November 22, 2023

Note: We’re sending this a day early as we head into Thanksgiving. All of us here at Cabot wish you and yours a fantastic holiday weekend.

WHAT TO DO NOW: Continue to put money to work, albeit in a step-by-step fashion. From a top-down perspective, our market timing indicators continue to improve, with all three of our key measures (Trend Lines, Tides, Two-Second) now positive. Individual growth stocks are acting well, though many are still repairing the damage of the past few months. Thus, we’re optimistic, but want to see continued improvement to pull us into a heavily invested position. In the Model Portfolio today, we’re going to buy a half-sized position in Arista Networks (ANET) and add another 3% stake to Duolingo (DUOL), leaving us with around 44% in cash.

Current Market Environment

The market is modestly higher today ahead of the Thanksgiving holiday—as of 11:30 a.m. ET, the S&P 500 is up 0.4% and the Nasdaq is up 0.5%.

Day by day, week by week, the market’s evidence continues to head in the right direction. First, our Cabot Trend Lines survived a test of its buy signal; then, our Cabot Tides turned positive; and now we’ve seen six straight days of sub-40 new lows on the NYSE, which is enough for an all-clear signal. We’d also note our Aggression Index continues to be bullish.

The picture for individual growth stocks is a bit murkier—many have broken out and act well, but a lot are still etching launching pads and have run back into some resistance. (Many we own or watch are set to report earnings in the next week or two.) Meanwhile, while the number of new highs has expanded (good), it’s certainly not booming even when the market does perk up.

To be clear, those aren’t red flags to us, but they describe a situation where leadership is still developing among growth-y stocks. Thus, we’re continuing with our game plan: Extending our line in stages as the overall evidence improves and as we see more quality growth titles emerge.

Big picture, then, we’re looking to extend our line—but to do so in a measured way, especially now as there aren’t a ton of great entry points out there. In the Model Portfolio, we’re going to start a half-sized position (5% of the account) in Arista Networks (ANET) and an additional 3% position in Duolingo (DUOL) to effectively fill out that position. That will leave us with around 44% in cash. Details below.

Model Portfolio

Arista Networks (ANET) is the networking leader of the new age, with cloud titans like Meta and Microsoft gobbling up its faster switches and software as they expand their data center operations. The customer concentration is a risk, but Arista has consistently gained share in the industry, and while CapEx may ease somewhat among the big players, other areas (think campus-wide enterprise networks) are strong and the AI movement is expected to really boost business in late 2024 onward—without getting into everything, analysts think AI hardware will eventually center on Ethernet technology, which Arista specializes in. The worry here is that 2024 will see a big deceleration in growth, though the stock doesn’t really buy into that. Plus, big investors might be looking ahead to what is almost surely a quick reacceleration as AI orders plow in. Like many stocks, ANET is a bit extended here, but it’s traded calmly for the past couple of weeks (though it had a bit of volatile action after NVDA’s earnings). We’ll start with a half-sized stake (5% of the portfolio) today and give it rope down to the 190 area. BUY A HALF

CrowdStrike (CRWD) remains in fine shape, and we’re impressed that it shook off the earnings gap down in peer Palo Alto Networks (PANW) last week. We’re also impressed that PANW has snapped right back to new highs, a good sign for the group. Of course, CrowdStrike’s own report, due next Tuesday (November 28), will be key—analysts see sales of $777 million and earnings of 74 cents per share, but lots of the sub-metrics (margins, free cash flow, deal flow) will be key, as will any talk about the longer-term targets it released a few weeks back. As always, we’ll take it as it comes, though we’re optimistic that CRWD will remain under accumulation given its rare growth story and outlook. We’ll stay on Buy a Half, though aim for dips if you want to nibble ahead of the report. BUY A HALF

Duolingo (DUOL) isn’t for the rent money, but we’re high on the potential here as investors start to think about whether the firm can transition from a language learning app (which, in and of itself, has great potential given the number of regular users that haven’t converted to paid subscriptions yet) to a learning platform as it delves into music and math. Neither will be meaningful revenue producers for a few quarters, but given management’s execution, big investors are likely thinking it’s a matter of time before those new areas are big successes. We just bought a half-sized position last week, but we like the action and the story, so we’re going to average up here, though because of the stock’s volatility, we’re going to keep it slightly smaller than usual—we’ll add another 3% position to DUOL today and use a loose stop on the combined position near 170. BUY ANOTHER 3%

DraftKings (DKNG) breezed through its Analyst Day (which had some bullish numbers we wrote about last week—EBITDA target of $1.4 billion in 2026 and $2.1 billon in 2028) as well as the launch of ESPN Bet (which reportedly was off to a good start in terms of downloads, etc.), which is a good sign that the buyers are in control. Like many of the strongest names, a pothole is going to happen at some point, though with the breakout just a couple of weeks ago, the odds favor higher prices ahead. We’ll stay on Buy, though if you’re not yet in, you can consider nibbling here or looking for dips of a couple of points. BUY

Noble (NE) almost certainly will see sales, earnings and cash flow kite higher for a long time to come, but the company is not the stock, and weak oil prices (and poor group action—the oil service sector is down to levels from early July) have continue to hit the stock. Shares are right at their 200-day line here and everyone hates the group, so having sat through this slog, we’ll give NE another week—but if it can’t get off its knees, we’ll look for greener pastures. Hold for now. HOLD

Nutanix (NTNX) is one of many leaders (and potential leaders) that has earnings coming next week—in this case next Wednesday, November 29, with analysts looking for $501 million of revenue and earnings of 17 cents a share, though free cash flow and bookings trends for big IT projects will be just as important. NTNX hasn’t been all quite as strong as some names this month, but it’s notched new closing highs a couple of times of late after a retest of its early-September earnings gap. We’ll stay on buy, but keep it small and/or look for dips if you want in this close to the report. BUY

Uber (UBER) remains very impressive, moving higher despite some items that could bring in selling. One example: The firm’s recent $1.5 billion convertible bond offering that will mostly be used to refinance existing debt—usually such a large offering would lead to a short-term dip for a few reasons, but so far, UBER has refused to budge an inch, a good sign that big investors are gobbling up whatever supply they can. Of course, a dip could still be in the offing here, but the sterling fundamentals and upside power bode well. BUY

Watch List

Elastic (ESTC): ESTC didn’t peak until mid-October, so it’s taking a little time to get going, currently five weeks into a new, reasonable (17% deep) launching pad. Earnings are due next Thursday (November 30), and a big gap would be very tempting. The firm’s data analytics platform seems perfectly suited for the coming AI boom.

Eli Lilly (LLY) and Novo Nordisk (NVO): LLY has been lagging the market so far, but it hasn’t done anything wrong—and a good couple of days could have shares at new highs. We’re waiting for it and peer Novo Nordisk (NVO) to show their hands; a breakdown could mean lots of the weight-loss benefits have already been discounted, but renewed strength could lead to very good things.

Expedia (EXPE): It’s not a true-blue growth stock, but EXPE was left for dead despite terrific results in recent quarters, and now the stock is showing exceptional power as free cash flow is giant. It’s an interesting turnaround situation.

Mobileye (MBLY): Like many growth titles, MBLY is still repairing the damage from the past few months, but shares have perked up impressively, especially given the war going on in the Middle East. The firm is the leader in ADAS and self-driving technologies; 2023 has been a bit of a transition year, but 2024 and beyond should see most of its recent deals kick in.

Nvidia (NVDA): NVDA continues to post bonkers numbers—in last night’s quarterly report, revenue rose 34% from the prior quarter (!), driven by data center (much from AI) sales that were up 41% sequentially, while earnings of $3.71 were up 50% sequentially and obliterated estimates. The Q4 outlook also was way ahead of plan. Shares are still battling with round number resistance near 500, but we think the next big move is up.

Palantir (PLTR): PLTR is wild and wooly, but it’s well sponsored and there’s little doubt the firm’s AI platforms are set to be rapidly adopted by private U.S. outfits in the quarters ahead—with government agencies (here and abroad) not far behind. Shares hit a mini-pothole yesterday but are still in solid shape.

Pulte Homes (PHM): Housing names won’t be the fastest performers, but the group can trend nicely when conditions turn favorable. Pulte is the strongest name among the builders, with a low valuation and a huge uptick in orders in Q3.

Vertiv (VRT): VRT remains in the good-not-great category, hitting new highs but not showing much power. It’s likely to be affected by NVDA’s report given the AI exposure; fundamentally, all seems right here, the question is whether the stock needs more time to digest its huge early-year move.

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