December 21, 2023

First off, housekeeping: We’ll be closed Monday for Christmas and will be in and out of the office next week. But there will be a Growth Investor issue next Thursday (December 28), so look for that—as well possible special bulletins if need be. In the meantime, for those that celebrate, have a very, very Merry Christmas and a great holiday week.

WHAT TO DO NOW: Remain bullish, but don’t be surprised to see some uneasy trading. Yesterday’s market selloff was overdue, but it did nothing to change any intermediate-term evidence with the market or leading stocks. Near term, it’s probably more of a coin flip as to what happens, so we are picking our spots. In the Model Portfolio, we could have some more new buys soon but tonight we’ll hold off. We will, however, switch DraftKings (DKNG) to a Hold rating. Our cash position will remain around 26%.

Current Market Environment

The market bounced solidly following yesterday’s wild reversal lower. Near the closing bell, the S&P 500 was up 0.9% and the Nasdaq was up 1.1%.

Yesterday finally saw the market suffer some profit taking, which is hardly a surprise after the massive run since early November including last week’s Fed exuberance, when the “good news” everyone was waiting for was released. The questions now are how meaningful the reversal was and what it means going forward.

On an intermediate-term basis, yesterday didn’t change a thing—all three of our market timing indicators are clearly positive, as are the trend of interest rates (actually tagged new correction lows this morning) and our Aggression Index (interestingly, despite the wobble, the Nasdaq has outperformed defensive consumer staples this week).

Also of note, yesterday’s dip comes after some “hyper-overbought” readings in the market (including one for small caps that is very enticing). These blastoff-type measures haven’t been pristine in the past two years, but they have a great long-term record and, when combined with the other evidence we’re seeing, it bodes well for higher prices down the road.

Near term, the picture is foggier. Many measures of sentiment have come a long way and so a cooling off period is possible (and might be a good thing, allowing the market to catch its breath)—and even before the selloff, we had seen more growth stocks start to take a breather while cyclical names improved. That said, “runaway” environments throughout history are known for short, sharp dips that quickly are erased as buyers gobble up shares on the dip.

All in all, we continue to lean bullish and might put some money to work next week (maybe even tomorrow if we see some weakness), but tonight we’ll stand pat. Our only change tonight is placing DraftKings (DKNG) on Hold; our cash position will be right around one quarter of the portfolio.

Model Portfolio

Arista Networks (ANET) tagged its 25-day line in the first week of December and then shot ahead in a big way, so this week’s retrenchment is totally normal. One analyst recently talked bullishly about the stock, seeing solid growth in Arista’s enterprise business in the quarters to come while optimism grows that more AI infrastructure will turn to Ethernet standards over time, unlocking big potential for Arista. We averaged up last week and, short-term wiggles aside, the odds favor higher prices ahead. BUY

CrowdStrike (CRWD) continues to act pristinely, with the stock’s recent exhale extremely modest compared to the recent advance. It probably hasn’t hurt that big outfits like Xfinity (Comcast) and First American Financial have reported breaches of late, reminding CIOs of the need to have top-notch protections. Overall, the stock continues to look like one of the market’s true leaders (and it leads one of the strongest sectors)—and given that it just emerged in September from its 2022-2023 doldrums and the fantastic long-term growth, we think CRWD can continue to run. Thus, we’d like to buy more, and we could if shares dip a bit more—but right here, we’ll simply hold what we have. If you’re not yet in, we’re not opposed to starting a position on a little more retrenchment. BUY A HALF

DraftKings (DKNG) was one of the first names out of the gate when the market turned, which is usually a sign of a leader—but the stock has run into trouble during the past three weeks, seeing a few big-volume selling days and, yesterday, falling back to its prior high and its 50-day line. Is it abnormal action? No, not yet, but it’s possible the competition bugaboo (mainly from the new EPSN/Penn offering) is causing some worries. We’ll switch to Hold and will look for signs big investors are supporting shares—if not, we may trim our stake. Hold for now. HOLD

Duolingo (DUOL) just sprinted to new highs above 240, so the latest pullback still leaves it well above the prior high (227) and the 25-day line (near 222). The firm has been quiet on the news front since the Q3 report, but shares certainly act like sponsorship is growing as more think the firm’s offerings can become a learning platform beyond languages. We’ll stay on Buy, though as always, buying on dips in a volatile name like DUOL is usually better. BUY

We started a half-sized stake in Elastic (ESTC) last week, and the stock has gyrated as the market and growth stocks have wobbled a bit. Still, it looks fine in the wake of its huge post-earnings move—up is obviously better, but a little rest period in here followed by renewed buying would be just fine. If you’re not yet in, you can start a position here. BUY A HALF

Nutanix (NTNX) has stalled out a bit lately, with the 46 to 47 area bringing some sellers, but it’s hard to be critical when shares remain a point off all-time high ground and have just cranked ahead seven weeks in a row. There are never any sure things in the tech world, but Nutanix’s IT platform is perfectly suited for what’s going on in the world right now, and its transition to a subscription model is mostly complete—all of which should lead to booming earnings and cash flow for many quarters to come. BUY

PulteGroup (PHM) boomed with other building-related stocks before and after the Fed’s meeting last week, and given how far it ran (the 25-day line is still south of 94), it’s not much of a surprise that shares have chopped around in the days since. Even so, the underlying conditions here remain excellent—mortgage rates have actually fallen a bit more since last week’s meeting and November’s housing starts figure trounced expectations anyway. We’re not opposed to entering here, though we’d prefer to get in a bit under 100 if possible. BUY

Uber (UBER) looks like many leaders, with a bit of stalling out of late (in the 63 area) but no real selling occurring (just a buck and a half from new high ground). Frankly, we’re impressed the stock is holding up this week even after the S&P 500-induced rush into the stock the past couple of weeks. Fundamentally and technically, we’re very high on this story, so much so that if UBER did pull in calmly for a week or two, we may consider averaging up again—but right here, we’ll just hold onto what we have. If you’re not in, start small and/or aim for dips. BUY

Watch List

Blackstone (BX) or KKR (KKR): All rallies in the so-called Bull Market stocks during the past two years fell flat, but now they’re coming to life (KKR especially, though BX also looks great) as asset prices go through the roof and the prospects for raising capital improve—which should lead to big earnings and payouts.

Cloudflare (NET): NET is one of a few big pandemic winners that looks like it could lead again thanks to its consistent 30%-ish revenue growth, surging profits and a fantastic position at the heart of the Internet that is attracting tons of huge fish to sign up. We don’t want too many tech-heavy positions, but NET does seem like a liquid leader of sorts.

GitLab (GTLB): GTLB finally broke out of a long bottoming area on earnings, with a lot of power behind the move. The big idea here is the firm’s software development and testing platform looks like one many big enterprises may standardize on in the years ahead.

Expedia (EXPE): EXPE isn’t a classic growth title, but we think it has big potential even after its recent run given the huge cash flow (something like $15 this year is likely, if not more) and a still-solid growth story that’s likely to accelerate as the headwinds from the Fed end (and tailwinds possibly begin).

ProShares Ultra Russell 2000 Fund (UWM): The Russell 2000 SmallCap Index is testing resistance at the 200 level it’s hit a few times since the summer of 2022—short term, maybe there’s a wobble, but with some “hyper-overbought” readings clicking, the odds favor this breakout attempt working.

Shift4 (FOUR): FOUR looks great, though admittedly some of that was due to rumors that giant Global Payments (GPN) may be interested in buying the company. (GPN denied that it was in talks with the Shift4.) We’re not into playing M&A situations, but the underlying story here remains terrific, growth could accelerate if the economy is goosed by the Fed and the market (and maybe a larger suitor) is starting to recognize that.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, December 28. As always, we’ll send a Special Bulletin should we have any changes before then.