Despite the tedious action and truckload of bad news, we are seeing some things pop up that are often seen near lows, such as growth stocks starting to find their footing and breadth doing the same. We’ve even seen some minor positive divergences from our Two-Second Indicator. Those are reasons to keep your head out of the sand and to keep your watch list up to date, especially with earnings season potentially providing a catalyst in the weeks ahead. Details inside.

Cabot Growth Investor Issue: July 14, 2022

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The Waiting Game
I’ll get into the guts of the recent market action in a second, but I wanted to lead with a personal thought. As in the market, life is often a game of outliers, and for me, my first big break came 23 years ago, right out of college, when Tim Lutts hired me at Cabot. It was a job I loved in 1999 and still love today.

There isn’t one type of boss that fits everyone, but looking back, I was lucky enough to hit the jackpot with Tim, whose style was perfect for me (and for many others)—teaching me the ropes of the business and many do’s and don’ts of writing and investing, but also giving me a wide berth to make mistakes (lots of them!) and go down a few rabbit holes, too. And, of course, having Tim’s trademark calmness during the craziness of the past two decades has helped all of us at Cabot keep our feet on the ground.

Now, though, Tim’s hanging them up after 36 years at Cabot, moving on to the golden years and greener pastures of grandkids and warmer weather (though I’m sure he’ll be in touch when the market does something dramatic). To Tim, I offer my deepest thanks and congratulations—and to you, our loyal subscriber, I want to say I’m as excited as ever to help lead the next chapter at the true American success story that is Cabot … in concert with the industry’s strongest lineup of analysts that, of course, Tim helped put together.

In Tim’s farewell letter to his subscribers, he mentioned his only regret is that he’s likely leaving closer to a major market bottom, which leads us into the current environment. Right now, we’re in the midst of the waiting game: Just as sure as the sun will come up tomorrow, history and experience tells us today’s down times will lead to a new bull phase that will precipitate not only a dramatic rise in the major indexes but tons of opportunities among new growth titles. A real opportunity to change your wealth for the better.

Those good times are coming with certainty—but the question of when is unknown. Sure, given the horrid sentiment and bad news out there, along with the time factor (the Nasdaq peaked eight months ago), the odds favor we’re in the middle to later innings of this bear phase. But whether that means two more weeks or two more months or longer is unknown.

That’s why it’s best not to predict, but just to take it day to day. Interestingly, despite the tedious action and truckload of bad news, we are seeing some things pop up that are often seen near lows, such as growth stocks starting to find their footing and breadth doing the same. We’ve even seen some minor positive divergences from our Two-Second Indicator. Those are reasons to keep your head out of the sand and to keep your watch list up to date, especially with earnings season potentially providing a catalyst in the weeks ahead.

What to Do Now
If we do see a real change in character, we’re ready, willing and able to do some buying—but, as we’ve written 100 times, we have to see it happen first. Today, with all of our key market timing indicators bearish, we again advise playing defense (we have 85% in cash) as we patiently await those great times to come.

Model Portfolio Update
When the market is bullish, not only is it mentally more pleasing (we all like up markets), but it’s easier as your brain is generally pushing in one direction—you’re thinking bullishly, of making money, and of buying stocks, and if you’re wrong, loss limits and stops automatically take you out.

However, bear phases are not only more sour, but your brain has to hold two opposite thoughts: First, for the here and now, you have to absolutely believe what you see, and that’s obviously what we’ve been preaching in recent months—with our trend-following measures pointed down (including our old reliable, long-term Cabot Trend Lines—see more on them later in this issue) and growth stocks in shambles, we’ve been carrying mountains of cash. If you’ve been doing the same, give yourself a pat on the back.

But second, even while keeping the defense on the field right now and being bombarded by bad news (yet another new high in the rate of inflation last month, etc.), you have to keep an optimistic attitude, mostly so you’ll act on the next green light whenever it comes.

We’ve been through these types of rodeos before (worse than this, in fact), and the market and our portfolio has come out clean on the other end each time, mostly because we realized things are going to get going many months before the real world looks good. Heck, just look at 2020 for an example of that.

As we look at the Model Portfolio today, there are still some modest positives bubbling under the surface, not the least of which is some growth stock resilience of late. Because of that, we’re keeping our eyes open and our watch list up to date, and are ready to move into the market if we get buy signals. Yet with the primary evidence negative, we’re certainly not going to call a bottom at all; we’re again holding north of 80% in cash in tonight’s issue.

Current Recommendations

Devon Energy (DVN)—DVN and most oil stocks remain on the outs, but many are trying to hold their lows during the past week, partially because even after the recent drop in commodities, oil prices remain elevated, still hovering in the low-$90 range and with futures prices for the end of next year in the $75 area, while natural gas prices are nearly at $7 despite pervasive recession fears. Clearly, prices in any of those areas would mean a firm like Devon is likely trading at a free cash flow yield in the 15% range, leaving plenty for dividends, share buybacks and debt reduction. More important to us, the stock is doing its all to steady itself at its 200-day line, a key longer-term area, though today’s drop was certainly discouraging. All in all, we do think the energy bull market has farther to run down the road for many reasons—beyond the cash flow figures, don’t forget how long the group and industry was out of favor, which led to a dearth of investment and should keep production under wraps for a while—so we’re willing to give DVN a chance to hold up. But, as we’ve written before, our remaining position is on a tight leash; given that last week’s low point was a smidge below there, the next couple of days will be key; if DVN can hold up and bounce, we’ll hang on, but any further weakness and we’ll be forced to at least trim. Earnings are due August 1. HOLD

Halozyme (HALO)—We decided to dip a toe in the water last week with Halozyme, which remains one of the better growth stocks out there—though, like everything else, it remains subject to the chop, with a great-looking breakout last week coming under some pressure this week. Even so, the overall chart looks fine (higher highs, higher lows, no huge down volume), and we’re OK giving our half-sized position some rope (likely down into the lower 40s) should the market’s shenanigans continue. The Q2 report is likely out in early August, and the closer we get to 2023, the better the chance that investors will start discounting a re-acceleration in earnings growth; analysts see earnings up just 6% this year, but that’s basically due to a one-time bump in the tax rate (without that, management says the bottom line would likely rise 30% to 40% this year). And while valuation isn’t our main focus, a P/E ratio of 23 times this year’s estimates hardly seems outrageous. Plus we’re not just excited about the next few quarters, as three Enhanze-related launches are likely from 2023 to 2025, including Argenx’s autoimmune treatment that could be a multi-billion-dollar drug; all told the launches should keep royalty revenue kiting higher. Back to the stock, if you don’t own any, we’re OK buying a half-sized stake (that’s 5% of the portfolio to us) here, with the idea of filling out the position if it rallies nicely from here and, of course, if the market confirms a new uptrend. BUY A HALF

ProShares Ultra S&P 500 Fund (SSO)—Nobody is going to look at the S&P 500 (or SSO) and conclude the sellers have left the building—the index is just a few percent off its lows after a 23% decline and SSO hasn’t been above its 25-day line since early June! And yet there’s also little doubt the market has been putting up a fight—the up-down-up-down action in recent weeks is a clear sign of that (lots of volatility after a big move can often mark a change in the supply/demand dynamic), while some stuff below the surface (such as improvement in our Aggression Index and breadth readings—see more later in this issue) has refused to worsen in recent weeks despite the barrage of bad news. That’s far from an all-clear, but with these factors, horrid sentiment and our highly defensive stance, we continue to think it’s best to keep a foot in the door on the long side—if you have a small position in SSO, sit tight. HOLD

Watch List

For the first time all year, we’re seeing many names resist the market’s heaviness over a period of weeks or even months—should the tide turn some of these will be in pole position to be leaders of the next advance.

• Bumble (BMBL 32): We continue to think Bumble is a great follow-on opportunity, essentially being the next Match.com as it offers a few key advantages (including girls having to initiate any chats) and it seems like the Tinder-induced hookup culture is fading. The stock has been living above its 50-day line for two months, far better than most.
• Celsius (CELH 75): CELH is certainly among the names in pole position to be a leader of the next run, with a mass market story, triple-digit sales and earnings growth and a stock that’s leapt to its highest level since January on good volume. There’s still overhead to chew through, but there’s no doubt it’s one of the best-acting growth titles out there.
• Enphase Energy (ENPH 197): ENPH remains in decent shape, but it also remains all over the place, whipping up and down 30 to 40 points in a matter of days. We want to see it settle down, but overall, we still like this story and the stock’s set of higher lows since January bodes well.
• Li Auto (LI 38): LI’s action is about as pristine as you can get, with a nice bottoming area in March and April, a huge-volume rally through June and now moving straight sideways for three weeks. The firm’s new SUV should help keep growth rapid, and the longer the stock can hold up here, the greater the chance its next major move is up.
• Intra-Cellular Therapies (ITCI 56): We’re not sure how much appetite we’ll have for money-losing biotechs, but ITCI remains within shouting distance of its highs as its bipolar drug could become the standard of care.
• Pure Storage (PSTG 26): Maybe the destruction in chip and memory stocks eventually cracks PSTG, but the myriad huge-volume buying weeks (including the one seen near Memorial Day after earnings) and the stock’s tightening action of late are constructive. Don’t forget the firm’s recent move to more subscription offerings, which promise more dependable growth.
• Shockwave (SWAV 200): SWAV got up to the 220 range in early April and then imploded with the market—but the fact that the stock has come all the way back from there, even as the market is still near its lows, tells us big investors are expanding their positions. And why not? There aren’t many names with a revolutionary product and triple-digit growth. As with many stocks mentioned, the longer the stock can hold up near these levels, the greater the chance the path of least resistance has turned up.

Other Stocks of Interest
Braze (BRZE 42)—Cloud software stocks have been taken out and shot during the past few months, but we’ve seen these sort of periodic washouts in years past, only to watch the sector get going during the next bull run ... but the key is that the next run is led by different firms. Just like nobody had heard of Twilio or Coupa five years ago, the next leaders here will be newer names. Procore (written about in the last issue) is one possibility, and we think Braze is another. The firm has what looks like a better mousetrap when it comes to brand management and customer engagement activities, allowing clients (many of them big ones) to have personalized, real-time interactions with customers. And unlike many legacy offerings, these interactions are integrated across channels (email, text, app notifications on your phone, etc.), allowing firms to keep in touch and prompt customers to do more with their brand, whether it’s buying something, watching a show or trying out a new service. It sounds like a nice idea, but the proof that it works can be found in the customer base, which is not only growing rapidly (1,503 clients at the end of Q1, up 50% from a year ago) but includes a ton of well-known outfits like Gap, Venmo, the NBA, Pizza Hut, HBO Max, IBM, Sophora, GoFundMe, P&G, CVS, Etsy, NASCAR and more. Impressively, current clients are using a lot more of what Braze, whose revenue comes almost solely from subscriptions, has to offer (same-customer revenue growth has been up in the mid-20% range or better for at least the past nine quarters). Given the potential reach, especially with just about every consumer-facing company that wants to build loyalty and digitally keep in touch with all their customers, we think Braze can grow many-fold from here if management makes the right moves with its product lineup and attracts more big fish, too. Revenues are advancing at a 60%-plus clip, and like many cloud software names, earnings are negative but (in Q1 at least) free cash flow is actually in the black. As for the stock, it came public in mid-November, right at the Nasdaq’s peak, and not surprisingly went through the wringer for a few months—but BRZE started to find some support in March (nearly 31), found more in the 28 to 32 range in May and June and has leapt above its 50-day line in July. Obviously, the longer-term trend is still iffy, but it looks like the stock has at least started a bottoming process. We’d like to see BRZE grow up a bit (trading volume and sponsorship is a bit light), but it’s got a great story and we think it’s worth keeping a distant eye on.

Lantheus (LNTH 68)—It’s not a common occurrence, but even in very tough bear markets you’ll often have a few stocks or an entire group countertrend, and we’re not just talking about gold or bankruptcy consultants. One of this year’s standouts has been Lantheus, which we mentioned a couple of months ago and, after a few weeks of rest, could be ready to resume its run. The company isn’t a household name, but it’s actually the leader in many medical imaging agents, which improve the contrast in scans for doctors to see what, if anything, is wrong. A product called Definity was the big draw, being an agent that improves the picture in an echocardiograms; there are still millions of suboptimal echocardiograms each year so the long-term potential here is solid. Business was on a slow but solid growth path for years, and while the uptrend was interrupted by the pandemic (with fewer patients getting tests done at hospitals and medical centers), things began to turn around last year. However, that’s not the real attraction here—instead, it’s Lantheus’ newest product (called Pylarify), which is used for scans in suspected recurrences of prostate cancer or those with possible metastasis. The market opportunity for these scans alone is something near $1.1 billion annually, and with just one other competitor (with what most see as an inferior solution), Lantheus is quickly capturing the huge opportunity—Pylarify hit the market in Q4 and sold $35 million right away, and in Q1 sales leapt to $93 million, making up 44% of revenue! All told, the top line lifted 126% while earnings exploded to 97 cents per share, and while some of that was due to a one-time deal with Novartis (to supply Pylarify to a clinical trial), there’s little doubt the upside is big—analysts see earnings rising from 49 cents last year to north of $3 per share this year, with another 20%-ish gain likely next year. The worry, if there is one, is that the growth from Pylarify could mostly be a one-time, step-function-like boost to the bottom line, which may mean the stock’s run could be short, but the blowout Q1 report and the size of the opportunity suggests that may not happen. LNTH blasted off in February and had a good run into the low 70s before finally correcting. Today it’s made no net progress for about two months, but the damage has been limited. The market is clearly a headwind, but odds favor the next big move still being up.

Quanta Services (PWR 128)— Quanta isn’t a dramatic growth story, but it’s a name that’s popped up on our screens frequently in recent years thanks to its consistent growth and execution, as well as strong and durable fundamentals. The company is one of the big engineering and construction outfits, providing clients with everything from design to project management to installation, maintenance and replacement services, with a focus on the utility sector, which is profitable, regulated (economically resilient) and drives nearly three-quarters of Quanta’s revenue. Despite the stodgy nature of its clients, the opportunity here is big—just to replace and upgrade thousands of miles of outdated circuit lines will probably cost $20 billion-ish a year for more than a decade, and the move toward electric vehicles means another couple dozen billion dollars in investment annually will be needed, too. And that says nothing about utilities’ need to modernize, upgrade and expand many gas and LNG pipelines. Then, for telecoms, you have the 5G infrastructure buildout (could be a $1 billion business for Quanta looking a few years out), and via a recent acquisition, Quanta has leverage to renewable infrastructure too, including for solar, wind projects and energy storage—indeed, the recent two-year waiver from solar tariffs is expected to keep demand strong. Granted, there are some moving parts here (a lack of workers has been a small issue), and it’s always possible that plans could be put on hold among some clients if the economy tanks. Then again, Quanta has seen earnings grow for at least six years in a row ($1.11 per share in 2015 to $4.92 last year), analysts see things pushing to $7 per share next year and, at an Investor Day this spring, management thinks $11 to $12 per share is possible by 2026. The stock had a beautiful, smooth advance through April of last year, and since then it’s etched three multi-month launching pads, each one sitting on the top of the prior one. Recently, PWR has been jagged due to the market, but buyers have stepped in after every selloff and shares are just 10% or so off all-time highs. It’s not the sexiest story but Quanta has been a winner and we wouldn’t bet against it remaining so in the next bull run.

Breadth, Growth Stocks Usually Bottom Before the Market Takes Off
One of the big underpinnings of everything we do—whether it’s our indicators or rules and tools used to pick stocks—is that we’re students of the market: We’ve lived through many cycles and have studied history before that, which gives us a roadmap of how the market actually behaves.

What we wanted to write about today is two things that usually (again, nothing is 100% in the market) occur toward the end of bear markets: First, the broad market usually bottoms out, and second, growth stocks stop “leading” on the downside, showing resilience, at least compared to the rest of the market—and both occur before a new bull run really kicks into gear.

Let’s take a look at the last few major bottoms to see how this played out.

First, there’s the 2002-2003 low area, which started in July 2002 and carried into March 2003, when the real blastoff began. Take a look at the two charts underneath the S&P 500 price action from that time: The first is the percent of NYSE stocks above their 150-day lines (30 weeks), which bottomed near 7% in both July and October, but was at 25% when the market got going in March. (You could look at the percent above the 50-day or 200-day, too; they tell the same tale.) It’s a similar story with Cabot’s Aggression Index, which measures the Nasdaq’s performance relative to defensive consumer staples—the bottom for the Index was in October, it gave a green light in November and was at much higher levels when the March liftoff took place.

Next up is the 2009 low, which put in a bottom to the horrific 2008 crash—but what’s not well known is that the broad market actually bottomed in October/November of 2008, months ahead of the low in the indexes—the percent of NYSE stocks north of their 150-day lines bottomed under 2% (!!) in October and November but was up at 5% in March (with far fewer stocks hitting new lows, too). And take a gander at the Aggression Index: The Nasdaq began outperforming defensive stocks in November and choppily trended higher after that.

Even in the quick and sharp 2020 pandemic crash (charts not shown), we saw things begin to firm up about a week before the ultimate low. For this instance, since it was such a quick event, we looked at the percent of NYSE stocks north of their 50-day lines, which actually hit a low on March 12, more than a week before the bottom, while the Aggression Index saw its nadir on March 18 and spiked in the days that followed, even before the final bottom.

Comparing this to our current situation: Both the broad market (whether you’re looking at new lows, percent of stocks above the 150-day, etc.) hit bottom in mid-June, while our Aggression Index technically bottomed out in May, though the June retest was close. That’s clearly not enough to conclude a major change in character—but both bear watching, as the longer they can hold up, the greater the chance the market is at least in a bottoming phase. We’re keeping an eye on both.

It’s Hardest to Keep Things Simplest
What if I told you there was a set of indicators that was guaranteed to keep you heavily invested during major bull markets and guaranteed to keep you heavily in cash during prolonged bear phases, with the only downside being the occasional whipsaw (a signal that’s quickly reversed) that would be more annoying than truly painful? Moreover, this indicator would be brutally simple, having nothing to do with economic reports, interest rates, the Fed, currencies or even market internals.

The funny part is that these very much exist: We’re talking about trend-following measures, which, in most cases, simply look at some major indexes or ETFs and compare them to moving averages. In our very first issue of Growth Investor (then called Cabot Market Letter), our main indicator was the Cabot Trend Lines—and a version of it has appeared in every single issue since. And we’re glad it has! Despite all the “never seen before” happenings of the past two decades, the simple Trend Lines (which compare the S&P 500 and the Nasdaq to their respective 35-week moving averages) continue to outdo most other more complicated indicators.

Since the Trend Lines’ first signal of the new century, buying and holding the Nasdaq would have resulted in a solid 240% total gain—but simply adding a 35-week moving average and a couple of easy rules, your gain would be 330% during that time (38% more money), and that’s without getting a head start on any major moves by using our Cabot Tides (intermediate-term trend) or the outperformance achieved by finding some true leading stocks. All of it is a big reason why we’ve outperformed the market handily since I took over the advisory in 2007, fifteen and a half years ago.

Of course, no indicator (or set of indicators) are perfect, and as we wrote above, it’s always good to keep your eyes on things like breadth and the Aggression Index that can give you a heads-up to any shift in the market. But most of your focus shouldn’t be on opinions or on tertiary stuff—stick to the trends and you’ll stay out of this bear phase and get back in when the environment shifts.

Cabot Market Timing Indicators
There are some small positives under the surface, from decent breadth to the action of growth stocks. Like we’ve seen a couple of times this year, these are solid baby steps—but we need to see much more (buy signals from some indicators) before putting much of our hard-earned money to work.

Cabot Trend Lines: Bearish
As we write about earlier in this issue, our Cabot Trend Lines are our most reliable measure, with the last two signals (a buy in June 2020, and a sell in January of this year) being the latest examples of keeping us on the right side of the market’s major trend over many decades. Today, the indicator remains clearly negative, with the S&P 500 (13% below) and Nasdaq (nearly 18%) well below their respective 35-week moving averages.

Cabot Tides: Bearish
Our Cabot Tides are also bearish, though next week will be interesting—all the major indexes we track (including the Nasdaq Composite, daily chart shown here) are still negative, but next week we’ll begin to drop off the huge drop from early June. And growth funds (our Growth Tides) are actually better off than the major indexes. Translation: If (still a big if) we get a good rally next week, the intermediate-term trend could turn up—but, as always, we don’t anticipate signals. Today, the trends remain down and argue for a highly defensive stance.

Cabot Two-Second Indicator: Negative
Our Two-Second Indicator rounds out our negative crop of market timing measures, with no sub-40 readings (56 was the lowest reading of the past month) and, this week, with readings back in the 150 to 200 range. On a positive note, the readings during the last two mini-selloffs have been way below the 1,100 seen in June, but we need to see a string of very low readings to conclude the sellers have run out of ammo.

The next Cabot Growth Investor issue will be published on July 28, 2022.

About the Analyst

Mike Cintolo

A growth stock and market timing expert, Michael Cintolo is Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable is his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.