In the October Issue of Cabot Early Opportunities, we go deeper down the software rabbit hole, jump into a new grocery chain stock I suspect you’ve never heard of, dabble with a hot AI semiconductor stock and consider the potential of an EV stock that’s exploded on news of a big DOE loan.

As always, there should be something for everyone!

It was yet another strong week for the market and countless stocks, many of which are breaking out to new highs. At some point the market may cool off, but for now at least, I’m not seeing any truly worrying signs. And in fact, the S&P 500 closed at a new record high as the index gained 1.44% on the week, while the Dow added 1.56%, and the Nasdaq rallied 1.63%.

It hasn’t been any dramatic one- or two-day event, but the evidence has moved steadily toward the bullish case during the past couple of weeks. We will say that there are more than a few secondary factors that aren’t ideal, including the fact that interest rates are going up nearly every day, so we don’t think now’s the time to cannonball into the pool, per se, but we’re mostly holding our winners (booking the occasional partial profit on the way up) and gradually extending our line as new opportunities emerge. We’re lifting our Market Monitor to a level 8.

This week’s list is definitely growth-ier than the past couple of weeks, which is no surprise given the strength seen in that area. Our Top Pick has re-emerged after a brutal summer correction and has big leverage to a strong equity and crypto market. It’s not for the faint of heart, so use a loose stop if you go in.

Stocks are at all-time highs, yet again, defying the myriad potential macro tailwinds (expanding war in the Middle East, looming presidential election, another damaging hurricane, Q3 earnings season underway, etc.) that have been threatening to derail the market. One of them still could, but for now, we’ll stick with what’s in front of us, and that’s a market with plenty of momentum. Today, we lean into that momentum by adding a mid-cap tech stock recently recommended by Tyler Laundon to his Cabot Early Opportunities audience.

Details inside.

The markets have continued to flirt with new highs—pulling back and then moving forward—for the past month.

The Fed’s 50-basis-point rate cut inspired investors, home buyers, and those folks wanting to refinance their homes. The Mortgage Bankers Association reported that refinancing applications rose 20% right after the rate cut!

JPMorgan (JPM) is due to report results Friday, kicking off bank earnings season. Lately, the market seems to be more focused on earnings than Fed interest rates, and this is a good thing.

As markets move towards the “Great Rebalance”, looking to diversify portfolios with different asset classes and international stocks, the Explorer and I are headed to Europe, Asia, and Latin America during the next year. But today, stick to the U.S. and add a very familiar face to the portfolio.

There is a colossal housing shortage in this country.

A decade of underbuilding in the housing industry following the financial crisis has left the industry unable to meet the needs of the growing population. It is estimated that the demand for homes exceeds the current national supply by a whopping 4.5 million.

The jilted supply/demand dynamic has caused the median U.S. home price to soar a staggering 40% just since the pandemic. In addition, mortgage rates have soared to the highest level in two decades. The prices and mortgage rates are making housing unaffordable for vast numbers of potential buyers. Sellers are unwilling to trade up and get a higher mortgage rate.

There aren’t enough new homes, and existing homes aren’t coming on the market either. Buyers can’t buy and sellers won’t sell. But there is reason to believe the housing problems will get a lot better in the years ahead.

While the situation is likely to improve, the supply/demand imbalance will likely remain for several years. That’s a problem for the housing market and economy to work through. But it’s good news if you’re a homebuilder. New homes should be in high demand for years to come, and sales should increase with the improving conditions.

In this issue, I highlight the premier luxury home builder in the U.S. The stock has the best track record of all large homebuilders, and the company is in an ideal position to benefit from high demand and increasing buying in the years ahead.

Despite plenty to worry about in the market including the rising tensions in the Middle East and the short-lived port strike, impressively the S&P 500, Dow and Nasdaq all rose marginally last week.

In the market, it’s not the news that counts, but the market’s reaction to the news—and that makes last week’s trading noteworthy: Middle East attacks along with a dockworkers strike (that was quickly put off for a few months) could easily have sent risk-on assets reeling, but instead, most indexes took the news in stride and, somewhat surprisingly, we’ve seen defensive stocks hit the skids. Now, to be clear, there are still flies in the ointment out there, including the possibility of a counterstrike overseas (rumblings of that today), rising Treasury rates, and a lot of indexes, sectors and stocks are still rangebound. There’s no question there remain many stocks that act well (including tons of Top Ten names), but we’re staying in the same stance as we wait for upside confirmation from more of the market—we’re encouraged, but we’re leaving our Market Monitor at a level 7 as we wait for the buyers to truly flex their muscles.

This week’s list is another one with something for everyone in terms of stories and setups. Our Top Pick is a firm that has its hands in many nuclear power cookie jars; the stock just emerged from a multi-month rest on big volume.

Spooky season is upon us! Yes, the usual October selling has commenced, although it’s been fairly mild thus far. But things feel unsettled, what with the expanding war in the Middle East, a toss-up presidential election less than a month away, and with earnings season getting underway this week. So today, to counter any further turbulence, we trim one modest laggard and add a new, low-beta, dividend-paying European stock that’s been a favorite of Cabot Explorer Chief Analyst Carl Delfeld for some time.

Details inside.

Despite plenty to worry about in the market including the rising tensions in the Middle East and the short-lived port strike, impressively the S&P 500, Dow and Nasdaq all rose marginally last week.

Despite plenty to worry about in the market including the rising tensions in the Middle East and the short-lived port strike, impressively the S&P 500, Dow and Nasdaq all rose marginally last week.

In my view, the best strategy for overseas markets is to play the trends with a contrarian value approach. For example, the Hang Seng China Enterprises index, a closely followed gauge of large Chinese listings in Hong Kong, has fallen about 11% so far this month after losing 14% last year. Foreign investors have sold about 90% of the $33 billion worth of Chinese stocks that they had purchased earlier in 2023 and have continued selling this year.

So today, we go against the grain on China.

After the stellar finish to last year, the market rally is continuing, sort of.

The S&P 500 is up for the year. But it’s only up 1.69% and participation is far less broad than it was. Technology stocks are driving the market higher but most of the other sectors are down. The AI euphoria is continuing, but the interest rate rally is gone.

According to credit rating agency Moody’s, debt obligations of the United States federal government are “judged to be of the highest quality, subject to the lowest level of credit risk” and thus are worthy of a “AAA” credit rating.

The other two major credit rating agencies, Standard & Poor’s and Fitch, disagree. These firms place an “AA+” rating on federal debt. For its part, Moody’s is not fully convinced of its AAA rating, as it recently added a “negative” label, implying that the rating is no longer “stable.”

Other than the buyout of Kaman (KAMN), it’s been a relatively quiet week for company-specific news.


Regarding Kaman, the company announced that it will be taken private for $1.8 billion, or $46/share, a huge 100%-plus premium over the prior day’s closing price. The market has had little confidence in Kaman’s turnaround, despite what we saw as evidence that impressive changes are underway, led by its capable new CEO. The huge premium is at a discount to our $57 price target, but we’re fine with the deal as it produces a reasonable return, in cash, today, compared to a slog for a year or more while the turnaround plays out.

With the market bouncing around in the first two weeks of the year on more speculation about Fed rate cut magnitude/cadence (economists are now thinking slower and fewer of them) and mounting geopolitical risks, small caps as an asset class have begun to trail the broader market.

That said, on a stock-specific basis there’s been a lot of positive motion in small caps in the MedTech and software space, which is where we concentrate.

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It’s earnings season again! And this one should be more important than most.

Earnings are, of course, a big deal for the individual company. But in addition to company-specific fundamentals, Wall Street will be carefully watching what company earnings indicate about the macro environment.

Earnings season has arrived, and with it could be a recalibration of investor expectations for stocks broadly.

The S&P 500 Index seems reasonably priced at 19.5x estimated 2024 earnings. But nearly 30% of the index’s weight comprises Magnificent Seven stocks, whose average multiple is 33x. Estimated earnings growth rates for these Mag Seven stocks, which average 19% for each of the next five years, set a high bar. When high expectations meet less-high reality… well, investors know what can happen to stock prices. And, any wobbling in the largest stocks can send the market broadly lower. As Dennis Gartman, the legendary and now-retired writer of The Gartman Letter, frequently said, “When the generals leave the field, the rest of the army follows.”

DKNG continues to trend higher, so we are going to buy back our September puts, lock in profits and immediately sell more puts for the October expiration cycle.

The Yale Endowment portfolio continues to shine, outperforming our benchmarks with portfolio gains currently reaching close to 15% since we initiated the portfolio back in mid-June of last year.

I’ve decided to lock in profits on my October 20, 2023, SPY iron condor. With 37 days left until our iron condor is due to expire, I want to eliminate all risk and simply lock in some profits. This brings our total returns in Quant Trader to just under 160% since introducing the service 16 months ago.

The Yale Endowment portfolio continues to shine, outperforming our benchmarks with portfolio gains currently reaching close to 15% since we initiated the portfolio back in mid-June of last year.

With the September 15, 2023, expiration cycle coming to a close in three days, it’s time to start buying back the rest of our September 15, 2023, and September 22, 2023, short calls and selling more premium going out 30 to 60 days. I’ll be sending out numerous trade alerts for the various portfolios over the next few days, including the potential for a few more new trades in our active portfolios.

Braze (BRZE) delivered Q2 results after the close yesterday that beat expectations. Revenue grew 33.6% to $115.1 million, beating by $6.4 million while EPS of -$0.04 was up from -$0.16 in Q2 last year and beat by $0.10.

Intapp (INTA) delivered Q4 results after the close yesterday that beat expectations. Revenue grew 25.3% to $94.6 million, beating by $1.5 million while EPS of $0.04 was up from -$0.04 in Q4 last year and beat by $0.03.

All right, it’s time to start selling some more premium.

We currently have one open position (currently profitable), an iron condor in SPY, and I want to add another iron condor today, this time in the Russell 2000 (IWM).

I will be sending out numerous alerts over the next few days. With 9 days left until the September 15 expiration cycle, now is the ideal time to begin looking to buy back our short calls and sell more call premium going out to October 13, which has 37 days left until expiration.

WHAT TO DO NOW: The market’s action of late is encouraging for sure, but there’s still more work to do with our Cabot Tides and growth funds. Today we’re going to sell our small remaining position in DoubleVerify (DV) and hold the cash—with an eye toward redeploying the funds in the near future should the market and individual stocks continue to firm up. Our cash level will now be around 45%.

The Yale Endowment portfolio continues to shine, outperforming our benchmarks with portfolio gains currently reaching 18% since we initiated the portfolio back in mid-June of last year. We have two short call positions due to expire today, so I want to buy them back and immediately sell more call premium.

A few Cabot Options Trader subscribers have asked me about ways to protect gains in their portfolios, so I thought I would write to everyone with a couple of strategies using options to hedge your portfolio.

A subscriber recently asked me if I keep a journal of my trades. Many traders keep journals so they can look back at their trades and evaluate what they did right and what they did wrong.

Want to know how the big institutional investors use options? Here is an example of how one trader spent $132 million on three technology stocks.

Options trading has its own vernacular. To know how to do it, you need to know what every options term means. Here are some of the basics.

Our Cabot Top Ten Trader’s market timing system consists of two parts—one based on the action of three select, growth-oriented market indexes, and the other based on the action of the fast-moving stocks Cabot Top Ten features.