Cabot Growth Investor Issue: March 21, 2024

Quick note before we get into it today: Join me and my fellow Cabot analysts Tom Hutchinson, Tyler Laundon and Carl Delfeld next Tuesday, March 26 at noon ET for a FREE special event in which we will discuss the state of the market, how to maximize profits in this bullish environment, reveal our top stocks to buy now, and answer any questions you may have. To join us, simply click here.

Selling Unable to Persist

More than a few times during the dark days of 2022 and 2023 we wrote about how the number one characteristic of that period was that repeated bouts of selling on strength—there were a few uptrends, but they tended to last only three or four or five weeks before the buyers pulled in their horns and the sellers got back to work. You never got the feeling (or saw the evidence) that the T. Rowe Prices and Fidelitys of the world were in a consistent accumulation campaign, allowing the bears to keep the pressure on for most growth titles.

Today, though, we’re seeing the opposite. After a big three-plus-month run, we started to see some churning in the Nasdaq and leading stocks in early February, with most of the institutional leaders doing a lot more chopping than trending during the following five weeks, including seeing some names stumble down to key intermediate-term levels.

But similar (in reverse) to what we saw repeatedly during the down times, the sellers haven’t been able to take control—waves of selling pressure come, but they don’t persist, which lets the major trend reassert itself. And that might be happening right now, with many leaders bouncing off support this week … and after a relatively dovish Fed meeting yesterday, a few leaders (some that got going last year, some fresher names) are bounding back to new high ground.

So are we off to the races again? We’re not going that far—all of the factors we’ve pointed out in the last couple of weeks remain in place, with a lot of “old” leaders still in chop-ville and, while there are fresher names acting well, we’re not seeing a ton of stocks near great entry points.

But that doesn’t mean you shouldn’t be bullish. Our market timing indicators remain firmly positive, and lots of big-picture measures tell us the market and leading stocks are likely to be higher down the road. Thus, we’re certainly holding our winners and looking for new buys, though compared to the straight-up days of November, December and January, we’re a bit more discerning when putting money to work, aiming for stocks that have shown power but aren’t miles above support.

What to Do Now

In the Model Portfolio, we’ve gradually pruned names that haven’t worked out, and we continued with that this week, ditching our half-sized stake in Shift4 (FOUR) via a special bulletin. But we’ve also started to gradually add fresher leaders, and we’ll continue with that tonight, where we’ll start a half-sized position in Celsius (CELH) and adding a small (3%) position to our DraftKings (DKNG) stake, as that stock appears to be resuming its overall upmove. Our cash position will be around 23%. We’re also restoring our Buy rating on Arista (ANET), which has surged back to new price and RP highs.

Model Portfolio Update

For leading stocks, the choppy environment that began in early February led right into the middle of this week—net-net during that time, the Nasdaq, the equal-weight Nasdaq 100 and the IBD 50 Index were all up less than 1% and had many brief but sharp swings up and down during that time. Happily, this week, we’ve seen a return of the buying pressures, kicking some top names to new highs and offering support in others that had pulled back.

Overall, we’ve been cooling our heels a bit, holding our winners and giving them room to breathe but ditching laggards and being selective on the buy side, aiming for fresher leaders—a couple of weeks ago we let go of Elastic, which croaked on earnings, but started to build positions in AppLovin (now a full-sized stake) and Cava Group (half-sized for now). And we’re continuing on that path this week, letting go of Shift4 but starting a stake in Celsius and adding a few shares back to our position in DraftKings.

Of course, we’ll still have around one-quarter in cash after these moves, so we’re not flooring the accelerator—but if this latest upturn in the market continues, we’ll almost surely put more money to work. Stay tuned.

CURRENT RECOMMENDATIONS

AppLovin (APP)—APP isn’t without volatility, as we’ve seen this week, but so far nearly all of that volatility has been on the upside, with the stock notching new closing highs on three different days this week. There are some moving parts in the online advertising industry (different standards and what-not being introduced), but big investors and AppLovin’s management don’t seem phased—if anything, the focus seems to be expanding into new non-gaming advertising areas like, say, connected TV, which is early in testing but has giant potential, allowing advertisers to buy and measure things on a performance basis. APP is extended price-wise right now, but we’re looking at that in a good way (as a show of power) given that the stock’s recent breakout was just in mid February. We averaged up two weeks ago and are sticking with our Buy rating, preferably on the occasional shakeout. BUY

Arista Networks (ANET)—ANET has been tested three different times, with the occasional whack when technology and AI stocks take a hit—but each time, buyers have showed up near the 10-week line (including one time earlier this week) ,with the result being a six-week sideways consolidation. And now, in the wake of yesterday’s Fed meeting, shares have popped to new price and relative performance (RP) highs! Impressively, big investors remained focused on the future here: Arista is the market share leader in overall data center switching, and as the need for more (and more powerful) data centers grows as AI becomes mainstream, it only makes sense that the firm will capture a huge chunk of business. At a conference earlier this month, Arista’s CEO said that it all reminds him a lot of what was going on a decade ago with cloud networking, as the company is current engaged in some AI-related testing (including a few large trials), and when things ramp, demand could pick up for many years. As it stands now, Arista has a goal of $750 million of AI revenue in 2025 (up from zero now), but the eventual upside should be many times that. We don’t think ANET (or other AI names) are going to repeat the straight-up moves in December, January and early February, but we’re not ones to argue with the stock—with new highs being hit, we’re holding what we own and are OK starting a position here or on dips if you’re not yet in. BUY

Cava Group (CAVA)—CAVA remains in good shape, holding at all-time highs, though like everything else the action is tricky (from 68 to 61 and back to 69, all within seven days). Still, there’s an emerging theme out there that involves strength in a few up-and-coming retail and restaurant plays (including Dutch Bros. (BROS), which is written about later in this issue), and Cava is certainly among the best-looking of them. At this point, we’re going to hold onto our small position and give the stock plenty of room to move if it wants to—if you’re not yet in, we’re OK buying a half-sized position (5% of the account) here or on dips of a couple of points. BUY A HALF

Celsius (CELH)—Celsius isn’t the newest story around, of course, with the firm’s healthier (and weight-loss enabling) energy drinks already rapidly gaining share and the distribution deal with Pepsi (officially inked in 2022 but began paying dividends in the middle of last year) already in place. But unlike other sectors, retail-related growth stories can have very long shelf lives, which means big investors will often stay interested as long as the top brass executes. (As one simple example of the potential here—Celsius’ Q4 saw sales of $347 million, which was just one-fifth that of Monster Beverage.) The big source of upside this year and next could come from Celsius’ international expansion, with the firm entering Canada (with Pepsi driving that move), the U.K. and Ireland (thanks to a deal with a distributor on that side of the pond) in January, with more countries to come in the months ahead. Meanwhile, here in the U.S., there remains tons of white space in many end markets the firm never played in until recently, with Pepsi giving the firm exposure in foodservice locations, hotels, spas, casinos, club stores and more. Analysts see growth slowing from the triple-digit pace of recent quarters to “only” 42% or so this year, but we tend to think that will prove conservative, all while the bottom line booms. As for the stock, it spent nearly half a year building a launching pad and soared to new highs after earnings and quickly raced as high as 100—before a quick 15% pullback with growth stocks in recent days. But CELH has found support and, while more near-term wiggles are possible, we think the late-February breakout (it’s a fresh situation) and sterling growth story will keep buyers engaged. We’ll start with a half-sized (5% of the account) position. NEW BUY A HALF

CrowdStrike (CRWD)—Given the wobbles in technology stocks, the poor action among its cybersecurity peers and CRWD’s own wild post-earnings reaction, we’re half-encouraged with how the stock is behaving, calming down a bit and holding the 50-day line on a test earlier this week. Long term, we think the stock is an established leader and has a bright future thanks to its rapid, reliable growth outlook both for the quarters ahead and for the next few years. Near term, though, we’re remaining flexible—a decisive break lower from here (likely coinciding with a crack in many tech leaders) may have us trimming our position, though we wouldn’t trim too much given that our stake isn’t big for us. Conversely, a clear wave of buying in the stock (and in other leaders) could have us restoring our Buy rating, and potentially buying more. As with a good number of stocks right now, we think patience is called for; we’ll stick to our Hold rating and see what comes. HOLD

DraftKings (DKNG)—In the last issue, we said that, even though we were shaken out of some shares during DKNG’s last correction, we’re not afraid to add some back if the stock emerges from its rest period—and that looks to be happening this week, with shares emerging from a five-week rest. There’s no obvious news for the buying, though a small management shakeup announced earlier this week (the current CFO is moving to a different role to wring more efficiencies out of the operation) and the start of March Madness this week (one of the largest betting events of the year) are probably helping the cause. We wouldn’t consider this the most powerful breakout we’ve ever seen, but we do like the overall action (not just the past couple of weeks but the entire pattern since mid January. We’ll add back a 3% position (if your account is $50,000, add $1,500 worth of stock) as the uptrend resumes. BUY ANOTHER 3%

Nutanix (NTNX)—NTNX has fallen off a bit in recent days, but it’s hardly a disaster, dipping to the rising 25-day line on mostly light trade. The company has been whisper quiet since its late-February quarterly report, but it’s clear from the action of the past few months that big investors see the very bullish demand environment combined with the firm’s mature subscription model (free cash flow margins for the current fiscal year ending in June expected to be 20%—and that’s likely conservative) producing plenty of growth ahead. We’ll stay on Buy. BUY

PulteGroup (PHM)—The growing uncertainty about inflation, interest rates and the Fed tossed around many homebuilding stocks, and it hasn’t helped that some recent earnings reports (like last week’s release from Lennar) were poorly received. Even so, the group as a whole and PHM in particular held up well given all the uncertainties, with the stock holding north of its moving averages as earnings estimates remained buoyant (around $12 per share for 2024)—and yesterday’s Fed decision and conference have most thinking easier money is on the way later this year, pushing shares to new highs today. PHM is going to be subject to news and economic reports, but there’s no question the major trend remains up. BUY

Shift4 Payments (FOUR)—FOUR has been tossed all over the place during the past few weeks on earnings, rumors of a buyout and then, this week, news that the top brass rejected any acquisition offers. But our main thought doesn’t involve that—instead, it’s the fact that, despite holding for three months during a bull move, the stock hasn’t been able to get going. Now, in terms of the fundamentals, we absolutely believe there’s a very bright future here, so if it can truly shape up and break out down the road, we could revisit FOUR. But at day’s end, the stock is not the company, and with the stock continuing to languish, we cut bait on our small position earlier this week. SOLD

Uber (UBER) retreated to its 10-week line on Tuesday for the second time since it got going in November, and it found support there as it “should”—and then quickly recouping nearly all of its dowmove in just the past three days. Of course, that doesn’t mean the stock can’t gyrate some more after its big move, but if the market remains in a general bull mode, we’re thinking Uber’s huge outlook for the next three years (along with a good-sized share buyback program) will keep big investors holding and adding to their positions. We’ll stay on Buy. BUY

Watch List

• Axon Enterprises (AXON 316): The valuation isn’t cheap, but AXON’s big attraction is that it has a rapid, reliable growth story that dances to its own drummer—it shouldn’t be affected much by rates, the economy or the Fed, and it’s the hands-down leader in the field, with the main “competition” simply getting more law enforcement agencies to sign up. The stock remains calm after a nice earnings gap.
• Hims & Hers Health (HIMS 17): HIMS is low priced and extended to the upside—but we may take a swing at it with a half-sized position anyway because the story has some big advantages (ease of use, personalized prescriptions, etc.) and the stock only just got going after years in the post-IPO wilderness.
• Palantir (PLTR 25): PLTR has taken on water with most other AI-related names, but it’s still within its post-breakout range and the 10-week line is approaching quickly. We see the stock as the go-to way to play the next wave of AI, which involves the systems themselves (not just the infrastructure).
• Procore Technologies (PCOR 81): We’ve followed PCOR for a long time, and after nearly two years of ups and downs, shares are acting well, and the big-picture story looks great. See more below.
• Robinhood (HOOD 19): HOOD is not for the faint of heart, but if we’re “only” four and a half months into a bull move that could last a year or two, assets and trading volumes should boom. Indeed, in February, assets and trading volumes of all sorts were up double digits just from the prior month.
• Shockwave Medical (SWAV 286): After a year of very rough action, SWAV totally changed character after the market’s October bottom and continues to stretch higher as earnings growth is set to reaccelerate. The stock is back up toward its old highs, so an exhale could be tempting.
  

Other Stocks of Interest

Natera (NTRA 92)—Natera was a big winner back in 2019 and 2020 as it led the way in the borderline revolutionary field of cell-free DNA (dubbed cfDNA), which combines molecular biology with advanced bioinformatics software to detect things on a molecular level from a tube of blood—obviously a huge improvement from invasive methods. The big seller has been and remains Panorama, the firm’s non-invasive prenatal test that can detect a variety of issues as early as nine weeks into a pregnancy, with results returned within a week in most cases. While Panorama has been around for a while, it continues to grow and Natera is improving and expanding the test—thanks in part to a favorable court ruling (one of many recently that’s defended the company’s technology), the firm is taking over accounts from competitor Invitae, while the possibility of a new syndrome (dubbed 22q, where part of chromosome 22 is missing) being added to a list of tests could further boost Panorama’s positioning. That’s all to the good, but there’s plenty of other tests too—Signatera is the biggest up-and-comer, detecting recurrent cancer sooner than existing methods; 40% of U.S. oncologists ordered the test last quarter and the firm is up and running for colon, breast and ovarian cancers with more (possibly bladder cancer) coming in 2025 and beyond. (Oncology tests totaled 98,000 in Q4, up 53% from a year ago.) And then there’s Prospera, which can better assess whether a patient is likely to reject a transplant (being used now for kidneys, but studies for heart transplants are underway). As its tests have been adopted and as insurance coverage spreads, Natera has continued to grow, with revenues rising steadily for years and lifting 43%, 27% and 32% the past three quarters. One issue here has been the bottom line, but the firm’s cash burn rate has declined significantly and the top brass sees a cash flow breakeven quarter by Q3 of this year. As for the stock, medical names haven’t really kicked into gear (beyond a choice few), but NTRA is joining the party, staging a persistent advance from the market’s bottom last November and a bullish earnings gap three weeks ago. If growth continues to crank ahead, we think the stock can do very well.

Procore Technologies (PCOR 81)—We’ve been watching Procore for nearly two years, and we continue to keep an eye on it because it’s one of those names that we’re convinced is going to have a big run at some point given its story, numbers and growth outlook. The firm is a cloud software player, but the attraction is that it’s solely focused on a gigantic niche—specifically large construction projects that involve many different players, from owners to architects to contractors to sub-contractors to suppliers to financiers and more, and which almost inevitably run way over time and budget. Procore’s solution is built from the ground up to address these challenges, getting all the players on the same page and drastically improving project and workforce management, centralizing financial information and invoicing and more—all of which gets things done faster, cheaper and better. Moreover, Procore charges based on the size of the project (no per-user fee), which encourages adoption, and it’s experimenting in some new areas, like payments (making it easier for money to flow through the platform between all the different parties; the top brass is very optimistic about this opportunity), insurance broker services and materials financing, too. Now, none of this means Procore has been immune to industry uncertainty (both because of demand and from a lack of skilled labor), which is likely to slow growth in the near term, but the top brass still sees 20% or more revenue growth in 2024, rapidly expanding margins (operating margin from 2% to 7.5% this year, with free cash flow likely to perk up as well) and, long term, there’s a huge amount of potential as the industry cycle turns up. The stock has been very tricky since its post-IPO bottom in 2022, with a series of consolidations and potholes, but it’s looking like PCOR may have finally changed character—after falling on its Q3 report late last year, shares have been in a persistent uptrend (no closes south of the 25-day line) and, after tightening up, popped to higher highs this wee. Upside power from here would likely indicate big investors (534 owned shares at year’s end, up from 400 nine months before) are looking ahead to a re-acceleration of growth.

Dutch Bros. (BROS 36)—Dutch Bros. is very similar to Procore, in that it’s an IPO that came out near the market top (public in late 2021) and was then decimated (fell by 75% from high to low)—but has always had an enticing story, and now the stock is starting to show signs of getting going. The company is actually the third largest coffee and beverage chain in the U.S. behind Starbucks and Dunkin, offering everything from classic coffees to frozen beverages, lemonade, energy drinks, shakes, lattes and much more (cold beverages account for the vast majority of sales)—usually serving customers efficiently via drive-thru lanes and runners that take orders and payments before you even hit the window (and often have it ready before then, too, running it back out to you so you can skip the rest of the line). The big attraction here is the cookie-cutter aspect of the story: While in third place overall, Dutch is a relative small fry with “only” 830 shops at year-end (compared to north of 15,000 for Starbucks), but is expanding like mad, opening 159 stops last year and aiming for 160 or so in 2024, with a goal of 4,000 (!) total locations down the road due to solid store economics (30% cash return in year two on a newbuild). (While it has many franchisees, nearly all of the new shops are company-owned.) So why has the stock struggled? First, there were some lingering pandemic effects, which boosted growth early but slowed it after—but more important were some cost issues with the quick expansion, including with labor, building and more. Thus, while sales growth has been strong, earnings have remained choppy (10 cents, 31 cents, 16 cents, and 30 cents per share the past four years). However, while there are still some heavy investments coming (including the opening and move to a support center in Arizona), the core business is strong and it seems like cash flow and more are on the verge of picking up—in Q4, sales growth slowed to “only” 26%, but same-store sales rose 5%, continuing an accelerating trend, and the top brass sees revenue up 25% or so this year while EBITDA lifts 20%, both of which could prove conservative. We’re also intrigued that the company promoted a new CEO last year who just came on a few months before and is a former Starbucks executive. As mentioned above, the stock did dreadfully in 2022 and much of 2023, but it got off its knees late last year, etched a launching pad and is now perking up. We’d prefer to see it grow up further (just 210 funds on board), but we’re keeping an eye on BROS.

Don’t Ignore “Old School” Sectors

We’re anything but macroeconomic investors, preferring a bottoms-up approach that we’ve written about before. That said, we’re aware of what’s going on just like everyone else, and from a top-down perspective, probably the biggest surprise of the past couple of years is how the economy has remained strong despite big inflation, a huge tightening cycle from the Fed (and other central banks) resulting in higher interest rates and an inverted yield curve (historically an accurate predictor of recession), as well as weak overseas economies (China’s been lagging for a couple of years now).

That’s a big reason why many cyclical and “old school” areas have remained resilient—and, more recently, have been acting very nicely even as growth stocks chop around.

Commodity stocks aren’t our favorite for a few reasons, not the least of which is that the group’s bottom line is highly dependent on things outside of its control, like oil prices. But there’s no doubt that oil prices have been resilient despite all of the aforementioned headwinds, and interestingly, we’re seeing some leading oil names move to new high ground. Diamondback Energy (FANG) is the liquid leader of the group, bolstered by a big acquisition (announced a few weeks back) and huge free cash flow even at modest oil prices.

A more interesting old school theme to us is construction, which spans everything from housing supply outfits to materials suppliers to infrastructure-related names—and, interestingly, a lot of this is thanks not just to roads and bridges but for so-called e-infrastructure, including data centers, chip factories, distribution centers and the like. Possibly the most broad way to play construction of everything are the makers of construction aggregates like crushed stone, gravel and cement. It’s not the fastest horse, but old friend Martin Marietta (MLM) looks great, as does peer Vulcan Materials (VMC), both of which should see solid pricing and volumes going ahead.

Beyond the base materials you have the big construction outfits that are needed to do many of these projects, such as smaller Sterling Infrastructure (STRL), where e-infrastructure is a big driver, to larger Quanta Services (PWR), both of which have strong earnings and cash flow and surging backlogs.

There are others, too, especially those that are tied more heavily to the housing market (like an Eagle Materials (EXP)), but the main point is that we appear to be in an unusual economic situation—the Fed may be cutting rates, yet the economy never truly bottomed out, and some old world areas are actually feeling the benefits from new world advances. We think many of these stocks can continue surprising on the upside.

Near-Term Sentiment: Worth Watching, but not Obsessing Over

We’ve written about so-called “big-picture” or “long-term” sentiment a few times, including last issue—the uptake being that, when you look at these types of measurements of how bullish or bearish big investors or individuals are, we saw multi-decade highs in pessimism (a good thing in the contrary world of the stock market), and even now, after the past few months of gains, those sorts of sentiment measures are, at best, approaching neutral status.

In fact, the latest Bank of America fund manager survey just hit the wires this week—below is our favorite chart among that, asking not a manager’s opinion but basing their bullishness on their cash levels, equity exposure and economic growth expectations. As you can see, in March, it was still at best mid-range, probably a bit below.

However, far more popular than these kinds of monthly indicators are things like the AAII weekly sentiment survey, the Investors Intelligence survey of advisories and even the NAAIM Exposure Index, which looks at how invested its members are. There’s nothing wrong with these more volatile, shorter-term barometers, but whereas we used to follow them closely each week, now we only give them cursory glances to see if any true extremes are being made. The reason for that: They don’t often have great predictive ability, at least on a consistent basis—in other words, sometimes they work well, and sometimes they don’t.

Take the AAII survey, shown here, with the net bullish figure (bulls less bears) averaged over eight weeks. You can see the surge into last July was a good time to lighten up—the market fell for about three months from there into the October low. But the same measure saw bullishness this time around become elevated near the start of the year … and has remained so since even as many leaders have done great.

It’s a similar story with the NAAIM measure, which, last week, leapt over 100—meaning its members are, on average, on margin! As it turns out, though, such readings since 2007 have actually led to relatively consistent gains going ahead, with the S&P up an average up 8% six months later and 15% a year later as these “signals.” (Hat tip to Jay Kaeppel, @jaykaeppel on Twitter, for the data.)

That’s not to say these measures are worthless—again, we still keep a distant eye on them. But whereas the “long-term” sentiment measures can give you a good idea where the market is in the overall cycle, these short-term barometers can be hit or miss when it comes to the market and don’t tell you more about leading stocks than you’d garner simply by watching the stocks themselves.

Cabot Market Timing Indicators

The action of many leaders was very choppy and churn-y for the past five-plus weeks, but the trends of the major indexes have remained stubbornly up, some newer leadership is acting well and even some of those gyrating leaders have found support at key levels this week and have popped higher. We’re ditching laggards and holding some cash, but we’re also holding our winners and selectively adding exposure in fresher names.

Cabot Trend Lines: Bullish
There are some near-term chinks in the market’s armor, but the bigger picture continues to look good, based off both historical studies (like the four months up by 20% study written about in the last issue) and the longer-term trend: Our Cabot Trend Lines remain clearly positive, though the gap between the indexes and their 35-week lines (S&P 500 above by 13%, Nasdaq above by 14%) has closed a bit. Translation: The odds still favor higher prices down the road.

Cabot Tides: Bullish
Our Cabot Tides are also still bullish, with all five five indexes (including the S&P 500, daily chart shown here) remaining nicely north of their lower (50-day) moving averages. To be fair, small-caps remain in the back seat, and following the choppy action of late, there’s not as much daylight should the market hit an air pocket. But until proven otherwise, the intermediate- and longer-term trends continue to point up.

Two-Second Indicator: Positive
Our Two-Second Indicator saw a couple of plus-40 readings to close out last week, but that’s calmed down in recent days, so the takeaway is the same as it’s been for a while: The broad market isn’t the strongest it’s ever been, but any selling pressures that emerge (a) aren’t overly intense and (b) have faded in short order. That can always change, but until it does, this indicator remains positive.

The next Cabot Growth Investor issue will be published on April 4, 2024.

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