February 14, 2024

Housekeeping: We’re sending this week’s update out a day early as I’ll be out of pocket for most of tomorrow (and in/out during the following week).

WHAT TO DO NOW: Hold your strong stocks, but near-term, it’s OK to sit on your hands a bit and see how things shake out. The overall evidence remains bullish, but there have been some yellow flags of late and yesterday’s broad, sharp decline is likely to have some near-term reverberations. We took partial profits in Arista (ANET) yesterday, selling one-third of our shares, and placed Pulte (PHM) on Hold, leaving us with around 34% in cash—and some great performers. We’ll stand pat tonight, though if things settle down for a couple of days, we could put some of our cash back to work.

Current Market Environment

The market is bouncing a bit after yesterday’s sharp decline, though leading stocks doing better than the indexes. As of 1230 EST, the S&P 500 is up 0.3% and the Nasdaq is up 0.5%.

There had been a growing number of short-term yellow flags building up: The market and leading stocks have had big, prolonged (three-plus-months) runs; the advance was relatively narrow, with most of the market doing nothing since the start of the year; and recently we saw some frothiness, with a few AI names going wild and some laggards breaking out.

As we wrote last week, that raised the risk of some sort of change in character, and it’s possible yesterday morning’s inflation report was the trigger—the market now expects the Fed to be less easy this year, and Treasury rates responded, spiking to their highest levels since the end of November, while the major indexes and nearly every leader took a punch to the gut.

So where does that leave us? In the short-term, yesterday’s very broad off-the-top decline is likely to lead to some more consolidation, especially given the aforementioned yellow flags that had built up and the fact that interest rates are now trending higher (or, at the very least, the downtrend there has been cracked).

Bigger picture, nothing much has changed: Our Cabot Trend Lines and Cabot Tides are still positive (another 3% or so decline could change the Tides, but we never anticipate that stuff), and so is our Two-Second Indicator (yesterday’s reading of 48 wasn’t bad at all given the mauling the broad market took) and Aggression Index (no real movement into defensive stocks).

Put it together, and we’re mostly watching and waiting for the moment, seeing how leaders and the market act in the days ahead—we’re all for yesterday being a one-day shakeout, but as we just wrote, the odds favor some more tossing and turning. That said, with most evidence positive, we’re certainly not anxious to let go of our strongest names, and if things can settle down we’d like to put some money back to work.

On yesterday’s special bulletin, we took partial profits in Arista (ANET) and placed Pulte (PHM) on Hold—and tonight, we’ll stand pat and see how things shake out over the next couple of days. Our cash position stands around 34%.

Model Portfolio

Arista Networks (ANET) reported a solid Q4, with sales up 21% and earnings up 48% and topping estimates (partly due to a lower tax rate). But, as we alluded to in yesterday’s bulletin, the stock got hit as the top brass kept its 2024 guidance in place (just 10% to 12% sales growth) and said that AI-related sales will gradually ramp but be more of a 2025 story. Given ANET’s prior run, the good-not-great results caused some selling, though we can’t say the damage was severe—heck, shares are still above their 25-day line. That said, partly because of the big run, partly because of the market’s wobble and partly due to ANET’s earnings reaction, we thought it prudent to lighten up a bit—we sold one-third of our stake yesterday afternoon, but we’re holding the rest and giving it a chance to stabilize and, eventually, head higher. SOLD ONE THIRD, HOLDING THE REST

CrowdStrike (CRWD) was very impressive yesterday, falling sharply at the open but quickly snapping back and actually closing in the green despite the market selloff. The firm has been mostly quiet on the news front, though it did ink a deal with a distributor in the U.K., which doesn’t hurt. Earnings are due March 5, which will be key, but CRWD has been one of the big leaders of this rally and remains so today. As an aside, we’ve gotten some questions about whether it’s OK to take some partial profits up here, and our general response is: Sure, if you have a “big” stake (whatever that means to you) and want to lighten up, there’s nothing wrong with that. However, for the Model Portfolio, the position size isn’t huge, so we’re inclined to just hold what we have and see what comes. If you’re not yet in, try to pick up a small position on pullbacks or shakeouts. BUY A HALF

DraftKings (DKNG) reports Q4 results tomorrow morning, which will obviously be key; analysts are looking for $1.24 billion in revenue (up 45%) and a profit of eight cents a share, though the EBITDA total and the initial 2024 outlook will be watched closely, as will any discussion about the firm’s new deal with Barstool sports (just inked after the Super Bowl). (Of course, the firm just had an Analyst Day in November, so it’s unlikely there will be major changes to that guidance.) All in all, we’ll take it as it comes—in the meantime, DKNG acts great, holding near new price and RP peaks. HOLD

Elastic (ESTC) isn’t the strongest thing out there, but it continues to act reasonably well, with yesterday’s morning dip close to the 50-day line (near 116) finding support. If this market pullback continues and ESTC really gets hit, we could go to Hold and even prune some shares, but at this point the story, numbers and chart all remain pointed up. Earnings are due March 1. BUY

Nutanix (NTNX) continues to act just fine, briefly slicing its 25-day line yesterday morning before bouncing back in the afternoon and today. After a mostly straight-up run since October (up 14 of 15 weeks!), we’re more comfortable on Hold, especially as earnings are coming in two weeks (February 28)—though shares have been mostly marking time since late January, so a bit more rest and a positive earnings reaction could provide an opportunity for new buying. Right here, though, we’ll just hang on. HOLD

PulteGroup (PHM) is sagging alongside interest rates, and to respect that action, we went to Hold in yesterday’s bulletin. Truth be told, though, we don’t think the selloff is bad at all given the move in interest rates—the 10-year Treasury yield, which is what most mortgage rates are based on, has quickly spiked from a low near 3.85% on February 1 to 4.30% today—and we’d note that many building supply stocks haven’t budged. Of course, we won’t just hold and hope: If PHM really breaks open, we’ll take our modest profit and move on, but we’re still optimistic that, big picture, Pulte’s business could easily surprise on the upside this year, especially if/when the Fed finally starts to ease. HOLD

Shift4 (FOUR) continues to trade in a tight range, holding above moving averages but unable to really get going on the upside. So far, we’re fine with it—in fact, a good day or two could have us averaging up, though earnings are coming up quick (February 27). Nothing has changed with the story or growth outlook here, with 2024 very likely to bring big growth in payment volume, sales and earnings as many of the deals the firm inked last year take hold and as its SkyTab point of sale system gains market share. Hold on if you own some, and if not, we’re OK buying a small position around here. BUY A HALF

Uber (UBER) already reported a fine quarter last week, but today’s Investor Update stole the show: While the presentation had tons of details over a few dozen slides (we’ll relay more in next week’s issue), the main takeaway was the three-year view, with management expecting 2024 to 2026 to see gross bookings lifting mid- to high-teens annually, while EBITDA soars “high 30% to 40%” and free cash flow totals 90% of EBITDA (up from 60% during the past three years), which obviously means humongous growth. To go along with that, Uber announced a $7 billion share buyback plan, though it will start mostly to offset dilution (from stock options, etc.). UBER popped on the news today, roaring to new highs on big volume, which is obviously good to see. We’ll stay on Buy, but at this point new buyers should aim for dips of a few points or a rest period of a couple of weeks. BUY

Watch List

AppFolio (APPF): APPF looks fine in the wake of its huge post-earnings reaction, though it can be a bit wild on a day-to-day basis. If it and the market settles down we could start a position in the days ahead.

Celsius (CELH): CELH has been herky-jerky for a few weeks, but it may be getting its act together here, with the stock testing multi-month resistance today. Earnings are due in about three weeks.

Eli Lilly (LLY) and Novo Nordisk (NVO): Both LLY and NVO have begun new advances, with sales and earnings likely to kite higher as their diabetes/weight loss drugs gain adoption. The stories are relatively obvious at this point, but our guess is they will do well as long as the market’s in gear.

Intra-Cellular Technologies (ITCI): ITCI continues to build a quiet launching pad ahead of earnings, due February 22.

Palantir (PLTR): It’s a super-volatile name, but we think PLTR’s Q4 report, which showed massive U.S. commercial growth for its AI platforms, was a game-changer in terms of perception. If all goes well we could start a position soon.

NexTracker (NXT): NXT actually tagged new high ground today, which is obviously a good sign. The solar group remains weak, and analyst estimates for 2024 are a bit underwhelming, but those are probably conservative and the recent quarterly report showed a huge and growing backlog.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, February 22. As always, we’ll send a Special Bulletin should we have any changes before then.

Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.