Stuck in the Middle (for Now)
One thing we learned early on in our investing career is to generally ignore the noise—there are so many non-essential factors out there that can lead you astray, preventing you from getting into (or, equally important, hanging onto) a top performer. And of course that says nothing about news and rumors, which are more prevalent these days with all the clickbait-y headlines out there.
Instead, while we’re aware of all the latest hubbub, it’s best to focus on the facts—the real evidence, mostly primary (trends of the major indexes and leading growth stocks) with some key secondary data points (Aggression Index, interest rates) thrown in.
And when you look at the facts today, it’s still mostly positive but becoming mixed: The trends of the major indexes (Cabot Trend Lines and Cabot Tides) are up, and the same goes for leading stocks, but at the same time, most growth titles continue to do more chopping than advancing over the past six to eight weeks. Thus, big picture, the outlook remains bright, and intermediate term, things are more positive than not—but many stocks have been stuck in the middle for weeks, unable to truly get going much when the buyers swarm but also holding support when a couple of potholes emerge. We saw another selling-on-strength example today, when a nice rally in most stocks was upended.
Our Aggression Index (daily chart shown below), which measures the appetite for growth names, shows what we’re talking about: Relative to defensive consumer staples, the Nasdaq topped out in early February and has been going sideways since then—but it’s also been holding its 50-day line, with downmoves arrested so far.
The common questions are: Has this been a distributional phase that will lead to a “real” correction for the first time since Halloween, spurred on by, say, a tighter than expected Fed (which was the impetus for recent weakness, including today’s slide)? Is it the pause that refreshes, with big investors quietly adding shares at support before another push higher? Or is this going to carry on for a while, with more ping-pong action coming?
For us, we prefer not to predict, but to play the odds—over time, that’s how you made (and keep) good money. Right now, that means sticking with the primary evidence (mostly positive), but given the mini-change of character in the leaders, continuing to hold some cash, booking some partial profits here and there and staying patient makes sense.
What to Do Now
Remain flexible. We put some money to work two weeks ago, but those stocks ran into a wall of selling (on some out-of-nowhere bad news), so we did pull in our horns a smidge, selling a small piece of CrowdStrike (CRWD) last week and moving Celsius (CELH) to Hold. Tonight, we’re doing something similar with Uber (UBER)—selling one-quarter of our position and putting some profit in our pocket—leaving us with around 28% in cash. From here, we’ll just follow the market’s lead, willing to pare back further if stocks decisively crack support ... but still monitoring many fresher leaders to buy if leaders can get going again.
Model Portfolio Update
While the big-cap indexes have been mostly quiet in recent weeks, leaders have been ping-ponging around under the surface, with a couple of tests of key support (50-day lines, etc.) in many names, followed by a couple of modest rallies. Net-net, though, most names we own or are watching aren’t letting loose on the upside—but the sellers aren’t able to take control, either.
Thus, we’re comfortable sticking with our winners and doing some selective buying, but we’re also comfortable holding some cash as many names do more chopping sideways than advancing in recent weeks and taking some partial profits here and there.
All in all, we’re flexible right now—a couple of very solid days among growth stocks could have us adding exposure (it would make today’s reversal look like a big shakeout), but we’re not against paring back further if we start to see some legitimate breakdowns. Tonight, we’re going to make one minor move, taking a little partial profit out of UBER, leaving us with around 28% in cash, and then see how it goes from here.
CURRENT RECOMMENDATIONS
Stock | No. of Shares | Portfolio Weightings | Price Bought | Date Bought | Price on 4/4/24 | Profit | Rating |
AppLovin (APP) | 3,302 | 11% | 63 | 3/1/24 | 73 | 16% | Buy |
Arista Networks (ANET) | 545 | 7% | 226 | 11/22/23 | 289 | 28% | Buy |
Cava Group (CAVA) | 1,620 | 5% | 64 | 3/8/24 | 63 | -2% | Buy a Half |
Celsius (CELH) | 1,154 | 4% | 92 | 3/22/24 | 79 | -14% | Hold |
CrowdStrike (CRWD) | 452 | 7% | 163 | 9/1/23 | 309 | 90% | Hold |
DraftKings (DKNG) | 4,435 | 10% | 35 | 6/23/23 | 45 | 30% | Buy |
Nutanix (NTNX) | 3,076 | 9% | 39 | 11/3/23 | 64 | 64% | Buy |
PulteGroup (PHM) | 2,019 | 11% | 91 | 12/1/23 | 114 | 25% | Buy |
Uber (UBER) | 3,037 | 11% | 44 | 5/19/23 | 75 | 69% | Sell 25%, Hold the Rest |
CASH | $520,163 | 25% |
AppLovin (APP)—AppLovin announced what could be big news this week: It inked a deal with a private social shopping site called Flip, with that company integrating Axon into its marketing platform—with AppLovin stating that it’s now making Axon available to others for the first time. We’ll see how it goes, but AppLovin’s proven results using the AI-powered offering for advertisers means there should be huge opportunities out there, and while valuation is a secondary factor to us, it doesn’t hurt that the stock still trades at less than 20 times this year’s earnings and free cash flow projections. More important, the stock popped on the news, with APP notching new closing highs on heavy volume yesterday and, despite today’s reversal, it also set a new relative performance (RP) peak today. Don’t be surprised if we see further near-term volatility, but the path of least resistance remains up. BUY
Arista Networks (ANET)—The next big surge in business for Arista isn’t likely to start until early 2025, but big investors continue to support the stock because perception is coalescing around the idea that this company will be one of (if not the) top ways to play a years-long networking boom that’s going to be part of the AI build-out. Indeed, the stock has taken many brief hits since early February, but every dip has been bought above its moving averages, though like most other tech leaders, it’s also seen selling on strength (most recently, near round number resistance at 300). A drop below 270 or so would be intermediate-term iffy, but right now we’re thinking positively—we’re holding our position (we took partial profits a few weeks back) and are OK picking up some shares here if you’re not yet in. BUY
Cava Group (CAVA)—CAVA is a good example of what we’re seeing under the market’s hood, with a lot of good-looking stocks finally exhaling even as the major indexes pull in just a smidge. Down is never fun, but all in all, the retreat has been acceptable so far; we knew we were buying a bit extended when we initially entered, which is why we never averaged up, so right now we’re comfortable sitting tight and seeing how things play out. The fundamental story remains enticing and should keep big investors interested (the early read for quarter’s end shows a big jump in sponsorship, and many highly rated funds still own small positions). If CAVA and growth stocks can rebound well from here, we may add to our stake—but, obviously, if the stock falls apart (likely due to a break in the market) we’ll look for greener pastures. Hold on if you own some, and if you’re not in, we’re OK starting small on this or further dips. BUY A HALF
Celsius (CELH)—We’ve had a lot of good entries in recent months, but Celsius was both bad timing and bad luck—bad timing as the post-Fed rally two weeks ago turned tail (at least for growth stocks) right away, and bad luck as the firm announced a re-working of its Pepsi deal just a couple of trading days after we entered. While many analysts spoke with management and believe margins won’t be crimped, there’s little doubt the report changed near-term investor perception, with CELH skidding straight down in recent days before finally bouncing today. Our game plan: The drop hasn’t been fun, and we have a growing loss, though we also have just a half position and volume has been far from overwhelming—and, just as important, we think if a bounce can get going it could gain steam if the market holds together. Long story short, we’re holding on to our half-sized stake here, albeit with a tight mental stop in the mid-70s. HOLD
CrowdStrike (CRWD)—CrowdStrike has the story, numbers and chart action that allow it to head nicely higher over time, assuming the market does the same in the months ahead—but, near term, the action has been sluggish, with the post-earnings reversal creating overhead that might take some time to chew through. Combined with the sluggishness in growth stocks and in many peers, we decided to trim our position a bit last week, selling 20% of our shares; as usual, the idea is to put a little profit in our pocket while giving the rest room to maneuver, thinking CRWD can be a bigger winner over time as it morphs into a liquid leader. As for the here and now, the stock is far from a disaster, but it continues to lose a little ground at a time on low volume—given everything, we think Hold remains the appropriate rating as we wait patiently for the stock to find support. HOLD
DraftKings (DKNG)—DKNG acted pristinely for weeks, but after bursting to new highs two weeks ago, the stock ran into selling on two pieces of negative news: First, it looks like some regulators might be taking a closer look at the group, making sure DraftKings and FanDuel (the parent company’s symbol is FLUT) aren’t targeting gambling addicts. And second, the NCAA said it would aim to stop any online prop bets involving college players, which are popular (and usually carry good “margins”). The drop wasn’t fun, but shares fell “only” to the top end of their prior range and have held above their 25-day line—and despite giving up much of its gains today, it closed higher on a very bad market day. If DKNG can’t hold here, we could flip back to Hold, but right now we continue to lean positive—we’re OK picking up a few shares if you’re not yet in. BUY
Nutanix (NTNX)—NTNX pulled in with the rest of growth stocks over the past month, but this week’s test of its 50-day line (near 60) found support on Tuesday and has seen excellent upside the past couple of days—obviously the type of action we want to see. The firm has been mostly quiet on the news front since earnings, announcing a partnership with consulting firm Wipro and an IP lawsuit against a firm that includes some former employees, but neither moved the stock. Long term, there should be a very long runway of growth here as more firms standardize on Nutanix’s platform, so we’re willing to give the stock every chance to keep going up, especially given that we’ve already taken some profits off the table. But like everything else, we’ll play it by the book near term—a drop into the high 50s could have us going to Hold, but with the stock still acting just fine, we’re OK grabbing some shares here if you’re not yet in. BUY
PulteGroup (PHM)—As interest rates have been testing multi-month highs and questions about the Fed’s future path come back into focus (see more later on that in this issue), PHM and other homebuilders have hit a good-sized pothole this week, but like most names out there, the action hasn’t been abnormal, with shares finding some support at their 25-day line. If interest rates really ramp up, it’s almost certain to be bearish, but sticking with the facts, rates remain a very long way off their peaks from last October, and the underlying factors in play in the housing market (limited supply, resilient prices) are pointed up. We’re not complacent, but the trend here remains up, both for the stock and for Pulte’s business, which we think can surprise on the upside. We’ll stay on Buy. BUY
Uber (UBER) is close to a carbon copy (chart-wise) of many leaders, with a huge move into mid-February followed by a lot of chopping and testing since—but, today the stock nosed below its 50-day line and tested its March lows, albeit on relatively tame trading volume. Business-wise, the firm’s very bullish three-year outlook should keep big investors interested assuming management executes, and given our profit cushion, we’re aiming to play UBER out for a bigger move. That said, the stock’s near-term wobbles and inability to find buyers has us making a similar move to what we did with CRWD last week—we’re going to sell one-quarter (25%) of our position here, taking some solid profits off the table and giving the rest room to correct and consolidate in the weeks ahead. SELL ONE-QUARTER, HOLD THE REST
Watch List
- Axon Enterprises (AXON 307): AXON has been cool as a cucumber since its earnings move at the start of March, trading in a tight range just above 300. This stock has a history of herky-jerky moves, partly due to liquidity and partly due to valuation, but the story is unique and there’s no doubt the stock has grown up in recent quarters, too.
- Hims & Hers Health (HIMS 15): HIMS has shaken out couple of points, which is completely normal given the prior run and the stock’s volatility. It’s still technically extended to the upside, but we’re thinking it’s close to a solid risk/reward entry.
- Palantir (PLTR 22): PLTR is weaker than we’d prefer, actually knifing its 50-day line, but we’re keeping it on the watch list (for now, anyway) because the massive earnings breakout is still intact and we want to see how it handles this test—a very powerful rebound off support (it tried today but couldn’t hold most of the move) would mark a textbook entry. We’ll be watching.
- Robinhood (HOOD 18): HOOD remains in great shape despite some growth stock and cryptocurrency wobbles of late. March monthly metrics are likely due in a week or so, but there’s little doubt the trend of business is up, and the firm’s new rewards credit card (heavy incentives if you use their brokerage) could be a winner.
Tidewater (TDW 98): Energy stocks have turned strong, and the fundamentals of the offshore drilling sector suggest boom times for many quarters (or even years) to come. See more below.
Other Stocks of Interest
Sweetgreen (SG 24)—If all goes well, 2024 is looking like it should launch some new cookie-cutter winners—we’re obviously high on Cava Group, and another small, up-and-coming restaurant with big potential is Sweetgreen, which is aiming to be a category-defining brand in the healthier-for-you segment. It’s best known for its various salads and warm bowls (that include a lot of yummy items from blackened chickened to pickled onions, blue cheese to hot sauce and more), both of which it’s been able to produce with consistent high quality (deals with tons of local growers around the country) while keeping costs in check. That said, the firm has also broadened its menu with protein-focused plates, including herb-roasted chicken, miso-glazed salmon and caramelized grilled steak (which is still being tested), and those are off to a good start, generally boosting dinner sales and margins. As for the cookie-cutter aspect of the story, it’s still early here—the firm had “only” 221 restaurants as of year-end, though that was up 35 from the year before, with another 25 openings likely on tap this year—all of which is bolstered by solid economics, with a year two cash return in the 40% range, which is solid; the average store brings in $2.9 million per year, which is also a healthy figure. Interestingly, the firm is testing (two are now open) so-called Infinite Kitchens, which is essentially an automated restaurant (rebranded from a small outfit named Spyce it bought last year) where customers can make their own meals; early tests show solid demand at higher price points than standard Sweetgreen locations, and the top brass thinks tons of its locations could be automated within a few years. Not surprisingly, business has been solid for a while, and the market is thinking the best is yet to come: Sweetgreen’s revenues were up 29% in Q4 (same-store sales up 6%), which marked the 11th straight quarter of 20%-plus growth, and while earnings are in the red, restaurant-level profit margins are excellent (17% last year) and should expand over time. Growth is likely to slow this year, but investors actually liked the outlook (including for positive EBITDA this year), sending SG flying higher—shares basically doubled in March (!), though this comes after a couple of years of sour post-IPO action. The stock is on the borderline of liquidity for us, and besides, shares aren’t at a great entry point here—but it’s clearly a name that’s growing up, gaining sponsorship and, if management executes, should be early in its overall run. We’re keeping a distant eye on it.
Coinbase (COIN 250)—We’re pretty good at sticking to our strengths, which over time is one of the keys to success—we’re not filling our portfolio with whatever is hot or moving or “in play.” That said, we’re also flexible and keep an open mind: A few years ago, we wouldn’t have been surprised if cryptocurrencies disappeared, but today, after seeing them hang around and gradually gain acceptance even during a tough bear market (especially from investors and some big banks), we think the future is likely bright, although it’s sure to be super-volatile. Long-term, then, it’s a good bet that Coinbase will be a winner, as it’s set up to be a combination of the Schwab and NYSE of the crypto world: Transaction revenue is the largest chunk of revenue, and like crypto prices, it can be very volatile, with Q4’s haul of $529 million up more than 80% from the prior quarter (!) and making up 55% of all revenue. However, with that figure set to gyrate, the firm has been putting emphasis on more stable (and still growing) subscriptions and services that include stablecoin revenue (a crypto that’s tied to something stable; revenue here nearly tripled last year and made up 22% of the total), blockchain rewards (users can “stake” their coins to help firms mine more crypto; revenues up 20% last year, making up nearly 11% of the total) and a small but expanding subscription service ($30 per month) that allows for cheaper trading fees. Beyond all that are company-specific moves to contain costs after the recent boom-bust cycle; operating expenses were down a ridiculous 45% last year, and that’s even with revenue for last year down just a couple of percent. Of course, what matters more than anything is the future path of crypto in general (bitcoin is the most popular product here, but “only” made up about one-third of trading volume last year), and the boom this year has COIN in favor—the stock pulled back sharply into February and has since soared as high as 280 before pulling into the 25-day line. COIN will regularly see 30% swings, but it’s an interesting play on crypto in general. If you’re game, see if the stock can settle down for a week or two, which often precedes bigger moves.
Tidewater (TDW 98)—Last summer we took a swing at Noble Corp., which is one of the leading offshore and deepwater drillers—but our timing was off, with everything (the market, oil prices and more) sinking for the next few months causing the stocks to be clobbered. But the fundamentals of offshore drilling never changed, with demand for long-term, secure energy supplies growing while the infrastructure in place is lower than it was a decade ago—leading to strong pricing and growth. Tidewater is the worldwide leader in offshore support vehicles (OSVs), which include platform supply vessels (transport fuel, drilling supplies, cement, drill pipe to rigs, etc.) and anchor-handling towing supply vessels (mooring and towing offshore rigs) and even some fast supply vessels (transporting up to 150 people to a rig right quick). What’s interesting is that, while always a major player, Tidewater added a whopping 85 OSVs via acquisition in the past year and a half, many of which were so-called high-spec (more capabilities and thus can charge more for their use). And with industry-wide utilization headed up (now in the 70% to 75% range, up from 55% to 60%), dayrates are following, up a whopping 40% or so in 2023 and there should be plenty of room to run if demand remains firm, as global shipyard OSV building is at the lowest levels in more than 20 years and down 65% from the 2008 peak! Not surprisingly, Tidewater’s numbers have taken off: Sales rose 56% last year while EBITDA was up 132% and the top brass sees another boom in 2024, with revenue up 40% and EBITDA rising by nearly 70%. (Analysts see earnings rising from $1.89 per share last year to over $5 this year and north of $8 in 2025.) Just as important as all of that is the timing aspect—while oil stocks have had a good few weeks, this comes after months of down action, and oil prices themselves have only kicked into gear since the second week of March. TDW looks like a leader, blasting to new highs on March 1 and heading higher ever since. Commodity names will never be the core of our portfolio, but we do think some names could be just starting sustained runs.
Chips Will Probably Tell the Growth Stock Tale (and Possibly Provide Some New Buy Points)
AI has obviously been the leading growth stock theme since the bull got going late last year, and along with some other infrastructure plays (networking, servers, even cybersecurity needed to guard against bad guys using AI against firms), chips have been one of the biggest beneficiaries of all the buying—all in all, they’ve been one of the leading sectors of the bull move thus far.
That said, along with most growth stocks, which have been chopping sideways overall the past few weeks, chip stocks are now at an interesting juncture—and, as the title of this section suggests, will probably tell the intermediate-term tale for growth stocks as a whole. Simply put, if the sector (Semiconductor Index, SMH, shown below) and its leaders falter from here, there’s a very good chance the growth arena will put into some sort of correction.
On the flip side, if the sector and leaders find support near here, it should be bullish for the market and growth stocks—and provide some potential buying opportunities among chip stocks themselves.
Nvidia (NVDA) is clearly the liquid leader among chips and, really, the entire market. Shares broke out of flat four-month rest in early January and essentially doubled by early March. Impressively, though, the stock has been calming down since an initial wobble, holding well above its 50-day line. While it’s not in the first inning of its overall run, of course, a big-volume upmove from here would be enticing, while a big slide toward 800 would be iffy.
Broadcom (AVGO) can be thought of as the more conservative AI chip play, with a solid position in AI accelerators (as well as tons of tech infrastructure areas) leading to solid growth this year (EBITDA expected to rise nearly 30%, and with giant margins too). Like many names, the stock’s price is up there ($1,400!), but it found support near the 50-day line last week and is testing its highs again.
And then there’s Micron Technology (MU), which, admittedly, has always been much more cyclical than many peers—the firm’s memory products are somewhat commoditized, leading to big price swings. But, right now, that’s a good thing, as business is turning up, and there’s tons of excitement about its AI-related memory products (some of which will be part of Nvidia’s offerings). The stock changed character after earnings a couple of weeks ago and remains in good shape—though any abnormal weakness from here (back to 110) would be a yellow flag.
There are others (ASML is another high-priced name that hovering just above its 50-day line), but the point here is that the chip group is worth watching—both as clue to growth stocks as a whole, as well as for potential buy ideas if the bulls show up soon.
Will the Fed Actually Move from Foe to Friend?
We write about contrary opinion a decent amount, usually in relation to the stock market as a whole or a certain sector. But, while not as frequent, we also use it when it comes to the economy as a whole—we’re not macroeconomists by any stretch, but when everyone is thinking one thing, the opposite usually happens.
One example of this in recent quarters is something we mentioned in the last issue on this page—after the stock market implosion, massive Fed rate hike campaign, Russia war and inverted yield curve, nearly every economist anticipated a recession in recent months. Instead, things have remained resilient, which is keeping earnings elevated (and even growing) for many Old World and commodity-type names.
When it comes to the here and now, we’re starting to wonder whether the consensus this year—that the Fed will be cutting rates numerous times—is going to go up in smoke. To this point, the Fed itself is still forecasting three cuts this year, but as inflation remains a bit elevated and the economy remains resilient, the Treasury market is heading in a different direction, and today even saw some of Fed speakers raise the prospects of no rate cuts this year.
Shown here is the chart of the five-year Treasury yield—since the low near year-end, we saw a bottom in yields formed during the next month, a sharp spike into February, and now a couple of bounces off the rising 50-day line … with yields now testing multi-month highs. As we wrote above, we’re not economists, so we offer no predictions here, but we continue to keep an eye on interest rates: Similar to chip stocks, we feel the next big move here will likely help determine which way stocks move from here.
Cabot Market Timing Indicators
The situation remains mostly the same—our three major market timing indicators are positive, while the big-picture outlook remains favorable (the odds strongly favor higher prices when looking months down the road). That’s enough to remain mostly bullish, though continued choppy action in leaders and some other factors (like fewer new highs) has us holding a little cash and picking our spots.
Cabot Trend Lines: Bullish
Nothing has changed with the longer-term trend, as Cabot Trend Lines remain clearly bullish as both of the market’s major big-cap indexes continue to levitate higher: As of today, the S&P 500 and Nasdaq both stand 11% above their respective 35-week lines, which obviously keeps the longer-term trend pointed up, while also giving stocks plenty of daylight to correct and consolidate without interrupting the overall bull move.
Cabot Tides: Bullish
Our Cabot Tides also remain in great shape, with all five indexes (including the NYSE Composite, shown here) above their lower, rising 50-day lines. While the NYSE has been in a firm uptrend for a while, it’s possible the rug will get pulled at some point—but we never anticipate these things (you could have guessed the move was ending weeks ago), so with the intermediate- and longer-term trends up, we continue to lean bullish.
Two-Second Indicator: Positive
Our Two-Second Indicator rounds out our collection of positive indicators, as the number of new lows on the NYSE continues to be well-contained, with only the occasional flare-up (including two days in March) before the readings back off again. That pattern will change at some point, of course, but right now it’s clear that the selling pressures on most names have been unable to persist.
The next Cabot Growth Investor issue will be published on April 18, 2024.
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