December 7, 2023

WHAT TO DO NOW: Continue to lean bullish, though keep an eye on things in the short term. Overall, our indicators look very good, so we’re aiming to put more money to work—but near-term, we are seeing a few warning signs, so we’re picking our spots and stocks carefully. On yesterday’s special bulletin we sold Noble (NE) and added another half position in PulteGroup (PHM), but tonight, we’ll stand pat and see how things go in the coming days. Our cash position is now 36%.

Current Market Environment

The major indexes are higher today, although that was mainly from mega-cap names—most growth stocks and the broad market were more mixed. As of 3 pm, the S&P 500 was up 0.7% and the Nasdaq was up 1.1%.

Nothing much has changed with the market’s evidence when it comes to the intermediate-term: Our Cabot Trend Lines are positive, the recently-bullish Cabot Tides are still pointed up, and our Two-Second Indicator has now recorded 17 straight days of fewer than 40 new lows. Throw in a downtrend in interest rates and still-solid performance from our Aggression Index (slowing down but still positive) and most of the evidence looks good.

That said, while the big-cap indexes look fine, we are seeing some turbulence start to pop up. We’ve mentioned recently that many junk stocks have been spiking, which is usually something that precedes some uncomfortable trading. We’ve seen lots of rotation on a day-to-day basis among market segments (tech stocks vs. small caps, for instance). We’ve also seen the indexes stall out of late despite a continued dip in Treasury rates, while some sectors (like chips, led by NVDA) and extended leaders gyrate.

Obviously, after the past two years when we’ve seen so many rallies fail after four or five weeks, our antennae are up for some sort of turn. That said, some near-term wobbles aren’t unusual after the nonstop run we’ve had, most leading stocks that have sold off remain in fine shape and, interestingly, there have still been a good number of positive earnings reactions among growth titles of late.

Overall, then, we continue to lean bullish and are looking to put money to work—though tonight, we’re holding off new buying to see if the market (and more importantly, some stocks we’re targeting) can pull in further and offer some more attractive entry points.

Model Portfolio

Arista Networks (ANET) has fidgeted around during the past week, but like many things, the damage has been limited, with shares just a few point off their highs and easing into their 25-day line. ANET does trade a bit in tandem with chip names, so if that group (which has been weakening) opens up on the downside, it could pull ANET lower. Still, at this point, the stock acts normal and the growth story is very solid. We’ll stay on Buy a Half, with a mental stop in the low 190s, and we’d consider averaging up on some decisive strength. BUY A HALF

CrowdStrike (CRWD) remains in terrific shape, not only reacting well to earnings but pushing higher since. Business here is obviously great, but it doesn’t hurt that other peers (ZS and S) have also reported great numbers and reacted well to their reports, too. The firm got right on the conference circuit after its report, and there’s some buzz about the firm’s Charlotte AI offering, which should be released in Q1 and that management thinks can start impacting new deals pretty quickly. Management also reiterated many of the newer fields it’s diving into and gaining traction, like identity ($200 million of recurring revenue, growing at triple-digit rates) and log workloads (over $100 million). Back to the stock, we’d like to fill out our position, and while we’re not anticipating a huge decline, we think it’s prudent to hold off right now as shares are very extended (20%-plus above their 25-day line). Hold on if you own some, and if not, start small and aim for dips. BUY A HALF

As we mentioned briefly during yesterday’s bulletin, DraftKings (DKNG) has been losing altitude this week with a sharp dip back toward the top of its prior base. There’s been no obvious news to account for the selling, though some hubbub about the ESPN Bet launch could be prompting traders to hedge. To be fair, the stock ran from 28 at the start of the market rally to 39 and is now down to 35-ish—not a massive change in trend. Right here, we’ll stay on Buy if you want to grab some shares, but we want to see some support show up soon. BUY

With many names starting to hack around, it’s no surprise that Duolingo (DUOL) is swinging around, too. So far, though, shares haven’t given up any of their earnings pop, with volume on the sell side far, far less than buying volume during the earnings rally. We’ve already averaged up here and are giving the stock plenty of breathing room, with a mental stop in the 175 area—if you don’t own any, we’re OK buying some here or on further dips. BUY

Eventually, it’s very likely Noble (NE) is going to have a big run even if oil prices aren’t sky-high as big explorers soak up all the deep-water rigs on the market. However, that time is not now, and despite giving our remaining shares plenty of room to get moving, they (and the oil group in general) remain on the outs. We sold our position in yesterday’s special bulletin. SOLD

Nutanix (NTNX) looks great, holding right near its highs following a nice pop in the days following last Wednesday’s quarterly report. While top-line growth here is just OK (up 18% in the October quarter), annualized recurring revenue rose 30% and a lot of that is falling to the bottom line—for the fiscal year ending in July, free cash flow should come in around $1.20 per share (likely conservative), well above earnings expectations of 92 cents. Like a lot of strong stocks, NTNX could easily exhale a bit in the near-term, especially as the stock challenges old resistance from late 2021 in this area. But there’s little doubt the buyers are in control. BUY

PulteGroup (PHM) looks great, clearly bolstered in part by the unexpectedly large drop in interest rates, with mortgage rates falling nearly a full point since their peak. Also helping was this week’s quarterly report from Toll Brothers (TOL), which, while definitely operating at the high end of the market, confirmed that housing demand remains solid. Tomorrow’s employment report could always shake rates up a bit near-term, but overall Pulte’s earnings power looks to be headed higher. We filled out our position on yesterday’s special bulletin, adding another 5% stake. BUY

Uber (UBER) has gotten a pop this week after it was announced last Friday (after the close) that the stock would be added to the S&P 500 prior to the open on December 18. Short-term, that’s a good thing and should keep buyers interested as all the big index funds will have to plow in later this month—that said, just a heads up that there’s often a post-index-addition fade that occurs, so be aware of that. Obviously, this is all short-term stuff—UBER remains very strong and the fundamentals here are pristine, which is likely to keep big investors interested. We’ll stay on Buy but aim for dips of you’re starting a new stake. BUY

Watch List

Elastic (ESTC): ESTC exploded higher after its quarterly report last week, as the numbers were solid and above expectations and more investors are coming around to the view that the firm’s search offerings will be a key cog in the AI world. ESTC is near the top of our watch list despite its big move.

Eli Lilly (LLY) and Novo Nordisk (NVO): Admittedly, both of these stocks haven’t been participating in the market rally, so they may have discounted a lot of good news already. But, frankly, it wouldn’t take more than a few good days for either LLY or NVO to be back in gear—if they start to go, we think they can really run. We’re still watching.

Expedia (EXPE): We remain very intrigued with EXPE, which looks like an entirely new stock following the market’s bottom. The strength here is hard to beat, and earnings and cash flow growth should remain strong for many quarters to come. Any shakeout would be tempting.

Mobileye (MBLY): MBLY still needs work, but the stock’s big multi-month launching pad may be rounding out and there’s little doubt that orders this year should be huge, boosting the long-term outlook for its ADAS and autonomous driving offerings.

ProShares Ultra Russell 2000 Fund (UWM): Leveraged long funds can get chewed up in a stop-and-start environment, but if the market has entered a sustained uptrend, we think small caps—which actually hit new bear lows in October but have snapped back nicely—could finally be ready to shine.

Shift4 (FOUR): FOUR has finally hit a little speedbump this week, which isn’t surprising given the stock’s rebound and the resistance in this area. But we think the stock has changed character and is likely headed higher.

Vertiv (VRT): VRT has effectively spent most of September, October and November digesting its monstrous early-year move, and following its Investor Day last week, it’s beginning to show signs of getting going. It’s not a lightning-fast grower, but it’s in the right place at the right time with its data center cooling solutions and margins that are set to expand in a big way.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, December 14. As always, we’ll send a Special Bulletin should we have any changes before then.