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Growth Investor
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Cabot Growth Investor Issue: November 17, 2022

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No Rush

It started in late September, when the broad market hit its recent low—and continued during the next few weeks when the indexes and many stocks held up among a barrage of bad news and bad action; in fact, our Cabot Tides were actually on the verge of turning up even as many sacred cows in the market were taken out and shot.

And now we see more improvement in the top-down evidence: The better-than-expected inflation report last week launched a solid upmove in the indexes, decisive turning the intermediate-term trend (Tides) up, while our Two-Second Indicator has shown signs of life, too. And this all comes as sentiment is still circling the drain as well, especially with the latest crypto disaster grabbing the headlines each week.

All of that is to the good and we don’t want to understate it—there are legitimate signs the sellers are losing some control. When it comes to the overall market, we’re cautiously optimistic that this rally could turn into the real deal.

So we’re buying a lot, right? The answer is no, and the reason for that is something we’ve written about all year long (and go into further detail later in this issue)—the sell-on-strength bugaboo is still in effect, where a stock will nose to multi-month highs, only to quickly reverse lower. All in all, there are far more air pockets out there (sudden drops of a few percent or more) than shooting stars (stocks that kite higher and hold the gains), which suggest the Fidelity’s and T. Rowe Price’s of the world aren’t piling in. It’s hard to embark on a big buying spree when so many names are still springing leaks.

Combine that with our still-bearish Cabot Trend Lines (our most reliable indicator) and some other yellow flags (our Aggression Index remains on the outs and the Dow is the leading index), and we don’t think there’s any rush at this point—if the market can keep chugging higher, some real leadership will emerge (we’re ready if it happens!), but until then, the environment is still a meat grinder for growth stocks, so it’s best to play lightly.

What to Do Now
In the Model Portfolio, we added three new half-sized positions last week, Albermarle (ALB), Enphase (ENPH) and Halozyme (HALO), but still kept 70%-ish cash on the sideline. Since then, though, we’ve punted on Shockwave (SWAV) as it tripped our stop, bringing us back toward 80% in cash, and tonight we’re placing ALB on Hold. We’re not opposed to another nibble or two, but the onus remains on the growth stock bulls to truly take control.

Model Portfolio Update

With the Tides buy signal from last week, along with the prior few weeks of encouraging action (holding up well despite sacred cows getting nailed, crypto blowups and the like), we started to put money to work—but we intentionally went slow, keeping plenty of the portfolio on the sideline, as most growth stocks were still repairing damage on their charts (at best) or getting hit (at worst).

Sure enough, as we write about in more detail later in this issue, the pattern has continued in large part, with a couple stocks we owned and others we’ve been watching hitting air pockets on little to no news. The number of new highs on the Nasdaq has actually dried up a touch since the start of this latest push higher as most buying has been in the beaten-down names.

That said, such action isn’t a death knell at this point—some growth titles have probed to multi-month highs, and the early rally phase off of a huge decline (don’t forget the Nasdaq was off a whopping 38% from its peak as of a few weeks ago) is often disjointed and volatile. Said another way, rallies don’t always (or even usually) see leadership launch right quick.

Because of our sales of Shockwave, the portfolio is 80% in cash. If the market can hold up and growth stocks perk up a bit, we’ll likely nibble a bit more, possibly adding another couple of half positions (including, ideally, averaging up on a name or two we already own). Tonight, though, we’ll hold tight and look for individual stocks to give confirmation the environment is changing.

Current Recommendations

StockNo. of SharesPortfolio WeightingsPrice BoughtDate BoughtPrice on 11/17/22ProfitRating
Albemarle (ALB)2914%327


Enphase Energy (ENPH)3115%305


3133%Buy a Half
Halozyme (HALO)1,7765%54


53-1%Buy a Half
Shockwave Medical (SWAV)Sold
Wingstop (WING)7426%13010/7/2216023%Buy a Half

Albemarle (ALB)—Albemarle has a great story, great numbers and, coming into this week, a great chart, being the institutional quality way to play the lithium boom, a metal that’s partially been legislated into scarcity as the electric vehicle boom (partly thanks to government incentives) accelerates. But this week ALB has plunged sharply from its highs on worries that China EV (and thus, lithium) demand could ease going forward; lithium prices dipped after a monstrous run in recent months. While the news is worth knowing, we honestly think most of the dip has to do with the market environment—rumors of the possibility of pricing weakness could take a stock down a few percent over a couple of days in normal times, but in this sell-on-strength environment, investors piled on and caused ALB to dip all the way to its 50-day line on Tuesday. Plus, of course, many disagree with the expectation of a softening market; if anything, an opening up of China (from super-tight Covid restrictions) could actually boost demand. Big picture, we think the underlying story is intact, but given the action, we’ll place the stock on Hold and use a mental stop in the upper 260s; the chart is ugly here, for sure, but there’s support in this area and we have seen more than a few breakout failures like this bounce back a bit in the days that follow. HOLD


Enphase Energy (ENPH)—ENPH is the leader in microinverters for solar arrays, and business is booming both in the U.S. and especially in Europe, where individuals and businesses are racing for energy security as everything in that part of the world remains a mess—and, really, there’s not likely to be much of a slowdown given the green energy bill in the U.S. this year and the vulnerability to energy supplies in Europe. (Management obviously agrees and has a couple of big capacity expansions coming online next year.) Plus, the firm’s battery systems (it has a new product coming in the months ahead, as well as more capacity expansion coming) and EV chargers should ramp nicely in 2023, which is likely to make next year’s earnings estimates (up 24%) appear conservative. The stock had a tough correction (28% from high to low) that knocked us out a few weeks ago, which we don’t regret; if the Q3 report (sales up 81%, earnings up 108% and well above expectations) wasn’t up to snuff, the stock could have bit the dust like so many others. But it didn’t–instead, the stock gapped up toward its old highs and, while it hasn’t been able to break through yet (again, par for the course with growth stocks), it certainly looks like it wants to if the growth stock environment can shape up. We’re OK starting a position in this area and, ideally, adding more on a decisive breakout, assuming the overall market continues to shape up. BUY A HALF


Halozyme (HALO)—Halozyme has always had a story that’s easy to love, as its Enhanze drug delivery technology allows huge-selling treatments to be delivered intravenously in far less time than usual, saving tons of time, money and adding convenience, too. The firm makes money from milestone payments when a client signs up to integrate Enhanze with its treatment (the product still has to be taken through trials, and as it progresses earns more milestones), and those are solid money-wise ($48 million in Q3), but also lumpy. The real attraction is Halozyme’s royalty stream, which currently is being driven by a couple of big sellers (including Darzalex from Janssen, a treatment for multiple myeloma); royalties totaled nearly $100 million in Q3, up 70% from a year ago—and with some new offerings likely to come online in the months ahead (an Enhanze version of a big-selling drug from Argenx was submitted for application in September), the top brass thinks royalties can surge 30% annually through at least 2027. There have been some worries about patent expirations, but management continually brushes them aside for a few reasons (knowhow, a new enzyme that would extend protection, etc.), and big investors are thinking positively—shares put the finishing touches on a 21-month launching pad, breaking out on earnings and holding up so far. Also, while we’re not valuation people, analysts see the bottom line up 26% to $2.75 per share, so the stock is at 19x those estimates (which we think will prove too low). We bought a half-sized stake last week and think it can do well if the market keeps improving. If you don’t own any, you can grab some here. BUY A HALF


Shockwave Medical (SWAV)—Three weeks ago, SWAV was rising on huge volume and actually nosed out to new high ground—it was primed and ready to get going if the market did. But in this environment, such a move has mostly attracted a swarm of selling, and the stock ended up going from hero to zero (down more than 25%) right quick, tripping our stop earlier this week. Is the stock completely broken? No, we wouldn’t say that, as the stock could be building a fresh consolidation (sitting on top of the prior huge correction) that eventually leads to higher prices. But it’s also a fact that the firm will start paying cash taxes next year (nothing to do with the underlying business, but could crimp earnings growth a bit; analysts see the bottom line up 26%), so while we’ll keep a distant eye on the stock to see if it can round out, we sold earlier this week and are focusing on names that look fresher and peppier. SOLD


Wingstop (WING)—WING remains one of a handful of potential leaders that has had a good run (including a positive reaction to earnings) and has held up well since—probably partly because the stock already went through the wringer earlier this year, which almost surely wiped out the major weak hands, and also due to what’s perceived as a reliable growth story that’s back on track. Moreover, while we’re not big into looking at the macro picture (overall economy), any sort of slowing inflation should continue to help costs (not only boosting earnings but improving the store economics for new restaurant openings), even as consumer spending remains in fifth gear. We’d still like to average up on our purchase (buying another half-sized stake, which equates to 5% of the portfolio), but with the 50-day line down near 140, we’ll hold off a bit longer, though a bit more of a dip or few days of calm trading could do the trick. If you don’t own any, we’re not opposed to nibbling on minor weakness. BUY A HALF


Watch List

  • Academy Sports & Outdoors (ASO 47): In our view, ASO has a very solid-looking launching pad (though it got jerked around by Target’s dip yesterday), as well as an attractive story that should see already-elevated earnings (north of $7 per share) not just hold up, but push higher down the road as the firm expands its store base. Shares are still holding support in the 40 area.
  • Axon Enterprises (AXON 191): AXON is one of the few names that has shown some real strength of late, including its moonshot after earnings. The big idea here is if investors begin to see it more likely that most cops and police departments (mostly the U.S. but also other areas of the world, too) will not just use Axon’s tasers and cameras (in-car and on-body), but also its rapidly growing cloud suite of evidence, dispatch and investigation software, business could rise many-fold down the road.
  • Dexcom (DXCM 113): DXCM had a huge October thanks to some favorable Medicare tidings and then a solid Q3 report and longer-term outlook, so the stock’s recent gyrations are completely normal in that regard. Like most names, shares do have some old overhead to deal with, but a little more of a rest would likely set up a nice entry point.
  • Celsius (CELH 99): In true CELH fashion, shares have been all over the place since its earnings report, but net-net the stock is trying to round out a decent-looking launching pad. The Q3 report was a bit noisy, as the firm transitioned over to Pepsi distribution on October 1 (it had to pay fees to cancel some other distribution deals that were in place), but all the metrics looked solid, with U.S. sales up 23% from the prior quarter.
  • Insulet (PODD 298): Insulet is another diabetes firm—its Omnipod 5 (which actually uses Dexcom’s CGM technology) is tubeless, virtually painless and can be controlled by your smartphone. It’s a hit, taking share from competitors (take a look at the chart of Tandem Diabetes (TNDM)) in the U.S. (launched in August) and just got E.U. approval in September, opening up another big market. Shares are perched near all-time highs.
  • Neurocrine Biosciences (NBIX 115): NBIX was hitting new two-year highs last week, so given the environment, this week’s slippage isn’t shocking. Even so, the uptrend is intact, growth is accelerating and the outlook for Imprezza and valenazine are strong.
  • Schlumberger (SLB 53): We’re very high on Schlumberger, which we view as something of a liquid leader in the oil patch at this point—growth has been strong, is getting stronger and the overall spending cycle in the energy sector should have legs given the many years of underinvestment pre-2021. Further controlled weakness would be tempting.
  • Shift4 (FOUR 47): FOUR basically came off our watch list after it was hit on earnings—but, very encouragingly, the stock has come roaring back, actually bursting to new multi-month highs before being yanked back. We love the payment story here as the firm is inking deals with tons of huge outfits (big stadiums and the like) that are just beginning to come online, driving big sales and earnings growth.

Other Stocks of Interest

ASML Inc. (ASML 589)—Chip stocks are always tough, as business (and the stocks) can turn tail in a hurry, and so chip equipment makers—which are down the food chain from the chip designers, so to speak—are even tougher, especially as there’s plenty of competition. But there is one firm in the group that’s always worth keeping an eye on, and that’s ASML, a Dutch outfit that’s a monopoly in high-end lithography systems. It’s the only provider of what’s called extreme ultraviolet (EUV) systems, which is able to etch chips at super-precise increments, which in turn means clients can make products with more transistors, which boosts performance. The firm also makes deep ultraviolet (DUV) systems, and simply put, a lot of the advancements in many gadgets around the world wouldn’t be possible without ASML’s systems, and that will only prove more true as innovation barrels forward in the years ahead. None of that means ASML is impervious to an industry-wide slowdown, but even there the damage has been modest: In Q3, sales were down 7% from a year ago while earnings were off 15%, and analysts see the full-year bottom line down 15%, too. But the stock is showing initial signs of turning the corner for a couple of reasons. First, near term, guidance for Q4 points toward an immediate uptick (analysts see sales up 15% vs. a year ago) and, at a recent Investor Day, ASML significantly increased its mid-term outlook, expecting revenues of 35 billion euros, up from last year’s 2025 outlook of 27 billion. Numbers aside, given the company’s position at the heart of the chip (and entire technology) industry, it’s a good bet the stock is going to get moving at some point, and ASML’s powerful comeback from its earnings-induced shakeout five weeks ago (including last week’s surge on its heaviest weekly volume in four years) certainly bodes well. To be fair, the stock isn’t in a true uptrend yet (and the RP line bottomed just a few weeks ago), but it’s worth keeping an eye on.


Shoals (SHLS 31)—We almost always prefer to go with the liquid leader in a group—in solar, the two main candidates are First Solar (FSLR) and, of course, Enphase, which we hopped back into last week. But as we wrote about a few issues back, the solar sector is developing an attractive roster of high-growth candidates that could run if the market really gets moving. Of the secondary names, Shoals looks particularly attractive fundamentally: The firm is the leading provider of what are called electrical balance of system (EBOS) products for solar, which includes things like junction and splice boxes, cable assemblies, inline fuses, wireless monitors and much more that regulate and transfer energy from solar panels. It sounds mundane, but EBOS is required on every solar project regardless of size and cost (on average accounts for 6% of total project cost, though it obviously depends), and Shoals is the hands-down leader, being more than twice the size of its largest competitor (73% of its offerings are custom solutions, too, including proprietary components and installation methods). Actually, installation costs are huge here, given the massive amounts of wires, trenching and the like that often needs to be done, but Shoals has developed a better way with more above-ground installation and fewer wire runs that don’t require licensed electricians, leading to 20% to 40% installation savings, with more innovation on the way. All in all, the firm is taking share in the industry, and EBOS demand should also pick up from emerging EV charging products (more than half the cost of an EV charging station is from EBOS!) and battery storage systems, too. Long story short, Shoals quacks like an arms supplier to the solar wars, with its EBOS offerings set for huge demand as the industry booms. Business had been a bit lumpy (growing, but at varying rates) due to some prior uncertainties in the industry, but there’s little doubt where things are headed: In Q3, just reported this week, Shoals saw sales rise 52%, EBITDA lift 57% and earnings rise 43%, while the backlog actually grew even faster, by 74% to $471 million (nearly 50% larger than 2022’s entire year of revenue). Analysts see the top line up more than 50% next year while earnings more than double, and there’s no reason that can’t continue for a few years after that. Shares plunged into May, rallied smartly in the summer and then corrected for two months—but now the stock’s back at its prior highs after the Q3 report. It’s lower priced and volatile, but we think SHLS can run if the environment improves.


Arch Resources (ARCH 151)—We still think many commodity producers could be late stage (possibly near the end of their runs), as just about all enjoyed monstrous runs in late 2020 through early 2022, with perception rising as prices went up and many gushed cash flow. (We also still think that service stocks, like Schlumberger (SLB) look earlier stage and peppier.) Even so, the longer some producer stocks hold up, the greater the chance they can at least have one more run. That leads us to Arch Resources, which is one of the bigger metallurgical coal makers (used to make steel) in the U.S., and it also has a legacy thermal coal business (for electricity). The firm spent a couple of years cutting back and paying down debt, so much so that it now has tons more cash than debt on the books (net cash is equal to 12% of the market cap!), and it’s also taken care of some long-term liabilities related to the thermal coal business. And that means, because it’s not anxious to expand much, it’s aiming to return all of its cash flow to shareholders … and that cash flow is, even as prices fade some, ridiculously large. In Q3, sales were up 45% thanks to higher prices, while earnings came in at $8.68 per share—and free cash flow came in north of $21 per share! According to its plan, Arch is paying out half of that ($10.75 per share) on December 15 (record date November 30), and will use the other half most likely on share buybacks, which could cut into the share count by a few percent just this quarter alone! Obviously, the question is how long these elevated prices can last, but Arch has already booked a good amount of high-priced coal sales for 2023, and analysts see earnings (which could be less than free cash flow) of nearly $40 per share next year. It’s most likely not going to be a long-term hold, but ARCH has recovered from a couple of tough dips this year and isn’t far from new-high ground. Further strength from here could set up a nice-looking breakout.


The #1 Thing We’re Looking For to Get Heavily Invested

If you’ve read us for any length of time, you know that we like to keep things simple. Obviously, there’s plenty of nuance and knowhow that goes into investing and picking stocks, but especially with market timing, simpler is usually best: A couple of moving averages for a trend-following indicator or looking at simple measures of the broad market (number of new lows) usually works just as well (if not better!) than complicated, black-box indicators that look at two dozen factors.

That said, not everything can be boiled down to its core, and one thing that’s always worth watching is simply how well the stocks you own and are watching are performing—and, assuming you focus on potential leaders (those that resist the market decline over months), whether they can overcome key areas of resistance.

In a bear market, these attempted breakouts (especially from growth stocks) are notoriously failure prone—and that’s been the #1 “tell” of the market’s health all year long, even during rally attempts in the spring and summer, as names that toy with getting going hit a wall and eventually fall apart. We’ve seen that with some of our names (SWAV, ALB) of late, but it’s all over the place, including stocks we were watching like Axonics (AXNX), Chart Industries (GTLS), Xometry (XMTR) and Progyny (PGNY) hitting the skids, not to mention many others that are simply stagnating near resistance even as the market ramps. For growth stocks, that’s a big reason to continue going slow, and the main reason we only tip-toe’d into the market last week when the Tides turned green.


However, the good news is that all of the above is descriptive, not predictive. Early in a new rally, it’s not unusual for things to be topsy-turvy, choppy and rotational, with off-the-bottom names (those down 80%, etc.) making big moves while investors are hesitant to grab things that are “high.” However, if the upmove is the real McCoy, then you’ll usually start to see some things finally pop out of there.

And we have seen some of that: Axon Enterprises (AXON) hit multi-month highs and then followed that up with a big earnings gap; and some others are in the testing phase, like Academy Sports (ASO), Dexcom (DXCM) and Insulet (PODD)—all of which are on our watch list.


All told, then, we’re obviously still keeping an eye on our market timing indicators (both those in the issue and stuff like our Aggression Index and Growth Tides), but the action of potential leaders is the key ingredient in our book: If we start to see more breakouts, we’ll be extending our line (possibly in a hurry), but if not, it’s best to stay with a cautious approach to buying.

Don’t Forget About (Leveraged Long) Index Funds

If this morphs into a new bull phase, the big money will come in the big swing with new leaders … hopefully including those listed above. However, if we get confirmation from more indicators—specifically our Cabot Trend Lines, but ideally also a proven blastoff indicator, like the two we wrote about last issue—one easy foot-in-the-door way to get exposure to the bull phase is via index fund ETFs. You won’t get rich on them but they can smooth out some of your portfolio’s returns and still offer solid upside.

These days, of course, you can find all sorts of ETFs that track all sorts of indexes and sectors (both long and short) with all sorts of leverage. We’ve had success in the past and will likely stick with ProShares Ultra funds that track the major indexes, with 2x leverage—generally speaking, if the index falls 1%, the fund will drop 2%, and vice versa. While leveraged funds can have a churn problem (lots of ups and downs can cause the fund to lose ground even if the index is flat-ish), it’s usually not a huge deal if you’re in a clear uptrend. (Years like this, though, are obviously different.)

Right now, the one that intrigues is the ProShares Ultra Russell 2000 Fund (UWM), for the simple reason that (a) it’s likely not to be too correlated to the growth stocks we buy, but mostly (b) because small caps are outperforming the market. Look here and see how the Russell 2000 Fund (IWM) actually saw its 25-day line perk up before Halloween (an early sign of resilience) and, during the push higher, stretched nearly to two-month highs for this week’s dip.


We’re not pulling the trigger on it just yet, as in our view, the jury is still out on the rally. But if we do get some salt-of-the-earth indicators to flash green, something like UWM would probably be added to the Model Portfolio.

Cabot Market Timing Indicators

The market put in a few weeks of bottoming effort and, from a top-down perspective, the evidence has continued to improve—our Cabot Tides are green and there’s been some other positives, too. The sell-on-strength bugaboo, though, remains in effect, which keeps us cautious.

Cabot Trend Lines: Bearish
Our Cabot Trend Lines are still bearish, though the picture has improved—the S&P 500 is currently just 2% below its 35-week line, though the Nasdaq is still nearly 7% below its own trend line. We need to see both indexes close two straight weeks above those levels to get a fresh green light, so it’s still a ways off, but the improvement of late is a step in the right direction.


Cabot Tides: Bullish
Our Cabot Tides were flirting with a buy signal for a week or two, and the market’s romp starting last week finally flipped the switch—all five indexes we track, including the S&P 500, daily chart shown here) are clearly above their lower, rising moving averages. Granted, our Growth Tides are lagging and individual stocks are hit or miss, but overall, the intermediate-term green light is a feather in the bulls’ cap.


Cabot Two-Second Indicator: Negative
The Two-Second Indicator is still negative by our measures, but like many things, there’s improvement of late—the number of stocks hitting new lows on the NYSE dipped under 40 for three days in a row before some modest upticks the past couple of days. We like what we see so far, though fresh bull moves usually see a string of five to 10 sub-40 (and usually sub-20) readings; until then we still consider the broad market unhealthy.


The next Cabot Growth Investor issue will be published on December 1, 2022.

A growth stock and market timing expert, Michael Cintolo is Chief Investment Strategist of Cabot Wealth Network and 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 was 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.