September 14, 2023

WHAT TO DO NOW: Remain cautious. Most stocks, sectors and indexes are still stuck in the throes of a corrective phase, though we do like some things like our resilient Aggression Index and (relatedly) some sturdy action among growth stocks. While we could add another small position if the market firms up a bit, we’re comfortable with the stocks we have in the Model Portfolio and our positioning right now. Thus, we’ll stand pat tonight and practice more patience—our cash position is in the low 40% range.

Current Market Environment

As of 2 p.m. ET, the major indexes are mostly up higher as they continue to ping-pong within their recent ranges—the S&P 500 is up 0.8% and the Nasdaq is up 0.9%.

The story remains the same, as the market’s correction that kicked off in late July/early August is still in place—you can argue whether the intermediate-term trend is down or neutral, but nobody can say it’s up, and that goes for the major indexes or the vast majority of stocks (68% of the S&P 1500 remain below their 50-day lines, while more than 50% are south of their 200-day lines, too).

Throw in the facts that there remain a dearth of stocks hitting new highs (only 32 Nasdaq new highs yesterday, just above the lowest reading of the year of 28 in March), that interest rates remain in an uptrend (yesterday’s inflation report was mostly a non-event for that) and that late September is notoriously difficult for the market (we’re not big on seasonality but the numbers are pretty decisive on this) and we continue to advise a cautious stance, holding a good-sized cash position and limiting new buying.

With that said, there remain some under-the-surface positives among some secondary measures—our Aggression Index remains encouragingly resilient (thanks in large part to poor action among many defensive stocks) and sentiment remains mostly in the dumps (equity funds and ETFs have seen five straight weeks of outflows, a pattern that’s generally come near short- to intermediate-term lows in the past year).

Plus, more important to us, many growth stocks that gapped up on earnings in late August or otherwise found some big-volume or persistent buying are holding well during the sloppy, choppy action of late summer—though we are starting to see a few take on some water. The longer that continues, the greater the chance the next upmove will see plenty of growth leadership to jump on.

All in all, then, not much has changed—the odds continue to favor the next major move being up, but most stocks, sectors and indexes are still battling through this correction phase, with plenty of rotations, news-driven moves and the like.

In the Model Portfolio, we like what we own and our overall positioning—if the recent sturdy action in some potential leaders continues, we could add another half position in a resilient name (and/or average up on something like CRWD). But, while we’re as anxious as anyone to see the next sustained rally, patience remains the name of the game for now—we have no new changes tonight, with a cash position in the low 40% range.

Model Portfolio

Celsius (CELH) stalled out for a while near the 150 level before gapping up on earnings—now the 200 area is proving sticky, with some low-volume selling on strength in recent days. Still, at this point, that mostly plays into our thinking that CELH is probably a lot like the overall market: The near-term could see the stock retrench as it remains extended to the upside (25-day line is above 188; 50-day is 167; both are rising steadily), though longer-term, there’s little doubt the firm’s rare growth story has a long runway ahead, which should keep big investors interested. We’ll stay on Buy, but new buyers should keep it small and/or aim for dips of a few points. BUY

We reviewed many of CrowdStrike’s (CRWD) excellent numbers from the latest quarterly report, but one that showed up in the quarterly filing (10-Q) was that the firm’s contracts are generally non-cancellable and total one to three years in length—and the value of all the money its due going ahead (dubbed remaining performance obligations) was a whopping $3.6 billion, up 44% from a year ago, up 9% from the prior quarter and totaling nearly five times revenue in the latest quarter! The stock is off to a decent start for us, though we’d note the relative performance (RP) line is still testing its prior May peak. Combine that with the iffy market and we won’t average up here—but we’re OK starting a position here or on dips if you’re not yet in. BUY A HALF

DraftKings (DKNG) has rebounded about as well as we could have hoped after the ESPN-induced dive last month—in fact, shares actually nosed to a marginal new relative performance (RP) peak on a closing basis last week before backing off a bit, which is obviously a good sign the buyers are still active. (As an aside, we’d note that Penn National (PENN) actually kissed new low ground yesterday.) One analyst thinks hold rates (how much a sportsbook keeps) could be down a touch from a year ago due to some unfavorable outcomes early in the football season so far, so we’ll see how that impacts Q3 numbers next month. But there’s little doubt the sports betting market is very strong, with one survey saying that 73 million U.S. adults will place bets during the 2023 NFL season, up from 27 million two years ago. Back to the stock, DKNG’s rebound is a great sign, but there’s still overhead to chew through and an iffy market to deal with. Thus, we’ll stay on Hold with our half-sized position for now. HOLD HALF

Despite a steady rise in oil prices (north of $90 per barrel today), Noble (NE) has been tossed around of late with most oil stocks—though overall, it remains in an uptrend, holding above its rising 50-day line and giving back zero of its big July rally. News of higher-priced contracts in the space could help perception, as would any bump in the firm’s dividend (likely won’t be announced until October, if it happens). As it stands, the story, numbers and chart are all positive, so we’ll stay on Buy. BUY

ProShares Ultra S&P 500 Fund (SSO) remains almost exactly right in the middle of its recent range and right on its 50-day line, too. Given our more-negative-than-not indicators, we went back to Hold in SSO last week and will keep it there this week. A drop back to the correction lows could have us trimming some of our large position, but we’re fine practicing patience as long as it continues to hold up. HOLD

Uber (UBER) has pushed back to its prior high (near 50) as it continues to round out a normal-looking launching pad. Fundamentally, its talk at an analyst conference last week helped the cause, with the top brass relaying many positive tidbits about business and the general outlook that we touched upon in last week’s issue. And, this past weekend, rumors surfaced that Uber might get into the handyman business, using its app to connect users and workers for tasks; it’s just a rumor at this point but we think the firm’s newer businesses (like ads on its app, which management thinks could be a $1 billion business next year!) have great potential to keep EBITDA and free cash flow strong and growing for a long time. We’ll stay on Buy, though don’t be surprised to see some near-term volatility. BUY

Watch List

Axcelis Technologies (ACLS): To be honest, ACLS looks sloppy after a big run, which plays into our thinking the stock likely needs more time to rest after its big run in the first half of the year. But we also think demand for the firm’s Purion line of equipment, which look to be best-in-class for SiC chips (used in EVs and other power hungry apps)—in turn driving earnings and free cash flow much higher.

Confluent (CFLT): CFLT saw massive volume support after earnings in late July (biggest volume week ever, in fact) and it’s continued to hold that area since—but, as we’ve written before, it’s also failed to bounce much. Big picture, we like the story and the overall setup, so we’re OK patiently waiting for some upside power to appear.

Duolingo (DUOL): DUOL has etched a very nice launching pad over the past three months, and we think the story and numbers are outstanding. Our only rub is the volatility here, as the stock moves around 4% per day on average.

Pure Storage (PSTG): PSTG briefly broke out on the upside before turtling in recent days. Overall, the stock is effectively still in the right range it’s occupied since May. More evidence that the storage-as-a-service (read: subscription) business is becoming the dominant part of the business could kick off the next rally.

Samsara (IOT): After a straight-up move from its lows of 22 to new highs above 32, IOT has shaken out a bit this week—so far, the action looks normal, though we’ll be watching. Our enthusiasm for the story hasn’t changed a bit, and if the stock can hang in there during the market’s sloppy period, we’ll likely grab some shares.

Splunk (SPLK): SPLK is one of the top names on our watch list, as it looks like investor perception has changed as business cranks ahead and the subscription model leads to outstanding free cash flow growth in the quarters ahead.

Vertiv (VRT): VRT has had a huge run without much of a dip, so we’re hesitant to jump in at this point—however, the longer it can hold up in an iffy market environment, the greater the chance it sees higher highs down the road. We like that this is a newer name and that earnings are getting a boost from supply chain healing and also the AI boomlet—earnings are projected to be $2 per share next year, too, and even that will likely prove conservative.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, September 21. As always, we’ll send a Special Bulletin should we have any changes before then.