Cabot Growth Investor Issue: July 27, 2023

Short-Term: Coin Flip; Big Picture: Bullish

Many investors like to pinpoint exact starts and ends to moves; the Nasdaq bull market topped in mid-November 2021 and bottomed in mid-October 2022, for instance. But we think of things more in terms of phases—much of 2021 was a topping phase for growth and most of the market, with the following bear phase mostly lasting into the fall. The market then had a multi-month bottoming effort that included some strong up action (January), some scary news-based declines (March when some banks went under) and plenty of sloppy, choppy trading.

Thus, by our logic, the current straight-up advance got going in early/mid-May and is roughly two and a half months old … which is often (not always) when you start to see some hesitation, some rotation and some extended stocks meeting with profit taking. That’s pretty much what’s been going on with growth stocks the past week or two, with a good number of the hottest stocks and sectors exhaling a bit, a few good-looking names getting clonked on earnings and overall some selling on strength (saw some of that today).

Near-term, we think it’s possible we see more of that—maybe including the market’s first “real” pullback (we won’t say correction, as the first dip is usually relatively well contained in the indexes) of this upmove. We’re not overly confident of that, but we’re seeing enough right now that we don’t advise pushing the envelope, per se, and are more interested in buying dips and/or some “non-fastballs.” (See more later in this issue.)

But none of that alters our overall bullish view that we’ve been writing about for a few weeks: The top-down evidence remains overwhelmingly positive, including our three key market timing indicators, while the vast majority of growth stocks are acting acceptably—and names from outside tech, chips and networking are kicking into gear. Simply put, the odds strongly favor this being a bull phase, but near-term, it’s a matter of moving through earnings season, pruning stuff that lags and moving into fresh opportunities as they arise.

What to Do Now

All in all, we advise holding your strong, profitable names, but we probably wouldn’t be diving in on any minor wobble, instead waiting for higher-odds entries, either on weakness or after some powerful earnings gaps to the upside. In the Model Portfolio, we’ve placed a few names on Hold recently, and we sold our half position in Inspire (INSP) as it broke down earlier this week. Tonight, we’re going to sell Wingstop (WING), which hasn’t been able to get off its knees—that will leave us with around 28% in cash, which we’re aiming to redeploy in stronger names.

Model Portfolio Update

We’re position traders, meaning we look at things from a (mostly) intermediate- to longer-term perspective. And on that front, we remain very encouraged, with all our key market timing indicators positive and, of course, with tons of big-picture studies of the market’s action (like our New High Buy signal, written about in the last issue) pointing to good things down the road.

That said, there’s no question growth stocks have gotten sloppier in recent days; after two and a half months up, it’s possible we’re approaching (or have begun) the market’s first “real” pullback, especially as earnings season ramps up. That doesn’t mean we’re selling wholesale at all, but we’re OK doing more sitting than trading at this time and mostly want to see how things develop over the next couple of weeks.

In the Model Portfolio, we cut bait on Inspire (INSP) earlier this week as the stock cracked support, leaving us with 21% in cash. Tonight, we’re going to sell Wingstop (WING), as the stock hasn’t been able to get off its knees and our patience has run out. We’ll hold the cash (28% cash position) for now, though if we do slough off, we could look to put money to work on dips.

CURRENT RECOMMENDATIONS

Celsius (CELH)—We placed CELH on Hold last week because the stock was doing something we’re seeing more and more of—stall out for a while (the 150 level, give or take, has been a ceiling) and then take on some water. That said, CELH also hasn’t broken key levels at this point and there are no indications the story is changing at all; even when the stock gets hit with an occasional downgrade, it’s based on valuation (which usually carry far less weight), with analysts seeing very strong growth ahead. The benefits of the Pepsi deal aren’t going to all occur in a quarter or two, or even a year or two, so earnings and cash flow should grow many fold as distribution expands, both into new sectors and more products in existing stores. Of course, the stock is not the company, so any decisive meltdown will have us bailing out—but at this point, we’re willing to give the stock some wiggle room as earnings (August 10) approach. HOLD

DoubleVerify (DV)—DV has been capped by the 42 level for the past week or two, but overall it remains a cool customer—besides a couple of sharp up and down days earlier this month, the stock has traded calmly and under control, refusing to even make contact with its 25-day line at this point. Of course, earnings will be vital: Wall Street sees top-line growth of 21% and earnings of six cents per share, but the outlook (especially if there are any signs of a re-acceleration in the ad market) and updates on some newer product launches could be even more important. We’ll stay on Buy, but keep new positions small and aim for dips this close to the report. BUY

DraftKings (DKNG)—DKNG remains very impressive—it likely didn’t have much pent-up selling pressure as shares chopped “only” slightly higher in May and June, so this month’s upmove has stuck. Fundamentally, while there’s still plenty of competition, it’s lessening some as the online sports betting and online casino markets mature, allowing for customer acquisition costs to fade and EBITDA and margins to improve—all while the sector itself is still in a solid growth phase. (One analyst said it’s likely the firm’s pace of expense growth and marketing in particular has likely peaked.) We’ve held off averaging up in DKNG because the stock was extended somewhat and the short-term market outlook is more cloudy; if you wanted to nibble here (whether you already own some or not), we wouldn’t argue over it, but once again we’ll stand pat with our half-sized stake given that earnings are just over the horizon (August 3). BUY A HALF

Inspire Medical (INSP)—INSP really couldn’t get going in a meaningful way for many weeks (hitting slightly higher highs but underperforming the market), and then this week the sellers pounced, with shares falling decisively through the 50-day line and they haven’t bounced at all since. Might the stock rebound on earnings (August 1)? Sure, it’s possible, and our sale had less to do with any big predictions of doom than simply that shares had trouble getting moving, broke down and were showing us a loss. At the very least, it’s not a leader here, so we sold our half-sized stake and are holding the cash. SOLD

MasTec (MTZ)—MTZ tried to get going today but saw selling on strength like everything else. Even so, it remains in a tight, quiet range following its persistent advance of the past couple of months. Like most everything else out there, earnings are just around the corner (August 3), with sales, earnings, and new bookings (and the backlog) all vital. We’ll see how it goes, but both the fundamental story here (infrastructure, including tons tied to green energy, is booming) and the stock’s own action (10 weeks up in a row, including seven straight on above-average volume) tell us the odds favor this being a normal digestion on the road to higher prices. BUY

Monday.com (MNDY)—MNDY has now dipped close to its 50-day line twice this month (once at 158, this week around 170), which is tedious but normal action after the massive-volume ramp in May and early June. The firm recently released a new data infrastructure system behind its work operating system platform that’s far faster, more elastic, real-time and overall more functional—nothing revolutionary, but it pushes the product line forward, especially for larger customers. We think there’s big potential here fundamentally, with not just big sales but also giant earnings growth coming, but we’ll play it by the book—a big drop below the early-July low would be a red flag, though any decisive show of strength could kick off the next leg up (and have us averaging up, too). Earnings are due out August 14. HOLD

ProShares Ultra S&P 500 Fund (SSO)—As opposed to some growth-ier funds and indexes, the S&P 500 hasn’t exhaled at all, holding firm and even eking out to new recent highs (and not that far from the March sub-peak of 2022). Of course, things won’t go straight up forever, and there are some signs that the “lockout” phase of the rally, where there are no pullbacks (since big investors are underinvested or invested in all safe stuff and are desperate to nibble on any dips) could be ending, resulting in near-term dips. However, these types of rallies almost always eventually lead to a more sustained, normal bull phase going ahead (three steps forward, one step back), so while we’re prepared for some discomfort, we’re not selling in anticipation of any major pothole. Of course, this is all just a game plan—it’s always possible something really changes (possibly a new uptrend in interest rates that brings lots of selling?) with the evidence, and if that happens, we’ll change our tune. But at this point, the big-picture outlook remains very encouraging, so we’ll stay on Buy, though again, some dips and shakeouts over the next couple of weeks wouldn’t surprise us. BUY

Shift4 (FOUR)—Shift4 has again pulled back in recent days with most growth stocks, and it’s hovering right near an area of support in the mid-60s. The story remains the same, with a great outlook for sales, earnings and free cash flow and with the firm continuing to ink some new deals (it just signed up with the NHL Eastern Conference Champion Florida Panthers)—but the stock has been range bound for a while as various worries (some company-specific, some sector-based; Visa and Toast have both taken hits recently) have put a lid on buying. Earnings are out the morning of August 3, and with a small position, we’re OK giving the stock a bit more wiggle room, but it’s getting close to time for FOUR to get going on the upside, or we’ll move on. HOLD

Uber (UBER)—UBER is extended to the upside here, but it’s also refused to give up any ground of late, even as many big movers have wobbled. Earnings are due out next Tuesday (August 1), and all eyes will be on bookings and EBITDA, as well as whether the 2024 outlook ($5 billion of EBITDA) can officially be raised. While it’s super early, we’re also interested to hear about any details surrounding some recent adjacent moves (like ordering Domino’s or from convenience stores through Uber Eats … but the product is delivered by others, or advertisements on the Uber app) and where it could lead. At day’s end, we have high hopes that Uber is a “new” liquid leader, effectively a blue-chip outfit with the stock kicking off its first sustained run just a couple of months ago, but we’ll see how things go after earnings. We’ll stay on Buy, but as usual, keep any new buys small (and aim for dips) this close to the quarterly report. BUY

Wingstop (WING)—WING has tried to rally a couple times of late, but the sellers pounced on each attempt and now the stock has moved to new closing lows for its correction. Our patience here has run out, and its main peer (Chipotle, CMG) gapping down on earnings today isn’t the best of signs. As always, next week’s earnings report (August 2) could save the day, and fundamentally we like the cookie-cutter story here as much as ever. But we have to go with the evidence in front of us, and along with the market’s near-term wobbles, we think it’s best to sell our weakest stock and look for greener pastures later on. SELL

Watch List

• Axcelis (ACLS 181): ACLS has hacked around since mid-June and is now within shouting distance of its 50-day line. As we’ve written before, we do wonder if the stock’s massive run needs more time to be digested, so we’re willing to wait—earnings (August 2) will be key.
• Confluent (CFLT 34): Like a lot of growth names, CFLT’s recent move to new highs was rejected, though now the stock is down to its 10-week line for the first time. Earnings are out August 2—a strong reaction could be buyable.
• Noble Corp. (NE 51): We continue to think drillers have started a group move, and NE looks like one of, if not the, leading players in the group—not just stock-wise but fundamentally, with a shareholder return program just being launched. Earnings are due August 2.
• NexTracker (NXT 44): We continue to keep a distant eye on solar names, which have been in long consolidations but have terrific numbers and stories. NXT (which makes solar tracking systems) gapped up today on earnings that crushed estimates even as backlog grew another 15% from the prior quarter.
• On Holding (ONON 34): ONON continues to futz around near its old highs—not a perfect pattern, but the story and numbers are there and the chart isn’t far behind.
• Nvidia (NVDA 458): Is NVDA in the first inning of its overall move? Almost surely not. But as we’ve written before, it’s the flag bearer of the growth stock bull move, and shares may be forming what’s known as an ascending base here. We’re still watching.

• Palantir (PLTR 16): It’s more speculative and crazy volatile, but PLTR has pulled back closer to its 50-day line after a massive-volume run. Fundamentally, the firm might have the leading AI platform that appears to be way ahead of everyone else. See more later in this issue.

  
  

Other Stocks of Interest

DoorDash (DASH 86)—There’s still plenty of competition in the delivery segment, but it’s certainly been winnowed down as many pretenders went out of business or were swallowed up. And that’s a good thing for DoorDash, which is clearly one of the leaders (along with Uber) in an industry that’s still plowing ahead; one estimate calls for delivery to rise 14% annually through 2027, and in the U.S., it’s likely to be far stronger than that—just 12% of all restaurant sales here are delivery, compared to 22% in Britain and 30% in Canada. And of course that says nothing about other potential end markets; DoorDash has expanded into grocery and convenience store deliveries (as well as things like pets, flowers and more) with good success (it says these areas are growing faster than the firm as a whole and it’s taking market share), though right now, restaurants still account for the the lion’s share of revenue. Importantly, much of the growth here is coming from current users—those that placed their first DoorDash restaurant order in June 2021, for instance, are currently ordering at about 30% higher rates than two years ago, while those that began in June 2022 are up north of 10% in the past year—and a similar pattern is playing out in the firm’s new verticals, too. All told, it’s a solid, well-run business that should grow nicely for many years to come. In Q1, total orders rose 17% (excluding an acquisition) and marketplace order volume was up 20%, while restaurant margin (the cut the firm is getting) was 12.8%, up one percentage point from a year ago. And though earnings are in the red, EBITDA is ramping nicely and should total $750 million (give or take) for the year as a whole and head higher from there. The stock came public in late 2020 and was completely overhyped, which led to a drop from around 260 to 40 (!) during the bear market. But DASH set up a nice launching pad in the spring and has shown intriguing persistence, rising 11 of 12 weeks since the start of May. Earnings are due August 2, which is always a risk, but the story, numbers and chart are all pointing to good things over time.

Apollo Global (APO 80)—The long-awaited pullback in the market might be coming, at least for growth stocks, but there’s tons of evidence that the big-picture outlook has improved for stocks and likely other asset classes, too. That always has us on the hunt for so-called Bull Market stocks, and right now, Apollo Global is the strongest. There’s nothing magical about the story—Apollo is a big alternative asset manager and retirement services provider, with nearly $600 billion in assets with an emphasis on credit, and like some peers it’s been focused on fee-related earnings (about three-quarters of assets are fee-generating), which smooths out results, making them less reliant on one-time realizations or sales. Apollo has seen best-in-class inflows even during 2022 ($154 billion in the past year alone, including $57 billion in the first quarter), and now that the environment is improving there’s no reason fees, asset values and inflows won’t improve nicely from here. Indeed, the firm has some lofty goals, with a target of $1 trillion in total assets in 2026, while fee- and spread-related earnings (spread earnings are from the retirement division) could rise to $9.50 per share total, up from $6.50 or so last year, which will help drive a doubling of net income. Of course, we wouldn’t put a lot of faith in multi-year outlooks in an industry so dependent on other factors, but the fact is that 2023 was already looking solid even before the recent market improvement, so if things go right, business, assets and dividends (43 cents per share in Q1) could really take off. As for the stock, it bottomed in September and rallied most of the way back to its all-time high before the March banking worries led to some sharp selling. But APO tightened up soon after and has marched all the way back to its 2021 highs, well ahead of the overall stock market and most peers. It’s not a traditional growth stock, but the timing could be right for a Bull Market name like Apollo. The Q2 report is due August 3.

Ollie’s Bargain Outlet (OLLI 72)—We’ve been following Ollie’s for years, from its Romance Phase way back in 2015-2018 (we owned Ulta instead, which also did great), to its Transition Phase, which has lasted for years and been spurred on by many potholes, some because of bad luck and some because of missteps—its CEO suddenly died a few years ago, which obviously affected sentiment, and then the trade war, pandemic, supply chain issues (higher costs, especially freight) and inventory mismanagement led to disappointing results. But the underlying story here never changed: Ollie’s the leading closeout retailer, offering customers in a variety of areas (food, sports equipment, home goods, candy, beauty products, clothing, pretty much anything) bargain basement pricing, thanks in part to a top-notch buying team that has relationships with 1,000-ish retailers (including many big ones), allowing it to pounce and buy in bulk when deals are to be had. (We remember when Target was having issues years ago, Ollie’s made a huge purchase.) And, moreover, the firm looks like it’s put the endless issues behind it—sales have risen four quarters in a row and are slowly accelerating (9%, 9%, 10%, 13%), same-store sales are doing the same (up 4.5% in Q1, up from 3.0% and 1.9% the prior two quarters), earnings are up three quarters in a row and Wall Street sees the bottom line rebounding 61% this year. That’s all to the good, but adding to the attraction is that Ollie’s is a pure cookie-cutter story—it had 476 locations at the end of April, expects to open another 36 by next January, and sees a general pace of 50 to 55 new locations a year until it reaches a target of 1,050 locations (a target that was raised a couple of years ago); there’s also a busy remodel program that has solid payback characteristics, too. Bottom line: After years in the wilderness (the stock is no higher now than May 2018), we think the repeated solid quarterly results may lead to a profitable Reality Phase, where shares make good progress as business improves and management executes on its plan. OLLI actually showed some decent strength last summer, but that rally failed, and it’s been working through the swamp for many months since then. But now the action is improving, with some big-volume buying around earnings in June and a move to multi-month highs in recent weeks. For the “non-fastball” portion of your portfolio (see more later in this issue), OLLI could be a solid option.

Is This the Top AI Platform Play?

When it comes to supplying the gear for the AI wars, there’s little doubt Nvidia (NVDA) remains the lead dog. But what about AI systems themselves—the platforms that firms will use to do all sorts of predictive analytics? There are bound to be many of them, but it’s not a cinch that big firms (or government agencies) will be signing up with just any old offering, desiring great usability, yes, but also security and the like.

The future isn’t yet written, but it’s possible that Palantir (PLTR)—a name that was basically left for dead in the bear market—is positioned to be the leader. In fact, while a lot of investors and managers are bullish on AI and the potential it has to revolutionize many aspects of business, it’s hard to find a management team more excited and, frankly, confident, than that of Palantir.

Simply put, the top brass thinks they’re going to be the platform of choice for businesses (and defense outfits, which the company has a long history of serving) to make the most of AI—Palantir began building an architecture years ago to handle the complicated language models that are now bursting on the scene and ultra-powerful, so it’s theoretically way ahead of the game. Indeed, the firm released the first version of its platform to selected customers in Q2, allowing businesses to deploy various AI models to specific (and real-time) data sets on their network with exact instructions on what to do (such as handing off tasks back to people or to other systems)—all with guardrails and security so the system does exactly what it’s supposed to.

Thus, the big idea here is that AI models themselves are quickly becoming commoditized (like ChatGPT); the key is having a platform that can access these models, use them with proprietary data in a secure and efficient way and produce actionable advice in seconds—and Palantir looks to be in the pole position. One small example of what could be here: It said it already deployed a pre-release version of its platform to an insurance company and within a few days was able to automate claims processing.

As mentioned above, the top brass is extraordinarily bullish, stating flatly that what they are building will become the platform of choice, that demand is bigger for the platform than anything seen in the past couple of decades, that they’ve had hundreds of conversations with potential customers and much more. That’s the theory anyway—the firm itself has been growing decently (sales up 18% in Q1) and is marginally profitable (earnings estimate of 21 cents per share this year), but clearly big investors think the AI angle could change everything: PLTR crashed in the bear market and was a nothingburger for many months earlier this year, but in May, the stock took off on six straight weeks of massive volume, with shares more than doubling during that time.

The past few weeks have seen some ups and downs, but net-net, the stock is basically unchanged since mid-June. Is it risky and a bit speculative? Yes. But it’s also a unique situation where a proven, large ($34 billion market cap), profitable firm with lots of big clients (including the government) and resources seems to have the clear lead in a revolutionary new field. That combination doesn’t grow on trees. PLTR is on our watch list. WATCH

How to Diversify in a Concentrated Portfolio

Frankly, we’re not big on diversification, at least when it comes to a growth portfolio—if you want to own 50 stocks, you’re usually better off just owning a couple of ETFs these days or whatnot. Plus, part of what we’re trying to do is ID some real leaders that can trend for months or longer; owning just a couple of them in a decent size can make all the difference in your account. That’s why, in the Model Portfolio, our “normal” full position size is 10%, and of course, that figure can grow if the stock does well.

Even so, there are a couple of ways we like to diversify, at least a little bit. The first isn’t a surprise—we try not to own too many stocks in the same sector or “theme.” Ideally, in fact, we’d love to own the #1 leader in the top six to eight groups, which will prevent the portfolio from taking too much heat if one or two themes fall out of favor.

But probably more important is a more general concept, which is that it’s best not to own all “fastballs,” which is a hard term to define but you know it when you see it: We’re talking about the names that can move around 4% to 5% a day from high to low for no reason at all. Don’t get us wrong, many of those stocks can have huge upside moves, but they’re also more difficult to hold onto and, when the sellers arrive, the drawdowns can be tough.

Of course, that doesn’t mean we want to own a bunch of Dow Industrial names, but if you own, say, 10 stocks, maybe something like two to four of them can be a bit more “grown-up”—right now, we would say our leveraged long index fund (SSO) and Mastec (MTZ) probably fit in that category, and we could look to add another (possibly something like Noble (NE), which is both non-growth and not a fastball). Obviously, potential big movers will always be the core of what we’re looking for, but our point here is, as the market broadens out, don’t be afraid to own some well-situated names—they can still do very well in a bull phase and can balance out the overall portfolio’s volatility.

Cabot Market Timing Indicators

Not surprisingly, there have been a few small air pockets among some leading growth stocks after big runs, but the top-down evidence is overwhelmingly positive and, while the near-term is more of a coin flip, the odds continue to favor nicely higher prices in the weeks and months ahead.

Cabot Trend Lines: Bullish
The earliest sign that 2023 was changing character came from our Cabot Trend Lines, which was bearish for 90% of 2022 (from late January on), but turned bullish in January of this year … and then stayed bullish throughout the spring muck. And today the long-term trend is not in doubt, with the S&P 500 (by more than 10%) and Nasdaq (by a huge 17%!) miles above their respective trend lines.

Cabot Tides: Bullish
Our Cabot Tides remain in positive territory, and unlike a few weeks back, it’s not just the big-cap names that are working—all five of the indexes we track (including the S&P SmallCap, shown here) are strongly above both their 25-day and 50-day lines, and those averages themselves are advancing strongly. Translation: The market is in a clear intermediate- and longer-term uptrend.

Two-Second Indicator: Bullish
While some individual names have been dented on earnings, the broad market remains in fine shape. Our Two-Second Indicator has now been below 40 every day for the past month, with just one plus-40 reading since the start of June. (Nasdaq new lows are also well contained and generally trending lower.) In other words, while pockets of selling pressure appear, there’s no sign the sellers are taking control of any major part of the market.

The next Cabot Growth Investor issue will be published on August 10, 2023.