March 2, 2023

WHAT TO DO NOW: The market remains in a pullback, with interest rate fears causing the indexes to slowly deflate. To this point, most indicators are still positive, though they’re leaning on the fence—yet there are many stocks and sectors that look ready to get going if the bulls can show up. All in all, we think how the Model Portfolio is situated (38% cash) makes sense here, though given the slippage, we will place ProShares S&P Fund (SSO) and Wingstop (WING) on Hold tonight. Details below.

Current Market Environment

Today was an encouraging day, with the indexes opening lower and testing support before reversing higher. At day’s end, the S&P 500 was up 0.8% and the Nasdaq rose 0.7%.

The market dynamic of recent weeks has been a push-pull situation—we’re seeing the major indexes mostly sag (and be unable to bounce much) as Fed speakers remain hawkish and as market interest rates continue to ratchet higher; the 10-year note yield is now at its highest levels since early November.

That said, under the surface, it’s hard not to notice many stocks and sectors that are hanging in there, with a decent number acting just fine and some actually pushing higher.

Not surprisingly, when it comes to our indicators, things are positive but also near key levels. Our Cabot Tides are positive … but two of the five indexes we track are below their 50-day lines, so much more weakness could change that. Our Two-Second Indicator is also OK … but has now recorded 40-plus new lows on three of the past five trading days. It’s the same “positive but close” story with most everything.

In a sense, the fact that the market has backed down, but not imploded, during the past month even as interest rates (and rate expectations) have ratcheted higher is a minor plus. But of course, we don’t make money because the market goes down less than before—we want a real bull move.

In the Model Portfolio, we feel like we’re in a generally good position given what’s going on, with 38% in cash and, frankly, with most stocks acting acceptably. However, because of the slow bleed of late, we are going to put ProShares S&P Fund (SSO) and Wingstop (WING) on Hold. If we see much more weakness, we’ll probably pare back either by dumping a name outright or selling a portion of a position or two.

That said, if the bulls can step up for a few days, we do think there are many stocks that are ready for sustained moves. Today, we’ll mostly stand pat while putting a couple names on Hold and keep our antennae up.

Model Portfolio

Academy Sports & Outdoors (ASO) is still doing it’s up-and-down thing on light volume, holding above key levels but not making much headway, either—much like the overall market. Peer Dick’s Sporting Goods (DKS) will report earnings on March 6, which could have an impact on the stock, though Academy’s own report (March 16) will obviously be even more vital. In the near-term, a break of the 50-day line (near 56) could have us going to Hold, but as with most names, we remain optimistic that the next big move is up and we like the tightness in recent days. BUY

Inspire Medical (INSP) is another name that looks a lot like the market—not bad, and still in a solid area of support (prior price area + 50-day line, etc.), but rallies haven’t been able to stick. The growth story here remains in place, with little standing in the way of the company becoming much, much larger over time as more specialists are trained for its sleep apnea solution. We’ll stay on Buy a Half here, as shares seem to be near a good entry point, but like many things, we’d like to see buyers return soon. BUY A HALF

Las Vegas Sands (LVS) has perked up, as more and more signs point toward China’s economy picking up steam in a big way (some surveys this week were the latest to support that thesis). We obviously like the action, and as we wrote last week, we’d like to fill out our position in LVS, but given the market, we’ll again hold off, as the chances of some more shaking and baking (the 50-day line is just above 54 and rising) is still real given the market. We’ll sit tight, though we’re OK starting a position here or (preferably) on dips if you’re not yet in. BUY A HALF

ProShares Ultra S&P 500 Fund (SSO) has been in a drip-drip-drip decline since the start of February, with rising interest rates and worries over how far the Fed will go (including whether they’ll go too far) pulling SSO lower. We don’t think the drop has entered abnormal territory yet, whether you’re looking at our market timing indicators or other factors that flashed in January (like the 2-to-1 measure), but it’s also leaning on that fence. Right here, we think it’s prudent to go to Hold—if the weakness continues, we’ll likely pare back (selling some), though a couple of good days could restore the bullish picture in a hurry. Right now, though, Hold seems appropriate while we see how the next few sessions play out. HOLD

Shift4 Payments (FOUR) was our weakest stock last week and couldn’t get off its knees, but a great Q4 report and solid outlook has completely changed the tone here: In Q4, revenue (up 36%), payment volume (up 55%), and EBITDA (up 115%) all did great, and even though management said their guidance included some scenarios where the U.S. had a mild recession, it sees payment volume up 45% this year, with revenues up nearly 30% and free cash flow likely up by at least 35%. Of course, good numbers still don’t guarantee anything in this environment, but FOUR’s reaction was superb—shares bolted higher not just the day of earnings but the next day, too, on the heaviest volume since November 2021. Having just sold a piece, we’ll stand pat for now—but we definitely like the action and think FOUR is a leader-in-waiting should the market get moving. If you really want in, we won’t argue with a nibble here, but officially we’ll stay on Hold and see how the stock handles this earnings pop. HOLD

Uber (UBER) has done the drip-drip-drip pattern with the market, with the fear obviously being that the Fed will go too far and in turn nail the economy, which will slow the firm’s rides and delivery business. Really, though, we think the weakness is simply about the market itself, as Uber’s cash flow is ramping and, barring a complete implosion, there shouldn’t be much standing in the way of continued bookings growth. A drop all the way toward 30 would be abnormal, but right here, we’re sticking with a Buy rating, thinking picking up shares is a good risk/reward situation if you’re not yet in. BUY

As we wrote in the last issue, Wingstop’s (WING) Q4 report was terrific, though after spiking initially after earnings, the stock has given up those gains as it tagged its 25-day line today. Wall Street actually wasn’t very revved up about the numbers—the stock was hit with three downgrades following the report, though the stock didn’t retreat badly on any of them. If the environment was more supportive, or if WING had enjoyed a larger advance before the reversal, we wouldn’t change a thing—but while we’re not overly worried, given everything we think it’s prudent to go to Hold here and see if the stock (and market) can find support. Remember that, to us, Hold means Hold (unlike Wall Street), so sit tight—but newer buyers could nibble on other names. HOLD

Watch List

Allegro Microsystems (ALGM) and Axcelis Technologies (ACLS): Some Tesla news overnight hit a variety of chip stocks that are involved in silicon carbide, including ACLS—but shares stormed back after an initial shakeout and remain in fine shape. ALGM handled itself even better, kissing its 25-day line before bouncing. Both are near the top of our watch list.

Axon Enterprises (AXON): AXON staged a nice breakout after earnings yesterday, leaping above the 200 level; analysts see earnings up 30%-plus both this year and next, driven by a continually rising stream of recurring revenue for its cloud and other offerings.

On Holding (ONON): ONON has been tossed around, but frankly we think the action in recent weeks is solid given its January rally and the market’s selloff. There’s no date yet for earnings, which we’re waiting for—a super-strong reaction could be a go signal if the market is in a decent mood.

Procore Technologies (PCOR): Admittedly, cloud software is not where it’s at right now, and might not be what the market favors for a while. But Procore has a great story—the leading cloud software designed specifically for the construction industry, which has tons of stakeholders, adjustments and inputs. The Q4 report and 2023 outlook was solid, and the stock is trying to emerge from a 10-month bottoming effort despite the market.

Sarepta Therapeutics (SRPT): Serepta has a handful of treatments for Duchenne Muscular Dystrophy (DMD), a rare disease that sharply limits lifespans and quality of life (mostly for boys). Those products are selling well, but its new DMD gene therapy treatment looks like a shoo-in for approval near Memorial Day—and that should drive earnings much higher down the road. The stock gapped up powerfully on Wednesday.

United Airlines (UAL): UAL hasn’t pulled back at all of late—in fact, it’s perked up and is testing its old price highs (and hitting 21-month RP highs!) on light volume. We continue to think UAL in particular, and big airlines in general, could play out similar to the energy names in the first half of last year.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, March 9. As always, we’ll send a Special Bulletin should we have any changes before then.