WHAT TO DO NOW: It remains a mixed environment, with a few mega-cap names doing well but most of the broad market under pressure—and for potential leaders, there remain a good number acting OK but the repeated air pockets make it challenging to make progress. After this week’s sale of Axon (AXON), our cash position is a bit over two-thirds of the Model Portfolio; we could add a couple of small positions if names on our expanding watch list remain intact—but tonight, we’ll stand pat to see if more strength can develop. Details below.
Current Market Environment
The broad market is down today, but the major indexes and many names are quiet as the market heads into the last hour of trading. As of 245 EST, the S&P 500 is down 0.3% while the Nasdaq is up 0.1%.
The story remains mostly the same for the stock market. From a top-down perspective, there are some positives, with the big-cap indexes holding up very well given the economic worries we’re seeing (Cabot Trend Lines positive) and a good number of potential leaders either setting up well, reacting well to earnings or both.
When looking deeper, though, the broad market remains very sluggish, led by financial stocks; today, while the Nasdaq was flat-ish, nearly twice as many stocks were down as up! (Our Two-Second Indicator remains negative, too.) Moreover, the intermediate-term trend (Cabot Tides) is divergent and sideways, few stocks are hitting new highs and defensive stocks are generally outperforming, with many potential leaders hitting air pockets.
Now, to be fair, we have seen some recent “blowups” morph into shakeouts—Duolingo (DUOL) is a good example, as this name was divebombed last week after a loose peer said something about AI hurting its business, but the stock has snapped right back. Palo Alto (PANW) and (to a lesser degree) Axcelis (ACLS) are two other examples.
Even so, it’s a mixed environment at best, with a few mega-cap stocks doing well but most of the broad market under pressure—and for growth stocks, the repeated sharp drops are making it difficult to make headway. There is plenty of dry bullish tinder out there in general, but until we see a spark, it’s still a meat grinder situation.
The way we’re looking at it is simple: If the market really gets going, there should be plenty to sink our teeth into given the good number of growth setups—but until then, whether we chop sideways or whether the sellers reappear, putting a bunch of money to work likely wouldn’t lead to much good.
That doesn’t mean we’re ruling out all new buying—our cash position is around two-thirds of the Model Portfolio, which is certainly elevated given the evidence. Thus, we could have a couple of small new buys in the days ahead if the market and leaders can show any strength, but tonight, we’ll grit our teeth, hold our cash and see if buyers can flex their muscle.
Axon Enterprises (AXON) continues to have the story and numbers of a potential leader, but after yesterday, the chart has cracked. In Q1, not only did sales rise 34% and EBITDA rise 33%, but annualized recurring revenue lifted 49% while future contracted revenue was up 61% from a year ago (though admittedly it was only up 3% from the prior quarter)—and management nudged up its 2023 revenue outlook while keeping margin guidance the same. AXON opened nearly unchanged, but then the sellers swarmed, driving the stock not just down big but clearly below the prior breakout level around 200; that forced our hand to cut bait with our half-sized stake. We’ll be interested in seeing what happens from here, given what we wrote above regarding more names cracking and then quickly reversing back up. We’ll keep a distant eye on AXON, but barring a stunning reversal, there are bound to be better names to own if the market gets going. SOLD
Academy Sports & Outdoors (ASO) is still sluggish, living under its 50-day line for the past few trading days. Having already trimmed the position (sold a third a couple of weeks ago), we’re going to sit tight for a while longer and see how things play out—overall, the retreat isn’t overly severe (12% off its high, with every week seeing well below average volume) and short of a complete collapse in consumer spending, it’s hard to see business really coming under pressure with another dozen or so new stores opening up by year-end. Of course, our leash isn’t limitless, but we’re OK giving ASO some wiggle room in the near-term. HOLD
On Holding (ONON) continues to look fine, basically chopping sideways with a slight upward tilt, which is more or less what we’re seeing from a lot of “strong” names. We do have our antennae up due to the market environment given that, if a stock acts well for a few weeks, a near-term trap door often appears. Still, at this point we’re OK waiting to see what earnings (due May 16) brings—if you don’t want to hold through the report, that’s your call, but we’ll follow the plan given our small profit, the prior blastoff and the outstanding growth outlook. We’re OK picking up a small position on this modest dip, but do keep it small ahead of next week’s report. BUY A HALF
ProShares Ultra S&P 500 Fund (SSO) is about as neutral as can be, chopping sideways along with the S&P 500. Big picture, we’re seeing more studies pop up that suggest the next big move will like be up: According to Ryan Detrick of Carson Group, the S&P’s year-on-year return was negative for 12 months in a row—but actually turned positive at the end of April. That’s only happened eight other times since 1958, with the market averaging a 13% gain a year later (all eight were higher a year later, too). We’re not going to pound the bullish table based on that study, but it’s another breadcrumb that shows the odds favor an accumulation campaign should eventually unfold following last year’s horror show. As it stands now, we remain patient with our small-ish position in SSO. HOLD
Shift4 Payments (FOUR) was hit with a short seller report in mid-April, and then was clonked on earnings last week, yet while we’re still keeping it on a tight leash, it has held up at some support this week despite PayPal’s sour earnings reaction (down 15% on the week thus far). To us, all appears a go fundamentally—the Q1 report was very solid, with estimates on the upswing since (analysts now see the bottom line up about 70% this year and another 28% next) as the firm inks new deals while its core business is strong. We’ll take it as it comes, but given that we have just a small position left in FOUR, we’re OK holding here and giving it some rope to resume its overall uptrend. HOLD
Wingstop (WING) popped nicely on earnings before quickly giving up some ground—again, the sell-on-strength environment is affecting most everything out there—but the retreat wasn’t overly severe and the stock is finding some support north of 200. We took partial profits here two weeks ago and are aiming to give the rest some room to maneuver, especially with business really powering ahead (three straight quarters of 40%-plus revenue growth) and the stock having punched out to all-time highs, surpassing its late 2021 summit. HOLD
Axcelis Technologies (ACLS): ACLS looked done for last Thursday, but it’s since snapped back nicely … though still has work to do on its chart. The growth story seems to be on track despite some hiccups among other silicon carbide-related stories.
Celsius (CELH): We wrote about CELH in the last issue, and earnings on Tuesday night caused a monstrous gap (likely with some short covering goosing the name). It looks like a decisive breakout and growth is re-accelerating, both of which we love—some calmness or a controlled pullback would be tempting.
DoubleVerify (DV): As we wrote above, we’ve seen some shake-and-snapback action from a few more names of late, and DV could be one of them after today’s earnings-induced rebound. We still think the story and growth profile is solid, though the stock itself needs a bit more work.
DraftKings (DKNG): DKNG reported a great Q1 (sales up 84%, and EBITDA breakout now expected in Q2, vs. Q4 previously), helping the stock to tag its highest level since January 2022 last week. It’s lower priced and volatile, but a bit more weakness would be tempting.
Duolingo (DUOL): DUOL cracked support last week after Chegg was crushed on earnings, which seemed weird—but now the stock has not only snapped back but rebounded all the way to its old highs after another great quarterly report. We like the action here a lot, but like most things, we’re not anxious to chase it this second after a 25-point rebound.
HubSpot (HUBS): HUBS is more calm, cool and collected (and higher priced) than many other names we’re watching—which is a good thing in our book. The firm remains a standout in its sector, with a marketing platform that remains in demand and, important, a management team that’s focused on the bottom line.
Inspire Medical (INSP): We’ve liked INSP’s story for a while, and we’re intrigued that the stock has not only perked up of late, but actually notched all-time relative performance (RP) peaks, something it didn’t accomplish earlier this year (it was close but never clicked). The 300 level could provide some round-number resistance, but we’re thinking a fresh upmove may be underway.
Las Vegas Sands (LVS): LVS has chopped around a bit since re-emerging to new highs three weeks ago, with peer Wynn’s so-so reaction causing some hesitation. Even so, if shares can hold firm around here, they would be in great position to get moving should the market improve.
Snowflake (SNOW): Snowflake is a name we’ve had our eye on for a long time, and it seems to be shaping up ahead of earnings (May 25). We always thought it could have liquid leader-type potential.
Uber (UBER): UBER has come alive after earnings, and while a wobble isn’t out of the question (especially in this environment), we’re thinking the third time’s the charm, with this upmove coming after a tighter launching pad and, fundamentally, with cash flow estimates continuing to rise.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, May 18. As always, we’ll send a Special Bulletin should we have any changes before then.
|Stock||No. of Shares||Price Bought||Date Bought||Price on 5/11/23||Profit||Rating|
|Academy Sports & Outdoors (ASO)|
|Axon Enterprises (AXON)|
|On Holding (ONON)|
|Buy a Half|
|ProShares Ultra S&P 500 Fund (SSO)|