August 3, 2023

WHAT TO DO NOW: Continue to pare back and hold some cash—though you should also continue to hold your resilient stocks and keep your eyes open for an eventual turn back up in the market (and growth stocks in particular). In the Model Portfolio, we sold pieces of DoubleVerify (DV) and Celsius (CELH) earlier this week, leaving us with 36% in cash. We’ll stand pat tonight but will be on the horn if we have any further changes going ahead.

Current Market Environment

It was a flat-ish day for the market today ahead of tomorrow’s jobs report – at day’s end, the S&P 500 was off 0.3% and the Nasdaq was off 0.1%.

In last week’s issue, we wrote about the market’s short-term future looking like a coin flip, and it’s certainly come up tails—this week’s action in the market (to a lesser extent) and growth stocks especially has been very rough. In fact, we’ve seen one of the worst earnings seasons (in terms of stock reactions) for growth stocks and sectors in a long time, with this week bringing tons of punishment regardless of the reaction.

Playing into that is interest rates, which have returned as the market’s main bugaboo, with rates rising sharply this week—long-term Treasuries have lifted nearly a quarter point in just four days!

Those are both definite negatives—but there are still plenty of big-picture positives out there. Our market timing indicators, for one, all remain positive, with the major indexes looking well contained so far. Moreover, while pulling back, our Aggression Index is also positive on a longer-term basis—and even near-term, is holding its 10-week line as there’s been no massive rush into defensive names.

So, what to make of it all? In our view, it’s a near-term/long-term situation. Right now, it’s looking like growth stocks have likely hit some sort of short- to intermediate-term high, as a lot of stocks cracked 50-day lines or otherwise showed some near-term abnormal action. That warrants some defensive action, of course.

However, long term, the overall market is acting normally—yes, it’s likely having its first “real” pullback, and that pullback will likely continue, but the odds continue to favor another enticing run higher once this selling squall finishes up. (In fact, given the back-up in interest rates, you could almost say the action of the major indexes has been resilient.)

Put it together and you have our current stance: We’re not hesitating to trim or sell positions that are cracking, but we’re holding onto anything resilient and, while we’re not looking to buy in a big way right this second, we’re not opposed to putting some money back to work if the market (and growth stocks) find their footing.

Following two sales last week, this week we sold half of DoubleVerify (DV) and one-third of Celsius (CELH) on special bulletins. Tonight, we’ll stand pat, but we could have changes (maybe more sells, but possibly putting money to work too) in the days ahead.

Model Portfolio

Celsius (CELH) is far from a disaster, but as we’ve written of late, the stock has basically hit a wall in the 150 area (give or take) since mid-June and then sliced under some support. Throw in the growth stocks turbulence this week and we sold one-third of our shares in a special bulletin yesterday. Could this stalling out period and dip yesterday be a shakeout? It’s possible, as the major trend is still OK and, of course, the odds favor growth remaining rapid for a long time to come; today’s bounce was a good sign. The intermediate-term tale will likely be told next Tuesday (August 8) when earnings are released. Right here, we’re OK holding a good chunk, but think paring back was the right move given CELH’s action and the environment. SOLD ONE-THIRD, HOLDING THE REST

DoubleVerify (DV) was acting about as good as can be heading into earnings, with a breakout many weeks ago and a smooth uptrend from there. But, despite a solid quarterly report, the stock imploded this week for no obvious reason. We sold half our stake on Tuesday and could sell the other half soon if the stock can’t find its footing—tonight, though, we’ll hold what’s left and see if and how well any bounce develops. SOLD HALF, HOLDING THE REST

DraftKings (DKNG) is one of the few growth stocks out there that has acted normally this week—down, yes, but no crazy action as the stock has dipped grudgingly into its 25-day line. Like everything else, though, earnings will tell the tale when they’re reported after the close: Analysts are looking for about $760 million in revenue with a loss of 25 cents per share, but all the sub-metrics in terms of users, bets per user, EBITDA and customer acquisition costs will be key. We still have “just” a half-sized stake here, as we didn’t want to average up when the stock was extended, and that was a good move so far. Because of that, a dip of a couple of points after earnings would be tolerable (both on the chart and for our position), though we’ll see how it plays out. Right here we’ll stick with our Buy a Half rating but will have updates after the report if necessary. BUY A HALF

MasTec (MTZ) also has earnings tonight, so we’ll see how it goes—the firm is obviously not a traditional growth play, which is one reason it’s remained strong (hitting new highs today). The fundamentals (surging new orders leading to an upcoming earnings/EBITDA boom) and stock (10 weeks up in a row, seven on big volume recently) both point to good things; as we’ve seen the past week or two, that doesn’t guarantee anything, but we’ll remain optimistic until the stock or story shows us otherwise. We’ll stay on Buy but will update you if we have any changes post-report. BUY

Monday.com (MNDY) has again taken on water, slicing its 50-day line yesterday, though it’s “only” back down toward the lower end of its range of the past few weeks. We have a half-sized position (never averaged up) so we’re willing to give it a little rope here—we still think the next big move is likely up. But we’ve been on Hold for a while and are staying there tonight … but want to see MNDY start to bounce back soon. HOLD

As we wrote above, while growth stocks have been shellacked, the major indexes are acting normally—pulling back, but not in an abnormal way. ProShares Ultra S&P 500 Fund (SSO) is still hanging around its 25-day line, with a max retreat so far of less than 5%. Of course, near term, we do think more selling is possible, if not likely; following two and a half months with no selling, it’s unlikely a couple of bad days are going to be enough to build up fear. But until proven otherwise, the odds are that this dip will lead to higher prices (potentially much higher) down the road. Obviously, if something really changes then we will, too, but right here we’re leaving SSO on Buy, thinking further dips should provide good opportunities to get in if you don’t own any. BUY

Shift4 Payments (FOUR) has been a frustrating situation, as basically everything has played out as we’d hoped for fundamentally and with the market (a general upturn since May), and yet other factors (possibly including horrid peer performance) have hurt the stock. The Q2 report this morning was another good one: Revenue less network fees rose 25%, gross profit was up 61% and EBITDA lifted 68%, all topping estimates, while free cash flow more than doubled and came in north of 75 cents per share. Meanwhile, Shift4 is signing up more and more big names in hotels and restaurants (Virgin Hotels, InTown Suites, Yellowstone National Park and more); sports and entertainment (renewed a deal with Disney and inked deals with Carolina Panthers, Texas Ranges, Charlotte Hornets, Toronto Blue Jays, etc.) and is now integrated in the top three ticketing providers as well. Management upped guidance for the full year, now looking for 33% revenue (less network fees) growth, 55% EBITDA expansion and north of $2.75 per share of free cash flow. That’s all to the good—but another poor earnings reaction from PayPal (down 10% today) and awful action from other peers (Square and Toast; Square has earnings tonight) capped the stock today. All in all, we’re holding on right now—a few good days really could make all the difference—but FOUR has just a couple of points of wiggle room at this point. HOLD

Uber’s (UBER) has taken some lumps this week with everything else, but the chart remains in good shape and the Q2 report was terrific, pointing to big things down the road. For the quarter, bookings for trips (up 28% in currency-neutral dollars) and delivery (up 14%) were stronger than expected, even including shrinkage in the small freight business, which led to a 17% increase in currency-neutral revenues and another big leap in EBITDA ($916 million, up from $761 million the prior quarter and $364 million a year ago) and free cash flow ($1.14 billion, about 56 cents per share). Some other stats caught our eye, too, including the fact that 13% of delivery bookings now involve something other than restaurants (groceries, etc.), while the ad business on Uber, Uber Eats and in-car tablets is now a $650 million annual business (up 30% from the prior quarter and that’s without many big outfits signing up yet). Of course, none of this stopped the stock from falling after the report—it’s been that kind of earnings season—but shares are still around their 25-day line even after more slippage today. All told, we’re optimistic longer term, so we’ll stay on Buy, though as with most things, aim for dips if you’re looking to grab shares. BUY

Watch List

Airbnb (ABNB): We’ve always been intrigued with Airbnb—like Uber, it’s basically a “new” blue chip firm, as it hasn’t had any major run in the stock since coming public in 2020. Free cash flow here is huge, growth is solid and the stock has recently hit multi-month highs. Earnings are due out tonight.

Axcelis Technologies (ACLS): We’ve seen a few chip stocks give up the ghost this week, but ACLS remains in good shape despite having had a huge run this year. Last night’s quarterly report was another good one, and the stock has so far remained resilient.

Confluent (CFLT): CFLT broke to two-month lows yesterday, which nearly had us scratching it off our watch list—but today’s earnings reaction was very encouraging thanks to another boom in its cloud data streaming offering (revenue up 78%). Ideally, this week will be a shakeout that clears the decks for a sustained move up, but let’s see how it goes.

Noble (NE): Cyclical stocks will never be our favorite, but the long-term cycle for drillers has turned up, with the recent uptick in oil prices helping perception, too. It’s a very good bet that earnings, cash flow and shareholder returns (the newly instated dividend, 2.3% yield, should move up over time) will head nicely higher for many quarters to come, with last night’s earnings report (another leap in backlog, to $5 billion).

On Holding (ONON): ONON has been sort of flopping around near its prior highs without much power—though the fact that the stock has held up during this week’s selling spree is a good sign. Earnings are due August 15.

Palantir (PLTR): PLTR is hugely volatile but remains in very good shape as more big investors are trying to build positions in this potential AI leader. Earnings are due next Monday, August 7.

Samsara (IOT): IOT has sunk to the 25 area three times since its huge early-June earnings move, holding that level each time—and remaining in position to get going if growth stocks find their footing.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, August 10. As always, we’ll send a Special Bulletin should we have any changes before then.