up on a rocket ship that needs to chill out.

All this said, I’m not opposed to picking up shares of a few beaten down stocks, provided you have conviction in the story. One such example in our portfolio is Freshpet (FRPT), which we have a nice gain on but which has sold off (stronger now).

I’m not saying load up on these types of “recovery” stocks, just that a little balance in your portfolio is fine.

If you look across a portfolio of two dozen stocks (plus or minus) not everything needs to be walking higher in order to make the cut. But you do need to know why you own each one and feel like it’s as good or better than other opportunities out there.

STOCKS

Asana (ASAN)
Note: This stock is being added as a Watch List stock.
The pandemic shone a spotlight on the need for cloud-based applications and remote conferencing tools like Zoom Video (ZM) so people could work remotely. A more subtle need that existed pre-pandemic but has been skyrocketing recently with all the remote work, has been tools to coordinate what all these distributed workforces are doing.

Asana (ASAN) develops software and applications to do just that. Its work management software helps teams organize, track and manage their work. Anyone on the platform can see who is doing what, where progress stands, and how everything relates to their role in the process.

Users of the platform say it helps them better understand what they’re doing, why and on what timeline they need to get things done. It helps with accountability.

Most teams using Asana’s solutions work in marketing, operations, sales and product development roles. But it is also used across companies in departments such as finance, IT, engineering, HR, design and more.

Interestingly, this type of work coordination software is relatively early in its adoption curve. That’s what makes Asana such an interesting opportunity. Even the analysts that follow the company aren’t sure if the recent spike in growth (Q3 smashed expectations) is a sign that Asana is pulling away from the pack, if the entire market for coordination solutions has suddenly taken off, or if this is just a growth spurt after which things will moderate.

The bullish thesis, and this is the one we’re leaning toward, is that teams across the department spectrum have members that will be working remotely for the duration. Management has realized that solutions to help coordinate what they’re doing are worth the investment, especially in a tight labor market.

In Asana’s fiscal 2022 Q2 report (released September 1) revenue was up 72%, to $89.5 million. Billings growth was 81%, well up from 62% in the previous quarter. And the company added 7,000 new customers for the second quarter in a row, bringing total customer count to 107,000. Enterprise customer (those paying over $50K a year) growth was especially impressive, rising by 113 to 598.

Despite the fantastic numbers, management continues to downplay the potential, issuing guidance that implies growth will decelerate to “just” 42% in Q4. That seems conservative.

For now, with measured expectations for a second consecutive year of roughly 60% revenue growth in fiscal 2022 and at least 30% in fiscal 2023, there appears to be significant momentum in the business. At the same time, the stock has gone vertical lately. I love the story, especially because there doesn’t seem to be overwhelmingly bullish consensus on the stock just yet (analysts seem behind the ball). Still, we’ll wait for shares of ASAN to cool off a little before buying, therefore it’s this month’s Watch List addition.

The Stock
ASAN came public at 21 on September 30, 2020 and popped 37% the first day. After a few soft months the stock advanced and was able to top 40 a few times in early-2021 but fell back into the mid-20s in March. ASAN then bounced around between 25 and 35 through May, finally jumping back above 40 after Q1 fiscal 2022 results came out. Shares then raced higher, clearing 60 in late June and moving into the high 70s in August. Following the Q2 fiscal 2022 report on September 1 ASAN shot up to 89 and has since climbed above 100.

Travere Therapeutics (TVTX)
Travere Therapeutics (TVTX) is a multi-month swing trade idea that has potential to deliver a 50% return by the end of the year and potentially more down the road if the flagship drug candidate sparsentan gains FDA approval for two indications in 2022. That said, this is small-cap biotech so the risks are high, albeit de-risked a little given recent data releases.

The backstory is that Travere develops therapies for rare diseases, with a current focus on progressive kidney disease.

The most advanced program is for sparsentan (RE-021), which his being evaluate in two pivotal Phase 3 clinical studies. The first (DUPLEX study) is for treatment of a rare kidney disease, focal segmental glomerulosclerosis (FSGS), which is a leading cause of end-stage renal disease. The second (PROTECT study) is for treatment of immunoglobulin A nephropathy (IgAN), the most common primary glomerular disease.

Sparsentan has the potential to help younger patients, typically in their 40s and 50s, that are at high risk of death from both FSGS and IgAN, which have no approved treatments in either the U.S. or EU.

In mid-August, IgAN Phase 3 interim analysis showed a nearly 50% proteinuria (excessive protein in urine) reduction, well above the 30% hurdle. This data release juiced the stock as it meant sparsentan was back to being a big part of the growth story after some concerns around the FSGS approval process surfaced in May. Following that data release Travere has been working on accelerated approval for IgAN in the first half of 2022, which would set up a product launch in 2023.

On that back of this news, in early September management held a successful meeting with the FDA regarding sparsentan in FSGS. Travere needs to provide additional estimated glomerular filtration rate (eGFR) data to support accelerated approval, which appears doable. This data should be available in the first half of 2022, setting up a mid-year approval application.

In the event sparsentan is approved for both indications TVTX could be worth nearly 50, representing 100% upside from current levels.

That’s the lede. There is a little more to the story.

Travere has two other clinical programs. Chenodal (CDCA) is being studied in the Phase 3 RESTORE study to evaluate effectiveness treating people with CTX, which is characterized by radiolucent stones in the gallbladder. And Pegtibatinase is being evaluated in a Phase 3 study to treat classical homocystinuria (HCU), which is characterized by high levels of homocysteine that can lead to vision, skeletal, circulatory and central nervous system issues.

Finally, Travere currently has treatments on the market that are bringing in steady revenue. These include Chenodal (gallstones), Cholbam (bile acid synthesis disorders) and Thiola/Thiola EC (prevention of kidney stones).

Altogether, the company generated $198 million in revenue in 2020 (up 13% and is seen generating $200 million both this year and next.

Still, for now this story is largely about sparsentan. And for that alone TVTX appears worth the risk.

The Stock
TVTX has been public since 2012 and has had many ups and downs along the way. We’re interested now because the stock was crushed in May (-40%) upon news of a delay in the accelerated approval process for FSGS. After trading as low as 12.75 in July TVTX walked back up to 15 by mid-August then gapped up to 18 on news of the IgAN data. With FSGS approval back on the table for 2022, TVTX’s ascent continued into September. Shares are now trading just below 25, back where they were pre-FSGS mess in April.

DLocal (DLO)

Last month we added Global-E Online (GLBE) to the portfolio because of the growth potential in direct-to-consumer cross-border e-commerce. This month we’re expanding on that theme with DLocal (DLO), a global payments company with a cloud-based platform that helps global merchants make and receive online payments.

The company was founded in 2016 and is located in Uruguay. It should come as no surprise that the business is heavily skewed toward Latin America, which represents nearly 90% of DLocal’s payment volume.

While DLocal is a niche player, it has a sophisticated, proprietary platform that addresses pain points for global enterprise merchants that are trying to deal with the complex nature of emerging market e-commerce payments. This is why DLocal has an impressive roster of clients, including Amazon (AMZN), Alphabet (GOOG), Uber (UBER), Netflix (NFLX), Facebook (FB) and Microsoft (MSFT).

These customers and others across streaming, SaaS, advertising, and retail work with DLocal for a couple of reasons. First, because emerging markets represent some of their fastest growing markets (averaging 27% annual growth through 2024). And second, because DLocal connects them to over 600 local payment methods across 30 emerging market geographies (Vietnam, Malaysia and Guatemala just added), all through a single direct API.

DLocal’s growth and profit profile is top notch. In terms of customers, it had just 152 in 2018. That doubled to 338 in 2020 and is closer to 350 now (10 new customers added in Q2 2021).

As customers get up to speed with DLocal we’re seeing them expand their relationships too. For example, Facebook began working with the company in Paraguay in 2018. It is now live in 10 countries throughout Latin America and Africa using 36 local payment methods on the platform. Netflix started in Argentina in 2018 and is now in six countries using 45 local payment methods.

Revenue grew by 88% to $104.1 million in 2020, and by 124% and 186% in Q1 and Q2 of 2021, respectively. The Q2 beat was very impressive (shares up 27% the next day) as roughly one-third of sales came from new merchants and net revenue retention jumped to 196% (meaning existing customers are spending a lot more with DLocal).

In terms of spending on the platform, total volume grew by 319% to $1.46 billion, roughly $350 million ahead of analyst expectations.

Altogether, DLocal is seen growing revenue by 111% to $220 million this year (could easily be conservative given the trends) and delivering adjusted EPS of $0.25 (up 150% from last year). That type of top line growth combined with profitability is a rarity, especially in a recently public company.

The Stock
DLO came public at 21 on June 3 and jumped 54% the first day. The stock stayed above 30 and by mid-June was racing higher, finally topping out near 57 in early July. DLO then traded in a wide range (42 to 57) until the Q2 earnings report on August 18 (when it closed at 49) after which DLO gapped up 27%. Shares have remained above 60 since and have traded as high as 73. We’ll jump in now with DLO in the mid-60s.

Bellring Brands (BRBR)
We made money on Bellring Brands (BRBR) in 2020 and are coming back to the stock today as I think we can make a quick 10% (+ or -) in the coming weeks on the relatively conservative packaged food products stock, in part because of a 5% decline yesterday that pulled BRBR below its 50-day moving average line. I think it can bounce back quickly. If not, we’ll move on.

The back story is that Bellring Brands was spun out from the cereal company Post Brand (POST), maker of Raisin Bran, Honey Bunches of Oats, Grape-Nuts, Pebbles, etc. in October 2020. It was spun out to hold three main groups of products: ready-to-drink protein shakes (82% of revenue), powders (14% of revenue), and nutrition bars (4% of revenue).

The three brands are Premier Protein, Dymatize and PowerBar. The business is concentrated within club channels, mainly Costco (COST), Walmart (WMT) and their affiliates.

Bellring grew revenue by 16% to $988.3 million in fiscal 2020 (fiscal year ends in September) and by 16%, 10% and 68% in the first three quarters of fiscal 2021, respectively (Q3 growth was helped by horrible numbers during Q3 2020 due to COVID). The company is profitable and delivered adjusted EPS of $0.30 in the recently reported Q3 fiscal 2021. That result was well above the consensus of $0.22.

The Q3 beat was a result of more-rapid-than-expected sales growth, which should extend in to Q4 as well as fiscal 2022. Sales of Premier Protein and Dymatize were particularly strong, up 65% and 99%, respectively.

One problem – a good one to have – is that demand and market share gains are outpacing supply. Management has been working to increase manufacturing capacity. But this takes time, and labor shortages compound the challenge. With pricing power Bellring has been able to pass price increases on to consumers (so far).

Analysts are currently looking for fiscal 2021 revenue to grow by 27% to $1.26 billion and for adjusted EPS to grow 51% to $0.92. In 2022 we’re looking for 10% to 12% revenue growth and 20% EPS growth.

Finally, in August Post announced it plans to distribute a significant share of its ownership stake in BRBR to shareholders, with the transaction to close in the first half of 2022. This news initially hurt BRBR, but shares bounced back as investors realized this is actually good since it will broaden the investor base.

The Stock
BRBR came public at 14 in October 2020 and climbed to 24 before falling back and trading as low as 13.6 during the March 2020 market crash. After a quick recovery, BRBR traded in the 17.5 to 23 range through November 2020, then stepped up and traded mostly in the 22 to 26.5 range through April 2021. Shares began to advance in May and crossed above 30 in mid-June. Aside from a couple intra-day spikes to 33.9 and a quick selloff after earnings in early August, the stock has been relatively stable. In the month since earnings, BRBR has trended higher, closing at 33.2 on Monday. Yesterday, shares fell more than 5% and cracked the 50-day line. I think they’ll bounce back within a week or two. If not, we’ll move on.

Snowflake (SNOW)
We added Snowflake (SNOW) as a Watch List stock last month and since then the company has reported another fantastic quarter and the stock has continued to climb. Despite a valuation that breaks the brain, we’ll behave like the false albacore my son and I chased on Vineyard Sound a couple weeks ago, snapping at what looks good because it’s right in front of us.

To refresh your memory, Snowflake is a hyper-growth stock that has brought the benefits of public clouds (scalable, flexible, etc.) to data management so customers can better understand their data.

It’s likely to post average revenue growth of 40%+ for at least the next seven years. But in the near term, we’re looking for at least 94% revenue growth this year then mid-60% growth in 2023.

The business is doing so well because Snowflake has developed a disruptive cloud-native data warehouse solution that is becoming part of nearly every cloud data warehousing discussion, included with offerings from Microsoft (MSFT), Alphabet (GOOG) and Amazon (AMZN).

The technology is cloud agnostic, hugely scalable, very flexible, easy to use, and different from other options in the market, so much so that Snowflake has the potential to create its own market, currently referred to as the Data Cloud.

Should this vision materialize, we would see a network of data providers and consumers all sharing and analyzing data across clouds and across the world. Those not in the network would want in as the value of being “inside” grows exponentially, thereby fueling significant long-term growth that’s not factored in today.

That future is becoming reality today as some sellers say it’s not so much about selling Snowflake – because customers know they need it – it’s more about selling the data warehousing environment that surrounds the solution.

In Q2 2021 (reported August 25) revenue grew 104% to $272 million. The health care and financial services verticals went bonkers, growing by 200% and 100%, respectively. Growth in Europe and the Asia Pacific region was also off the charts, with sales up 185% and 170%, respectively.

With a rapidly growing revenue base the bottom line continues to improve (adjusted EPS of -$0.64 beat by $0.03), however Snowflake is not taking its foot of the growth pedal, and continued investments mean profitability is several years away.

Valuation is still an issue here, as SNOW is trading at twice the valuation of the best peer group. However, that risk is potentially offset by the reality that SNOW is really in a class of its own and has tremendous scarcity value. With the stock in a solid uptrend now we’ll take a swing and see how it goes.

The Stock
SNOW came public at 120 in September 2020 and jumped 112% the first day. After chopping around in the 200 to 300 range for a few months, shares rocketed up to 429 in December. That was the peak, and SNOW came back to earth in the following months, ultimately falling as low as 185 on May 13. The stock has looked a lot healthier since. SNOW moved above its 50-day line on May 18 and, aside from an intra-day dip to 248 on August 20, has remained above that trendline since.

Previously Recommended Stocks
We’ve trimmed a number of positions since the August Issue of Cabot Early Opportunities.

We said goodbye to Concentrix (CNXC), FirstService (FSV), Fox Factory Holding (FOXF), Shift4 Payments (FOUR) and 10x Genomics (TXG). Our gains on these positions were 8%, 3%, -4%, 27% and 141%, respectively.

An updated table of all stocks rated BUY, HOLD and WATCH as well as recent stocks SOLD, is included below.

Please note that 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.

For stocks rated BUY A HALF, you should average into a position size that’s roughly half the dollar value of your typical position. We may do this when stocks have little trading history (for instance IPOs), when there is more uncertainty in the market or with a stock than normal, or if a stock has recently jumped higher.

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

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

The next issue of Cabot Early Opportunities will be published on October 20, 2021.

Cabot Wealth NetworkPublishing independent investment advice since 1970.

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Chief Investment Strategist: Timothy Lutts
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