November 9, 2023

WHAT TO DO NOW: Remain cautious overall, but if you have a ton of cash, it’s OK to put a little to work. Our market timing indicators have improved, but by our eye, haven’t yet turned up, and while last week was a great first step for the market, there hasn’t been much follow through or expansion of new highs. To be clear, we’re optimistic and a few good days could make all the difference, but right here we’re still going slow and seeing if the market and leadership can truly emerge. In the Model Portfolio, we’ll buy another half of DraftKings (DKNG), leaving us with around 65% in cash. We’re also restoring our Buy rating on Uber (UBER) for those that don’t own any given the stock’s very powerful snapback. If things kick into gear, we’ll likely put money to work quickly, but right now we’re going slow and letting the rally prove itself. Details below.

Current Market Environment

A poor bond auction led to a pickup in interest rates today, which in turn dragged the market lower. When the closing bell rang, the S&P 500 was off 0.8x%, the Nasdaq was down 0.9% and broader indexes were off in the 1.1% to 1.3% range.

Our market thoughts can be summarized in the following way: We thought there was a very good setup in recent weeks (lots of pessimism, improving seasonality, still some stocks hanging in there) for the market, and last week’s very broad, very powerful advance (egged on by a nice drop in interest rates) was a great first step for the bulls.

Since then, the action has been solid—though to this point, not decisive. Our Cabot Tides are in an interesting spot: By the letter of the law, they’re technically positive, but that could change within a few days if the indexes don’t rally further. We’ll call them neutral for now.

Moreover, our Two-Second Indicator is still negative, telling us the broad market is still iffy; indeed, small-and mid-cap indexes still look very suspect and more than 60% of stocks are south of their 50-day lines. Plus, the number of new highs remains very small day in and day out.

And let’s not forget about interest rates, which fell hard last week but, following today’s move higher, are still holding near their 50-day lines.

Now, we relay all of that not to convince you that this rally is sure to fail—in fact, we’re still relatively encouraged by what we see. Besides the setup and last week’s surge, one very solid piece of evidence is that we’re not seeing any real selling among potential leaders (including some earnings winners) even after some big upmoves. That’s a marked change from the past few months (and much of the past two years), when just about any sharp rally was quickly overwhelmed with selling.

Put it together and we’re optimistic … but we’re not outright bullish given the not-quite-there marketing timing indicators and still-sloppy broad market. Given our giant cash position, we are going to do a little buying tonight in our current names, but we’ll go slow.

In the Model Portfolio, we’ll average up (buy another half position, which is 5% of the account) on DraftKings (DKNG), which appears to have finally gotten going from its long consolidation, and we’ll restore our buy rating on Uber (UBER) for those that don’t own any. Our cash position will now be around 65%.

Model Portfolio

CrowdStrike (CRWD) doesn’t report earnings until after Thanksgiving (November 29), so the stock is basically moving around on its own—and the action remains just fine, with the stock notching new price and relative performance (RP) highs earlier this week. Given the low-volume rally, we’ll simply stay put, but continued improvement in the market and a higher-volume push in the share price could have us upgrading back to buy. HOLD HALF

DraftKings’ (DKNG) Q3 report was a beauty and has lifted the stock up and out of its range. Sales in the quarter rose 57%, well above expectations despite some bad luck, thanks to both a big gain in active users (up 40% from a year ago) and a continued gain in revenue per user (up 14%). Moreover, profitability continues to improve, with the top brass significantly slicing the expected EBITDA loss this year (to $105 million from $210 million) and starting with a 2024 forecast of $400 million in EBITDA, well above what analysts had been modeling. There is an Analyst Day next week (November 14), and the EPSN/Penn National site launch is coming around the same time, so if you want to simply hold what you have that’s fine. But we’re putting more emphasis on the four straight days of huge-volume buying that’s brought the stock to new price and RP highs—so we’ll fill out our position by adding another half-sized stake (5% of the account). BUY ANOTHER HALF

Noble (NE) enjoyed a very solid couple of days following its quarterly report … only to give most of that back during the next four days. We don’t think the action is horrible, especially given that oil stocks are struggling, but we’re not in a rush to restore our buy rating. Having held our remaining shares to this point, we advise sitting tight and seeing if the post-earnings buying can return. HOLD

Nutanix (NTNX) was added in last week’s issue and it continues to look fine, recouping most of its mid-/late-October decline before a reasonable wobble today. Earnings are due November 29, which will likely be the next big event—in the meantime, the stock’s breakout in early September and resilience since (along with a very strong story and numbers) bode well. BUY A HALF

Uber’s (UBER) story is playing out exactly as we thought it would months ago—and, as opposed to some other situations in the past couple of years, the market is rewarding the stock. What’s interesting is that Uber actually missed some estimates—Q3 revenues were up just 11% and earnings of 10 cents missed the mark by two cents, some of which was due to accounting shenanigans and some due to a lackluster freight business. But the core ridesharing and delivery areas continue to do terrific: Trips rose 25% from a year ago while monthly active users were up 15%, and bookings for both ridesharing (up 30%) and delivery (up 16%) looked great. Most important, profitability continues to surge, with EBITDA of $1.09 billion (up from $916 billion in Q2 and $761 million in Q1) and free cash flow coming in at $905 million, well above 40 cents per share. The Q4 outlook was solid, too, and the stock (which had already spiked last week) continued higher and is now challenging round-number resistance near 50. Similar to DKNG, there is the chance that UBER could pull in here—though there’s also the chance that the stock’s extremely encouraging snapback propels shares nicely higher. Yes, we trimmed on the way down, but the stock’s rebound has been very enticing. We’re going to restore our Buy rating for those that don’t own any, and we might add back some shares in the days ahead if the market firms up and UBER remains powerful. BUY

Watch List

Arista Networks (ANET): ANET’s 2024 projections aren’t inspiring, but it’s hard to argue with the stock’s never-say-die action of the past few months and the decisive breakout after earnings last week. They have something of an Analyst Day later this afternoon, and if the stock can hold up/act well after that, we could take a swing at it.

Duolingo (DUOL): Duolingo remains as volatile as ever, but there’s no real doubting the growth here, with all the Q3 metrics (sales up 43%, earnings of seven cents well above expectations, paid subscribers up 60%, free cash flow near 80 cents per share) wowing investors—and with management beginning to integrate math and music lessons onto its app, which won’t be big revenue producers for a while but clearly expand the opportunity. The stock showed extreme power today, soaring to two-year highs on overwhelming volume. This might be something we buy and simply stick with a half-sized position given its volatility; either way, we’re intrigued.

Elastic (ESTC): It’s not a perfect chart this second, but we still think ESTC has big potential as big enterprise (many of which are already customers) sign up for the firm’s search platform as they expand their AI efforts. Earnings are due November 30.

Eli Lilly (LLY): LLY got approval for Mounjaro as a weight loss treatment from the FDA yesterday (it will be marketed as Zepbound), which caused a brief rush toward new highs yesterday … before a sell-the-news reaction today, in part due to a lower-than-expected price point. The question is how much of the good news has already been discounted, but this is a unique situation, with Zepbound (and Novo Nordisk’s Wegovy) potentially being the biggest-selling drugs in history. We’re still watching.

Nvidia (NVDA): Net-net, NVDA went nowhere from late May to late October (five months), and now it’s quietly marching higher, challenging some resistance today. Earnings are due out November 21, and it’s obviously not an unknown at this point, but we also believe it’s one of (if not the) top growth leaders out there.

Vertiv (VRT): VRT is still hanging around new high ground, though we’re starting to wonder if the stock simply needs more time to digest its humongous advance this year; shares are still 65% or so above their 200-day line.

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