August 4, 2022
The major indexes continue to act well in the wake of our Cabot Tides buy signal, which is clearly a good thing. That said, the vast majority of action remains in stocks that are buried on their charts, while those that acted resilient in recent months are mostly just sitting around.
WHAT TO DO NOW: The major indexes continue to act well in the wake of our Cabot Tides buy signal, which is clearly a good thing. That said, the vast majority of action remains in stocks that are buried on their charts, while those that acted resilient in recent months are mostly just sitting around. Thus, we continue to be selective and patient, though we’re fine extending our line when we see a real powerful situation. In the Model Portfolio, we added a half-sized stake in Enphase Energy (ENPH) on yesterday’s special bulletin, leaving us with around 70% in cash. We’d like to put more money to work (preferably averaging up in some names we have) but will see how earnings reports next week go.
Current Market Environment
The market is flat-ish today, with the Dow off 80 points and the Nasdaq up 40 points as of 3 pm EST.
From a top-down perspective the market continues to do its job, and some more positives are popping up. The major indexes have acted well since our Cabot Tides turned positive, and we’re even seeing improvement in other measures—today was the third straight day of sub-40 new lows on the NYSE, while our Aggression Index has improved and could be on the verge of a green light itself.
All of that is to the good, but the trick is when it comes to individual stocks: To this point, nearly all of the action has been from off-the-bottom names, while just about anything near a new high (or multi-month high) remains stuck. Why is that important? Simply because rallies without leadership are far more suspect—eventually, these names run into their own resistance areas and stall out, leaving the market nothing to hang its hat on.
As we wrote last week, such action isn’t negative; up is good, especially after what we saw the first half of the year. And the longer the rally can continue, the greater the odds that we’ve seen the low of the bear phase. (We’re not ready to go there yet, but we’re open to it for sure.)
However, for a new bull move to begin—which is where the real big money will be made—we’re obviously going to have to see stocks hit higher highs and keep going. So far, big investors haven’t been willing to do that, which tells us to continue taking it slow.
Thus, we continue to mostly bide our time; if you want to try to trade a few names here and there, go for it, but in terms of position trading (holding a stock for the intermediate to longer term), force-feeding money into resilient names hasn’t been paying off. That doesn’t mean it can’t start paying off tomorrow or next week, but until it does, we’re being very selective, looking for stocks showing great power with great stories.
In the Model Portfolio, we nibbled on what could be the best-looking growth stock in the market yesterday—Enphase Energy (ENPH)—but are still holding 70% in cash as we await new leadership to take off. Tonight, our only change is placing Halozyme (HALO) on Hold as the stock has weakened of late.
Bumble (BMBL) acts well, stretching to new highs last week before pulling back in recent days, partially due to a horrid earnings reaction from peer Match.com (MTCH), which fell 18% yesterday after its numbers missed estimates. BMBL did get hit initially on the news—but encouragingly, the stock found support at its 25-day line and has held up since. We think there’s a growing view that Bumble is the next Match.com, though earnings (due August 10) will be key. We like just about everything here, from the numbers to the story to the chart action—if we see a positive reaction on earnings (and a decent buy point), we’re game for averaging up, but we’ll see what comes. Hold on if you own some, and we’re OK grabbing a small position here, though earnings will be key. BUY A HALF
Devon Energy (DVN) remains in great shape fundamentally—as expected, the firm’s Q2 was a barnburner, with tons of free cash flow that allowed the firm to declare a $1.55 per share dividend (payable end of September) and buy back about 1% of the company in the quarter. Moreover, the outlook was generally unchanged, with $75 oil likely to produce free cash flow in the $6 to $7 range annually, and management talked up its share buyback program. That said, after rallying into the 60-ish area, DVN and the sector has pulled back as oil prices continue to slip (near $88, though interestingly, prices for the end of next year have remained near $80). So far, the retreat is normal, but we think DVN is approaching key levels: If the long-term supportive change in perception of the sector (and DVN in particular) is still intact, we’d think the stock will hold up in the low 50s (call it 50-52) on this retreat—and, of course, eventually get moving on the upside. If not, we’ll take the rest of our profit and look for greener pastures. Right now, we’re sitting tight. HOLD
Enphase Energy (ENPH) is one of the few growth stocks out there that has the “classic” bullish look to it—a long consolidation, relative strength in recent months and a huge-volume blastoff after earnings … with upside follow-through afterwards, too. Fundamentally, things are firing on all cylinders as demand for Enphase’s microinverters (which offer better performance and reliability than competing inverters) and battery storage solutions are booming all over the map: In Q2, overall revenues leapt 68% and earnings more than doubled, with across-the-board strength among its products, geographies and in the size of deployments. In fact, demand in Europe is most impressive—revenues there increased a whopping 69% from the prior quarter (89% from last year) as
its offerings are being gobbled up in many countries as consumers are looking to avoid sky-high natural gas prices and general energy insecurity, and Q3 should bring another huge gain (up 40% sequentially)! Overall, bookings continue to come in above expectations and the supply chain for inverters remains solid, though there’s still a three-month wait for batteries. (Even so, battery capacity shipped grew 10% sequentially.) The EV charging business here is still tiny, but a late-2021 acquisition is now fully integrated, and Enphase is shipping 8,250 chargers in the quarter, a figure that should mushroom in the years ahead as Enphase becomes a one-stop shop for home electrification. Looking ahead, Q3 should see revenue growth accelerate further, and long term, there’s no reason worldwide demand for Enphase’s products can’t grow many-fold. The stock briefly shook out yesterday after peer SolarEdge tanked on earnings, but ENPH quickly snapped back. Shares are very volatile, so we’ll be using a loose leash, but if the rally is the real deal, we think ENPH will do well. BUY A HALF
Halozyme (HALO) looked picture-perfect a few weeks back when the stock lifted on huge volume to new highs, but it then stagnated and, this week, has come under pressure, falling the past few sessions and today dipping below its 50-day line. To be clear, we don’t think this action is the end of the world—HALO has rarely been a go-go stock and has had plenty of dips and twists over time, and the story remains excellent, so this could very well be a pre-earnings dip (August 9) to clear the air. But given the action, it’s prudent to flip to a Hold rating today, respecting the weakness and using a stop in the 42-43 area. HOLD
ProShares Ultra S&P 500 Fund (SSO) has been doing well with the major indexes, rallying back into its resistance area from late May/early June, presenting a key area—further upside would obviously be good, though a shakeout or retrenchment wouldn’t be uncalled for. Given some of the other building positives (like the number of new lows drying up), we’d like to go back to Buy here, and possibly add back a few shares, but tonight we’ll wait a bit longer to see how the market handles itself now that it’s stretched its legs. If you don’t own any, we’re not going to argue with a nibble, but officially we’ll stay on Hold here. HOLD
Shockwave Medical (SWAV) looks like a lot of high relative strength stocks—it looks fine (the stock closed at multi-month highs on Tuesday), but it also hasn’t really been able to power ahead, with the 220 area proving sticky. Of course, some of that hesitation probably has to do with the quarterly report next Monday (August 8); analysts are looking for sales of $108 million and earnings of 44 cents per share, and the stock’s reaction to the report will probably tell SWAV’s intermediate-term tale. Right here, the stock has done nothing wrong, so we’ll stay on Buy a Half, but obviously we’ll be in touch next week with any changes (buy or sell) following the report. BUY A HALF
Celsius (CELH): Pepsi finally pulled the trigger with Celsius, investing a good chunk of money and inking a distribution deal, too, which has caused CELH to pop. There’s resistance up here (its old high from last year is in this area) and earnings are due next week—let’s see if we get a reasonable shakeout to enter.
CrowdStrike (CRWD): CRWD has rallied up to a key area—round number resistance near 200, as well as the 200-day line near there—so let’s see if it can gain enough strength to really punch through. We still enthuse about this story, though admittedly the group is still on the outs.
Duolingo (DUOL): DUOL has the story and very solid numbers, as well as a big bottoming area (dating back to March at least) on its chart. Earnings are due out tonight; we’d be intrigued by a gap up, but let’s see what comes.
Gitlab (GTLB): Gitlab is a newer name (public last October) that has an interesting software story—interestingly, its development platform is becoming the go-to solution for firms that need to upgrade software … and these days, that includes just about every big firm out there. Sales rose 75% last quarter, and the stock is trying to lift above multi-month resistance now.
Onsemi (ON): ON remains super resilient, powering back from an ugly June to within a whisker of all-time highs. The firm’s chips are in huge demand for many fast-growing areas, though next year’s estimates (no growth in sales or earnings) are a blemish.
Pure Storage (PSTG): PSTG continues to look under control, moving up steadily on a near-daily basis as it noses above some resistance in the 29 range. We’d like to see a major show of strength before buying, but the overall pattern and many weeks of big-volume buying over the past year are encouraging.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, August 11. As always, we’ll send a Special Bulletin should we have any changes before then.
|No. of Shares
|Price on 8/4/22
|Buy a Half
|Devon Energy (DVN)
|Enphase Energy (ENPH)
|Buy a Half
|ProShares Ultra S&P 500 (SSO)
|Shockwave Medical (SWAV)
|Buy a Half