May 23, 2024

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WHAT TO DO NOW: Remain optimistic, but continue to pick your spots. Most of the evidence is positive, but the action among growth stocks is good but somewhat mixed, with many names acting great but some hitting air pockets and lots hitting resistance near prior highs. In the Model Portfolio, we’re doing a little reshuffling tonight—we’re going to sell one-half of DraftKings (DKNG) and sell one-quarter of Uber (UBER), but we’re also going to start another half-sized stake in On Holding (ONON). We’re also placing Pulte (PHM) on Hold. We’ll still have about 23% in cash after these moves. Details below.

Current Market Environment

The market hit a wall early this morning and most stocks are in the red today despite Nvidia’s positive reaction. As of 2 pm EST, the S&P 500 is down 0.6%, the Nasdaq is off 0.3% but the broad market is off well over 1% and most growth stocks are down.

All in all, the market remains in a good position, but it’s far from perfect. All three of our key market timing indicators remain bullish, though we would note that today was the second straight day of more than 40 new lows on the NYSE as broader indexes again approach key levels (50-day lines, etc.). That’s something to watch, but all in all, the vast majority of the market’s top-down evidence is pointed up.

When it comes to growth stocks, things are a bit more mixed—a lot of “good, but …” situations. For instance, our Growth Tides are bullish, which is a good thing of course, but … most growth measures are lagging big-cap indexes (and, in some cases, defensive stocks) while are hitting resistance just south of their prior highs. As for individual stocks, again, most are trending higher, but … there remain plenty of potholes and selling on strength out there (like we saw today), especially as many stocks battle with those prior resistance areas.

Put it together, and we’re more bullish than not, but right now we see a choppy uptrend that’s somewhat mixed for growth names.

In the Model Portfolio, we’re seeing the same thing as mentioned above—–mostly good, but somewhat mixed action among our collection of names. Tonight, we have a few changes, with a little reshuffling.

First, on the sell side, we’re going to sell one-quarter of what we have left in Uber (UBER), which is our weakest position. We’re also going to sell half of our remaining stake in DraftKings (DKNG), which is threatening to break down and has been underperforming for a while. These moves will leave us with small positions in each, and we’ll keep relatively tight stops on the remaining portions.

On the buy side, we’re going to add one more half-sized stake, buying a 5% position in On Holding (ONON), which is gaining strength after last week.

That will still leave us with nearly the same cash position—near 23%—and also results in us having four recently-bought half-sized positions (TMDX, PSTG, TOST and now ONON). Ideally, if the rally strengthens, we’ll be putting at least some of our sidelined cash to work in these names if they grab the leadership baton.

Model Portfolio

We’ll start with On Holding (ONON), which we just wrote about in last week’s issue, so we won’t rehash it all here. Suffice it to say that the firm has long had the makings of another Nike or Under Armour, and the Q1 report is looking like a perception-changer, with continued strong top-line growth (29% in currency-neutral terms), improving margins and increasing confidence in the longer-term outlook. We’ll start with a half-sized stake (5% of the portfolio) with a loose stop (near 34) and look to buy more if this nascent breakout continues. NEW BUY A HALF

AppLovin (APP) has been pulling back for the most part since the big share sale by KKR last week, which isn’t fun but also isn’t unusual; we’re watching it, of course, but so far the retreat hasn’t even gotten to the 25-day line (near 77), so the action appears normal to us. The questions down the road in regards to the firm’s Axon advertising engine are (a) how big the opportunity is within online gaming, and (b) how much penetration Axon can get in other areas. Right now, analysts see a slowdown next year (“only” 12% sales growth on top of the recent boom), but that could prove conservative—and, either way, cash flow and earnings are huge and growing. If the market really runs into trouble, APP could easily take a breather, but so far shares remain in a firm uptrend. BUY

Cava (CAVA) had a big push higher as soon as the pressure came off the market, with many of its cookie-cutter restaurant peers perking up as well during the past couple of weeks. But CAVA’s big tell will come next week, with the quarterly report due next Tuesday, May 28—analysts are looking for earnings of five cents per share (up from a two-cent loss last year) and sales of $245 million (up 21%). Long term, we’re as optimistic as ever, partly because of the brainpower here—the Chairman of the Board was the founder and former CEO of Panera when it grew rapidly for more than a decade, so the ins and outs of growing the outfit to many-fold its current size aren’t a mystery. As always, though, we’ll just go with the evidence in front of us: Right now, CAVA acts fine, so we’ll stay on Buy, though keep any new positions small this close to the report. BUY

CrowdStrike (CRWD) has notched new closing highs a few times in recent sessions, which is obviously a good thing, especially in the wake of a poor quarterly report from peer Palo Alto Networks. We would point out that the relative performance (RP) line is a bit short as shares test round-number resistance near 350, and given the sell-on-strength vibe out there and the fact that earnings are due soon (June 4), some sort of pullback wouldn’t surprise us near term. If you own some, hang on, and new buyers should consider keeping it small and/or aiming for dips. BUY

DraftKings (DKNG) really didn’t show much power during its attempted bounce, and now that bounce has disappeared in a hurry as the selling pressures pick up. While anecdotal reports suggest business remains buoyant, there are political concerns popping up—namely more and more states that are looking to hike taxes on sports betting and online casino play, sometimes in a meaningful way. Back to the chart, it’s not just the recent selling—DKNG hasn’t been outperforming the market for a while, so this sharp downdraft has a more ominous look than if, say, the stock had recently run to new highs. To be fair, there is support around here, so we’re not throwing in the towel completely, but it’s obvious the stock isn’t a leader right here. We’ll sell half of what we have, leaving us with a small position that we’ll keep on a relatively tight leash. SELL HALF, HOLD THE REST

Nutanix (NTNX) has had a great run to new highs of late and continues to hold near virgin turf. The firm did drum up a little excitement on the news wires this week, collaborating with Nvidia to integrate that firm’s chips into an offering that should allow more enterprises to hop on the AI bandwagon. Like many names in the portfolio, next week will be key, with earnings due next Wednesday (May 29)—Wall Street sees sales of $516 million (up 15%) and continued strong earnings growth. As always, we’ll see what the report brings—right here, we’ll stay on Buy, but new buyers should keep things small and/or look for dips this close to the report. BUY

We wrote in last week’s issue that PulteGroup (PHM) was positive but likely to be news-driven, and we saw that yesterday—not because of any big move in interest rates, but because of a poor reaction from peer Toll Brothers (TOL), which got walloped despite very solid earnings and orders figures. And then today Treasury rates again gained ground (up five to 10 basis points, depending on what bond you’re looking at), which kept a lid on the group. Stepping back, the recent slide itself isn’t abnormal, but it is an expectation breaker of sorts: Despite interest rates being much lower than their mid-April peak, homebuilders weren’t able to get going, and the group (and PHM) haven’t been outperforming the market for a while, either. We hate to flip-flop on our ratings, but we’re going to go back to Hold and use a stop in the mid-to-upper 100s. HOLD

Pure Storage (PSTG) remains near its highs on the back of Nvidia’s strong report, with the thinking that demand for all sorts of AI gear (including the firm’s storage offerings) could continue to accelerate going ahead. The stock looks great having recently broken out, though as we wrote last week, the real tell will come on earnings next Wednesday (May 29)—analysts are looking for sales of $681 million (up 16%) and earnings of 21 cents (up from eight cents a year ago), though AI-related details on the conference call and many sub-metrics (like subscription-related recurring revenue) will also be key. BUY A HALF

Toast (TOST) is off from our buy point last Friday (thanks in part to an analyst downgrade earlier this week) but is still well within its recent range (post-breakout) as the firm’s Investor Day (next Wednesday) approaches. According to at least one analyst, an update to 2024 guidance is unlikely (they just hiked numbers after the Q1 report two weeks ago), but they could address their long-term model, especially in regard to margins—the framework laid out a couple of years ago looks relatively conservative today—while also potentially talking about any opportunities beyond restaurants. Now, if the presentation is a dud, we may be forced to quickly cut bait, but at this point, we’re thinking optimistically, as the story should produce rapid and reliable growth for years to come. BUY A HALF

TransMedics (TMDX) can move around a lot, but since the big earnings reaction, it’s acting just as we’d like, not just going up but doing so in a controlled manner, which usually means big investors are active. We’d like to average up here, though we don’t have much cushion yet and shares could easily exhale a bit, especially if the market does the same. We’ll sit tight then, with what we have, though we’re not opposed to grabbing a few shares if you’re not yet in. BUY A HALF

Uber (UBER) has a great story and numbers, but we own the stock, not the company, and UBER hasn’t been able to get out of its own way despite the market’s recent rally—which raises the question of what’s to come if the market does pull in. Big picture, we don’t think the overall retreat is truly abnormal and we do think the tremendous cash flow story could produce a turnaround … but we’re also not in the business of just holding and hoping with weak stocks, either. We’ve already sold some of UBER at higher prices, and today we’re going to sell another quarter (1/4) of what we have left. That will leave us with a small (about 5% of the portfolio) stake—and we’ll use a stop near the 200-day line (61 area, give or take a few dimes) for the rest. SELL ONE QUARTER, HOLD THE REST

Watch List

AppFolio (APPF): APPF continues to battle with resistance near 250, which is fine for now—and sets up a potential entry point if leadership broadens out and the stock kicks into gear. The firm’s cloud software is becoming the go-to solution for property managers across the U.S.

Core & Main (CNM): CNM isn’t making many waves, which is fine by us, with shares essentially still consolidating their huge November-March move. Earnings are due June 4.

Eli Lilly (LLY): LLY is attempting a breakout this week, which is always a good thing. Weight loss remains the big story here, but Lilly has a meeting with the FDA about its Alzheimer’s offering in early June—most expected approval in May, but if the meeting goes well, it could boost perception that the drug will contribute to sales in a big way down the road.

Robinhood (HOOD): It’s very volatile and a lot of its income is from interest (like most brokerages and money operations), but if this bull market has further to run—and the odds favor it does—then HOOD should see assets under management, accounts and trading growth continue to surge.

Samsara (IOT): Samsara has a story that oozes long-term growth, but the stock has been choppy as can be for the past year. But since the April low, we see a slight change in character, with a persistent upmove (rare for this name) that’s taken the stock to minor new highs.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, May 30. As always, we’ll send a Special Bulletin should we have any changes before then.

Model Portfolio

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