April 27, 2023

WHAT TO DO NOW: Remain cautious. The market and (especially) growth stocks have come under further pressure this week, and while many names are still setting up well, more are hitting air pockets. Overall, we think the general environment is mostly unchanged (tedious, up and down, etc.), but we are making a couple of small defensive moves today—we’ll sell one-third of our stakes in both Academy Sports (ASO) and Wingstop (WING), taking some profits and holding the cash (around 63% of the portfolio) for now. Details below.

Current Market Environment

The major indexes are up so far today—as of 1145 EST, the S&P 500 is up 1.1% and the Nasdaq is up 1.7% thanks to a gap up from Meta (META)—but most growth stocks are flat to down after some very sour earnings results from a few potential leaders.

The slippage we began to see in earnest two weeks ago has picked up in recent days, with most of the market (outside a few mega-cap names) sagging as financial stocks again come under pressure (regional banks, symbol KRE, have moved to new lows) and more air pockets appear among potential leading areas—this week, we saw cybersecurity names get hit, while today has seen more than a few potential leading stocks get whacked after earnings.

The slippage is also being seen in our indicators—the Two-Second Indicator is now seeing new lows on the NYSE really accelerate, and, for what it’s worth, new lows on the Nasdaq are also bursting higher (more than 400 yesterday!). Meanwhile, the improvement seen in our Cabot Tides has mostly fallen by the wayside and our Aggression Index is on the verge of turning down, too.

Of course, we’ve been in a cautious stance for weeks, so this week’s damage doesn’t necessarily have us running to our storm cellar—there’s still a solid chance the on-again, off-again market pattern is in place.

That said, we do have a couple of defensive moves tonight, though they’re based more on stock action than the market as a whole. We’re going to take partial profits in both Academy Sports (ASO) and Wingstop (WING), both of which have had choppy-but-solid runs—we hope these sells turn out to be big mistakes of course (the remaining positions go up big), but we think pruning here after nice moves makes sense in this environment.

That will leave us with about 63% in cash, which we’ll hold onto tonight—but, should growth stocks find support after this dip (as you’d expect in this up-and-down environment), we may add a half-sized position or two from our watch list. For now, we’ll book partial profits in ASO and WING and see how things play out.

Model Portfolio

Academy Sports & Outdoors (ASO) is a name that, over time, we think can do very well—it has the story, the numbers, the cookie-cutter story and the “newness” (public in late 2020; first big base breakout was in December of last year) that often correlate with winners. That said, the fact is that shares have been rising for a few months now, and the going has been very choppy of late, with tons of up/down action, including the recent dip right back to the 50-day line after some management shifts (all promoted from in-house). Ideally, ASO is just fine and continues its uptrend—but having given the stock plenty of breathing room and yet having just a small profit to show for it, we’re going to sell one-third of the position here and see how it goes. We’re not in a rush to sell the rest but believe lightening up is the prudent move given the stock’s action and the renewed growth stock selling. SELL ONE-THIRD, HOLD THE REST

Allegro Microsystems (ALGM) was sold on a special bulletin Tuesday morning, as the stock’s dip last week gained steam, causing us to cut the loss on our half-sized stake. The “cause” of the dip, beyond the market, was likely Tesla’s sour quarterly report, which dragged down many EV-related names—and last night’s poor report from distant peer Wolfspeed (WOLF) caused further losses today. Of course, Allegro has its own earnings report on May 9, so we’ll see if it can find support and round out a fresh launching pad. But right now, there’s no doubt the sellers are taking control. We’ve sold and are content to hold the cash. SOLD

Axon Enterprises (AXON) has been sagging some with most growth stocks this week, and it even nosed under its 50-day line by a smidge today. Still, shares are still well within their 200 to 230 trading range, which sits atop the prior giant launching pad. Earnings are due May 9, which, as with most every stock, should tell the intermediate-term tale, but right now, we think AXON is under pressure but OK—hold your half-sized stake if you’re in, and we’re still OK nibbling if you don’t own any. BUY A HALF

On Holding (ONON) took on some water today after Crocs (CROX) got taken apart on earnings, but to this point, the selling has been well-controlled—shares only dipped to their 25-day line before bouncing. We can’t rule out more wobbles, of course, but we’re impressed that the stock hit new closing highs earlier this week despite the tricky environment; all told, ONON still quacks like a new, fresh leader that likely blasted off in March. Hold on if you own some, and we’re OK starting small here or on further dips if you’re not yet in. BUY A HALF

ProShares Ultra S&P 500 Fund (SSO) has sold off some but remains firmly in its range (and above its 50-day line), propped up by some mega-cap names (Microsoft, Facebook) that have reacted well to earnings this week. If the recent market weakness spreads and we get an across-the-board decline, we probably won’t stick around with the rest of our position—but, especially from a top-down perspective, nothing that big has changed, with the tedious up-and-down environment still in place … and with many (mostly big-cap) indexes and even growth stocks still setting up. We’ll sit tight. HOLD

Shift4 Payments (FOUR) is hanging in there, still trading a bit above its closing levels from the short report-induced selling wave from a week ago. The CEO did respond to the report last week, making a few points that seemed to calm nerves, though FOUR is now more likely trading alongside recession fears and what that could do to consumer spending (and profits) here. Still, we think the story is just fine; earnings are due May 4, and we’d like to hold into the report given our small remaining position, though that will be up to the stock. For now, sit tight. HOLD

Wingstop (WING) looks great, motoring to new highs and helped this week by a barnburner of a quarterly report from fast-casual peer Chipotle—raising hopes that the firm’s own Q1 report (due May 3) will be pleasing, too. That said, we’re actually going to use this pop to sell one-third of our position for a couple of reasons. Shares are extended a bit headed into earnings; are sitting right at round-number resistance (near 200) and WING has generally been advancing all year (with fits and starts of course). Throw in the renewed growth stock weakness and we’ll take partial profits, selling one-third and holding the rest. Note that, as with most of these partial sales, we’re hoping it turns into a big mistake—we’d be thrilled to see our remaining (two-thirds) of a position go wild on the upside. But given all the evidence, we think pruning makes sense. SELL ONE-THIRD, HOLD THE REST

Watch List
Arista Networks (ANET): ANET retreated to its 50-day line and has held thus far—though earnings next week (May 1) will be key. Overall, this remains one of the strongest liquid growth stocks out there.

Axcelis Technologies (ACLS): ACLS has slipped along with most chip stocks (including ALGM), but not badly at all. It’s still worth watching—when the environment truly turns up, odds favor a few of the newer chip names being leaders.

DoubleVerify (DV): DV is still a bit thinly traded for us, but we’re very high on the story, which looks like a new, follow-on theme given all the digital advertising out there. Earnings are coming May 10.

DraftKings (DKNG): DKNG remains in good shape, holding near multi-month highs after a solid base-building effort in the past couple of months. Earnings are due May 4; beyond general business trends, we’ll be watching to see if management ups cash flow guidance.

Duolingo (DUOL): DUOL remains in fine shape … which, in this environment, might mean it’s due for a dip. Still, the super-powerful blastoff in March bodes well; dips toward the 50-day line (near 125 and rising quickly) would be tempting. Earnings are due May 9.

Freshpet (FRPT): FRPT has some defensive characteristics (pet food), but there’s been a big underlying growth story here that should be getting back on track after some snafus in recent years. The stock is perched near multi-month highs. Earnings will be released May 8.

HubSpot (HUBS): HUBS took a hit earlier this week but snapped right back and remains in its tight multi-week consolidation. The stock really changed character near year-end and looks like it wants to move higher—if the market cooperates and earnings (coming May 3) are pleasing.

Inspire Medical (INSP): We took a swing at INSP earlier this year, but the stock broke down—but like many growth names, it’s spent the past couple of months rounding out a new, proper, tighter basing structure. Earnings are due May 2.

Las Vegas Sands (LVS): LVS is another former holding that cracked a bit in February/March but held firm and has nosed to new highs after earnings. Near term, another dip is possible, but the overall rest period since early February looks tight and proper.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, May 4. As always, we’ll send a Special Bulletin should we have any changes before then.