May 9, 2024

WHAT TO DO NOW: Do a little buying. The market’s evidence has improved over the past couple of weeks, with our Cabot Tides on the verge of a green light and our Two-Second Indicator having flashed an all-clear. Even so, growth measures (Aggression Index, Growth Tides) are still broadly neutral, while earnings season has been tricky for individual stocks. Put it together and we’re doing a little buying tonight but starting slow: In the Model Portfolio, we’re adding a half-sized stake (5% position) in TransMedics (TMDX) and adding a 3% position in Cava Group (CAVA), leaving us with around 36% in cash. We’re also placing Pulte (PHM) back on Buy. Details below.

Current Market Environment

The major indexes are up modestly as of 1 pm EST today, with the S&P 500 and Nasdaq up 0.3%.

When we look at the past couple of weeks, there’s little doubt the evidence has improved—our Cabot Tides are just shy of a green light, with the major indexes hovering a bit above their 50-day lines (some of which are flat) while the broad market has impressed, with our Two-Second Indicator giving an all-clear with nine straight days (likely 10 today) of fewer than 40 new lows. And of course all of this is happening while the longer-term trend (Cabot Trend Lines) has remained firmly bullish.

When it comes to the growth arena, though, things aren’t quite as positive: Our Growth Tides are broadly neutral here, our Aggression Index is still negative and individual stocks have been mixed—most have rebounded, but few have really taken off while earnings season has been tricky.

Stepping back, the market had a decent correction of 6% in the S&P 500, 8% in the Nasdaq and 10% or even more in some growth measures—and that could be enough to re-set the table after the prior run. The signs of late have been overall encouraging … though it’s certainly not a buying panic out there, especially with growth stocks.

Put it together and we’re putting a little money to work tonight but also holding a good-sized cash position—and from here, we’ll simply follow the market, looking to add exposure (possibly quickly) if growth stocks kick into gear, but standing pat if the rally runs into trouble.

In the Model Portfolio, we’re going to add a new half-sized stake in TransMedics (TMDX), while buying another 3% position in Cava Group (CAVA), which is one of the stronger growth names in the market. That will leave us with around 36% in cash.

Model Portfolio

We’ve written about TransMedics (TMDX) a couple of times of late, including in the issue dated April 18, so we won’t repeat the story here—suffice it to say that the firm is revolutionizing the organ transplant “business” via its organ care systems that mimics the body by infusing the organs with blood and providing circulation, which is the only FDA-approved alternative to the cold storage (put it on ice) method that’s the standard of care. TransMedics is also building a fleet network to transport the organs on its own, and all of it is working—Q1 again destroyed estimates and produced another triple-digit revenue quarter (up 133%), and the bottom line (35 cents per share) soared into the black, causing TMDX to erupt to the upside. Yes, it’s short-term extended, but we love the story and the stock’s power—we’ll start a half-sized stake today, adding a 5% position in the portfolio, and use a loose leash, with an initial mental stop under 110. NEW BUY A HALF

AppLovin (APP) reported another outstanding quarter last night, with total revenue booming 48%, led by Axon, its AI-powered ad engine, which grew revenues by 91%. Meanwhile, EBITDA doubled and margins were again out of this world (52% overall, 73% from Axon), while free cash flow came in well over $1 per share. But perhaps more important was that management talked a lot about expanding Axon beyond just gaming, where the vast majority of business is today, and into other verticals. Shares had a good day and we have high hopes—but near-term, just be aware that selling on strength has been the norm, so we’ll stay on Buy, but if you want to start a position, keep it small and/or aim for dips of a few points. BUY

Cava (CAVA) is very volatile, but remains very strong, actually hitting higher highs both early last week and early this week. Earnings are coming up on May 28, less than three weeks away, which is obviously a risk, but seeing as how we only have a half position here, we’re going to add a few more shares—we’ll add a 3% position here (that is, 3% of our total account), which will leave us with a cost basis in the upper 60s—and we’ll use a mental stop in the 60 to 62 area, which is reasonable risk for what could be solid upside potential. BUY ANOTHER 3% POSITION

CrowdStrike (CRWD) has rebounded decently since the market low and is now challenging its 50-day line from below—all normal action thus far, though like most names, it’s now battling resistance. Interestingly, a peer (Zscaler) just announced it may have been hacked, which is a bad look, but in this case it could drive even more business toward CrowdStrike. The company has announced a slew of new/upgraded offerings, including some that can be added on to products from big players (like one from Microsoft), but earnings here aren’t out until June 4 (the firm’s quarter didn’t end until April 30), which will be what counts. In the meantime, our thoughts haven’t changed—CRWD seems to be building a normal launching pad for now, so we’ll continue to sit tight. HOLD

DraftKings (DKNG) released a great Q1 last Thursday evening, with revenue up a strong 53%, driven about equally by new customers (3.4 million in the quarter, up 23%) and revenue per customer ($114 per customer, up 25%), while costs (including customer acquisition costs) remained contained, all of which prompted management to up their 2024 outlook. Indeed, the firm now sees about $400 million in free cash flow this year (north of 80 cents per share) and $500 million in EBITDA, compared to a $150 million EBITDA loss last year. The stock, though, looks like a lot of earnings plays this season—it initially gapped up before reversing hard, though it’s held up since then. Net-net, not much has changed, with DraftKings’ business looking great, but the stock is still fighting to come out of its correction. HOLD

Nutanix (NTNX) acted pretty solidly during the growth stock decline, and once again that subtle relative strength was a clue—shares have had a nice few days, rallying to new price and relative performance (RP) highs, albeit on light volume. One analyst just upgraded shares, citing something we’ve written about a few times—Nutanix looks likely to take share from VMware after Broadcom bought them (and proceeded to mess with things, bundling offerings and raising prices), possibly up to a couple hundred million dollars worth, though it’s likely to play out over many years given how much of a pain it is to switch providers. The real key will be May 29, when the quarterly report will be released; in the meantime, we’ll stick with our Buy rating. BUY

It’s hard not to be encouraged by the action in PulteGroup (PHM), which found support where it “should” (mid-100s), reacted well to earnings and quickly returned to its prior highs before backing off a bit. Obviously, interest rates are very news-driven (next week’s CPI report will be closely watched), and if they spike after their recent tumble, PHM could slip. But we’ll restore our Buy rating here, thinking the longer-term uptrend is reasserting itself as investors focus on the underlying business trends. BUY

Uber (UBER) reported a good-not-great Q1 yesterday that was a bit confusing. Just looking at the report, sales were up 15%, but that undershot the “real” results as some business model changes hacked off about seven percentage points from the top line’s growth. Meanwhile, EBITDA was up 82% and free cash flow was huge (north of 60 cents per share). However, the Q2 outlook was below expectations, though again there were some moving parts, including a good-sized hit from expected currency movements. Bottom line, the story is very much intact, especially when it comes to earnings and free cash flow, but the stock needs to hold up around here—UBER got whacked after the report, though it did find some support late yesterday and again today. We’re holding our remaining position, but would expect buyers to show up if all’s well. HOLD

Watch List

AppFolio (APPF): APPF could never really get going after its big January earnings gap, but now it’s trying again following a super earnings report (sales up 38%, earnings of $1.05 per share beating by 17 cents and up from a loss last year).

Core & Main (CNM): CNM looks fine overall, though near-term, shares have crawled back toward their highs on very low volume after testing their 50-day line.

Eli Lilly (LLY): It’s not a fresh story, but LLY still looks like a liquid leader—and the stock is back near its highs after a quick shakeout last week. A breakout on the upside could be powerful.

Natera (NTRA): Natera will report earnings tonight—the stock is set up nicely and has a great story we’ve written about, but we’ll see what the report brings.

Pure Storage (PSTG): Pure Storage has a lot going for it—we think it can be an emerging blue chip, with best-in-class storage products needed for everything (including the AI boom) combined with an increasing subscription business that is driving cash flow and recurring revenue higher. The stock is in the midst of a nice-looking launching pad.

Robinhood (HOOD): HOOD had a great Q1, but like so many stocks, the initial pop today faded, likely partially because much (not all) of the increased business came from crypto trading—which has cooled off now that the coins have sagged for a bit. We’re still watching it though, and if shares can shake off this reversal, we could take a stab at it.

Toast (TOST): TOST staged a good-looking, earnings-induced breakout after sales, payment volume and customers all grew in the 30% range, while EBITDA was solidly positive again. If it and the market hold, we could dive in.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, May 16. As always, we’ll send a Special Bulletin should we have any changes before then.

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