WHAT TO DO NOW: Remain defensive, but be ready to take some action. From a top-down perspective, the market is improving, with our Cabot Tides on the verge of a green light. However, individual stocks remain a mine field, with many acting better but plenty of blowups, including many high-profile names, like Meta (META) today and our own Wolfspeed (WOLF), which collapsed today after earnings; we sold our shares earlier today via a special bulletin. That will leave us with around 85% in cash, which we’ll hold for now—that said, if the Tides improve further, we’ll likely put some money back to work in the days ahead as earnings winners reveal themselves.
Current Market Environment
We have two different thoughts right now when examining the evidence. The first is looking at the overall market—from that perspective, there’s no doubt we’re seeing improvement, with the bottom in the broad market back on September 23, and with the indexes resisting some bad news and earnings of late, so much so that our Cabot Tides are technically turning positive right now.
For our part, we’d like to give the Tides another couple of trading days before we take action because the signal is mostly from the fact that the indexes have stopped going down, not that they’re racing higher, and that’s especially true for growth funds, which are lagging. Plus, of course, the long-term trend (Cabot Trend Lines) and our Two-Second Indicator are both still negative.
And then you have the action of growth stocks, which, at best, remains hit or miss—and, as has been the case all year, whenever some names perk up near multi-month resistance, they back off (at least) or get hammered (at worst). That’s a sign that institutions still aren’t committing to any big positions, instead lightening up on strength.
The sale of WOLF today gives us around 85% in cash, which we’re holding onto tonight—and we’re keeping SWAV on a tight leash after a failed breakout attempt yesterday, too. That said, we’re also open to redeploying some funds, especially if more well-situated growth names begin to pop higher on earnings and the indexes push higher. Tonight, we’ll stand pat and see how the market and individual stocks handle themselves for another couple of days—we’ll be on the horn if we have any changes in the days ahead.
Model Portfolio
Shockwave Medical (SWAV) is pretty much the poster child for the current market environment: Shares have been etching a good-looking base (considering the weak market) for a few weeks, and as the pressure began to come off the indexes this week, SWAV roared ahead on good volume to test new high ground—but then it was firmly rejected, which has been one of the most telling traits of the market the entire year. So where does that leave us with the stock? The double top and big-volume selling is certainly a yellow flag, especially given how the market has had a habit of eventually nailing stocks that are holding up well. That said, overall, SWAV is still far more resilient than most names (near its 50-day line and “only” back to where it was last week), and the fact that it even tried to break out this early in a market rally is a positive. All in all: We’re sitting tight but watching closely. Earnings are due November 7. HOLD
Wingstop (WING) has been a breath of fresh air, with the firm’s Q3 report looking great and helping the stock to ratchet up to new recovery highs. The top-line numbers here beat nicely (sales up 41%, earnings up 55%, EBITDA up 33%), but investors were more encouraged by some other factors, including strong 6.9% domestic same-store sales growth (most of which was driven by higher transactions, not just higher menu pricing), as well as expanding margins as wing prices deflate. Plus, big picture, management sees a path toward boneless chicken (such as its chicken sandwich) offerings making up half of the sales mix, which will keep costs lower than they have been in the past. As for the store count, 40 new ones opened in Q3, with the number of total restaurants up 13.5% from a year ago, and with strong sales trends and lower costs, brand partners (most of Wingstop’s restaurants are franchised) are seeing new stores pay back the initial cost in far less than two years. Said another way, the underlying growth story (possibly better than before if the lower cost structure comes into pay) is back on track after some ups and downs during/after the pandemic, and big investors are discounting better times ahead. The stock gapped up to new recovery highs yesterday and actually tacked on some more gains today. We’ll stay on Buy a Half and are hoping to fill out our position, though given the sell-on-strength mentality, we’re hunting to pick up more shares on dips. BUY A HALF
Wolfspeed (WOLF) was sold via this morning’s special bulletin, and we really don’t have too much to add to what we wrote then—there’s no doubt that demand is going through the roof, with new orders (design-ins) leaping 35% from the prior quarter as everyone rushes to lock in supply of silicon carbide chips for a variety of applications (not just electric vehicles). That said, this sort of reminds us of Tesla in the old days, before it was a super company. when demand was always really big but the firm had endless production snafus, which hit the stock repeatedly over many years. We’re not drawing a direct comparison between the two situations, of course, but the point is that part of the story here was that Wolfspeed had the most amount of capacity coming online in the quarters to come, and the guide-down for the next couple of quarters due to supply issues burned up a lot of good will. To be fair, the stock did find support after its awful open, and the company is hosting an Investor Day on Halloween (next Monday), so some sort of bounce wouldn’t be shocking; if you still own some shares and want to see if a rally develops, that’s fine. But overall, (a) we only had a half-sized stake, so selling a portion would leave us with very little, and besides (b) the stock clearly broke support today on massive volume. We’re out and will look for greener pastures should the market continue to shape up. SOLD
Watch List
We have an expanded watch list today given the market’s recent action—and we also expect to add some names to our radar as earnings season progresses.
Academy Sports (ASO): ASO is seven weeks into a fresh launching pad, which sits right near the top of a larger year-long structure. It’s not a classic growth story (earnings are backing off a bit) but the valuation is dirt cheap and the firm has a solid cookie-cutter plan for the next few years.
Albemarle (ALB): ALB nosedived two weeks ago, but that move now looks like a shakeout, as shares have quickly snapped back and earnings estimates remain huge. Earnings are due November 2.
Axonics (AXNX): AXNX is a bit thinly traded, but as we wrote in last week’s issue, the firm has a great story and should have a long runway of growth. Similar to ASO, this stock is hanging out near all-time highs, part of a year-long rest. Earnings are due out on Halloween.
Celsius (CELH): CELH is in its ninth week of building a new launching pad, though to this point it hasn’t snapped back quite as strongly as some other names. Even so, the growth profile here is hard to beat, and we still think there’s a good chance the stock reasserts itself. Earnings are likely out in mid-November-ish.
Chart Industries (GTLS): GTLS remains set up very well ahead of earnings tomorrow (October 28). Another big quarter of orders could get investor perception moving on the upside.
Enphase Energy (ENPH): ENPH decisively broke support a few weeks ago, which forced us to sell; most stocks that have done that (even in recent weeks) kept moving lower. But ENPH’s dip after that was modest, and this week’s earnings report was another great one (sales up 81%, earnings up 108%) and helped the stock gap back up toward its highs. It’s back on our watch list.
Shift4 (FOUR): We still really like the Shift4 story, and the stock remains within a tight basing area, but it needs to show some decisive strength for us to get involved. Earnings are due November 7.
Xometry (XMTR): XMTR continues to intrigue us, with a fresh growth story that could lead to very good things in the months ahead. Our biggest rub is trading volume, as the stock is rather thinly traded, which can make it hard to hold on to. Earnings are due November 10.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, November 3. As always, we’ll send a Special Bulletin should we have any changes before then.
