Cabot Growth Investor Issue: January 11, 2024

Volatile—but Still Bullish

In the market, we’re all dealing with real, hard-earned money that none of us want to see vanish into thin air. That’s what makes volatility hard to stomach—and these days, when everyone can sell positions with the click of a mouse and there are record amounts of money sloshing around, there’s plenty of volatility, especially among individual stocks.

Even so, as much as we all want all our stocks to simply go up every day, that’s not going to happen—indeed, while stock selection and market timing are obviously key to long-term success in this field, properly handling individual stocks so you can ride through the periodic moderate storms (but not holding and hoping during tsunamis) and develop some bigger winners is key.

That’s been and remains our goal during what has so far been a typically volatile January—the first week of the year saw widespread profit taking in leading stocks, with many getting knocked around pretty good … but few really cracking key support. But, as often happens given all the crosscurrents to start a new year, this week has seen many rebound strongly, often to higher highs, which is obviously good to see.

That’s not to say the one-week dip to start the year is all the bears are going to throw at us. In fact, while we’re not short-term traders, we’re half expecting more reverberations based on earnings season (which is getting underway for some big-caps this week and next) and, of course, perception of the Fed, which changes based on the economic report (such as this morning’s inflation reading, which caused a wobble). Thus, right now, we’re not eager to dramatically push the envelope on the buy side.

Even so, at this point, nothing has changed with the intermediate- to longer-term evidence—the market’s key trends are still pointed up for nearly all indexes and leading stocks, the broad market is in good shape and growth stocks as a whole, after two-plus years in the wilderness (see more later in this issue), are in gear.

Thus, overall, we’re definitely much more bullish than not—while we’ve all had the rug pulled out from us many times in the past couple of years, at this point the odds favor higher prices down the road. That said, in the meantime, we’re mostly focused on managing our positions, though we’re open to a small move here or there as opportunities arise.

What to Do Now

Remain bullish, but keep your eyes open to see how thing shake out as January continues. Last week, we sold half of our stake in DraftKings (DKNG) and placed Duolingo (DUOL) on Hold—tonight, though, we’re going to start a half-sized position in Shift4 (FOUR), whose story is as good as (or better) than ever, and it looks poised to move higher if the market cooperates. Our cash position will be around 21% following the new buy.

Model Portfolio Update

January has lived up to its billing thus far, with a bunch of short-term air pockets showing up in the first week of the year, followed by a rush higher in most growth stocks this week—though there are still plenty of crosscurrents and news-driven action given dozens of investor presentations going on every day in a variety of sectors.

Stepping back, not much has changed with the intermediate-term evidence: Our Trend Lines, Tides and Two-Second Indicator are still positive, while the trend of interest rates remains down and, while it bears watching, our Aggression Index is still positive, too (see a little more on that later in this issue). Throw in the fact that most leading stocks are in good (or great) shape, and we continue to lean bullish.

That said, while early January is the worst offender when it comes to random volatility and gyrations, the rest of the month is also tricky as earnings season ramps. Thus, we’re still in the mindset of picking our spots and stocks carefully. Tonight, we’re going to do one new small buy—of Shift4 (FOUR), which has pristine numbers (should see accelerating growth this year) and looks primed to head up if the market does.

CURRENT RECOMMENDATIONS

Arista Networks (ANET)—While everything pulled back last week, ANET was one of the better actors in growth-ville, never closing below its 25-day line—and that solid action led to this week’s romp higher on solid (not exceptional) volume. One smaller research outfit upgraded shares earlier this week, which may have helped, agreeing with what’s becoming the consensus: That Arista should see an influx of AI-related orders later this year, which the stock should discount ahead of time. Clearly, the stock’s uptrend remains intact, so we’ll stay on Buy, though after the pop, it’s probably best to look for wobbles of a few points if you’re not yet in. Earnings are due February 15. BUY

CrowdStrike (CRWD)—CRWD was another growth name that pulled back very, very reasonably last week, giving up little of its November/December run—and this stock has come to life on very nice volume, bursting to higher highs. Again, similar to ANET, CrowdStrike has been helped this week by some bullish tidings from analysts: One big investment house talked about the sector as a whole, believing rising threats (MGM and Clorox incurred more than $100 million in damages recently; one source said ransomware attacks are up more than 70% from a year ago!), regulatory changes (we wrote about that two weeks ago; disclosure after an attack is now a must, increasing the demand for forensic tools) and a desire to consolidate on one platform (the average enterprise deploys around 50 different security products!!) should drive growth. All of that is to the good—but, near term, we’re keeping our eyes open given the stock’s big run in recent months followed by the move this week, which brought with it a series of upside gaps. That said, big picture, if the market is going to run a few months, CRWD quacks like a magnet for institutional money—right now, we’ll stay on Buy a Half, but aim for dips of at least a few points if you want in. BUY A HALF

DraftKings (DKNG)—We sold half of DKNG last week as the stock gave up all of its post-breakout upside and knifed below its 50-day line—and it’s been living below that intermediate-term trend line since, despite a bounce. From here, we’ll pretty much play it by the book: The fundamentals remain on track (it entered Vermont today, its 26^th state that it offers services), and if the EBITDA forecasts the firm released at its investor day in November ($400 million this year, $1.4 billion by 2026) by prove true, investor perception could easily get back on the upswing. Right here, we’ll hold our remaining shares with a tight mental stop in the 31 to 32 area. Earnings are due February 15. HOLD

Duolingo (DUOL)—DUOL fell about 18% from high to low, which … is actually not out of character, given its many 20%-ish corrections last year and its overall volatility. At heart, we’re optimistic, given the big-picture chart (massive-volume blastoff to all-time highs in November, recent support near the 50-day line) and upside potential of its learning platform, especially as it broadens out from its core language offering to music and math. That said, we’ll take it as it comes: We’re willing to give the stock more rope given the aforementioned volatility and positives, but a decisive downmove from here could have us trimming or even selling our stake—though on the flip side, a move back above 225 or so would be a bullish sign DUOL’s overall upmove is resuming. We went to Hold last week, and we’ll stay there tonight. HOLD

Elastic (ESTC)—ESTC is about flat so far this year, and net-net, it’s still effectively consolidating its huge earnings move from early December. Obviously, we’d prefer if the stock simply kited higher, but the action certainly isn’t unreasonable. Business here is solid as the firm’s search offerings are big hits in applications like security and observability; sales were up 17% in Q3 and analysts see earnings up 34% in the fiscal year that starts in May. But the bigger question in terms of investor perception is how quickly the tidal wave of interest in the firm’s search solutions for AI platforms—which are a natural fit, allowing large language models to quickly mine relevant databases to produce answers—results in actual, meaningful orders in the quarters ahead. We’re optimistic the best is yet to come, so we’re holding what we own, and think you can grab a small position if you’re not yet in. BUY A HALF

Nutanix (NTNX)—As we wrote in last week’s update, NTNX’s dip was very modest compared to its recent run, and this week it’s moved back to new highs on solid volume. Interestingly, we’re once again seeing some acquisition rumors surrounding the company—a couple months ago, it was rumored that Hewlett Packard Enterprises (HPE) was sniffing around the firm, though that company looks like it’s going to be gobbling up Juniper Networks; thus, the potential suitor is unknown, though Nutanix’s reasonable market cap (just under $12 billion) and leadership position in the IT field would seem to make it attractive to a good-sized tech outfit. Even so, we don’t trade based on rumors, which can go as fast as they come—but we do see a reasonable dip toward the 10-week line followed by a strong rebound. We’ll stay on Buy, but as always, try to enter on dips if you’re not yet in. BUY

ProShares Ultra Russell 2000 Fund (UWM)—Our initial buy with UWM was, to put it succinctly, bad, coming just before the sharp New Year pullback. We’re never afraid to move off a losing position (even if it’s just within a week or two) if we think that’s what’s best, but right now, both the overall chart and many longer-term signposts tell us the path of least resistance here is up—i.e., while the initial entry points was bad, the retreat doesn’t look abnormal, so we’re expecting a resumption of the overall advance. A drop down to the 32 to 33 area would likely be as far as we’re willing to stretch, but we’re holding on right here—and, frankly, if you didn’t buy initially with us, we think you can grab a small position on this dip. BUY A HALF

PulteGroup (PHM)—There is tight trading, and then there is tight trading, and PHM (and many other homebuilders) essentially didn’t move the past three weeks despite a modest backup in mortgage rates and the market’s wobbles, leading to some follow-on buying this week. That doesn’t necessarily mean it’s off to the races, though—following an end-of-year romp, it’s likely PHM and other homebuilders need to rest a bit, especially if (like this morning’s report showed) inflation is staying stubbornly elevated (making it less likely the Fed cuts rates anytime soon). Still, we’re focused on the intermediate term, so while we do think new buyers should aim for reasonable dips to enter (especially with the next report starting to come into view—due out January 30), we’re holding on tightly to our position. BUY

Shift4 Payments (FOUR)—We tried our hand with FOUR a year ago, as it acted like a young, new leader as the market began to perk up, and shares did do well for a couple of months—but as the market soured (especially for smaller growth stocks), this name went through the wringer. But we’ve been keeping an eye on the company ever since we exited, and as we wrote a month ago in Other Stocks of Interest, the story here hasn’t changed; if anything, it’s improved, with management giving a great 2024 forecast for payment volume (up 47%) as lots of new deals kick in, and with it completing the buyout of Finaro, which gives it exposure to Europe. (See more on that and on how Shift4 is outperforming its peers, both fundamentally and chart-wise, later in this issue.) All told, current and future growth (earnings expected to rise 31% in 2024) look great, and now that the market is in a better mood, we think the strength that popped up for a bit last year can be sustained. We would note that, a month ago, some M&A rumors popped up, which helped the stock a bit, but FOUR has held firm during the market’s early-January wobble and has returned near the top of a huge launching pad. Don’t get us wrong, this is still a smaller up-and-comer in the payments field and the stock is volatile, so we’ll start with a half-sized position (5% of the account) and use a loose initial stop in the 63 to 64 area in case the stock runs into trouble. NEW BUY A HALF

Uber (UBER)—UBER has joined everything else on the market’s roller-coaster so far this year, likely partly due to the after-effects of its S&P 500 inclusion (back on December 18) along with other factors. Still, the selloff was normal, down to the 10-week line, and the ensuing bounce all the way back to its highs is encouraging (though it has come on light trade). The firm has been mostly quiet on the news front since earnings in early November, with even other news items (like a new rule from the Dept. of Labor that involves defining contractors vs. employees) unlikely to influence Uber’s bottom line much. All in all, we continue to think UBER looks like a liquid leader that can continue to do well assuming the market does. We’ll stay on Buy. Earnings will be reported February 7. BUY

Watch List

• Celsius (CELH 59): Old friend CELH still has as good a growth story as there is in the market, and the stock is beginning to perk up after a multi-month correction. See more below.
• Eli Lilly (LLY 635) and Novo Nordisk (NVO 107): Both LLY and NVO have perked up since the calendar flipped, though their RP lines are still shy of their prior peaks. Even so, we continue to watch both as they could be setting up a run.
• Expedia (EXPE 151): EXPE won’t be a stock you brag about to your neighbors, but we think it’s a powerful “perception” turnaround here, with still-strong numbers, massive free cash flow, a great backdrop (travel spending remains superb) and a chart that has shown eye-opening strength.
• KKR (KKR 82): KKR remains the strongest Bull Market stock, with a tidy pullback to its 25-day line. To be fair, the group isn’t amazing, but KKR’s deeper move into insurance (and the assets it will offer for investment) seems to be a difference-maker.
• Shopify (SHOP 81): Of the “old” winners, such as DDOG, NET and others, SHOP remains the most impressive on the chart—and the current and projected growth (earnings up 49% in 2024) are also better than most, too. Shares have bounced very well off their 10-week line last week.

Other Stocks of Interest

Affirm Holdings (AFRM 43)—Financial innovation has been one of the heartbeats of the economy for years, and despite the big shakeout of the past year, it’s looking like one of the latest innovations is here to stay: The so-called Buy Now, Pay Later (BNPL) movement has a revolutionary tint in that it brings financing alternatives that are common in bigger purchases (like, say, automobiles) to relatively small buys, and it doesn’t require having a certain high-end credit card or exclusive offer code, either. While there’s competition (including from AfterPay, which is run by Square/Block), Affirm is one of the leaders in the field, thanks in part to its transparency (no late fees, hidden fees or penalties, interest rate up front, etc.). Some noteworthy points: First, it looks like Affirm’s machine learning-based risk models are at the top of the industry, allowing them to find capital partners (to lend money to consumers) while keeping delinquencies low. Second, the top brass has been able to sign up with many big-name retailers: It’s been working with Shopify, allowing merchants on that platform to offer Affirm’s BNPL services; it just expanded a deal with Walmart to not only offer its service online but now at a few thousands in-store checkout locations; it’s used by Target online; and recently inked a deal with Amazon Business, a marketplace for business-to-business transactions—and there are also recent wins like Booking.com, Royal Caribbean, Temu and more. Also very interesting to us is the firm’s Visa debit card, which allows users to apply in real-time (or up to 24 hours later) for BNPL financing on whatever they charge; growth there has been massive (total users of around 500,000 in October, up from 125,000-ish in May; payment volume of $100 million or so in October, up 10-fold from March) and Affirm says it’s giving them angles into many commerce areas (like groceries, restaurants and gas stations) it hasn’t been used for. All told, in the September quarter, the firm had 16.1 million users (up 16%), had reasonable delinquency rates (2% or so) and saw revenue less network fees up 16% while gross merchandise volume growth of 28% pointed to faster growth ahead. Indeed, management sees operating income turning positive in 2024 while other metrics expand—and the stock seems to think even better times are ahead, possibly due to lower funding costs, allowing for increased top- and bottom-line growth: AFRM went ballistic starting in late November and its January retreat seems sharp, but normal. It’s speculative, but if things go right for the economy and consumer, we think AFRM can do very well. Earnings are due February 8.

Celsius (CELH 59)—If you’re looking for big growth stories, they don’t get much bigger than Celsius, which is playing in a big, growing market with a product that’s taking huge market share and a heavyweight partner that’s helping growth to go wild. The underlying growth story hasn’t changed: Celsius’ various energy drinks are becoming hugely popular, in part because they’re healthier (no preservatives, aspartame, high fructose corn syrup, etc.) and also because they’re shown to help burn calories by turning on the body’s thermogenesis (generating heat) response. Business-wise, distribution had been growing nicely, but a deal with Pepsi in 2022 took things into a new gear last year, re-accelerating sales growth back to triple-digit rates (up 104% and 112% the past two quarters) by entering new end markets (universities, foodservice, club stores, casinos, hotels, hospitals, etc.) and, soon, expanding overseas. Indeed, reports are that Celsius is launching in Canada this month, and management made it a point on the Q3 call to talk about 2024 being a big year that Pepsi will help the firm go overseas—in terms of the potential here, international sales for Celsius are just 5% of the total, compared to nearly 50% for leader Monster. In fact, overall, Celsius’ market share in the U.S. market (while doubling in the past 12 to 18 months; the firm makes up something like 30% of the entire industry’s growth) is still south of 10%, while in some mature markets (like South Florida) the firm has 24% share, so again, plenty of growth potential no matter where you look. As for the stock, it was one of many that got clonked during the market’s fall correction … and it didn’t spike back with the market in November. But overall, CELH’s action was in character, including some tightness near the 40-week line—and, as the calendar has flipped, there’s been a push back into the middle portions of its base. Bottom line: The major story here remains as good as ever, and if we see some more signs that the stock’s consolidation is ending, we could hop on board. Earnings aren’t likely out until late February.

PDD Holdings (PDD 151)—If you’re looking for a contrary trade, Chinese stocks are about as hated as it gets—between sour performance, the ever-present threat of regulations and what’s sure to be plenty of political bashing during election season, the group has generally remained the dog’s dinner—the China Internet Fund (KWEB) is not only testing 2023 lows right now, it remains more than 75% off of its 2021 highs. Despite that fact, there actually are a handful of strong relative performers among Chinese stocks that have solid sponsorship, and PDD Holdings (formerly known as Pinduoduo) is the best looking out there. The firm, which has a huge $220 billion market cap, is most popular among bargain shoppers thanks to the firm’s original blend of shopping and social media that offers discounts for big group buys; while other big e-commerce players are launching their own lower-priced offerings (China’s economy has been weak relative to the rest of the world, so bargains are in), PDD has mindshare in that department given its history, and it’s also moving into new areas such as agriculture (helping farmers with more precise farming techniques and giving consumers more healthy options). However, we think the firm’s Temu subsidiary is the main driver of improved investor perception: Launched in around 40 countries including the U.S. (it’s consistently one of the top shopping apps downloaded in the Apple and Google app stores), it’s giving global consumers access to very cheap goods—and, of course, it helps its standing with Chinese authorities by opening big international markets to that country’s businesses. (One article pegged Temu’s revenues near $16 billion for 2023 as a whole, just shy of half of PDD’s total sales.) Growth for the company has been both strong and, in Q3, picked up steam—revenues boomed 94% in local currency terms, with net income lifting 37% (growth slower there partly due to soaring marketing expenses), with analysts looking for top-line growth of nearly 40% (and earnings up nearly 30%) this year. As for the stock, it’s been very strong since April of last year, with a big earnings gap in November and some tight trading since. The path of least resistance is up.

Growth Stocks vs. “Growth Stocks”

I’m doing a 2024 Stock Market Outlook webinar next Thursday (January 18—free to sign up), and while I’m not going to get into all of it here, one point I’m going to make regarding growth stocks is in response to something I saw talked about a lot late last year: That, after 2023 and a big run in the Nasdaq and Nasdaq 100, growth stocks had already made back their relative performance loss in 2022 and (it was implied) were over-owned and over-loved.

And, for a few of the biggest of the big stocks, maybe that’s true. Apple (AAPL), for instance, is a great company and you can’t take 10 steps in my house without bumping into one of its products—but the stock is recently tested its 200-day line and is no higher than it was in June. And, while we’re not fundamental investors, the stock trades at 30x earnings and the bottom line is expected to grow 7% this year, which makes you wonder how much gas is left in the tank here. (Note, since we’ll be asked: We’re not saying to sell AAPL, but we also don’t see it as a true market leader at this stage.)

However, despite what the indexes (dominated by mega-caps like AAPL) and some select areas (like chips) did last year, the true picture is that growth stocks have been on the outs for two and a half years. In other words, if you look beyond the popular mega-cap stocks, the rubber band is certainly stretched in a good way—and if this is a real bull move, there should be plenty of upside, especially for the true market leaders.

The weekly charts below prove the point: Whereas the focus is usually on the popular indexes, take a look at the IBD Mutual Fund Index (top chart; it consists of real-money, active, growth-oriented mutual funds), the IBD 50 Index (second chart; it’s a rotating crop of stocks that have solid growth and strong charts) and, on the more speculative side of things, the Renaissance IPO Fund (IPO)—you can see all nosedived in 2022 and spent last year mostly bottoming out, with the post-October rally bringing them near key resistance.

Near term, that sets up an interesting situation— a few weeks of upside follow-through after the January volatility could bring something of a breakout for these growth-heavy measures.

That said, whatever happens the next couple of weeks, our bigger point is about the bigger picture: If the market’s intermediate- and longer-term good vibes are accurate (obviously a big if), there’s every reason to think the recent upmove in growth stocks could mark a major turning point, which means growth indexes and especially true market leaders should do well.

Top-Down vs. Bottom-Up

Shift4 Payments (FOUR)

From a 10,000-foot view, there are two different types of stock analysis. The first is top-down analysis, which begins by looking at big-picture items (many of them economic), then looks at sectors and only then drills down into individual stocks. The theory here is that the majority of gains are supposedly determined by what’s going on in the world (first) and with a certain economic sector (second)—with what individual stocks you pick mattering less.

And for some areas, this can work well: Most airlines, for instance, are going to swim fairly closely together, and the same goes with commodity sectors (oil, copper, etc.) for obvious reasons. Even housing has a lot of similarities between stocks, so maybe a sector ETF or something makes sense.

However, while we pay attention to everything, we’ve always favored bottom-up analysis because it’s much better at identifying unique growth stocks, where performance varies widely among different names and where, sometimes, firms are creating entirely new sectors (like, say, when we rode First Solar back in 2007-2008 to huge gains before there was a “solar sector”).

Today, for instance, take a look at the payments sector. There’s PayPal (PYPL), the well-known service and former market leader whose stock acts terribly, with a new low in October and a lackluster bounce; Toast (TOST) was a high-flying IPO in 2021 but is seeing slowing growth and the stock hasn’t had much luck (shown here); and there’s Block (SQ), which has had a very nice comeback, though it hit a wall recently and is actually down over the past year.

Comparatively, Shift4 Payments (FOUR) continues to look the best of an admittedly subpar bunch: It was able to hit multi-month highs last spring unlike its peers, and while the correction in the fall was hair-raising, the rebound since then has been superb. And why not? Despite slowing growth from others, Shift4 believes its gross payment volume will lift nearly 50% this year thanks to its move into many new areas (like stadiums and ticketing), while its Finaro subsidiary, which was acquired last year, gives it a beachhead into Europe’s enormous restaurant sector, where it expects to sign up thousands of clients this year. To be fair, there were some buyout rumors here that helped the stock, but we like the setup and we’re adding a half-sized stake tonight. BUY A HALF

Cabot Market Timing Indicators

Our market timing indicators remain in fine shape, and while the action of leading growth stocks is more mixed given January’s ups and downs, the trends remain up. Of course, the month isn’t over yet and earnings season is just starting up, so the near-term is still likely to bring plenty of movement, but the path of least resistance remains up.

Cabot Trend Lines: Bullish
Our Cabot Trend Lines have been bullish for nearly a full year at this point, and they remain solidly on the positive side of the fence today, with the S&P 500 (by 7%) and Nasdaq (by 8%) well above their respective 35-week moving averages. It’s not an exciting indicator that changes its tune frequently—but that’s what makes it so valuable. Right now, the longer-term trend is clearly up.

Cabot Tides: Bullish
Our Cabot Tides are also in gear, with all five indexes (including the S&P 400 MidCap, shown here) still well above their lower (50-day) moving averages. There’s still a good amount of “daylight” between the indexes and their 50-day lines, which could imply we’ll see more volatility as January continues. But beyond the next couple of weeks, both the intermediate- and longer-term trends are pointed up—so the odds continue to favor higher prices ahead.

Two-Second Indicator – Positive
Our Two-Second Indicator has worsened a bit as the broad market has been knocked around so far this year—that said, so far, we’ve yet to see any days of plus-40 readings (Wednesday saw 39). Translation: Despite the wobbles, the broad market remains in good shape and overall selling pressure on the market is under control.

The next Cabot Growth Investor issue will be published on January 25, 2024.