March 30, 2023

WHAT TO DO NOW: The market remains stuck in the middle—on one hand, growth stocks and big-cap indexes are holding up very well considering the recent banking and economic fears, but on the other, the broad market is still weak, financial stocks are a mess and a couple of our key indicators are negative. All in all, then, we’re following the market’s split personality, holding about half in cash but also holding and nibbling on some resilient growth names. Tonight, we’re going to buy a half-sized stake in Axon Enterprises (AXON), though that will still leave us with 48% on the sideline. Details below.

Current Market Environment

Stocks were mixed today, reflecting the bifurcated environment—the broad market and financial stocks were lower, but the big-cap indexes and most growth names were in the green. At day’s end, the S&P was up 0.6% while the Nasdaq was higher by 0.7%.

Big picture, if you told us the market and potential leading stocks would be where they are today following a mini-bank panic, we’d be pleased—even the worst-looking indexes are still within their multi-month ranges going back to last spring/summer, while the Nasdaq and even the S&P 500 are flirting with intermediate-term uptrends. Importantly, our Cabot Trend Lines have held their positive signal as the big-cap indexes have held north of their longer-term moving averages.

What remains more encouraging is the action of individual growth stocks. Yes, there’s been some damage, and this week has seen a bit of rotation (some defensive names have perked up), but there remain a ton of mostly growth stocks that are holding up well, with some even nosing to new highs every few days.

Now, despite the good vibes, the top-down evidence remains more negative than positive—because of the broad major indexes (small caps, mid-caps and the NYSE Composite), our Cabot Tides remains negative by a fair margin, and our Two-Second Indicator is in the same boat. Yes, both have improved in recent days (today was the third day out of four that we saw fewer than 40 NYSE new lows, in fact), which is good, but to this point more work needs to be done.

Translation: You have a split tape at this point—large-cap indexes and many growth stocks are holding in there nicely (with some moving up), but the broad market is still in iffy territory (~75% of NYSE and Nasdaq stocks are south of their 50-day lines), and that goes double for the financial sector, which has barely gotten off its knees.

All in all, with the market in an in-between area, we’re playing things similarly, holding a good chunk of cash but also giving our resilient names a chance to hold up and continue their uptrends. We added two half-sized stakes last week, and tonight we’ll add one more—Axon Enterprises (AXON)—though we’ll still be holding onto about 48% in cash.

(An aside for newer subscribers: A “full” new position for us is 10% of the Model Portfolio, but we’ll often—especially in this environment—start with a “half,” which is 5% of the portfolio, with the aim of adding the second half should the stock (and market) act well from there.)

Model Portfolio

Axon Enterprises (AXON) is our new addition tonight, and it’s a name we’ve been watching closely for about four months now—the first three of which it gyrated while the market was shaky, but now it’s broken out and (importantly) is holding well during the latest bout of market weakness. We’ve written about the story many times, including in the last issue, so we won’t rehash it all here—it’s the clear leader (really the only major player) in bringing law enforcement agencies into the cloud age with safer weapons and the ability to store, share and present evidence online. Back to the stock, AXON can be very herky-jerky, with the occasional sharp shakeout, so our idea is (a) to start with a half-sized stake, (b) give the stock plenty of rope initially, possibly down to the upper 180s if necessary, but also (c) consider filling out the position on a decisive move higher from here. BUY A HALF

Academy Sports & Outdoors (ASO) continues with its stair-step-like action—shares have pulled in a bit since its solid earnings gap, but remain within the confines of its uptrend (the 25-day and 50-day lines are at 61.5 and nearly 60, respectively). As with any name, a clear break going forward would have us selling at least some of our shares, but right here the buyers remain in control and the story is as solid as it’s been. BUY

Allegro Microsystems (ALGM) is in fine shape, with an early-week dip to the 25-day line bringing in another round of buying (albeit on light volume). The stock’s powerful breakout from a big post-IPO base in late January/early February bodes well over time, as does the firm’s leading position in all sorts of advanced automobile applications, which has led to a backlog stretching out a year. We’re sticking with our half position here, though further improvement in the market and in ALGM could have us averaging up. BUY A HALF

On Holding (ONON) has moved around a little bit, but net-net, it’s held all of its massive post-earnings rally. Short-term, more wiggles are certainly possible, but On quacks like a new retail leader, and analysts see sales and earnings lifting in a big way in the quarters to come. We’ll stay on Buy a Half; if you don’t own any, we’re fine starting small here or on dips. BUY A HALF

ProShares Ultra S&P 500 Fund (SSO) has bounced nicely of late, recouping about half of the February-March decline. We’ll take it, but we’re also keeping an open mind—the intermediate-term trend for the S&P is neutral-ish, but for the broad market it remains down, and the S&P is back into an area of resistance just as we approach tomorrow’s key inflation report. Don’t get us wrong: We’re encouraged by the recent bounce and SSO’s overall resilience of late given the banking issues and economic worries, but need to see more before restoring a Buy rating or even adding back shares. HOLD

Shift4 Payments (FOUR) looks great, with a mild post-earnings pullback with the market, followed by three tight weekly closes (usually a constructive sign) and now a push to slightly higher highs on good volume. On the deal front, the firm announced that it’s now in use at Camden Yards for the Baltimore Orioles; management thinks sports and entertainment is a huge opportunity as it’s one of the leaders in that field and is inking deals in a hurry that should begin to pay off in the quarters to come. Back to FOUR, the market remains a risk, but the strength here is too much to ignore—we’ll restore our Buy rating, though as with most everything, aim for pullbacks if possible. BUY

Wingstop (WING) suffered yet another downgrade this week, which led to some selling, but the stock is still perched near its highs; most of these analyst moves have been valuation-based (as opposed to signs the business is turning down), which is probably one reason the stock has taken things in stride so far. We’re open to anything, but given the overall picture, we advise sitting tight—though for new buying, we prefer some other names more than WING right now. HOLD

Watch List

Axcelis Technologies (ACLS): Having already nibbled on Allegro, we’re less likely to dive into ACLS … though we’re keeping the option open of owning half-sized stakes in both ALGM and ACLS, giving us one “full” position in the chip sector. Either way, both names continue to act well.

Arista Networks (ANET): ANET finally hit a pothole this week after a huge run to new highs. Still, while shares likely need some time to rest, the overall uptrend is in fine shape. Our one worry here is that 2024 estimates are light as the upgrade cycle finishes up, though the stock obviously isn’t worried.

DoubleVerify (DV): DV is another recent IPO (mid-2021) that has bottomed out for a while and is now perking up. The stock looks like a follow-on play on the move to digital advertising: It’s the only ad verification company (cutting out fraud, making sure ads are viewed and placed where they’re supposed to) that covers all of the top ad-supported connected TV players and social players, too.

Duolingo (DUOL): DUOL looks amazing, pulling back for just a few days during the banking worries and then ramping to much higher highs. Some sort of shakeout would be tempting, assuming the market isn’t keeling over.

HubSpot (HUBS): Unlike many fallen angels, HubSpot is still growing nicely and management is focused on profits and free cash flow as its all-in-one CRM platform (sales, marketing, content management, operations, etc.) helps small- and mid-sized companies grow. Shares are perched near multi-month highs.

Palo Alto Networks (PANW): Many cybersecurity names are still on the outs, but some are re-strengthening, and PANW has the best combination of story, numbers and chart out there, with massive and growing cash flow keeping big investors interested. Shares had a great start to the year and have actually crawled higher in recent weeks despite the market.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, April 6. As always, we’ll send a Special Bulletin should we have any changes before then.