February 1, 2024

WHAT TO DO NOW: Remain bullish, though we are seeing more crosscurrents pop up. The big-picture evidence remains positive, so we’re holding most of our winners, but we’re also comfortable holding some cash as earnings season progresses. We’re watching a few of our names closely (as well as many names on our watch list), but tonight we’ll hold our 23% cash position and have no changes.

Current Market Environment

The market snapped back nicely today after yesterday’s drop—at day’s end, both the S&P 500 and Nasdaq were up 1.3%.

We continue to look at the market right now via two different viewpoints, the most important of which is the intermediate- to longer-term evidence—just about all of which remains bullish, starting with our key market timing indicators and extending to the action of leading stocks. In fact, while earnings season has had its normal share of hits and misses, we’re impressed by some notable earnings moves on tremendous volume, even in some big-cap names, a sign that institutions are still active.

However, the second piece of the pie is the near-term outlook, which is a bit shakier, with many stocks extended in both price (above moving averages, etc.) and time (many have been running without any real dips for three months), all while the broad market has marked time for the past five weeks—indeed, small- and mid-cap indexes tested their 50-day lines today.

Plus, while it’s not our main focus, we would point out that one of last year’s bugaboos—regional banks and their loans/assets—may be re-emerging as an issue, especially with the Fed saying it’s unlikely to cut rates in March. The regional bank fund (symbol KRE) fell as much as 12% yesterday and this morning before bouncing back some. Interestingly, our Aggression Index is back at key levels as consumer staples (XLP) have ramped the past few days—though, on the flip side, interest rates have fallen quickly, which is an overall good thing.

Add it up and most of the key evidence is still bullish, so we are, too—but there are a growing number of near-term crosscurrents (or yellow flags, if you want to be more cautious), so we’re remaining mostly patient on the buy side while looking for opportunities during earnings season.

Add it up and we’re still overall bullish, so we’re aiming to give our winners a chance to breathe. That said, there are a growing number of crosscurrents out there, so we’re also not leaving our brain at the door, with some of the nascent yellow flags and the big three-month run possibly leading to some wobbles near-term.

As always, we’re aiming to hold all (or most of) our best performers, but we’re also OK taking a partial profit here and there, getting rid of laggards and holding some cash near-term. In the Model Portfolio tonight, we’re standing pat tonight, holding onto our 23% cash position.

Model Portfolio

Arista Networks (ANET) took a wallop yesterday on its biggest volume since its earnings breakout, which is a near-term yellow flag; as with many names, that could usher in a pullback. Even so, one bad day is not a trend, and even now, ANET is still 10 points or so above its 25-day line, so the trend is clearly up. Earnings are due February 12, which will be the key event—the numbers and outlook are vital, of course, but so will be any commentary on AI-related interest. It’s possible we decide to take partial profits depending on how things play out with the market and this stock, but right here, the one-day dip isn’t enough for us to change our thinking. BUY

CrowdStrike (CRWD) continues to battle with round-number resistance near 300. That said, it’s also refused to pull in much and remains well above its moving averages, so we’re simply holding on for now. One simple-but-interesting note from an analyst this week: In terms of revenues, CrowdStrike is just 41% the size of peer Palo Alto Networks (PANW) and less than 60% of the size of Fortinet (FTNT), and that says nothing about many pure-legacy players, so the firm should have years of strong growth ahead if management pulls the right levers. We’re not complacent here, but we have a modest-sized position that still acts well—we’ll stay on Buy a Half, but we think new buyers should be looking to enter on weakness. BUY A HALF

DraftKings (DKNG) is toying with new price highs, which makes for an impressive comeback from its sharp December/early January retreat; the news that it’s likely to team up with Barstool helped the cause. Interestingly, the parent of FanDuel, the firm’s chief competitor, recently went public (FLUT), but it hasn’t seemed to have any effect on DKNG one way or the other. Earnings are due in two weeks (February 15), which will obviously be important to see how the ESPN launch last fall affected marketing spend (which recently was actually falling despite higher monetization). Back to the stock, it acts well, though the relative performance (RP) line is still laggy near-term. If you don’t own any and want to nibble, we wouldn’t argue with that, but officially we’ll just stay on Hold. HOLD

Duolingo (DUOL) is our problem stock, slipping all the way back to its prior peak in October, albeit on lessening volume. To be frank, the chart looks poor right now, but the long-term trend is still up and there is support in this area—and, of course, the story remains solid. Maybe we’re being too lenient, but having already sold half, we’re going to hold our remaining small position here, giving it a smidge more rope to see if buyers can reappear; if not, we’ll move on. HOLD

Elastic (ESTC) has been volatile with most growth stocks in the past couple of weeks, but also like most names, remains fine overall, as the 50-day line (now at 108 and rising) catches up. A drop below that line might have us going to Hold (especially if it coincides with a growth stock selling wave), while a dip below the January low near 103 would be more of a red flag—but right here, this two-week rest appears normal, and the prospects for the firm’s search platform (for observability, security and, soon, AI) are big. BUY

Nutanix’s (NTNX) set a new closing high today, so it’s clear the buyers are firmly in control. The combination of some super-bullish analyst commentary in the middle of January (it appears Nutanix is taking a lot of share from VMware in the wake of that firm being taken over by Broadcom) and lingering M&A rumors are keeping buyers interested. We sold one-third of our shares and are comfortable sitting tight with the rest. HOLD

ProShares Russell 2000 Fund (UWM) had a very tough retreat into mid-January and has hacked around since—including a test of the 50-day line this morning. Small caps can be heavily influenced by financial stocks, so the weakness in regional bank stocks could be an issue, but at this point the intermediate-term uptrend is still intact. We’ll play it by the book here—if UWM can really get moving, we still think it can surprise on the upside this year, but a drop much below the recent low of 33 might have us moving on. Hold for now. HOLD A HALF

Business remains great at PulteGroup (PHM), which reported a solid Q4 this week—while sales were off 15% and earnings fell 10% from a year ago, that was a smidge better than expected and down from very elevated levels. But more important is the fact that the future looks bright, with net new orders leaping 57% and with the top brass saying some positive things given the drop in mortgage rates. Analysts have moved up their earnings estimates to $12 per share for 2024, and even that could prove conservative if rates continue to move lower (the 10-year Treasury yield is off 30 basis points this week!). Shares have been volatile of late, but to this point it’s only three points or so below new closing highs. BUY

Shift4 (FOUR) again tested the 76 to 78 resistance area this week—and again fell back, with it coming close to the 50-day line during yesterday’s Fed-induced selloff. Still, it bounced back today and is nearly unchanged on the week—and is still in the same range it’s been in for the past few weeks. We started with a half-sized position and are holding on, waiting for the stock to make a decisive move. BUY A HALF

Uber (UBER) has earnings next Wednesday, so if you don’t own any, we advise keeping it small this close to the report. That said, the stock continues to look very strong, with about the only negative being a lack of upside volume during its gains so far this year. We’ll take it as it comes, but we have no new thoughts here—UBER acts like a liquid leader, though like many names, it’s had a big run so we’ll see how the stock reacts to its report. BUY

Watch List

KKR (KKR): It’s not the most exciting name, but KKR remains in great shape, setting new price and relative performance (RP) highs. Earnings are due next Tuesday.

Eli Lilly (LLY) and Novo Nordisk (NVO): NVO reported a great quarter yesterday (sales up 41%, earnings up 68% in dollar terms) with a solid outlook (operating income up mid to upper 20% range this year—which is likely conservative), gapping the stock to new highs. LLY has its own report out next Tuesday (February 6). We’re optimistic both of these liquid names can run as sales of their diabetes/weight loss drugs explode.

Expedia (EXPE): EXPE has bobbed and weaved in a tight range since late December as the 50-day line catches up. Earnings are due next Thursday, and a continuation of the November/December rally would be tempting.

GitLab (GTLB): We’re not eager for another technology name, but GTLB does quack like a fresh leader, with excellent price/volume action and the likelihood of consistent sales and earnings growth for years to come.

Neurocrine Biosciences (NBIX): NBIX remains in great shape, with a mild rest this week—next Wednesday’s earnings (February 6) should tell the tale.

NexTracker (NXT): NXT has been the “best” of an awful group (solar) for a while, though the stock did break out today after earnings on monster volume following a big beat. There were a few moving parts here (FLEX used to own a ton of it), but the story looks clean now and business is soaring.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, February 8. As always, we’ll send a Special Bulletin should we have any changes before then.

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