November 10, 2022

WHAT TO DO NOW: After weeks of a bottoming effort, stocks came alive today after a tame inflation report, which turned our Cabot Tides positive. There are definitely still headwinds, but we’re also mostly on the sideline, so tonight we’re going to take three baby steps into the market—buying half-sized stakes in Albemarle (ALB), Enphase Energy (ENPH) and Halozyme (HALO). That will still leave us with 70%-ish in cash, so we’re not getting aggressive, though if the market continues higher, we’ll look to add more names (or average up on stocks we have). Details below.

Current Market Environment
The market boomed today after a tamer-than-expected inflation report, with the Dow exploding higher by nearly 1,200 points (3.7%) and the Nasdaq surging 761 points (7.3%).

The big news was today’s better-than-expected inflation report, which was obviously good to see. From a top-down perspective, the market’s in an interesting position: The broad market’s recent low was in late September, and the market has put in a few weeks of “work” to try to bottom out, even among the cratering of many sacred cows (META, GOOGL, AMZN, etc.) and this week’s crypto crash.

Indeed, even before today, the Tides were on the fence, and today’s action is enough for a green light, which will have us putting some money to work.

To be clear, this isn’t some pound-the-table signal, at least right now: Our Cabot Trend Lines and Two-Second Indicator are still negative, and our Aggression Index just hit a new low yesterday. (Growth stocks and funds are still generally underperforming most else; the Nasdaq is “only” back to its 50-day line.) Moreover, a lot of the action even today was among the worst performers (the names down 80%, etc.), and we still haven’t seen much in the way of breakouts—i.e., there’s still plenty of selling on strength.

All that said, the combination of the recent resilience in the market, the Tides’ green light and the fact that sentiment is very negative is encouraging. If we weren’t so heavily in cash, in fact, we might simply sit tight—but with 85% on the sideline, we’re going to do a little buying tonight by adding three new names … two of which are old friends.

Specifically, we’re going to add half-sized positions (5% of the Model Portfolio) in Albemarle (ALB), the lithium leader that’s already out to new highs; Enphase Energy (ENPH), which is emerging from its sharp correction this fall; and Halozyme (HALO), whose great story is trying to get going from a 21-month structure.

We’ll still have 70%-ish in cash or so after these moves, so we’re hardly flooring the accelerator; if the sellers show up quickly, we’ll cut back quickly. But we’re in the business of following the evidence, and there’s no question the evidence has improved, so we’re taking a couple of small steps back into the water—and will add further if this proves to be a kickoff of sorts.

Model Portfolio
Albemarle (ALB) is one of the better-looking stocks in the market, and there’s plenty of reason for that—its main product, lithium, has effectively been legislated into scarcity as demand for electric vehicle batteries goes nuts, which has caused prices to spike and remain elevated, which is leading to massive earnings ($21 per share this year, $27 next year estimated). The firm is in expansion mode, too, expecting output capacity to rise steadily for years, but with prices this high it’s still hugely free cash flow positive anyway. Shares have effectively etched a year-long structure and are trying to break out now. We’re adding a half position (5% of the portfolio). BUY A HALF

Enphase Energy (ENPH) still looks like a potential leader to us—granted, we were kicked out of it a few weeks ago during a sharp (28% from high to low) correction, and if the Q3 report wasn’t pleasing, a further decline would have been in the cards. But it turns out business is actually still accelerating: Sales rose 81% and earnings were up 108% in the quarter, and analysts hiked estimates for next year (earnings up 24%, likely conservative) as demand for its microinverters (as well as batteries and EV chargers) is surging. Like most names, ENPH is still battling with resistance, but we’re going to start a half position here with a stop in the 260 area, with the idea of averaging up if things get going. BUY A HALF

Halozyme (HALO) has a story we’ve enthused about for a couple of years now—its Enhanze drug delivery technology has big advantages (far quicker delivery time), has a couple of big drugs driving royalties today (up 70% from a year ago in Q3) and more coming (including a potential blockbuster from Argenx next year), which should keep royalties surging for years to come. The stock topped in Febraury 2021, bottomed late last year and looked ready to get going in the summer—but the market pulled it back down again (down 28% peak to trough). But now it’s rounded out again and broken out powerfully on earnings. We think a real move could be getting underway, so we’ll start with a half position and go from there. BUY A HALF

Shockwave Medical (SWAV) definitely remains in a rapid growth phase, with the Q3 report being another great one—not only did sales once again more than double (up 102%), earnings crushed estimates (92 cents vs. 68 expected) thanks to higher margins, and those margins look sustainable going forward, too. That said, the stock got hit after the report, partly due to a good-not-great revenue beat, and the fact is Shockwave’s earnings will be impacted by higher taxes next year, though the stock has bounced back some over the past couple of days. A strong rally from here would tell us the earnings dip was a shakeout (possibly the last shakeout to the past three months of consolidation), but right here we think hold is the appropriate rating. HOLD

Wingstop (WING) continues to act well, and we’d like to fill out our position (and came close to doing so here)—but we decided against it as the stock is still extended and today hit a new recovery high on light volume. Maybe we’re wrong and the stock just takes off (would be a good problem to have), but we’d rather sit tight with our half position and see if a normal dip/further rest occurs. Overall, though, we do like the action and the story. We’ll stay on Buy a Half, though new buyers could also look for dips. BUY A HALF

Watch List
Academy Sports (ASO): ASO is now nine weeks into a normal-looking rest between 40 and 50 (ballpark), with the latest dip coming on very light trade. We think a decisive upmove from here could kick off a new run as investors look ahead of a few years of aggressive store openings and huge earnings.

Arista Networks (ANET): ANET looked to be having a coming out party a year ago, but the bear market got in the way—and yet, the stock is now back to its same level from back then (give or take) while growth for its networking solutions (especially from giants like Microsoft, Meta and Google) has remained strong.

Axon Enterprises (AXON): AXON lifted above multi-month resistance a couple of weeks ago, kept rising (a rarity) and then gapped on earnings this week as demand for its Tasers, in-car and body cameras and Evidence.com platform remain strong, with Q3 bringing another solid sequential gain in annual recurring revenue and total contracted revenue.

Dexcom (DXCM): DXCM has a history of resting for a year or two before going on another run, and we think that new upmove may be underway—the Q3 report was great, but more important is the ongoing launch of its new G7 CGM (overseas now, in the U.S. likely early next year). The stock is acting well, though it does have overhead to chew through.

Insulet (PODD): Insulet, like Dexcom, is also in the diabetes management sector, with a superb insulin pump that’s gaining share here and should soon be approved in Europe, too. The stock has been super strong before and especially after the Q3 report and is now near all-time highs.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, November 17. As always, we’ll send a Special Bulletin should we have any changes before then.