June 22, 2023

WHAT TO DO NOW: Remain optimistic. The market and leading stocks have finally begun to pull in somewhat, but the action has been completely normal so far and our market timing indicators are bullish. We’ve put a good chunk of money to work of late, and tonight we have one small addition—we’ll add a half-sized position (5% of the portfolio) in DraftKings (DKNG), which seems to be set up well. That will leave us with around 35% in cash, which we’ll aim to put to work (including, ideally, by filling out some existing positions) if the market continues to behave itself.

Current Market Environment

The market was mixed today, with the broad market lower but the Nasdaq and leading growth stocks higher. At day’s end, the S&P was up 0.4% and the Nasdaq was up 1.0%.

The market’s much-anticipated pullback seems to be underway, with the indexes and leading stocks retreating this week, helped along by some renewed hawkish talk from some Federal Reserve members. (The market now sees an 80%-ish chance of a 0.25% rate hike next month.) Given what happened in February—when a good-looking rally went up in smoke after the Fed engaged in some saber rattling—we’re not whistling past the graveyard.

Still, right now, it’s hard to call this anything but a normal and well-deserved dip. The Nasdaq, for instance, broke out in early May and ran up about 1,600 points—and to this point has given up just one-quarter or so of that. The S&P has been a touch weaker, but still given up far less than half of the prior move.

More important, all of our market timing indicators (Cabot Trend Lines, Cabot Tides, Two-Second Indicator (new lows today were close to 40 but look to be just under), as well as secondary measures like our Aggression Index) are still solidly positive, and there’s only been one leader we’re watching that’s flashed any iffy action (Duolingo (DUOL)), and even that one isn’t completely toast.

If you’re looking for something to watch, it would be the broader indexes, which are positive but not powerful, and financial stocks, which are still lackluster and have a history of pushing and pulling the market.

In the near term, we think some more tree shaking is likely to re-raise the fear level and allow for leaders to consolidate their big moves. That said, we’re not going further than that until we see abnormal evidence—at this point, the odds favor (a) some more ups and downs near-term, but (b) higher prices for the indexes and leaders down the road.

In the Model Portfolio, we’ve been steadily putting money to work, and tonight we’re going to make one small move, adding a half-sized stake (5% of the portfolio) in DraftKings (DKNG). That will still leave us with around 35% in cash; if the market continues to behave itself, we’ll likely put more cash to work soon (including, ideally, filling out some of our small positions). Details below.

Model Portfolio

We’ll start with DraftKings (DKNG), which we’ve been eyeing for a while now. In a sense, the story is somewhat similar to Uber—a firm that’s a big player in a growing field, and after huge amounts of cash burn, the firm is aiming for cash flow growth and (eventually) profits; in this firm’s case, customer acquisition costs are falling rapidly (down 27% in Q1 from a year ago) as sign-up incentives ease, while current customers continue to increase their usage and new clients are using the gaming platform more than prior cohorts. (While a smaller market than sports gambling, DraftKings is the leader in iGaming (online casino), which helps.) the stock gapped up on earnings in early May but has mostly chopped sideways since, doing nothing wrong—but DKNG has held up well so far during the market’s mini-wobble of late and began to push higher today. We view it as a good risk-reward situation—we’re going to add a half-sized position and use a stop a bit under the 50-day line (near 23), but if shares get going, we’ll look to fill out the position. BUY A HALF

Celsius (CELH) pulled back 10 points or so recently, which is sharp but not at all out of the ordinary given the stock’s volatility; shares never even tagged their 25-day line (now near 137 and rising) before today’s rebound. Expect more near-term volatility, but all signs continue to point toward the buyers being in control as the company’s distribution deal with Pepsi gets its energy drinks into more locations and channels. We filled out our position last week and remain on Buy. BUY

DoubleVerify (DV) has been very impressive, not so much because it’s racing higher (we’re up a couple of bucks) but because it’s been crawling higher nearly every day, regardless of the market. This morning the firm announced a new offering today that allows advertisers on Meta Reels to ensure the video ads are both seen and safe from fraud—a potentially big move given the boom in short-form video content across many platforms. We’re tempted to average up here; we think the straight-up action since the breakout five weeks ago bodes well. That said, we’ll stand pat tonight, still thinking some sort of exhale is possible in the near term. If you don’t own any, we’re OK picking up a small position here or on dips of a couple of points. BUY A HALF

Inspire Medical (INSP) continues to act well, holding above its 25-day line and actually nosing to new highs today; we think business is in fine shape, and the odds favor the next big move is up. Still, right here, we’re going to stick with what we have—if you don’t own any, we’re OK buying a small position here or on dips, but if you’re already in, we think waiting for a bit more upside confirmation (or a more prudent entry point) makes sense. BUY A HALF

Monday.com (MNDY) was added last week and, as we wrote, it’s been volatile, with a quick dip into the mid-160s yesterday, but it held support near the 25-day line and bounced nicely today. Overall, the stock has held onto nearly all of its huge-volume May advance, and the fact that earnings and free cash flow are just taking off should keep buyers interested. BUY A HALF

ProShares Ultra S&P 500 Fund (SSO) is now four days into its consolidation, and like most things, it looks normal to this point, holding well above its rising 25-day line (now nearing 54). We’re not ruling out anything when it comes to the market, especially if the Fed decides to again turn super hawkish; if things really fall apart, we’ll again pare back. But as we wrote last issue, the vast majority of evidence is bullish today, especially when looking out a few months. Said another way, it’s not a sure thing, but the odds are growing a new bull phase has begun, which means SSO and other indexes should do well over time. Hold on if you own some, and if not, we think you can grab some shares on this retreat. BUY

Shift4 Payments (FOUR) has been futzing around in the low 60s, unable to overcome the 50-day line on any rally attempt. Nothing’s changed with our thoughts—a few good-volume buying days could make a big, bullish difference here, but a decisive drop from here would probably have us moving on. Right here, we think holding the small position makes sense. HOLD

Uber (UBER xx) caught an upgrade earlier this week, with one analyst seeing the stock possibly added to the S&P 500—we’d be all for it, but that’s usually a short-term thing (if it even happens), with big investors buying thanks to an ever-growing outlook for EBITDA and free cash flow. Like most things, some near-term weakness is possible, but we’re not expecting a huge retreat. BUY

Wingstop (WING) is near the edge here, with some support in the past week but, today, a move down to its correction lows. We think business is likely just fine, and after a good rally in recent months, its dip is normal in the overall scheme of things—but it’s going to have to find support right quick or we’ll likely prune more or sell the rest and move on to greener pastures. For now, hang on. HOLD

Watch List

Axcelis Technologies (ACLS): ACLS pulled back about 12% from high to low before bouncing. Like a lot of names, we think it’s fine overall, but also think the stock could bounce around for a bit after its recent moonshot.

Confluent (CFLT): CFLT quacks like the next winner in the Big Data wars, with a platform that allows for real-time streaming and insights of data into all of a firm’s apps. The stock showed extreme power in May and early June and the recent rest has been sharp, but normal.

MasTec (MTZ): MTZ remains in good shape, poking to new recovery highs yesterday before turtling today. The RP line isn’t out to new highs yet, but we’re putting more emphasis on the seven straight weeks of above-average volume gains. It’s not going to be a rocket, but we think it’s among the new leaders of a construction/infrastructure boom out there.

On Holding (ONON): ONON still needs seasoning, so really, the stock is probably more on our “backburner” watch list than something we’d re-enter in the next week or two. Still, with the market environment having turned, the stock has begun to bounce back, and the underlying story and growth expectations (80%-ish this year and 25% or so next) remain outstanding.

Samsara (IOT): IOT has been pulling back with everything else, with a normal dip of a few points. We’d like to see another few days or couple of weeks of digestion to set up a higher-odds entry point.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, June 29. As always, we’ll send a Special Bulletin should we have any changes before then.