February 16, 2023

WHAT TO DO NOW: Continue to lean bullish. The market has chopped around for the past couple of weeks, but while we’re always on the lookout for yellow flags, none have appeared yet—all of our key market timing indicators are positive and most stocks are doing pretty well. We’re not close to fully bullish, but we’ll put a bit more money to work tonight by filling out our position in Uber (UBER), which will leave us with around 35% in cash. We’re also going to place Shift4 (FOUR) on Hold after today’s selling. Details below.

Current Market Environment

Another hot inflation report hit the major indexes today, with the S&P 500 down 1.4% and the Nasdaq was off 1.8%, but both remained in their recent ranges.

The market got a bit hot and heavy two weeks ago, with the major indexes soaring above their December highs and some speculative names leaping; meanwhile, the number of stocks hitting new highs reached their highest level since November 2021, which is a good thing overall but usually ushers in a short-term exhale in the market.

Sure enough, stocks have been engaged in a digestion phase since then, but the good news thus far is that the rest period looks normal, with pullbacks having been relatively well contained in the indexes and leading stocks. Our Cabot Tides remain in good shape, our Cabot Trend Lines are still looking good and the number of stocks hitting new lows on the NYSE (Two-Second Indicator) remains very low, often in the single digits—not something you’d likely see if the sellers were really revving up.

Of course, something can always change, and we’re far from complacent—today’s action (spurred on by relentless tough talk from many Fed speakers) was a shot across the bow, and if the Fed really isn’t that close to being done with its tightening phase (or if they re-accelerate the pace of rate hikes), we’ll have to see how it goes. Said another way, we’re flexible.

That said, we always prefer to go with the evidence, and so far, this recent retreat has the makings of being a normal rest after a strong move higher, a pattern that usually gives way to higher prices.

When it comes to the Model Portfolio, our goal has been to steadily shovel money into the market as long as things were going bullishly, which is what we’ve done over the past month. We’re still mostly in that mindset, but given that the market is meandering here, we’ll make just one small move tonight—we’re going to fill out our position in Uber (UBER), which looks ready to continue its nascent advance. That will leave us with around 35% in cash. We’re also placing Shift4 (FOUR) on Hold given its decline today (brought on by a peer’s poor quarterly report). Details below.

Model Portfolio

Academy Sports & Outdoors (ASO) broke out nicely in late January and early February, but then gave most of that back in the days that followed. Still, similar to the overall market, nothing really changed when looking at the evidence—ASO dipped on light volume to its prior highs (and near its 25-day line) and has begun to perk up a bit despite the up-down action in the indexes. If the stock really keels over, we’ll abandon ship, but at this point, the thesis remains intact, with a dirt-cheap name that’s embarking on a big cookie-cutter expansion plan that should lead to estimate-beating growth. We’ll stay on Buy. BUY

Inspire Medical (INSP) is off to a nice start, with its earnings-induced breakout holding nicely despite the market’s wobbles. Every quarter that goes by adds to the view that Inspire’s sleep apnea solution could be another standard of care in the giant industry, with opportunities to grow its procedure volume manyfold in the years ahead. We wouldn’t be surprised to see some near-term wiggles, but the story, numbers and chart all look good. BUY A HALF

Las Vegas Sands (LVS) has sagged a smidge during the past couple of weeks, but it’s been very calm about it, easing down to its 25-day line on quiet volume. If the market gets hairy, a dip toward the 50-day line (nearing 53) is possible, or maybe the stock needs more time to catch its breath after the January run. But big picture, everything here is still lined up, with China’s reopening on track, which is likely to help cash flow soar in its Macau properties. A show of strength from here could have us filling out our position, but at this point, we’ll stick with our half-sized stake—though, if you don’t own any, you can grab some shares around here. BUY A HALF

ProShares Ultra S&P 500 Fund (SSO) has been hacking around with the S&P 500, with near-term resistance in the 52 area (correlates to around 415 on the SPY and 4,150 on the S&P 500, give or take) rejecting recent rallies. Still, as we wrote in the first section, all of our market timing indicators remain positive during this two-week rest period, and we’d also note the S&P has acted as it “should” following the 2-to-1 Blastoff green light just over a month ago. A drop down to 47-48 or so would probably have us going to Hold, but right here, the path of least resistance remains up. BUY

Shift4 Payments (FOUR) took a big hit today, especially in the afternoon, falling from near multi-month highs to month-long lows. The reason didn’t have anything do with the company itself—instead, Shift4’s peer Toast (TOST) reported earnings this morning, and the market hated them (driving TOST down 23%). Of course, what will count most is Shift4’s own quarterly release (due February 28); overall spending trends in the economy certainly seem solid, and the company’s move into a variety of new industries should help as they ramp. (Also helping the cause: Shift4 is solidly profitable and free cash flow positive, unlike Toast.) That said, the stock is not the company, so we’re focused on the action—on one hand, shares hadn’t had any “real” dip in a while and today’s selling didn’t crack any key support (the 50-day line is around 58.5), so at heart we’re optimistic. That said, the big-volume snap right off the top (and implosion of one of its peers) isn’t a good look. We’re OK giving FOUR some rope, but feel it’s prudent to go to Hold here and see how this dip plays out. HOLD

Uber (UBER) was also tossed around briefly by a competitor—in its case, Lyft (LYFT) imploded after its Q4 release last week, which pulled UBER down a bit on the day we were buying. That’s fine by us, and shares have steadied themselves nicely since last Friday’s dip. A still-strong global economy and uptick in travel are clearly helping business, but in terms of investor perception, it’s likely more important that the top brass is laser-focused on profits and free cash flow, with Uber consistently beating targets of late, too. It’s quick, but we’re going to go ahead and fill out our position tomorrow (buying another 5% stake)—and given our (likely) average cost, will be using a stop in the 30 area on the combined stake. BUY ANOTHER HALF

Wingstop (WING) dipped about 15 points before and after Chipotle took a hit on its earnings report, but the stock held its 200-day line—and, this week, has gone nuts, busting out above recent resistance and testing all-time highs from late 2021! The company will report earnings on February 22 (next Wednesday), which will really tell the tale, but there’s no question the big-volume buying (today notwithstanding) up and out of its launching pad is a good sign. We’ll stay on Buy, but if you enter ahead of earnings, keep it small and look for dips of a few points. BUY

Watch List

Airbnb (ABNB): Airbnb might be the growthiest way to play the new travel boom, and the stock has turned super-strong after earnings this week. Free cash flow came in around $5 per share last year, well ahead of reported earnings of $2.79.

Axcelis Technologies (ACLS): Axcelis is one of two chip names (Allegro Microsystems (ALGM) is the other) that look like new leaders. Axcelis is an equipment maker with machines that are in huge demand to make silicon carbide (and other) chips, a market that’s growing rapidly thanks to the EV boom and other factors; the firm could be the weapons supplier to the SiC war, so to speak. The stock is very strong—we’re looking for a shakeout to enter.

Axon Enterprises (AXON): AXON looked like it was done for a couple of weeks ago, but so far the crack was a one-day event, with shares rallying all the way back to their highs near 200. Earnings are due February 28.

On Holding (ONON): ONON has set up a nice bottoming base, though we’ll probably be waiting for the Q4 report (no set date yet) to see if the buyers can really flex their muscles. Fundamentally, we do think the firm has a chance to be another big-selling brand.

United Airlines (UAL): UAL and other major airlines are nearly five weeks into flat, tight consolidations following their early-year moonshots. It’s not a growth industry, obviously, but we think a group move could be getting underway—analysts recently hiked their estimates here, now looking for over $8 of earnings per share this year and more than $10 in 2024.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, February 23. As always, we’ll send a Special Bulletin should we have any changes before then.