February 29, 2024

WHAT TO DO NOW: Remain bullish, but continue to be selective on the buy side. The market continues to act well, and we’re encouraged by the snapback seen in many leading stocks of late, as well as a fresh barrage of positive earnings reactions in recent days. In the Model Portfolio, we’re happy to own some very strong actors, and tonight we’re going add one new half-sized stake (5% of the portfolio) in Applovin (APP), while also restoring our Buy rating on Nutanix (NTNX), which reacted well to earnings today. Our cash position will be around 28%.

Current Market Environment

The major indexes were modestly higher today, with leading stocks doing even better thanks to a surprising number of fresh, bullish earnings reactions. Near the close, the S&P 500 was up 0.7% or so while the Nasdaq was up 1%.

Bigger picture, the story remains the same—our Cabot Trend Lines, Cabot Tides and Two-Second Indicator are all positive, and our Aggression Index remains in good shape, with no real movement into defensive names. On the flip side, interest rates remain a bugaboo, as the five- and 10-year Treasury yields are technically trending higher and have recouped about half of their prior decline, though rates did back off a bit after this morning’s inflation report.

As for leading stocks, it’s been less than a week, but most have handled themselves well since Nvidia’s (NVDA) earnings report last week—it’s possible the two sharp wobbles shook out many near-term weak hands, while the NVDA-induced rally cleared the air. Moreover, believe it or not, this is one of the busiest weeks of earnings (lots of firms have fiscal years ending January, etc.), and so far we’ve seen much more good than bad (including from a couple of our names).

Of course, what we’ve written recently still holds true—many stocks are extended in both time and price, which makes them difficult to buy in any size, and the recent up-down-up-down action is something often seen when buyers and sellers fight it out after a big run. (The Nasdaq 100 (QQQ) fund has actually been battling with the 435 to 440 area for the past three weeks.)

All told, then, we’re still bullish, but are picking our spots for new buying. The good news is that some of the recent earnings reactions have come in “fresher” names. Tonight, we’re going to start a new half-sized position (5% of the portfolio) in Applovin (APP), which quacks like a stock that could gain a lot of sponsorship going ahead. We’ll also restore our Buy rating on Nutanix (NTNX) after today’s earnings-induced pop out of a tight area.

We could have some more new buying in the days ahead—either averaging up in a current name or starting stakes in new names—but tonight we’ll do just the one new buy and see how it goes. Our cash position will now be 28%.

Model Portfolio

AppLovin (APP) is a name we’ve written about a couple of times in recent weeks (including in last week’s issue)—while the “old” game business should stabilize and remain profitable, the firm’s machine learning-powered marketing engine (upgraded just under a year ago) has proved to be a huge, huge success, producing stunning growth and massive cash flow margins (EBITDA margins of 69% in Q4!!). Indeed, in 2024, early estimates call for something like $4.50 per share of free cash flow and management wants to return a chunk of that to shareholders—and, interestingly, is starting now. This morning, the firm announced that nearly 20 million closely held shares are being offered (no dilution to the company), but the firm is set to buy back about half of those ($540 million worth), which would be nearly 3% of the entire company in one fell swoop. Of course, the growth story and numbers count more, but it helps and shows how the firm is starting to gush cash. We’ll start with a half-sized stake (5% of the portfolio). BUY A HALF

Arista Networks (ANET) has bounced off its 50-day line, mainly thanks to the help of NVDA’s report last week. We’re happy to give our remaining shares a chance to hold up, especially as, looking out a few quarters, Arista is basically the #1 institutional way to play the coming boom in AI (and all cloud-based) networking—and that opportunity should be massive. That said, the stock is running into some resistance, and the lack of AI-related 2024 visibility (at least at this point) could certainly keep big investors from piling in. All in all, we put some profit in our pocket a couple of weeks ago and are simply sitting tight with the rest. HOLD

CrowdStrike (CRWD) has snapped back about as well as anyone could have hoped from last week’s brief plunge after Palo Alto Networks’ own quarterly report. That said, the earnings gauntlet for CRWD is still ongoing—tonight, peer Zscaler (a closer peer than PANW for the company) reports results, and CrowdStrike itself will report next Tuesday (March 5). Given the action, we’d normally go back to Buy, but with earnings coming soon, we’ll stay on Hold and see how the stock handles the news items in the days ahead. HOLD

DraftKings (DKNG) has bounced around since its quarterly report, though some analysts have offered encouraging words—one bumped up his long-term estimate for the firm’s take-rate as new betting offerings (including gaining share in iGaming) boost that figure. If DKNG can set up properly, we could entertain adding to our small-ish stake, but at this point, we’ll just hold what we have and see if the stock can gain momentum. HOLD

Elastic (ESTC) survived the two recent selling waves in AI stocks, holding its 50-day line and, thanks to Nvidia’s (NVDA) report, rebounding back to marginal new highs today. That’s a good thing, of course, but the company is set to report results after the close tonight, and the reaction (tomorrow, yes, but also in the days ahead) will be vital. We moved ESTC to Hold last week during its wobbles, and we’ll leave it there tonight and see what comes. HOLD

Nutanix (NTNX) released another very solid quarterly report last night—revenues were up 16%, but annual contract value lifted 23%, recurring revenue was up 26% and free cash flow more than doubled to 54 cents a share (well above the 46 cents per share of earnings), with an outlook that was mostly in-line (seeing similar continued growth going ahead). Shares popped a bit on the news, though the movement wasn’t major—which is fine by us, as the stock very much remains “under control.” We don’t think NTNX is at a pristine buy point, and like many leaders, it’s had an elongated run—but after closing four weeks tightly just under 60, today’s move looks bullish. If you own some, hang on, but we’re OK starting a position here or on dips of a couple of points if you’re not yet in. BUY

PulteGroup (PHM) has been sneaking higher in recent days on quiet volume; overall it’s holding firm in a tight range (100 to 110, ballpark) for the past few weeks. We remain optimistic the next big move is up, but the near term is more uncertain, especially given that rates are still a fly in the market’s ointment. If you wanted to nibble here, we wouldn’t argue with it, but if you already own some, hang on and see if the buyers return in a big way. HOLD

Shift4 (FOUR) reported Q4 results on Tuesday, and initially, they looked fairly poor—the firm missed estimates due to some big clients pushing back integrations into 2024—and, indeed, that caused the stock to gap down a few points at yesterday’s open. However, the buyers have been at it since then for a few reasons. First, even with the “miss,” growth was still terrific, with revenue less network fees (the key top-line metric) up 35%, payment volume up 55% and EBITDA (the main bottom-line measure) up 44%. Second, the top brass sounded confident that any implementation delays are just temporary. And third, the 2024 outlook was fantastic, with payment volume likely to lift 60% (bolstered by some acquisitions late last year), revenue less network fees and EBITDA up 40%-plus and free cash flow likely well above $4 per share! All of that is to the good and had the stock back near the top of its range mid-day yesterday—and then rumors surfaced that Fiserv and Amadeus were reportedly ready to submit buyout offers for Shift4 in the coming weeks, causing FOUR to break out on the upside.

Obviously, that action is great to see—but acquisition-related moves can come and go, as we saw somewhat today: For its part, Amadeus said it was not interested in a buyout, causing FOUR to slip back somewhat today. Our plan here was to average up on a breakout above 80-ish, and we don’t want to deviate much from the plan—but we also don’t want to leave our brain at the door, as the stock is likely to be news- and rumor-driven near-term. Given it all, we’re going to simply hold what we have right now—though if FOUR can continue higher after today’s hiccup, we could add to our position. Stay tuned. HOLD

Uber (UBER) has stalled out a bit just shy of 80, but of course, this comes after a huge upmove in recent months (basically doubling from its October low), so some wiggles are to be expected. Even so, unless something really big and negative appears on the horizon, it’s a good bet that big investors will likely support shares on dips given the bullish bookings, EBITDA and free cash flow outlook relayed at its recent Investor Day, along with some other tasty tidbits. (Here’s one: For Uber’s delivery segment, 14% of monthly active users bought groceries through the platform in Q4, up from 8% a year ago, while 5% of new Uber Eats users actually come in the door by ordering grocery or retail delivery.) We’ll stay on Buy, but aim for dips and/or keep it small if you want in. BUY

Watch List

AppFolio (APPF): APPF continues to trade well, chopping around a bit with the market but actually building on its post-earnings gains a bit. Indeed, we think that, after a tough two-year period, the Q4 report may have been the perception-changer the stock needed.

Cava (CAVA xx): CAVA reported a great Q4, with sales up 36%, earnings in the black and booming same-store sales, and the early 2024 outlook was sanguine. The stock is trending up but sort of in no-man’s land—we’ll watch for a higher-odds entry.

Celsius (CELH): CELH reported Q4 results this morning and they were terrific, with sales up 95%, earnings of 17 cents up from a loss a year ago and EBITDA rose nearly five-fold. Shares opened lower but boomed after that, reaching new price highs on big volume. We’re watching it closely, and if it settles down, we could start a position.

Eli Lilly (LLY) and Novo Nordisk (NVO): LLY and NVO have hacked around with the market over the past couple of weeks but look fine overall—they even digested news that a small biotech released great trial results for its own weight-loss offering. We’re not chasing them here, but a bit more weakness would be tempting.

On Holding (ONON): ONON has been building a massive launching pad for about a year at this point, and shares have begun to perk up ahead of earnings on March 12. The story and numbers have been great all along, so we’re keeping an eye on it to see if it can decisively get going.

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.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, March 7. As always, we’ll send a Special Bulletin should we have any changes before then.

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