There’s been a lot of bad news in the past couple of weeks, but nothing has changed with the market--it’s still trending down, and the broad market remains on the outs, and today, we started to see the first signs that even the many resilient stocks are coming under the gun. Big picture, we’re continuing to advise a cautious stance with much more cash than stocks and patience as we wait for the bulls to re-take control.

And we do think they can re-take control, possibly sooner than most think: There’s so much negativity and bearishness out there that any spark could ignite a big rally, if not a sustained uptrend. But as always, we have to see it first to act on it, so we’re continuing to stay close to shore--we’re selling one name tonight and placing the rest on Hold.

We spend most of tonight’s issue discussing the overwhelming negativity out there, which is setting the stage for the next advance, as well as diving into a handful of new names to watch, including one cheap cookie-cutter story that looks ready to go if the market can stabilize.

Cabot Growth Investor Issue: September 22, 2022

DOWNLOAD ISSUE PDF

The Story Remains the Same
Since the last issue two weeks ago, a good amount has happened, including another 75 basis point rate hike by the Fed, accompanied by a lot of tough talk indicating more big rate hikes are likely in the months ahead. Meanwhile, Treasury yields have followed along, hitting new yearly highs, housing sales in August were down 20% from a year ago and Russia is mobilizing hundreds of thousands of troops to continue their war.

Still, from our point of view, all of that has simply led to a continuation of what was already in place: The trends of the major indexes (our Cabot Trend Lines and Cabot Tides) are pointed down, and the same can be said for most stocks out there (nearly 80% of the NYSE and Nasdaq are below their 200-day lines); we’re now seeing many of the resilient stocks get nailed as well. Indeed, our Two-Second Indicator started seeing triple-digit readings in late August and has continued right through this week. Hence, as we have for many weeks and months, we remain in a cautious stance, and after tonight’s sale of one of our names, our cash position will be around 70%.

All that said, most of the bad news and terrible market action is very obvious to most … which is part of what we want to write about today. We’re trend followers at heart, looking to interpret market action and not predict it … and that’s a big reason why we’ve had so much cash all year. Yet we’re also students of the market, and on that front, it’s hard not to see that there’s a lot of dry tinder out there for the bulls—if it can catch a spark.

First off, while today was ugly for resilient names, there are still a lot of that are hovering near support; sure, they might crack, but overall, they’ve held up well despite the indexes being close to their lows. Second, we’re possibly approaching a crystallization of bearish opinion; we write about a few measures of sentiment later in this issue, with some reaching true extremes (today’s AAII readings was one of only five readings with more than 60% bears out of the past 34 years).

And third, as we wrote above, the bear case is very obvious—the Fed is tightening, the economy is flat, and so on. We’ve even heard some popular sports podcasts take a minute to discuss shorting stocks! It’s almost the opposite environment from the meme stock craze in early 2021 (when most growth stocks topped), and it’s a good time to remember the market often fools the majority.

What to Do Now
None of this is to say you should fight the market at all; we’re selling Celsius (CELH) from the portfolio because of a loss, which will leave us with around 70% in cash; we’re also placing our other stocks on Hold given the market. But it’s important to stay flexible and keep your head up—if something can go right in the world, we think there’s enough dry tinder for a great upmove, but as always, we have to wait for it to occur.

Model Portfolio Update
The big Fed announcement is out, with another good-sized rate hike and tough talk about the future, but nothing has really changed with the overall environment: The major indexes and most stocks and sectors remain in downtrends. What might be changing, though, is that the sellers are coming around for names that have meat left on the bone--while few resilient names cracked today, almost all staged big declines.

Because of that, we’re are taking another step to the sideline, selling our half position in Celsius (CELH), which is our weakest stock, and we’re putting our remaining three names on Hold given the market’s action.

Going forward, we’re not going to fight the market, but we’re not ruling out a nibble or two if some potential leaders find support and the market stops its nosedive. Said another way, we’re not eager to get maximum defensive (85% to 90% cash, etc.), but let’s see how things go--if the market can hold firm on this retest of the lows and some potential leaders do the same, we wouldn’t mind nibbling, but we won’t jump the gun.

Current Recommendations

Celsius (CELH)—CELH has been all quiet on the news front, but there’s little doubt that everything is going well fundamentally; energy drinks offer a bit of a defensive flavor (they’re more of a staple than a discretionary purchase), so a slowing economy shouldn’t crimp things much, and of course the Pepsi tie-up will put Celsius’ offerings in front of thousands more consumers in the months ahead. That said, as we always say, the stock is not the company, and the stock itself is now getting caught up in the market’s unrelenting decline: After a great run from 72 in July to 118 three weeks ago, the recent digestion was acceptable, but the action of the past few days (not just today’s sharp decline) along with the weak market gives us a loss and puts the stock below its 50-day line. To be fair, the chart isn’t a disaster, and we could still the stock still being in a rest phase, eventually rounding out a fresh (and tighter) launching pad and getting going when the market eventually gets its act together. But we’re not in the mood to play around with losers much given the environment, so tonight, we’ll cut bait on our small position and hold the cash. SELL

Devon Energy (DVN)—Oil stocks started retreating a few sessions ago, and that continues—though few have cracked or done anything abnormal given their recent recoveries. DVN is a good example, as the stock has retreated a few points after its off-the-bottom run-up but is still (for now) holding above support. It’s worth noting that DVN (and just about every oil stock) is not early stage, having kicked off their overall advances a year or more ago; if the stock really gives up the ghost, we’ll prune some or all of our shares, as a deeper retreat is certainly possible after the stock’s big advance. That said, shares have certainly had ample opportunities to keel over given the overall bear market and even the latest slide in oil prices (down to $84 or so, with year-end 2023 prices near $74), but they haven’t, which takes precedence in our view. We’re obviously keeping an eye on it, but the fact that oil prices are still north of $80 with all of the worrisome economic news and super-aggressive Fed bodes well for the firm’s cash flow, payouts, buybacks and even more (small-ish) M&A if something actually goes right in the world (what a concept!). Given the market environment, we think the prudent thing to do is to put off new buying, so we’ll go back to a Hold rating and see if DVN can continue holding up. HOLD

Enphase Energy (ENPH)—Before today, ENPH was acting in a classic, resilient fashion, not only holding up well but trading relative tightly (on a percentage basis; the point moves can be big because it’s a higher-priced name) and actually making a little upside progress during the last month even as the Nasdaq has pulled in 14%. Today, of course, the stock got hit with every other resilient name, though it’s above support and actually flat for the month, which is rarified air. The news this week that Russia is essentially doubling down on the war in Ukraine should ironically help business, keeping Europe’s energy disaster in place—and thus keeping demand high from people/companies who want control over their own energy production, including solar rooftop systems. Obviously, we’re remaining flexible when it comes to the stock; good stocks can go bad in a hurry in a bad market, and it’s possible the market is in the process of flushing everything down the drain. But, overall, the stock is still acting normally; we’ll go to Hold because of the market but are willing to give ENPH some rope. HOLD

Shockwave Medical (SWAV)—SWAV was very weak today, and as we’ve written elsewhere, it’s certainly possible the market is starting the process of coming around for all the resilient names out there. That said, if you’re heavily in cash and don’t have a truly gigantic position (whatever that means to you), we’re OK seeing how this plays out, at least for a few more days: Our cost basis for the stock is around 245, and the stock closed today near its 50-day line and in the vicinity of its huge earnings gap (which is another area that often, though not always, can offer support, as big investors who missed the move add to their position). Don’t get us wrong, though--today’s plunge was iffy to say the least, and while we’re willing to hold through one or two bad days given our positioning, SWAV needs to hold up north of our cost or we’re likely to protect our capital. If you bought with us, we advise gritting your teeth and holding on right now, but as with every other stock, we’ll be in touch if we have any changes (selling some or all of our shares) in the days ahead. HOLD

Watch List

• Academy Sports & Outdoors (ASO 45): Academy Sports was mostly thought of as just a pandemic play, but business remains good and there’s a solid cookie-cutter story (35% hike in the store base during the next four-plus years) that is just getting started. See more later in this issue.
• Albemarle (ALB 273): ALB is showing classic relative strength, with higher highs and lows in recent weeks as the market is doing the opposite. Meanwhile, despite global economic worries, lithium prices are hitting new highs, which will keep earnings in the stratosphere.
• Gitlab (GTLB 51): We really like the Gitlab story—it smells to us like an emerging blue chip, with years of big growth ahead. The stock needs some work but we think it’s likely in a (very wide) bottom-building phase.
• Shift4 (FOUR 45) and Toast (TOST 18): Neither is ready for primetime right now (then again, few stocks are in this environment), but both FOUR and TOST have the story and numbers to gain major institutional backing during the next bull phase. We write more about FOUR below.
• Uber (UBER 29): Last week, Uber’s top brass said the firm recently had its best week ever, with more best-ever weeks to come, a sign that business continues to improve—all while the focus has turned to cash flow and earnings, with a goal of $5 billion in EBITDA in 2024 (up four-fold from current levels). Shares actually nosed to a new recovery high last week before being pulled back in. We think it could be a big turnaround situation.
• Wingstop (WING 127): WING is retrenching but remains north of its 50-day line, which is relatively rare at this point. After a crushing decline, the focus seems to be returning to the firm’s outstanding long-term cookie-cutter story.
• Wolfspeed (WOLF 110): WOLF is increasingly dancing to its own drummer, actually kissing new recovery highs before selling off with everything today. Chip stocks as a whole are weak, and demand in the sector is known to turn quickly, but the stock certainly quacks like a new leader whenever the market can get its act together.

Other Stocks of Interest
Progeny (PGNY 37)—PGNY is a name we owned for a bit last year and had very high hopes for, but the timing was all wrong—growth stocks were topping out last summer and this one hit the toboggan slide with everything else starting last November. But the story hasn’t changed (and is still relatively new; the firm came public in 2019), the numbers remain excellent and the stock seems to be shaping up. The company is a health insurance operation, but instead of a big, well-rounded outfit, it’s a niche player focused on fertility care—current options leave most wanting, with inferior access to specialists, so-so pregnancy success and a higher rate of high-risk pregnancies, which not only is worse for the patient but also for the company (more absenteeism, worse retention/recruiting, etc.). Progyny’s system is far more robust and modern, with access to a large network of fertility specialists and a few hundred locations, personalized support services, pharmacy offerings and all-inclusive treatment bundles, too. The proof is in the results: Progyny’s patients have a 16% better pregnancy rate per IVF transfer compared to the national average; a 26% lower miscarriage rate; 25% improvement in live births; and 72% fewer multiples (twins or triplets) with IVF. And that has led 265 big, self-insured firms (including a ton of well-known names like PayPal, Microsoft, Unilever, Google, Hershey and more) to sign up—and that’s just the tip of the iceberg, as Progyny believes any firm with more than 1,000 employees (8,000 of them in the U.S.) is a potential customer. (Progyny also claims a “near 100%” renewal rate among existing clients, and says this year’s sign-up season looks good.) There can be some ups and downs in terms of usage (how many employees use the fertility services affects revenue), but the numbers here have been great for a while: Revenues lifted 52% in Q2 and EBITDA (the more apt profitability measure) was up 78%, and analysts see both surging in 2023 as well. As alluded to above, the stock itself fell sharply (more than 60% peak to trough), but reacted excellently to earnings in early August and has held those gains in recent weeks. The rub here is liquidity, which is light (only $30 million per day), but interestingly, 500 funds own shares and we know PGNY was liquid last year when we owned it. We’re keeping a distant eye on it, as this seems like a rapid, reliable growth story that can play out for a long time.

Shift4 (FOUR 45)—We wrote about Toast (TOST) in the last issue on this page, so we figured we’d write about its peer we’re watching—Shift4 Payments (FOUR)—as it has an equally big story. The company has been around for a quarter century (though it only came public in mid-2020) and it offers clients in tons of industries an end-to-end commerce platform, with not just mobile and point-of-sale solutions but unified commerce, which means offering customers the same experience online, in store or across a campus (and keeps the kitchen or back-of-house operations up to speed). The restaurant and hospitality sector as a whole is the core of the business (after much beta testing, it just launched its next-generation point-of-sale system for restaurants), but Shift4 is big in any sector where firms have large footprints: In the past few months it’s inked deals to be the payment processor for Philly’s Wells Fargo Center, the Tennessee Titans, Arizona Cardinals and New Orleans Saints (and Pelicans), and colleges are also lining up (Alabama, Notre Dame, Wisconsin)—and that says nothing of its move into online gaming (deal with BetMGM), non-profits (added 400 new clients since it acquired The Giving Block to enter the sector), travel (Allegiant Air), digital media (Time) and other e-commerce (Fanatics). (A lot of those new areas are set to ramp in the second half of this year, too.) While the economy is obviously a factor (less payments = less revenue), everything continues to look great, with the top brass expecting end-to-end payment volume of $69 billion this year (up 48%), net revenue of $700 million (up 32%) and EBITDA of $260 million (up 56%), with free cash flow of around $1.20 per share and earnings a bit higher (up 87%), with plenty more growth going forward. The stock was hit with everything else for the first few months of the year (of note, the CEO added shares on the way down), but it stabilized in June and July and surged before and after earnings in early August. Like most of the names we’re watching, FOUR has held up well since then, etching a very reasonable six-week structure. Shares need a bit more seasoning, but we think the stock is in the conversation of being the next leader in the payment sector.

Las Vegas Sands (LVS 35)—The two firms above are small-ish, young and have a big growth opportunity ahead. Las Vegas Sands is … not that. But, while we obviously focus on pure growth outfits, it’s a fact that many big winners over time are turnaround operations, and we think investors are beginning to discount a massive upturn in business for Sands—one that could persist for at least a couple of years. The company, of course, is one of the big casino and gaming players out there; what’s interesting is that, despite its name, it no longer has a business connection to Vegas, having sold its properties there for $6.2 billion last year. Instead, it went all-in on Asia, embarking on a good-sized expansion effort, spending $2.1 billion so far to build a new Macau resort (The Londoner) and then add new luxury suites there, and also adding suites to its Four Seasons Macau property; meanwhile, it’s forked over $1.2 billion (with another $3 billion to come!) to both renovate and add a major expansion (opening in 2026) to its Marina Bay Sands resort in Singapore. There’s been just one problem: Covid, which due to the policies overseas, has kept travel and visitation to these areas in the dumps. In Q2, air traffic to Singapore’s nearest airport was about 40% of the pre-pandemic level, and Macau’s overall visitation was just 16% of 2019’s--that’s down 86%! Despite that, Sands was actually EBITDA positive in the quarter (very small loss even including interest and taxes)—which, to us, means there should be tons of earnings/cash flow power here when China/Singapore turn right side up. And the market, which is looking ahead a few months, may be sniffing that out: Since March, LVS has seen seven weeks of strong-volume support buying, with just two weeks of similar selling, all while the stock has been trying to round out a low. We need to see some real strength, but if things move back toward normal in Asia, we think there could be big upside.

Is Sentiment Crystallizing on the Downside?
“Sentiment is always secondary” is a line we learned early on in our investing career and we still keep it near the forefront of our mind—in fact, if you dove too far into sentiment readings, you would have been seeing green lights way back in January of this year, not to mention a few other times, which would have left you with big losses, especially if you dove into growth stocks.

Instead of developing sentiment indicators to produce specific buy or sell signals, the better way to use them is as background measures, and only at extremes: When things are super bubbly and money is pouring into the market, it simply means risk is elevated, with a reversal or big pothole possible if something “bad” (or less good than expected) happens.

Conversely, when the news is bad, most investors are worried and the vast majority of sentiment measures are bearish. We think of it as dry tinder: There’s plenty of buying power out there if something “good” happens (or less bad than expected), but, importantly, you still need a spark for it to occur.

That’s the situation we find ourselves in today, about 10 months removed from the market top—it appears that sentiment is crystalizing somewhat on the downside, with the Fed’s hawkishness, still-hot inflation readings and (thanks to FedEx’s warning last week) economic fears causing most every sentiment measure to keel over into deep pessimism. A few examples:

In the options markets, people are scrambling for protection, with the 21-day equity put-call ratio back to its highs of the year. Longer-term, the 40-week moving average of the VIX Volatility Index (another measure of investor hedging/worry) has hit 25, which it’s only done a handful of times in the past 20 years (June 2020, November 2011, October 2008, October 2002), all of which save 2008 were near lows—and even that 2008 example was near the low for the broad market.

On the survey side of things, check out this long-term chart of the AAII results: Over the past 40 weeks, there have been on average 19.5% more bears than bulls, which is the lowest reading since the survey started in 1988!

Back to the present, we have our own Real Money Index, which is back in the lower reaches of its range this year—but possibly more telling, we’ve now seen three straight weeks of outflows of at least $10 billion each, the first time that’s happened in many years. Throw in some other measures (large speculators are short the market, and that’s usually the wrong-way crowd) and headline bearish articles (good one in the New York Times this past weekend), and it’s clear that the crowd is negative.

Overall, it’s easy to be a bear now—tell someone the market is in trouble and the economy is going to tip over, and everyone will agree; tell someone the market is headed up 50% over the next 18 months and the bartender cuts you off and asks for your car keys.

Again, that’s no reason to be complacent; heck, we’re pruning a name from the Model Portfolio tonight and are holding nearly 70% in cash. But the bottom line here is many already expect bad things ahead—so if something goes right in the world, the market could surprise on the upside.

Another Cookie-Cutter Story to Watch
Academy Sports & Outdoors (ASO) is a mid-sized sporting goods retailer, with 261 stores in 16 (mostly southern) states. It’s a solid, well-balanced business (sales nearly equally split between seasons and a variety of categories like sports, footwear, outdoor and apparel, etc.), and the stock had a big run in late 2020 and most of 2021 as business exploded during the pandemic—as people favored outdoor activities, earnings exploded from $1.12 per share in 2019 to $4.16 in 2020 to $7.60 last year!

Most investors figured earnings would fade as the world turned right side up, in essence making this just another pandemic play that had seen its best days. But that’s where things get interesting: First, business has remained very solid—while sales and earnings have fallen off, they’ve only done so a touch (sales down 6%, earnings down 2% in Q2; analysts see earnings down just 5% this year), as Academy is getting juice from company-specific improvements (cost controls, more private-label brands, bigger e-commerce operation) that are boosting margins while, of course, sales remain resilient.

More important to us, though, is that management isn’t thinking defensively—Academy, in fact, is aiming to be the top sporting goods retailer (another Dick’s Sporting Goods, in a sense), and it’s just beginning a major store expansion plan, adding nine locations this year and 80 to 100 total during the next five years … and these locations add to EBITDA (cash flow) starting in year two, with a payback within two years as well (solid store economics).

Translation: Instead of seeing earnings slip, this company should actually crank out decent gains going forward. We’re not big on valuation, of course, but the current tally (P/E of just 7) certainly looks cheap, and management agrees; having paid down most of its debt as business surged, the top brass is now buying back shares in a big way (share count down 11.5% from a year ago).

And Wall Street seems to be sniffing out all of this: ASO peaked at 50 last November, fell as low as 25 in May (in what was a giant-volume shakeout) and then motored all the way back to its prior highs, where it’s gyrated for the past few weeks ... not surprising given the action of the indexes since late August. The market will obviously be key, but we’re very intrigued by the big-picture story here—ASO is on our watch list. WATCH

Cabot Market Timing Indicators
The story remains mostly the same—the top-down evidence remains negative, with the trends of the indexes, as well as most stocks and sectors, pointed down. There are tons of negativity out there, but until the selling pressures ease, we continue to advise patience and caution.

Cabot Trend Lines: Bearish
Our Cabot Trend Lines are still stuck in the mud, with the S&P 500 (which is currently 9% below its 35-week line) and Nasdaq (11% below) unable to get any traction. At this point, those respective trend lines are near each index’s August peak, so any coming rally that can motor above those levels would likely produce a green light. But right now, there’s no doubt the longer-term trend is still down.

Cabot Tides: Bearish
Our Cabot Tides are also still bearish, with all five indexes we track (including the S&P 600 SmallCap, shown here) sitting below their 25-day and 50-day moving averages. (It’s a similar story for the handful of growth funds and indexes we look at.) Yes, this could still be part of a bottoming process in the market, but with the intermediate- and longer-term trends still pointed down, more patience is needed.

Cabot Two-Second Indicator: Negative
You don’t need a technical analysis degree to interpret the action of our Two-Second Indicator: It’s negative, with readings in the triple-digits on most every day of the past couple of weeks. If the indexes do retest their May/June lows, it will be interesting to see if we see any positive divergences, but for the here and now it’s clear the broad market is still on the outs.

The next Cabot Growth Investor issue will be published on October 6, 2022.

About the Analyst

Mike Cintolo

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