Cabot Growth Investor Issue: October 20, 2022
The story remains the same in the market, where the primary evidence (trends of the market, action of leading stocks, etc.) is still poor, with every rally meeting with selling, all of which keeps us highly defensive. However, many under-the-hood positives are also still there, including a positive divergence in the numbers of new lows and massive pessimism. Long story short, we’re keeping our eyes open for a spark that could launch a major rally, but we’re still 80% in cash in the Model Portfolio and continue to practice patience until the bulls show up.
Today’s issue is very stock heavy, with commentary on our three remaining stocks, a larger-than-normal watch list and write-ups on four potential leaders--all of which keeps us ready to pounce whenever the sellers run out of ammo.
Searching for a Spark
The bear market remains intact, as nothing has really changed with our key indicators and the market’s primary evidence—the intermediate-term trend (which has been down 75% of the time this year) is negative, as is the longer-term trend (down since late January), while hundreds of stocks are hitting new lows most every day and any strength seen in growth stocks has been quickly sold into (possibly the most telling aspect of the year so far).
Thus, we remain defensive, as we have for many weeks and much of this year; the Model Portfolio is holding nearly 80% in cash as we let everyone else fight out the daily moves and argue about what’s to come. We’d rather keep our capital (and confidence) mostly safe and keep our watch list up to date as we hunt for the next big winners.
All that said, nothing has really changed with the beneath-the-surface positives that are lurking out there, either. The broad market’s nadir during this latest (since late August) down leg actually came nearly a month ago, on September 23, when north of 2,300 stocks hit new lows on the NYSE and Nasdaq combined; last Friday’s total, when the indexes were hitting new lows for the bear market, was “only” 1,900. Call it a first step.
Then there’s sentiment, which is downright horrid, with money consistently flowing out of equity funds and ETFs (eight straight weeks now); with big investors running for safety (the Bank of America survey shows institutions have their largest cash hoard since 2001; the percent of those saying earnings will improve is down to late 2008 levels!); and with granddaddy-type surveys (like Investors Intelligence) at hugely pessimistic readings. And let’s not forget the “short stocks, short bonds, long U.S. dollar” trade is extremely obvious at this point and has been for a while.
Is that enough for us to start buying in a big way? No—until the trends of the indexes and potential leaders turn up, we won’t be putting a bunch of money to work. But this wave of pessimism and the lurking rays of light do have us looking for a potential spark: We still believe any couple of pieces of “good” news (which could include a softening economy, a peak in rates or declining inflation) could deliver a meaningful rally–if not something more.
What to Do Now
Thus, you should remain defensive, but also flexible. In the Model Portfolio, we’re still holding three stocks and a cash position of 80%, but we’re spending more time than ever running our screens and hunting for new leaders—especially as earnings season gets underway. If the market can push higher for another week or so, we could see an intermediate-term green light. We’ll be on the horn if that happens, but tonight we advise patience. Our only change is that we’re moving Wingstop (WING) to Hold.
Model Portfolio Update
Nobody spends a lot of time studying stocks, indicators and other market measures in order to do nothing for most of the year, but that’s what the evidence has called for in 2022, so we continue to remain in a defensive stance, with around 80% in cash (give or take) and small commitments on the long side. While we’re as eager as anyone to put money to work, patience has been a major virtue this year, and we’ll continue to practice it going forward until our indicators speak up.
That said, as we wrote on page 1, it’s important to remain flexible and to stay in the game—it’s about this time in the cycle, when the news is awful and the reasons for the bear market are obvious, that people tune out, which is often a mistake. For our part, staying in the game means continuing to run our screens, honing our shopping list and (in the weeks ahead) flagging major earnings winners for potential new leadership or turnaround situations.
In the meantime, we’re trying to give our three remaining names every chance to hold up; all have the stories, numbers and relative strength to be among the leadership crew of the next advance—though, as always, we’re keeping our eyes open to see if they can hold up should market wobble again (we’re moving WING to Hold as it tests support). All in all, we remain defensive, but flexible, and are ready to pounce should we see a definitive upturn.
|Stock||No. of Shares||Portfolio Weightings||Price Bought||Date Bought||Price on 10/20/22||Profit||Rating|
|Shockwave Medical (SWAV)||808||11%||245||7/22/20||271||11%||Hold|
|Wolfspeed (WOLF)||863||5%||111||10/7/22||102||-9%||Buy a Half|
Shockwave Medical (SWAV)—There aren’t many growth stocks that corrected sharply early this year, ran all the way back to new highs in the summer, and have used the market’s latest implosion (the Nasdaq fell as much as 23% from late August to the end of last week!) to build a tidy launching pad. But Shockwave is one of them (maybe the only one?), which probably bodes well if the market can get going. Of course, the risk is that SWAV could “catch up” with other names on the downside given its lack of correction if the market caves in again, something we’ve seen from some other stocks in recent weeks. Even so, the way we look at it is that the longer the stock can hold up and act properly, the greater the odds it can really get moving when the pressure comes off the market—risk/reward, in other words, is skewed to the upside. Fundamentally, the next big event is November 7, when the Q3 report is due—analysts are looking for earnings of 67 cents per share and a 90% ramp in sales, though we’d note that Shockwave usually crushes expectations, so investors are likely looking for even more than that. We won’t hesitate to sell our position on a decisive break of support (though we could give it a few points of leeway depending on the environment), but given the stock’s action (and our huge cash hoard), we’re hanging on to our position. HOLD
Wingstop (WING)—WING isn’t as strong overall as SWAV—it’s still well below all-time highs—but it’s one of many names that showed extreme buying in the summer (in fact, the big-volume buying followed all the way into early September) and has since given back less than half that move … though, to be fair, it’s been unable to hold its early-week bounce due in part to a downgrade today. Near term, the upcoming earnings report (due October 26) is likely to be paramount—the Q2 report in late July sent the stock flying higher (shares are still holding near that level, in fact), and if the firm reports another solid quarter of not just top line numbers (sales expected to rise 36%, earnings up 24%) but also new store openings and margins (both as chicken wing prices fall and any uptake in the popularity of new chicken sandwiches on the menu), it’s possible we see another show of support by big investors that are thinking the underlying growth story is back on track. Of course, a big negative reaction would probably have us cutting bait. All in all, we’ll switch our rating to Hold here given the stock’s sloppiness (support near the August lows under 110 is key), but we’re trying to hold on to see what the quarterly report brings next week. HOLD
Wolfspeed (WOLF)—Chip stocks have had a rough go of it, and WOLF hasn’t been able to escape that (and the market’s) downward pull, with shares moving to new correction lows south of 100 last week (testing support near the 200-day line) before snapping back some. As with WING, the stock is still acting relatively resiliently following its massive recovery this summer (again giving back much less than half the advance, even as the indexes dipped to new lows), and earnings here are also due October 26 (next Wednesday)—analysts see sales up north of 50% and a loss of just five cents per share, but we’ll also be watching the figure for design-ins during the quarter; if they hit a new record after the huge Q2 despite an iffy economy, it would go a long way toward confirming the race for silicon carbide chip capacity is full steam ahead. As with everything, there’s risk, and a dip much below last week’s low might be too much for us to accept, but we’re aiming to hold WOLF through earnings and see what comes. As with WING, you could nibble here if you want in and already have lots of cash, but don’t overdo it ahead of earnings. BUY A HALF
- Academy Sports & Outdoors (ASO 42): We still like ASO as a potential “sneaky” growth story that can work—there’s a cookie-cutter aspect, a bargain valuation and big share buybacks, too. And, of course, the stock is relatively resilient, holding in a 10-week zone near its all-time highs.
- Albermarle (ALB 255): ALB cracked intermediate-term support last week, so we can’t say it’s at the top of our watch list right this second; some repair work will be needed. But we don’t believe the chart is broken at all (it’s 11% off its highs from late 2021) and it’ll be hard for earnings not to be in the stratosphere in the quarters and years to come. Earnings are due November 2.
- Axonics (AXNX 68): AXNX is a smaller-cap name, but it has a great medical device story that should see the firm get much bigger over time. Despite its small size, it has some top-notch sponsorship, too. See more later in this issue.
- Chart Industries (GTLS 197): Infrastructure-type plays usually have lumpy results (one reason they’re not our favorite picks), but Chart is seeing orders go through the roof for its various LNG, green energy and water offerings. The stock is perched near all-time highs. See more below.
- Chord Energy (CHRD 150): We’re still mixed on energy stocks—many are still in late-stage, sloppy consolidations after huge, prolonged runs (i.e., they could be tops), but the group is showing strength, and some are very peppy. CHRD is one of our favorites, though a name like Chesapeake (CHK) in natural gas is also worth watching.
- Progeny (PGNY 38): Health insurers obviously aren’t our normal targets, but Progyny’s best-in-class fertility plans are proving to be a hit among big, self-insured outfits and their employees—it’s a proven system with better results, yet the company has captured less than 5% of its potential market. Shares are in the midst of a 10-week base. Earnings are due November 3.
- Shift4 (FOUR 45): FOUR looks ready to get going if the market can snap out of its slumber—it’s 10-plus weeks into a relatively tight launching pad that comes after a major earnings gap this summer. The stock is a bit thinly traded, but we’d still be interested in starting a small position if it busts out. Earnings are due November 7.
- Xometry (XMTR 54): XMTR has joined the market in a correction of late, dipping to its 50-day line, but that’s more than acceptable after its prior run. It probably needs some more seasoning (more time to set up a “real” launching pad) but we love the new growth story here. Earnings are due November 10.
Other Stocks of Interest
Axon Enterprise (AXON 127)—We’ve been keeping a distant eye on Axon Enterprise for the past few years—the firm used to be known as Taser, and a core part of its business remains the “electrical weapons” (basically stun guns) that continue to gain in popularity among law enforcement departments; all told there are 960,000 Taser units in place globally. But the story goes far beyond that now—Axon is also big into body cameras (which drastically reduce complaints and use of force; the Federal government issued an executive order to ensure all federal cops have a body camera of some sort), in-car video systems (providing a panoramic view), a real-time operations system (far improved communications than radios) and, most importantly, the cloud, where its Evidence.com platform allows evidence to be electronically stored, shared and examined far easier than the old days. (There’s even a new virtual reality training simulator that teaches people how to use a Taser.) When combined with a shift toward bundled and subscription offerings, Axon is now a reliable, higher-margin grower, rather than dependent on one-time sales or upgrades of just one or two products. The numbers have shown rapid and reliable growth as this business focus has taken hold: Revenues grew 31% in Q2, with core Taser revenue up 21% from the prior year, Cloud sales rising 35% and sensors revenue up 49%. (Revenue is expected to rise 27% for the full year.) Better yet, Axon’s annualized recurring revenue from all its products has been expanding every quarter, coming in at $368 million in June, up 42% from the prior year, while total contracted future revenue of $3.33 billion was up a big 63%. Granted, the bottom line (and EBITDA) is lumpier (though earnings are expected to lift 31% next year), and to be fair, the top brass here has a so-so history (sometimes too much hype, not enough numbers), but that seems to have changed, as the past few quarterly reports bear out. As for the stock, it effectively topped out early last year above 200, hit a double top in November and then crashed into the 80 area in May. The rally after that was fine, but what caught our eye is AXON’s tidy launching pad formed during the past nine weeks, which is far different than the horror show of the indexes during that time. (The stock also has five months of positive relative performance, a good sign.) A powerful move into the 130s with a healthier market could be interesting; earnings are likely out in mid-November.
Chart Industries (GTLS 197)—There aren’t many stocks out there in position to stage a legitimate breakout in the days ahead if the market turns up, but little-known Chart Industries is one of them. And it’s for good reason: The firm is positioned as one of the leading picks-and-shovels players in the buildout of all sorts of energy and water infrastructure, as well as many specialty products for industrial applications. Basically, Chart makes the cryogenic storage, cold boxes, containers, LNG railcars, fueling stations and dispensers, heat exchangers, treatment containers and much more for natural gas, LNG re-gassification, carbon capture, hydrogen liquefaction, gas storage/distribution, water treatment and hydro power. The firm used to be very reliant on fossil fuels and big LNG orders, and while that’s still a good part of the business (in fact, management sees huge opportunities here, with the potential market nearly quadrupling since the Russian invasion; Chart is working on Cheniere’s latest expansion), a new CEO in 2018 put in a plan to diversify into many areas, and that’s paying off in a big way, smoothing out the ups and downs in the business and leading to a torrent of new orders: From 2018-2020, new orders averaged about $285 million per quarter, but that ramped to $419 million last year and, this year, new orders have jumped to $637 million in Q1 and $888 million in Q2 (!), all resulting in the firm’s seventh straight record backlog ($1.95 billion at the end of June, up 80% from a year ago). Even more encouraging is that Chart isn’t just leaning on a few large firms—it’s booked 169 orders from new customers and many first-of-a-kind orders, too. With such long lead times, those orders take a while to flow through to the bottom line (Q2 saw sales up 26% and earnings up 10%), but there’s little doubt boom times are coming (the CEO says “we view all of this as significant multi-year momentum”). Management itself earlier this year saw 25% annual earnings growth through 2025, but that’s likely too low given the recent orders; analysts see the bottom line rising 72% this year (to $4.76 per share) and another 65% in 2023 ($7.85) and more beyond that. As for the stock, it got hit earlier this year, but bottomed in January, recovered sharply and has been holding near its highs (and tightening up a bit) for the past couple of months. Earnings are due October 28, and a bullish reaction could be enticing.
Biogen (BIIB 263)—We prefer stocks with solid sales and earnings growth, of course, but the fact is that many successful biotech names—even the big ones—often follow the Romance-Transition-Reality playbook: Stocks make their biggest move in the Romance phase, where investors anticipate huge potential from new drugs; then stocks enter the Transition phase, where valuations come back to Earth; followed by the Reality phase, with stocks trading off cold, hard quarterly numbers. (Gilead was a classic example of this with its cure for Hep C years ago.) Biogen is one of the big boys in the biotech field, and frankly, it’s been a dud for many years—the bottom line is hugely in the black and profit margins are solid (around 20%-plus after tax), but the stock peaked in 2015 up at 400 and has had some weird false starts over the years … including one on an Alzheimer’s drug that technically got approval but was shunned by doctors, Medicare and others, and it’s since been effectively abandoned. But now it’s possible a “real” Romance phase has truly begun, and ironically, it’s because of another treatment for Alzheimer’s and dementia: The company’s drug (named Lecanemab) showed a 27% improvement in cognitive and functional abilities after 18 months of treatment for early-onset Alzheimer patients, which is a statistically significant improvement over a big sample of patients (1,795) and leads many to think it could be submitted for approval within a few months (in concert with the firm’s partner, Japan’s Eisei, which will split 50-50 profits with Biogen); many leaders in the field report they’re likely to use the drug if approved. There is upcoming competition from Eli Lilly, Roche and others, but Lecanemab could beat them to the punch and the latest trial results for others aren’t out yet (Roche’s isn’t due until 2024). Of course, we’re not FDA experts, but the key will be investor perception, and we’re intrigued by BIIB’s action—the stock went vertical a month ago after Lecanemab’s results were released, but as opposed to prior false starts, BIIB has held firm during the past three weeks, giving up none of its move and even showing some strong support last week. Like most things, we’d like to see some real upside follow through, but we’re thinking the stock could have upside surprises in store once the market gets moving.
A New Medical Leader? Axonics (AXNX)
We’re still of the mind that biotech and medical in general could help lead the next growth stock advance, given that many have basically made no progress for the past few years. One small-cap name (market cap of ~$3.5 billion) that has a great story is Axonics, which has a new (possibly revolutionary) way of treating urinary and fecal incontinence, something that affects 58 million adults in the U.S. alone and, believe it or not, doesn’t have great treatment options; north of 80% of patients discontinue use of medications within six months based on poor results and cost, which is one reason less than half with severe symptoms even seek treatment!
The solution is something that’s been around for 20 years, dubbed sacral neuromodulation (SNM), which is proven to be safe and effective—it shoots mild electrical impulses into the sacral nerves to restore normal communication between the brain and bladder via an implanted device … but, historically, that device (Medtronic has two legacy devices that dominate the market) needed to be replaced surgically every three to five years, was often big enough to cause discomfort and would only allow for MRIs of the head (it would have to be removed temporarily for a full-body MRI).
That’s where Axonics comes in: Its R15 SNM device is 60% smaller and half the weight of the competition, lasts 15-plus years (3x to 4x Medtronics’), is full-body MRI compatible and is rechargeable. And then there’s the F15 (approved in March 2022) that’s actually recharge free with a 10- to 20-year battery life (most patients will get 50%-plus more battery life compared to the competition) and is 20% smaller. Both work by providing constant low levels of stimulation. Most importantly, the results of Axonics’ approach are very good, with one huge study that showed leaks per day falling from 5.6 to 1.2 just six months after implant, with figures dropping further (to 1 leak per day) two years later. (37% of patients reported a complete elimination of leaks!)
Axonics also has a product called Bulkamid, which is a bulking gel injection that allows the urethra to fully close (fixing what’s known as stress urinary incontinence), eliminating any issues when laughing or exercising; Bulkamid requires a few injections over just 15 minutes, is successful in 80% of cases and lasts for seven years! Management expects the product to be used in 50,000 patients this year, but that figure could mushroom in the years ahead as millions of women are potential treatment candidates.
As for the numbers, total revenues have been growing rapidly (50%, 41% and 53% the past three quarters), and while Wall Street sees that slowing to 25% next year, our guess is that will prove conservative as Axonics’ solutions gain traction and expands the market. The stock topped last September near 80, plunged under 40 in May but rallied all the way back (despite a share offering) to its highs last month—and AXNX has held most of those gains the past six weeks despite the market’s cave-in. The stock is a bit thinly traded, but that hasn’t stopped 472 funds (including many sharp growth funds) from grabbing shares. The Q3 report is due on Halloween; a big gap up and a healthier market would be very tempting. WATCH
What to Do with All Your Cash
Somewhat surprisingly, one of the more common questions we’ve gotten in recent weeks doesn’t involve the stock market, but instead, what to do with all the cash we’re telling people to hold—for the year, we’ve averaged something like two-thirds of the Model Portfolio on the sideline, and now it’s up near 80%. Should you look at bonds, bond funds, certain ETFs?
It’s a fair question, but our answer is to just stick with money market funds for a few reasons. First and foremost, we’re running a growth portfolio, where the goal is to make outsized capital gains when the market is healthy, so we value liquidity and safety (which is why we’re holding the cash in the first place)—there’s nothing that says XYZ income investment can’t lose value, especially as bonds are trending lower (rates higher). Moreover, while we’re far from experts on income stuff, many money market funds are actually paying out 1% to 3% these days, so gunning for a few extra nickels on some other income investment that could lose money don’t seem worth it.
None of that is to say you shouldn’t have income investments—Cabot has other advisories that can help you with that—but for our part, we’re keeping laser focused on staying safe and staying liquid, which will help us hop on the leaders of the next bull phase.
Cabot Market Timing Indicators
The situation remains the same as it has for many weeks all of the primary evidence remains pointed in the wrong direction, though there remain many secondary positives out there, including horrid sentiment and a positive divergence in the number of new lows. We’re certainly flexible, as any spark could unleash a meaningful rally, but the onus remains on the bulls to show up first.
Cabot Trend Lines: Bearish
Our Cabot Trend Lines don’t give quick signals, but that’s a big reason why it’s our most reliable indicator—its last signal was in January (since then the Nasdaq has fallen as much as 27%). And today, the major trend is clearly down, with the S&P (by 9%) and Nasdaq (by 12%) well below their respective 35-week lines. Usually after these kinds of wipeouts, the next buy signal is a great one, but for now, caution remains your best course.
Cabot Tides: Bearish
Our Cabot Tides are also still in the bear camp, though the situation here bears some attention—all indexes we track (including the S&P 400 MidCap) are still negative, but most have also stopped going down (net-net) during the past three to four weeks. Thus, a strong rally from here could actually produce a green light in the next week or so … but we never anticipate signals. Right here, both the intermediate- and longer-term trends remain down.
Cabot Two-Second Indicator: Negative
The good news is that our Two-Second Indicator hit a peak reading on September 23, nearly four weeks ago, which is notable given the indexes’ plunge to new lows last week—a positive divergence. That’s a solid first step, but now we need to see the new low figures dry up in a big way; there were some early signs of that, but we’re really looking for a handful of sub-40 readings (the lower the better) as a sign the sellers have run out of ammo.
The next Cabot Growth Investor issue will be published on October 20, 2022.
About the Analyst
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.