There’s little doubt the market’s evidence has worsened of late, with our Cabot Tides and Two-Second Indicator re-joining the Cabot Trend Lines on the bearish side of the fence; thankfully, we went slow on the buy side in July and early August, and today, stand with about 65% in cash. But we’re also not completely in the storm cellar, as we still see signs the market could be in a bottoming effort (and in-between phase between bear and bull), so we’re happy to hold onto some resilient stocks and aim to nibble on potential leaders if the market can find its footing.

In tonight’s issue, we dive further into our thoughts on the market, but spend most of the time writing about future leaders, including a few from one sector that’s clearly in pole position to do well if the bulls can step up to the plate

Cabot Growth Investor Issue: September 8, 2022

DOWNLOAD ISSUE PDF

Some Good—but More Bad
In the last issue we talked about the market being in an “in-between” area, with many indexes, sectors and (at least) the best stocks likely having already hit their nadirs back in May, June and early July—but big, institutional investors (the ones that drive the market up and down) not yet in the mood for a consistent buying spree, instead nibbling here and there while repositioning their portfolios.

Admittedly, since then, the evidence has worsened—what was a normal pullback morphed into a straight-down decline when the Federal Reserve essentially said the tightening phase would continue and even accelerate, causing our Cabot Tides and some other encouraging indicators to flip to negative. To us, then, it’s hard to avoid saying that there’s more bad than good out there at this point, which argues for a cautious stance.

Of course, what to do in response to this worsening of the evidence relies in large part with what you did during the prior few weeks. If you’re heavily invested, you shouldn’t whistle past the graveyard or hold and hope, instead taking some action by ditching your worst stocks. Thankfully, for our part, we never got overexposed, so while we’re sitting on nearly two-thirds in cash, we only ditched one position during the recent rout. We’re content to wait in a heavy cash position (as we have for most of this year) until, at the very least, the sellers clearly leave the building.

Right now, there’s definitely a chance this steep downleg continues; we’re trend followers, after all, and the trends are pointed down (or at least not up). But for our part, we still think we’re mostly in the same in-between environment we were two weeks ago, as (a) it would be unusual to see so many stocks from a variety of sectors rally so strongly off their lows in June, July and early August just to have them keel over again, and (b) even now, after a straight-down, 13% drop in the Nasdaq, there are many potential leading stocks holding up well—including the handful in our portfolio.

What to Do Now
Thus, our game plan here is pretty straightforward: We advise remaining in a cautious stance given our negative market timing indicators (our cash position is a hefty 65%), giving us both cushion and potential dry powder if the bulls finally show up. But we’re also aiming to give our remaining, still-resilient stocks a chance to keep holding up—the longer they do, the greater the chance they can extend higher should the market find its footing. We sold our stake in ProShares Ultra S&P Fund (SSO) last week but have no new changes tonight.

Model Portfolio Update
What started as a normal pullback, with the indexes shaking out some investors but most leaders holding strong, has morphed into a steady slide lower since the Fed basically said they’ll do whatever it takes to squash inflation. In turn, most of the good intermediate-term vibes from July and August have vanished, especially from a top-down perspective.

As we wrote on page 1, it’s not a disaster out there—we’re still seeing a lot of names that almost surely bottomed in May/June, had big run-ups and are pulling in normally. If we had to lay odds, we think a majority of evidence points to the market being in a prolonged bottoming process.

Of course, that doesn’t mean we’re going to argue with the trends out there—as the market came off, we quickly let go of our leveraged long fund, and because we went slow on the buy side, we’re already back up to nearly two-thirds in cash. At this point, we’re taking things on a stock-by-stock basis with what we own, while spending most of our time searching for future leaders; we think we own some and have identified others should the market keep from imploding.

But right now, it’s a matter of getting the timing right given the market environment. Thus, we have no changes tonight as we hold a big cash position and four positions.

Current Recommendations

Celsius (CELH)—If the market kicks into gear in the near future, we remain very optimistic that CELH will be among the top performers. As we’ve written before, there simply aren’t that many stocks with a mass market, consumer-led story (i.e., not dependent on government subsidies or regulations that can change in a hurry) that’s growing at triple-digit rates—and, with the help of Pepsi, such lightning-fast growth should continue as distribution grows much faster than planned even a couple of months ago (management said they expect distribution to grow 40% faster than planned over the next 12 months due to the Pepsi deal). We’d also point out that energy drink sales should be relatively recession resistant—they’re more consumer staple than anything. However, the company is not the stock, and in the recent sell-first, ask-questions-later environment, CELH took a good-sized hit the past two weeks, though the bounce this week has been solid. Indeed, shares are far from a disaster, as they’re still hanging within their August range, but we’re approaching this cautiously: We moved our half-sized position to a Hold rating last week and have a mental stop in the upper 80s. Above there, we’re happy to hang on—and if the stock and market can get moving, we’d love to average up down the road—but we’re also willing to cut bait should the stock break support. HOLD

Devon Energy (DVN)—Not unexpectedly, DVN has been hacking around during the past couple of weeks, essentially consolidating its big rally off its 200-day line last month (from 54 to 75 right quick) and tagging its 25-day line during yesterday’s dip; with the stock acting fine, we’re sticking with a Buy rating. That said, we are keeping our eyes on two things. The first, of course, is energy prices: While the stock (and its peers) remain miles above their summer lows, oil prices are doing the opposite, with current prices dipping to multi-month lows near $82 this week (year-end 2023 prices down to the mid-$70s), and even natural gas prices have retreated sharply from their highs. To be fair, stocks tend to lead the underlying commodity price, so this sort of combination (stocks resilient but current prices fading) leads to good things more often than not, but we’ll have to see how it goes. The second thing we’re watching, which is a relatively new phenomenon, is how DVN acts after going ex-dividend tomorrow (September 9)—with such large payouts (north of 2% on the quarterly payment, $1.55 per share), we’ve seen a tendency for energy titles to weaken for a few weeks after the ex-date as dividend chasers move on. Again, we’ll see how all that goes from here, but (a) right now, the stock acts normally, and (b) big picture, the firm’s cash flow profile remains outstanding, as the cash flow boost from its recent acquisitions likely more than makes up for the recent dip in oil prices. We’ll stay on Buy. BUY

Enphase Energy (ENPH)—Given the market, ENPH is acting about as positively as possible, with the stock giving up very little of its July breakout, trading tightly for a few weeks (usually a sign of accumulation or at least very little selling pressure) and actually lifting to new high ground during the past couple of days. Fundamentally, a few recent press releases suggest Enphase is putting a lot of emphasis on Europe and Germany, where the energy situation is dire: It partnered with one smart green home firm (will be able to manage appliances and Enphase’s solar and battery assets from a smartphone app), acquired another (with its own Internet of Things platform), and expanded a distribution partnership with a third. Remember that, in its Q2 call, the top brass said revenues from Europe rose 89% from a year ago, and Q3 is expected to see a 40% bump compared to Q2 (!) as that continent scrambles for some semblance of energy independence. Back to the stock, solar certainly seems to be in pole position to be a leading sector of the next sustained rally, and while there are some interesting, smaller firms (see our write-up later in this issue), Enphase looks like one of the top liquid leaders in the group. We’ll stay on Buy, though we’re still seeing a good amount of selling on strength in the market, so if you want in, we favor entering on dips of a few points. BUY

ProShares Ultra S&P 500 Fund (SSO)—When the next bull phase decisively gets going—ideally with one of the “granddaddy” blastoff signals flashing green (not the “mini” ones we’ve seen this year, which have failed) and our Cabot Trend Lines turning clearly bullish—we’ll likely dive back into a leveraged long index fund (we prefer the 2x ones, and sticking with indexes; getting into 3x or 4x and/or sectors is more for day or swing trading), as it’s a great way to get a foothold in a new bull market. But that time is not now: Not only has our Cabot Tides seen its positive stance vanish, but other measures like our Two-Second Indicator (triple-digit new lows for seven days in a row before today) and Aggression Index (back in the soup, like most of the market) have also given up the ghost, at least for now. We decided to reverse course quickly last week, preferring to be safe instead of sorry, selling our entire SSO stake and looking to reinvest the proceeds when the coast is clear. SOLD

Shockwave Medical (SWAV)—SWAV has finally succumbed to a little selling pressure, suffering earlier this week from an analyst downgrade, who cited valuation and some budding competition. Even so, shares only dipped to their 25-day line before bouncing nicely, and the weekly chart (shown here) depicts how modest the correction has been relative to the recent, earnings-induced rally. There’s nothing new on the fundamental front here, with the company’s unique offerings for removing calcified plaque from coronary and periphery arteries likely to continue gaining share around the globe, driving earnings much higher. The average cost basis for our position is near the 50-day line at this point (mid-240s), which is also near the low of its big earnings gap and breakout from early August; that area (give or take a few points) is the mental stop we’re working with—but, right now, we’re still thinking optimistically, as the longer SWAV can hold up relatively well in this tedious environment, the better the odds the liftoff seen last month can continue. BUY

Watch List

• Albermarle (ALB 291): ALB was a bit sloppy over the past couple of weeks (295 down to 250 in just a few days), but the action was reasonable and now the stock is storming back nicely. (Its peer Livent Corp. (LTHM) is also acting peppy.) We think the lithium story has legs, and if ALB can continue holding up, we’d like to take a swing at it once the market gets moving.
• Pure Storage (PSTG 29): PSTG is right on the edge of the watch list—it looked done for after falling on earnings, but did find support and, overall, is in a reasonable pullback. A powerful leap above 32 would have us paying closer attention, but we’re still watching.
• Shift4 (FOUR 45) and Toast (TOST 20): As we write a bit about below, we think these two names could be the next winners in the broad payment/back office space, following in the footsteps of firms like PayPal or Square (which is the more apt comparison). Both went through the wringer, surged after earnings and are holding well of late.
• Uber (UBER 31): We can’t say it’s our top choice, but we continue to look favorably on UBER, which has solid prospects in both its segments (Rides is recovering now; Delivery is a long-term growth area), and a renewed focus on profits (EBITDA was positive in Q2 and is expected to soar further in Q3), leading us to believe big investors will be building positions.
• Wingstop (WING 144): We love a good cookie-cutter story, and in fact took a swing at WING back in the post-crash pandemic environment (got out near even). But after a year of challenges and a huge washout in the stock, WING has staged a powerful rebound as investors see the underlying story (which was sidetracked in 2020-2021) getting back on track. See more later in this issue.
• Wolfspeed (WOLF 111): WOLF is right near the top of our shopping list, as it’s showing the characteristics (huge volume earnings gap, yes, but also eight weeks up in a row, a sign of persistent accumulation after a huge decline) of a stock that wants to head higher. The race to lock up supply of silicon carbide chips is on, and Wolfspeed looks like the biggest beneficiary.

Other Stocks of Interest
Toast (TOST 20)—During the past 20 years there’s been some sort of payment player that’s been among the market’s leadership—first it was MasterCard and then Visa, then came the PayPal and Square duo of the past few years. During the next go-round, there are two we’re watching closest: One is Shift4 (FOUR), which we wrote about on this page back in the May 19 issue; and another is Toast, which has a simple, big story that reaches beyond just payments. The firm has a platform that’s purpose-built for restaurants, which is an $800 billion industry in the U.S. alone (north of 860,000 locations), and it usually starts with point-of-sale and payment processing solutions (part of its base offering). But Toast is far more than that, offering clients digital ordering and delivery products, team management (payroll, scheduling, tips manager, etc.), analytics, marketing and loyalty programs, restaurant operations (like inventory management) and even loans. Yes, there’s competition (including from Shift4, though that firm’s specialty is more in giant stadiums and campus-type setups), but Toast’s products work well and have a big following—20% of new locations come via referral (!), yet the firm is just scratching the surface of what it sees as a $15 billion to $55 billion total U.S. market. Most of the metrics look great: Annualized recurring revenue metric (consisting of subscription and payments) rose to $787 million in Q2, up 59% from a year ago, with total revenues up a similar amount (58%) and Toast serving 68,000 locations (up 42% from a year ago and up 6,000 from the prior quarter) at the end of the quarter. To be fair, the bottom line is still clearly in the red, mostly due to a ramp in investments in the sales force; that should pay off over time, but clearly, the top brass is playing the land grab game, thinking its clients will prove sticky once they sign up (Toast has less than 10% of locations in the U.S. as clients). Fundamentally, we think growth here could be rapid and reliable for many years, and the stock may be just starting to perk up—TOST came public at a ridiculous valuation and near the market top, and then imploded as the market fell apart. But it began to bottom out in May, perked up in July and gapped on earnings in August. It still needs work and time, but the recent pullback with the market has been very tame and tight; we’re also intrigued that a decent number of funds actually bought into shares as it came down (260 owned shares at the end of June, up from 185 three months earlier). Overall, it’s a solid bottoming base, and another multi-week thrust higher could turn the overall trend up.

Procore (PCOR 56)—Similar to the payment theme, it’s nearly a sure bet that some software stocks will be among the winners of the next bull phase—not the Shopifys and DocuSigns that have seen their point of peak perception, but new names that are far earlier in their growth curve. Procore is a name we think has the right stuff if it can grow up (gain more sponsorship) going forward: The firm’s software offering is specifically targeted at the construction industry, which is enormous (spending in the trillions of dollars annually worldwide) and rife with inefficiencies and complexities, due in large part to the massive number of stakeholders (owners, insurers, financiers, architects and engineers, general contractors, various specialty contractors, etc.) and, of course, endless change orders as the project gets underway. (Procore says the typical large non-residential construction project runs 80% over budget and 20 months off schedule, and we believe it.) Procore’s platform is built from the ground up to ease these potential potholes, with everything from bid management to project management to field productivity to invoicing and accounting all included; it’s even beginning a materials financing program to help subcontractors with working capital constraints. And with no per-seat or per-user fee (it’s subscription based, with the money coming in from the number of modules subscribed to and annual construction volume contracted), there’s no barrier to having as many stakeholders as possible involved. “But Mike, isn’t the Fed going to crush the construction economy with its rate hikes?” That’s been the fear, yes—but so far, there’s no sign of that, and in the Q2 conference call, the top brass detailed how past recessions often saw construction spending rise, and even in 2008, non-residential construction (especially infrastructure) held very firm, partly because big projects occur over two to three years, so these aren’t things that get tossed aside easily. All in all, business here remains excellent: Q2 revenue was up 40% (up 34% excluding a recent acquisition), with Procore serving 13,400 customers (up 20% from a year ago) and with management saying its pipeline of new business has continued with the momentum seen earlier in the year. Like Toast, PCOR came public last year, went through the wringer, bottomed in May and built a bottoming area before popping on earnings—the stock is still thinly traded for us ($35 million a day or so), but we like the story and it’s one of many recent IPOs that’s well into a bottoming process.

Wingstop (WING 144)—We’ve always enthused about Wingstop’s fundamental story, which has been excellent for many years—the top brass is aiming to make the company a top 10 global brand, and we see no reason they can’t, given the top-notch store economics (payback in less than two years for a new location) and simple menu that most enjoy—we even owned the stock for a time after the pandemic crash but without much profit to show for it. And as it turned out, that sloppiness was the tip of the iceberg: While the company had been growing steadily for years, the pandemic sort of messed up the natural flow of things, first accelerating business in a big way as mobile ordering went nuts (Wingstop always had a great digital ordering system; in Q2 it still brought in 61% of revenue), but then leading to shrinkage as the world turned right-side up; revenue growth slowed and rising wing prices crimped earnings, with the bottom line shrinking in two quarters over the past year. The end result was the stock not only stalled out but went over the falls, not bottoming until it hit levels first seen in October 2018! Now, though, investors are optimistic the underlying growth story is back on track: Q2 saw revenue up 13% and earnings up 18%, and the top brass hasn’t backed off its cookie-cutter plan, with 67 new openings and the store count up 14% from a year ago. And, with under 1,900 locations, Wingstop has years of growth ahead of it before it reaches its target of 7,000 restaurants (4,000 U.S., 3,000 international). Of course, this won’t be a triple-digit grower, but there’s little doubt the company is going to get much, much bigger over time as they open new locations and as same-store sales clip ahead at modest rates. After being crushed, WING staged a dramatic rebound, recouping around two-thirds of its decline in just a few weeks; the recent pullback to the 10-week line was bought aggressively, too, with shares hitting new recovery highs today. If the stock can calm down and the market can truly get moving, we could take another shot at WING.

Solar Sector: Pole Position for Leadership
If the market is in some sort of bottoming process—admittedly still an if, though there’s a decent amount of evidence to support that—then the best stocks and sectors have likely already hit their lows, with many setting up their play for a sustained run. One sector that looks to be in pole position to be a leading group is solar, the prospects for which have been supercharged by the recent green energy bill, mostly due to certainty surrounding future tax credits for the group. (An earlier decision to delay tariffs for a couple of years also helped.)

Of course, the fact that the group’s strength is well-known could serve as a negative (at least in the short term), but what’s most interesting to us is that it’s one of the few areas where we see a bunch of different players in different types of niches within the sector that all appear ready to move—if the market can find its footing.

On the liquid leader side of things, you have Enphase (ENPH), which now looks like the hands-down leader in the inverter space, as the industry (especially residential) moves toward microinverters. There’s also First Solar (FSLR), which is a lumpy type of story, with sales bobbing up and down depending on a variety of factors, but there’s little doubt that business is strong (their backlog gives them visibility out to 2026!) and the new green energy bill has the company expanding capacity ($1.2 billion investment coming up) in anticipation of higher orders. The stock has shown massive accumulation during the past few weeks and has plowed to new highs.

However, beyond the more liquid, well-sponsored names are a variety of younger pups that are acting well, have solid current and terrific projected growth—and all involve making current solar arrays more efficient, which should obviously be big business going ahead.

Array Technologies (ARRY) is the U.S. and Latin American leader (it’s #5 in Europe thanks in part to a recent buyout) in tracking systems used in utility-scale solar projects. These gradually shift the huge collection of modules so that they’re always at an optimal angle to the sun, leading to greater output (up 25% or so according to the company) while adding 11% to the project cost. Module delays crimped growth earlier this year, but things picked up big time in Q2 (sales more than doubled, earnings leapt into the black), and the bottom line is expected to triple next year to nearly $1 per share. The stock is holding tightly well above its 40-week line.

A similar story comes from Shoals (SHLS), the leading provider of what’s known as electrical balance of systems (EBOS for short), which are a collection of products (junction boxes, recombiners, inline fuses, splice boxes, disconnects, etc.) needed to gather, regulate and transfer electricity. Every solar project needs EBOS—and half of all solar installations use Shoals! (EBOS can also be used in EV charging, another growth area.) There are some company-specific positives here—the firm has been cutting installation costs, and three-quarters of revenue comes from system solutions, which rely on proprietary components and installation methods, hence boosting its advantage. Recent results have been lumpy, but analysts see sales growing at 45%-plus rates and earnings booming going ahead.

Finally, there’s Stem Inc. (STEM), which is actually a software company: It has an artificial intelligence platform with forecasting and real-time demand processing capabilities that improve the usage of energy storage systems—in a sense, while fossil fuels are “always on,” solar and other alternative energy offerings are “sometimes on,” and Stem’s software can help provide energy to the grid right quick when it’s needed. Clients usually ink 10- to 20-year deals, and business is soaring, with revenues and the backlog growing at triple-digit rates. STEM isn’t quite as strong as the SHLS and ARRY but is also holding its August surge well.

Obviously, the overall market holds the key—if this leg down accelerates and everything melts down, maybe big investors will move on from the solar group. But the fundamentals are obviously there (both current and projected growth), and chart-wise, these names either had very long, tedious sideways phases (like ENPH) or went through the wringer (all the rest), so the weak hands should be out. We’re holding ENPH, and we’re not ruling out owning a smaller solar company if the market can decisively get going on the upside.

Cabot Market Timing Indicators
It’s not a disaster out there, and many signs point to the market being in the midst of a long bottoming process; we’re OK holding some resilient potential leaders in your portfolio. Right now, though, with our indicators back to negative, the onus is on the bulls and an overall cautious stance is appropriate.

Cabot Trend Lines: Bearish

Our Cabot Trend Lines have been bearish for seven and a half months at this point and they remain clearly negative today—the S&P 500 (by more than 4%) and Nasdaq (by more than 6%) are still solidly below their respective 35-week lines. Now, we’re not ruling anything out, from a continued slide to a powerful turnaround, but we’ll need to see the long-term trend turn up before really cannonballing back into the pool.

Cabot Tides: Bearish
The buy signal from the Cabot Tides has gone up in smoke, with the post-Fed slide in all indexes (such as Nasdaq Composite, daily chart shown here) easily breaching their lower (50-day) moving averages. We’re open to the view that the intermediate-term trend is essentially neutral here—the indexes are “only” back into the range of the past few months—but it’s clearly not positive, which is another reason to stay be cautious.

Cabot Two-Second Indicator: Negative

Our Two-Second Indicator isn’t seeing readings anywhere close to its peak of the bear market—north of 1,000 back in May and again in June—but there’s no doubt the broad market has again turned unhealthy, with readings north of 100 for seven days in a row before today! What we’re really looking for going forward is an evaporation of these figures (single digit readings, which is what’s usually seen soon after major lows); right now, though, the sellers clearly aren’t in hibernation.

The next Cabot Growth Investor issue will be published on September 22, 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.