March 14, 2024

WHAT TO DO NOW: Remain bullish, but keep some dry powder on the sideline. Most of the evidence remains positive, but the choppy, churning action among some leading stocks (as well as the Nasdaq itself) is still in place. To be fair, many fresher names are acting well, but we’re content to hold some cash and our strong performers and see how things play out. After putting some money to work last week, we’ll stand pat tonight with a cash position of around 27%.

Current Market Environment

As of 2 pm EST, a big jump in interest rates is hitting the market, with the major indexes down some (S&P 500 and Nasdaq off 0.5%) but the broad market (small caps down 2%) and leading growth stocks off much more.

Nothing has changed when looking at the market from a big-picture perspective—our Cabot Trend Lines, Cabot Tides and Two-Second Indicator (today was more than 40 new lows, but that was the first plus-40 reading since February 22) are all still positive, and most stocks as a whole (and leading stocks in particular) remain in solid uptrends.

Under the surface, though, there continue to be lots of crosscurrents and choppy action, with many stocks moving around a lot but not showing a lot of progress. In fact, we’re even seeing that in some indexes—the Nasdaq reached over 16,000 back on February 12, and today, a month later, it’s close to the same level. Same goes for the IBD 50 Index, which has been thrashing around since early February. (Our Aggression Index is in the same boat, too.)

To be fair, the Nasdaq and IBD 50 both remain near their 25-day moving averages—so we’re hardly seeing outsized selling pressures yet. Moreover, when it comes to leading stocks, it depends where you look: As we wrote last week, many big winning AI and tech plays are chopping around, though fresher names are acting better.

Thus, we’re not seeing red flags at this point, but we continue to think it’s best to (a) manage your winners, giving them room to gather strength for another push higher, (b) focus new buying on fresher names that have shown good power of late, and (c) hold a chunk of cash given the wobbles.

We did a bit of buying last Friday, but we’re going to sit tight tonight and see how things play out—partly in regard to the overall market, but also among individual stocks, looking to see what names firm up vs. which ones continue to act sloppily. Our cash position will remain around 27%.

Model Portfolio

AppLovin (APP) is one of the fresher leaders out there, so if the market holds together, we have high hopes for it, especially as the story here is less hope and more reality—its Axon advertising engine is cranking out massive results, driving earnings and free cash flow much higher. Near term, APP will probably follow the market’s path, but big picture, we think the earnings gap last month kicked off a new upmove. BUY

We have to admit there have been a couple of times in recent weeks where we thought Arista Networks (ANET) may go over the falls, but each time it’s found support and bounced back—and today the stock was within shouting distance of new closing highs. Nothing has changed with the fundamentals here, with the near term looking fine (not amazing) while everyone waits for what should be a very big AI-induced buying wave down the road. Back to the stock, shares have hacked around for the past five weeks, and we’re content to stick to a Hold rating and see what comes—a breakout to new highs would obviously be good to see, though a dip back toward 250 would be iffy in the intermediate term. HOLD

Cava (CAVA) is extended to the upside, but we started a half position in it last Friday because it looks like a cookie-cutter story that could quickly gain lots of sponsorship as the restaurant count expands (15% annually), as store economics remain strong (35% cash payback in year two alone) and as retail/consumer stocks gain steam. We’ll stay on Buy a Half, but use a loose leash given the stock’s volatility. BUY A HALF

CrowdStrike (CRWD) has definitely seen some resistance of late, first after its big earnings gap and since then near its prior highs in the 340 area. That said, like the market, the sellers really haven’t stepped up, with the stock still holding around its 25-day line and not far from new closing highs. Interestingly, another cybersecurity peer (SentinalOne (S), a smaller outfit) got walloped on earnings today, so the group is definitely on its heels right here. Big picture, we remain optimistic here, but short term, we’ll stay on Hold given the ups and downs and group action. HOLD

DraftKings (DKNG) continues to hack around in the 40 to 45 area as the 50-day line (now nearing 40) approaches. Ideally, this sets up a good add-on point—possibly with a shake to or slightly below the 50-day line followed by a strong turn back up—but, as always, we’ll have to see how it goes. Fundamentally, everything looks to be on track here, with the firm having just launched online sports betting in North Carolina on Monday. We’ll stay on Hold here while watching to see how this rest period plays out. HOLD

As opposed to most tech names, Nutanix (NTNX) zoomed to a new high earlier this month after a great earnings report, and while it hasn’t run away on the upside, it’s remained firm, trading nicely above even its 25-day line (now near 60.5). There’s been no news or analyst tidings since the report, but big investors are clearly thinking rapid, reliable growth is likely for a long time to come thanks to the switch to its subscription model (more recurring revenue), the AI boom and likely grabbing some clients from VMware after that firm went under Broadcom’s wing. We’re holding our stake, and if you’re not yet in, we’re sticking with our Buy rating, though as with most everything, we prefer to target dips of a couple of points. BUY

PulteGroup (PHM) and peers took it on the chin today, with the combination of a big pop in rates (the 10-year Treasury yield is up 20 basis points so far this week) and a bad reaction to earnings from Lennar (LEN) bringing in the sellers. If perception continues to grow that rates will stay higher for longer, homebuilders would almost certainly suffer. That said, no damage has really been done here, with shares hanging around the highs of the recent rest period (from 100 to 110 mid-December through February), and the same can be said of the group as a whole. Translation: We’ll keep our eyes open but we’re also keeping our Buy rating intact here. BUY

Shift4 (FOUR) has sagged back into its prior consolidation, which, while not abnormal, is disappointing. We never averaged up despite the rumor-driven move to new highs a couple of weeks ago, so we’re OK giving the stock some more wiggle room, especially because business remains in fine shape and (in theory) there should be support in the 70s. At this point, we don’t have a ton of patience with the stock given its inability to get moving in a strong environment, but we’ll hold for now and see if support arrives where it “should” in the near future. HOLD

Uber (UBER) hasn’t been immune to the choppiness in growth stocks, but so far, it’s acting very solidly, sitting a bit under the 80 level as the 25-day line has caught up; shares are still hanging around where they closed following the super-bullish Investor Day in mid-February. None of that means UBER can’t correct if something hits the wires of the market sells off, but so far, the selling pressures have been light. We’ll stay on Buy, preferably on dips. BUY

Watch List

Celsius (CELH): CELH continues to act well in the wake of its earnings report two weeks ago, with Monday’s shakeout quickly leading to higher prices. We’re not chasing it here, but a rest for a week or two would be tempting.

Freshpet (FRPT): FRPT is trading very tightly after its big earnings gap, which itself came after a tight area for a few weeks—all of which is constructive. As mentioned before, our biggest worry is that the stock can trade very thinly at times, but there’s no doubt the buyers are in control.

Hims & Hers Health (HIMS): HIMS is lower priced but liquid, and the story is easy to enthuse about, with huge growth and increasing cash flow likely for a very long time. Shares are extended but showing great power.

On Holding (ONON): We scratched ONON off our watch list yesterday when it got whacked on earnings—but then it stormed right back yesterday on big volume. The chart still needs work, but the 2024 outlook (30% currency-neutral revenue growth and faster EBITDA growth) was excellent. We’ll watch a bit longer.

Palantir (PLTR): PLTR tried to get going last week before the weakness in AI names pulled it back in, but the action looks normal to us—and if the stock can hold around here, could present a good entry point.

Robinhood (HOOD): HOOD remains in good shape despite a few wobbles among the market’s hottest stocks; its monthly update last night showed a big boost in trading volumes, helping the stock today.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, March 21. As always, we’ll send a Special Bulletin should we have any changes before then.

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