Bull Market Behavior
When I was an intern at Prudential back in the summer of 1998, the market had just begun to keel over into its very sharp but short (Nasdaq down 33% in four months!) bear market—egged on by the collapse of Long-Term Capital Management and some other global issues (Russian ruble imploded). At the time, Ralph Acampora was the Chief Technician at Prudential; he was correctly bearish, and he was having a firm-wide conference call about what he was seeing.
One broker got on, asking Ralph if this was a start of a new secular (super long-term top) bear market, a bear market within a secular bull market, or just a correction with the retreat being the first of three waves down. I remember the response: “I don’t know—call it a banana market. The market is headed down.” Said another way: Labels in the market are overrated; what counts is the action you’re taking in your portfolio. (FYI, Cabot timed that downturn very well, raising lots of cash in August and then piling into many leading Internet names after the bottom in October.)
We still feel the same way, which is why we’re not the types to thump our chests and make dramatic predictions. That said, what we do follow is the market’s evidence—and right now, there’s no doubt that the market is showing loads of bull market behavior.
Last year, of course, we had a deep and prolonged bear phase in 2022—building up crazy amounts of pessimism. But since the calendar flipped, the evidence has taken a huge turn. We’ve seen more days with fewer than 40 new lows on the NYSE so far this year 2023 than in all of 2022; the 2-to-1 Blastoff Indicator gave a rare buy signal on January 12; the major indexes have overtaken their December highs, switching the Cabot Tides to bullish; our Aggression Index has turned up (see below) as consumer staples stagnate; and, last week, our Cabot Trend Lines turned positive, telling us even the longer-term trend is now positive.
Obviously, there are never any guarantees in the stock market, and if things change, then we’ll change our thinking. But if you’re following evidence of the market itself (which is the best way to time the market, far better than tracking economic reports or Fed speeches) then the game plan is clear: Continue to put money to work in the indexes and potential new leaders.
What to Do Now
That’s just what we’ve been doing during the past three weeks, and we’re continuing the gradual buying spree tonight: In the Model Portfolio, we’ll start half positions in Uber (UBER) and Inspire Medical (INSP), leaving us with a cash position of around 38%.
Model Portfolio Update
Everyone runs their ship in a different way—for us, we like to run a concentrated ship (our “standard” full position size is 10% of the account), but when buying or selling, we’re not big fans of making all-in or all-out moves for the portfolio. Yes, sometimes it can work, but plunging leaves you open to getting chewed up if you’re wrong a couple of times in a row.
Instead, we’ve always favored moving in steps, allowing the market to pull us in to a more heavily invested position ... if the evidence continues to improve. That’s what we’ve done this time around: As things have improved, we’ve shoveled money into the portfolio each week, and are doing so again tonight.
Beyond the new buys, our focus is also shifting to monitoring our current holdings. The fact is, not every pick is going to be a superstar, or even a winner, so if the market continues to act constructively, we’ll prune what’s not working and look for what is.
Back to the here and now, we’re going to take a step into two new stocks tonight, buying half positions in Inspire Medical (INSP) and Uber (UBER), leaving us with just south of 40% in cash.
|Stock||No. of Shares||Portfolio Weightings||Price Bought||Date Bought||Price on 2/9/23||Profit||Rating|
|Academy Sports & Outdoors (ASO)||3,091||10%||62||1/13/23||58||-7%||Buy|
|Inspire Medical (INSP)||-||-%||-||-||268||-%||New Buy a Half|
|Las Vegas Sands Corp. (LVS)||1,590||5%||58||2/3/23||58||-%||Buy a Half|
|ProShares Ultra S&P 500 Fund (SSO)||4,818||10%||49||1/13/23||50||2%||Buy|
|Uber (UBER)||-||-%||-||-||36||-%||New Buy a Half|
Academy Sports & Outdoors (ASO)—ASO broke out nicely on the upside last week, reaching all-time peaks after a tightening base during the past 14 months, though it’s pulled back in this week as some of the market’s sell-on-strength undercurrent still lingers. Such action isn’t ideal, so we’ll keep our eyes open, but at this point we think the stock acts fine, with the path of least resistance up. Peer Dick’s Sporting Goods (DKS—stock also acts well) has earnings due in early March (no set date yet for Academy’s own report, but likely in the same time frame), which will probably be the next big piece of data for the stock. In the meantime, we’ll be on the lookout for new store openings; the firm opened one in Lafayette, Indiana in early January, and we’re sure many more should come in the weeks ahead. Back to the stock, we’re not complacent, and a plunge all the way back into the lower 50s would be a red flag, but at this point, we’re holding tight—and think you can pick up shares in this area if you’re not yet in. BUY
Las Vegas Sands (LVS)—If you dig into Sands’ balance sheet and income statement you can get lost in the weeds, but the story is relatively simple: All of the firm’s casino resorts are now in either China or Singapore (it sold off its Vegas operations a year ago), and business there has been hammered, with Q4 travel in Macau, China (where two-thirds of the firm’s cash flow came from before the pandemic) down more than 80% from the comparable 2019 quarter (pre-virus), while Singapore visitation was down in the 30% range. Despite that, Sands was actually EBITDA positive in Q3 and Q4, and it doesn’t take a Ph. D in math to figure out that, with all the fat cut, cash flow should begin a tremendous long-term upturn now that China has effectively given up on its Covid-zero stance. Even after a so-so Q4 report as a whole (partly due to bad luck), estimates have gone up and the stock continues to act well. (Peer Wynn Resorts, which also has a huge Macau business, had similar positive tidings about the future in its Q4 report last night.) LVS was a bit extended when we started a position last week, but we weren’t expecting a major retreat—and indeed, shares have basically marked time. We’ll stand pat with our half-sized stake here; if you don’t own any, we’re OK starting a position here or dips of a couple of points. BUY A HALF
Inspire Medical (INSP)—We’ve written about Inspire a couple of times in recent issues, so we won’t rehash it all here; suffice it to say that the firm’s sleep apnea solution is a better mousetrap than the standard treatment (CPAP machines) and far better/safer than other surgical options. And given the size of the market in the U.S. alone, taking just a few percent share could dramatically boost business. That’s what’s happening already: Inspire’s revenues have lifted at a consistent 70% to 77% rate each of the past seven quarters, and while that will slow some this year, 40%-plus seems like an easy bet. The firm is losing money, which isn’t ideal, but most of that’s going into sales, training and marketing to capture more of the opportunity. Shares have gone nowhere for two years or so, but this week popped on earnings; the RP line is still a bit shy of recent highs, but we think the stock wants to head higher if the market holds firm. Just as a note: INSP can trade somewhat thinly, so (as we touch on later in this issue) try not to place overnight orders. We’ll start with a half-sized position. BUY A HALF
ProShares Ultra S&P 500 Fund (SSO)— We started a half position in SSO three weeks ago, bought another half two weeks ago, and actually added another 3% stake last week—which brought up some questions about whether it’s prudent to go “overweight” in a leveraged long index fund. The way we look at it is this: We had a deep, prolonged bear market last year, and over the past few weeks, we’ve seen just about all of the top-down evidence (our three indicators at the end of every issue; our Aggression Index; the 2-to-1 Blastoff Indicator) turn green. Plus, even with a good-sized stake, we can still keep a reasonable loss limit in place, getting out should all of this evidence fail (which is always a possibility). To us, then, if there’s ever a (relatively) low-risk time to dive into a leveraged long index fund like SSO (or others that track major indexes), now is it. With that in place, we’ll see how it goes—a dip back into the 43 to 44 range (which would likely negate the Tides buy signal, if not cause issues with other indicators) would be iffy, but so far, the S&P and most indexes are consolidating normally while our indicators remain in good shape. We’re holding on tight, and think grabbing a few shares if you’re not in makes sense on this dip. BUY
Shift4 (FOUR)—FOUR remains in good shape, continuing to glide higher above its 25-day line as shakeouts tend to be sharp but brief. The firm will release Q4 results on February 28, though its new-age payment peer Toast (which focuses solely on restaurants, a big client base for Shift4) will report on February 16, which could move the stock. If the market can continue its winning ways, we do have high hopes for Shift4, which has a target to double its gross payment volume (thanks in large part to its move to so many new sectors, from stadiums to casino resorts to non-profits to airlines) in 2023-2024, which should grow revenue by 60% and keep earnings and cash flow headed higher. As always, we’ll take it as it comes, but at this point we’re optimistic—hold on if you’re in, and if not, try to nab some shares on dips into the lower 60s. BUY
Uber (UBER)—UBER has always had a good story, with its Rides and Delivery segments firmly in long-term growth trends, but management’s disregard of any profits (along with a massive valuation) led to predictable results during the bear market, with shares falling by nearly two-thirds. But now everything seems lined up on the bull side: Business is solid, with Rides eclipsing its pre-pandemic booking levels, while the pandemic’s effect on Delivery (boom then slowdown) is over according to the top brass. Most importantly, while growth is still solid (Q1 bookings forecast at 22%, which is likely conservative), Uber is now a cash flow story: EBITDA has been soaring by the quarter, coming in at $665 million, up 29% from the prior quarter, and with management still looking for $5 billion of EBITDA next year (doubling from here). Shares bottomed out back in August, built a bottoming base for months and have now come alive, popping to multi-month highs this week. We do think UBER is extended here so a shakeout of a couple of points is possible—but given the stage of the market advance (ideally early) we’ll start with a half position (5% of the account) and go from there. Note that peer Lyft is reporting earnings tonight, which could cause some volatility tomorrow, but we think UBER is the leader and poised for good things. BUY A HALF
Wingstop (WING)—WING has been pulling back a bit lately , pulled down in part because of a sub-par earnings reaction from fast-casual peer Chipotle on Wednesday. Even so, we think WING is following a typical script: After a stock goes over the falls, it will first get off its knees in a big way (this stock did that in the fall), holding above its 200-day line for at least a couple of months, and then it will build a shallower, tidier launching pad, which WING has during the past 13 weeks. Now the key is to see if shares can really get going—earnings are due February 22, and whether it’s that or something else, we’d like to see a definitive move above resistance in the weeks ahead. Right here, we like what we see, so we’ll stay on Buy. BUY
- ASML Inc. (ASML 664): ASML weathered the downturn in the chip equipment industry in fine fashion, and now earnings are set for another multi-year leg up as demand for its super-high-end systems (which it has a monopoly on) will pick up in concert with greater demand for the highest-performing chips in many growth areas. Near term, we think the stock could pull in further.
- Impinj (PI 126): As it preannounced, PI reported a solid Q4 last night, with sales up 46% and earnings more than doubling. The stock, though, is doing more hacking around than advancing of late.
- Super Micro Computer (SMCI 87): SMCI looked done for, but a huge rebound after earnings has the stock perched near its highs. The firm’s new-age server systems are still in big demand.
- United Airlines (UAL 50): Nobody is going to argue that airlines like United are buy-and-hold-forever situations, but there are real signs that the travel sector has seen a sea change improvement in its earnings power (partly from booming demand, partly from structural supply issues). After three years in the wilderness, UAL looks ready to head higher.
Other Stocks of Interest
Dynatrace (DT 44)—We owned Dynatrace for a while in 2021 before the bear market arrived, and we’re glad we sold, as shares hit the skids with every other tech and software play out there. However, as opposed to many pandemic tech darlings, this firm always had an emerging blue chip-type of story. It all revolves around the mass of technology (often legacy systems) that mid- to large-sized firms (Dynatrace focuses on the Global 15,000) are moving to the cloud, as well as the increasing trend of microservices—basically, big firms have dozens of different apps and systems that act as independent offerings, which allows for far more flexibility but can also be ridiculously complex to integrate. (One Dynatrace survey showed development and operation teams spend 30% of their time on manual tasks like code quality and security, which is a waste.) That’s why the so-called observability market remains in a strong growth mode: Firms need to not just monitor but also see how all these different software tools work together and predict if there are any issues set to arise; big companies are looking not just to move more to the cloud but to optimize it, too. There are many players in the space that attack this from different angles, but Dynatrace is one of two leaders (Datadog is the other), seems best for giant outfits and multi-cloud (more complex) environments, and business has remained strong: On a currency-neutral basis, the December quarter saw revenues and annualized recurring revenue both up 29%, while earnings were up 39% and free cash flow during the past 12 months totaled north of $1 per share (well ahead of net income); new additions (215 new clients in the quarter), same-customer revenue growth (just shy of 20%) and remaining performance obligations (up 24% and equal to 1.5x trailing 12 months of revenue) all look good, too. Probably the best way to see that the company has something unique is by looking at the chart—DT plunged into May, but that was the low, with resilience being shown in September/October and constructive tightness in December and January just below the 40-week line … seven months of textbook bottoming action. And now shares have broken out, though a (non-dilutive) share offering has pulled DT in a bit thi week. Even so, we think the odds favor higher prices ahead.
Dutch Bros. (BROS 37)—We looked at a decent number of promising newer names early in 2022, but of course the timing wasn’t right with the market, causing most to fall apart—but now that the market is finally in a better mood, we think some of those have a shot to get moving. Dutch Bros is one we’ve kept a distant eye on since last spring, with a simple cookie-cutter story that should take the firm far. Dutch operates 671 small beverage shops, mostly in the west and southwest U.S., offering mostly cold beverages (84% of sales; 27% of sales comes from its proprietary energy drink called Blue Rebel), with about half of all sales coming from coffee-based drinks. Each location is pretty efficient, with 90% of sales coming from drive-through (average order ticket is around $9), and the firm is known for solid customer service—there are actually runners that go out and meet people in the drive-through line with tablets to take orders and payments, and if the order is done before you get up to the pick-up window, there’s an “escape lane” that veers off and the runner will hand off your drink. It’s been a hit, and the store economics seem very solid: New locations mature within just nine to 12 months, with new openings in recent years collecting north of $2 million in revenue per year, with very healthy cash margins in just the second year of opening. And that allows for the rapid expansion plan: Dutch is looking to grow its base by 150 shops this year (21% growth) and have 1,000 locations by the first half of 2025—on its way to a whopping 4,000 locations in the U.S. alone. To be fair, there are some cost issues here, with inflation and longer-term leases crimping margins early last year, but the underlying story has always been sound and it looks like everything is back on track. Management is looking for low-30% revenue growth this year while earnings push ahead and margins improve. The stock … well, the stock still needs some work, with the 40s being a tough nut to crack. But BROS has moved above its 40-week line after bottoming out for a few months; a decisive rally from here (possibly on earnings; no set date yet but probably out in late February) would be tempting.
Clear Secure (YOU 30)—Now here’s a big idea. Clear Secure is a biometric identity platform that allows paying users to quickly and securely have their IDs verified. (The service has been verified at the highest level of security by the Dept. of Homeland Security, which alleviates that risk.) Depending on where you live, you may have seen a Clear station at an airport; the firm is in 50 of the busiest airports today, allowing members to skip the initial stage of the check-in (ID verification by TSA) and move straight to the security line. There’s still plenty of opportunity for expansion in airports (both new locations and additional Clear lanes in existing locations), which should be helped in part via a recently-launched offering with TSA Precheck; while the services are separate, Clear has been cleared (ahem) to bundle the services and also sign up Precheck renewals. (Partnerships with Delta and United help the cause, too; United is also an investor.) However, there’s no reason Clear has to be limited to airports, and indeed, the firm is slowly expanding into other locations where either check-in, including more than 18 sports stadiums (the latest launch came in Allegiant Stadium for all Raiders home games; you can even buy beer with it!) and more than 100 other office buildings, theaters, hotels and the like—basically anywhere you need to show ID, Clear could make it easier/quicker to check in. Of course, the program isn’t free—it costs $189 for the first member, but just $50 per family member after that (and those under 18 are free if going with a parent), and some higher-end cards from American Express (another partner of the company) offer free or discounted memberships, too. What’s enticing about this is that it’s the ultimate network effect model: The more members that have Clear (currently north of 14 million), the more attractive it is for airports, stadiums and more to have a Clear lane, and the more places that have Clear, the more attractive it is for potential users to sign up—and the thinking is that, thanks in part to the travel boom, the firm may be reaching critical mass (it was used 11 million times in Q3 alone) so that it becomes more of a must-have offering even for those that travel a modest amount. Business, which is mostly based on subscription revenue, looks great—revenues rose 72% in Q3 while bookings (more forward-looking) were up 47%, retention was 92% (should fade a bit to a still-healthy upper-80% range over time) and free cash flow for the past 12 months was around 60 cents per share. YOU is a bit thinly traded, but the stock actually began to bottom out a year ago and at this point has etched an eight-month consolidation with resistance in the mid-30s. If Q4 results (no set date yet) show an acceleration of user sign-ups, we think the stock could grow up in a hurry.
A Collection of Thoughts
We didn’t have one or two major topics we wanted to highlight in today’s issue—instead, we have a handful of brief missives that have come up in our various conversations with subscribers and others in the industry we keep in touch with. (By the way, never hesitate to email me at firstname.lastname@example.org if you have any questions—put a stock symbol in the email title so my junk box doesn’t eat it. I usually get back within 24 hours if not much sooner.)
Anyway, in an effort to give you all of our latest thoughts, we figured we’d run through them all right here.
First, always remember the market is an odds game, and the best way to put the odds in your favor is by following the evidence—not your feelings (or our feelings) or the news. Of course, that doesn’t mean you want to ignore the news or the Fed (more on that in a second), and there will never be any surety when it comes to the market; something bad can always happen. But the fact is that the intermediate-term trend, longer-term trend and broad market are all pointing up, even as many investors are still bearish, which is a sign to take action.
That said, it makes sense to keep an eye open to things others are paying attention to. One is interest rates, specifically the 10-year Treasury yield, shown here. A couple of things: First, the yield is testing its 200-day line for the first time since late 2021; a decisive dip below that would probably be a good thing for stocks—though a strong bounce would probably lead to more near-term wobbles. Just something to keep a distant eye on.
Second, while we’ve put a slug of money to work here, we still have a good chunk of cash. Why? Because the usual course after big, prolonged bear markets (like we saw last year) is that new leadership takes some time to develop. We’re seeing that now, with the number of new highs improving only slowly, with the figures not really much better than was seen in November. Shown below is the 15-day moving average of new highs on the Nasdaq over the past few months – perking up, but hardly a moonshot. All of that makes sense as so many stocks still have overhead to chew through—we’re happy to be wrong, but given the overhead and the uncertainty surrounding the economy and Fed, an uptrend with some starts and stops makes more sense than a straight-up move. Translation: Buying in stages and following up with what’s working is your best bet.
Third, while some of the “old” leaders may have good runs in the near term, and maybe a couple can return to their glory days going forward (like ASML), history shows the vast majority will rebound some but then go dead. FSLR was probably the #1 glamour stock of the 2007 growth stock bonanza, but shares cracked in 2008 with everything else and, after an initial bounce, did nothing for years—eventually caving in during 2011 and 2012. Thus, when it comes to things like Tesla (TSLA) or Twilio (TWLO), which both went up a giant amount in the few years before 2022, the odds favor they could rally more if the market continues to improve … but it’s unlikely they’ll go on big, sustained runs and be leaders again.
Lastly, we’ll often put out advice to buy (or sell) after the market closes or before it opens (though we have done more during-the-day moves in the past year). Realize that the buy (or sell) price we use for the Model Portfolio is the average of the stock’s high and low in the next full day of trading; thus, you don’t have to place an overnight order. (This is especially true with stocks that can open the day somewhat thinly, like Inspire Medical, which we’re starting a position in tonight.) In fact, buying right at the open will often get you worse prices than you could get just tuning in at 10 a.m. or lunchtime, etc., as the market makers can gap the stock up for a minute or two before pulling it right back in. Just a heads up that, most times, it’s usually best to check in during the day.
Cabot Market Timing Indicators
There’s never any surety in the market, but as we wrote on page 1, the evidence is now mostly bullish—with our Cabot Trend Lines the last to join the positive parade last Friday. Individual leadership is still a work in process, but the path of least resistance is up.
Cabot Trend Lines: Bullish
The Cabot Trend Lines flipped back to a buy signal last Friday—the first signal since the sell in late January 2022—when both indexes closed their second straight week north of their 35-week moving averages. Currently, the S&P 500 and Nasdaq are hovering around 5% above their trend lines, which gives this new signal some breathing room in case the sellers put up a fight. It’s not an exact timing tool, of course, but there’s no question the fresh green light from this indicator is an arrow in the bulls’ quiver.
Cabot Tides: Bullish
Our Cabot Tides are also bullish by our measures—most indexes (including the S&P 500, daily chart shown here) have been above their lower, rising moving averages for a while. But we were waiting for a move above December resistance, which has happened in the past week. With both the intermediate- and longer-term trends pointed up, the odds favor higher prices to come.
Two-Second Indicator: Positive
It’s now been 27 straight trading days—every session so far in 2023—that we’ve seen sub-40 new lows from our Two-Second Indicator. That’s more than we saw all of last year! That doesn’t mean more time won’t be needed for new leadership to form, or that near-term wobbles can’t come. But with the broad market this healthy, the odds favor further upside.
The next Cabot Growth Investor issue will be published on February 23, 2023.