Note: We’re sending this out a day early this week but our regular schedule hasn’t changed—your next issue of Growth Investor is coming next Thursday (February 24) and, as always, we’ll shoot out special bulletins if need be in the interim. Have a great long weekend.
WHAT TO DO NOW: Remain defensive, but keep your eyes open. The market hasn’t done anything amazing, but it’s held above the January lows for three-plus weeks while shrugging off a few worries. There’s still more repair work to do, but a few days of strength would get our Cabot Tides and Growth Tides into an interesting spot. Still, right now, the market remains in the repair phase and we’re still seeing a lot of earnings-related potholes—we advise remaining cautious and patient as we wait for the next upmove to arrive. We have no changes tonight.
Current Market Environment
The market is down on the day, though individual stocks aren’t doing too badly. As of 2 pm EST, the Dow is off 280 points while the Nasdaq is off 165 points.
From an overall perspective, nothing has changed with the market’s stance during the past week—all of our trend-following models (Cabot Trend Lines, Cabot Tides, Growth Tides) are still negative, and on most days we’re still seeing a ton of stocks hitting new lows (even yesterday’s rally saw 370 combined on the NYSE and Nasdaq) while most issues are sitting below intermediate- and longer-term moving averages. Moreover, we’re still seeing a good number of potholes today, especially among former leaders (SHOP, ZI, etc.).
Thus, you shouldn’t overthink it: With little money being made (and plenty still being lost), we advise holding plenty of cash and letting others fight the fight on a daily basis, while we wait for a better setup.
With that said, we are finding some things to be optimistic about. The January 24 selling crescendo has held up despite a spate of bad news like Facebook’s earnings, the Russia uncertainty and rising expectations of numerous Fed rate hikes. And while there have been high-profile duds, we’re starting to see some of the wheat separate from the chaff among individual stocks, with some themes emerging (like “reopening 2.0”) and a few potential leading growth stocks set up.
As we’ve been writing, ideally we’re in a repair phase, where some things fall by the wayside but fresh names start to shape up. To be clear, at least on the growth side of things, this phase will likely take more time given the damage suffered, and might involve a re-test or two of the January lows. Plus, of course, there’s always the chance the rally goes up in smoke with another sharp leg lower.
Still, given the fact that most major indexes and growth funds have held up, a few good days put our Cabot Tides and Growth Tides in an interesting spot—we’re not necessarily knocking on the door of a buy signal, but a few percent higher from here could actually do the trick.
Right now, though, we’re just playing it by the book—if we see the trends turn up, we’ll start to take a step back into the market’s waters, but at this point, it’s best to remain cautious and patient as the market futzes around. We have no changes tonight.
Model Portfolio
The underlying thesis for Arista Networks (ANET) continues to play out, with Q4 results and the outlook confirming that business is good and getting better. While there remain some cost pressures due to supply chain issues, just about every number and all the commentary was great: In the quarter, revenues (up 27%) and earnings (up 32%) easily topped expectations, with demand for the so-called Cloud Titans (Arista’s language) rising rapidly (from the conference call: “Feedback from our largest customers is consistent. Arista products are easier to work with and have far fewer issues than competition”), while the company is also doing great in the enterprise and campus market (campus revenue is small but doubled last year and should double again to $400 million this year). Looking ahead, the firm reiterated its 30% top-line growth target for this year with many years of growth after that (though likely at slower rates). The supply chain stuff is still a headwind, but Wall Street liked what it heard—ANET rose after the report, though it didn’t really change the chart all that much (still in the middle of its consolidation). Even so, we’ll take it, and our overall thoughts haven’t changed: We think ANET is positioned to be a growth stock leader of the next upmove, and the longer it hangs in there, the greater the chance it happens. HOLD
Devon Energy (DVN) reported yet another barnburner of a quarter last night, as the cash flow story continues to crank ahead. In Q4, Devon earned nearly $1.2 billion of free cash flow (after CapEx, before any dividends or share buybacks), and it gave just about all of that back to shareholders—it announced a total dividend (fixed plus variable) of $1.00 per share (ex-dividend date March 10, payable March 31), and it also said that it bought back just over 2% of outstanding shares in Q4 alone. As for details: The fixed dividend was hiked to 16 cents per share (up from 11 cents) and the top brass effectively reloaded the share buyback program, upping it back to $1 billion (after using $589 million to repurchase shares last quarter at an average price of 42). The firm is sticking with its maintenance-type production plan (CapEx relatively flat for 2022; oil growth “up to” 5% for the year) and again aims to return 50% of post-base-dividend free cash flow each quarter. (We’d also say that, at this early stage of earnings reports for oil companies, most are toeing the line on tame production growth, which should be supportive for prices.) Not surprisingly, the projections that the company released in early January still mostly hold—at $75 oil and $4 natural gas, Devon sees around $6.30 per share of free cash flow, while at $85/$4, that figure would be around $7.35 per share. The stock popped today, though on the week it’s actually relatively flat, so we wouldn’t say today was anything decisive. To be fair, DVN has had a big run since its breakout in late September, so realize that the intermediate-term move isn’t in the first inning. Still, there’s been little in the way of sustained selling pressure, while every dip to this point has been met with lots of big-volume buying. Until that changes, we’ll stick with a Buy rating. BUY
ProShares Ultra S&P 500 Fund (SSO) doesn’t look great, which isn’t surprising given the market’s trends; SSO has come off a few points during the past week as Russia/interest rate fears have ramped up. As we wrote last week, we’re not going to just hold and hope given our market timing indicators, but having held through the January meltdown, we want to see how this rebound goes—so far, we see a few encouraging things but will just take it as it comes. Bottom line, if we sniff out a serious new leg down, we’ll likely sell some or all of our stake in SSO, but at this point, the odds continue to favor things being in a bottom-building process, so we advise sitting tight. HOLD
Watch List
Datadog (DDOG): We got whipsawed on DDOG at the start of the year, but that was all about the market and not the company—shares mostly held their 200-day line during the crash and popped after yet another quarter of accelerating growth. It looks like it wants to go higher if the market can get out of its own way.
Dutch Brothers (BROS): BROS is now 15 weeks into its first launching pad—it remains wild and probably needs more seasoning, but the two huge-volume buying weeks off the lows (as well as the top-notch cookie-cutter story) bode well. Q4 results are due March 1.
Halliburton (HAL): Every day that goes by plays into our thinking that 2022 could be big for oil service stocks. The trick here is the downside probably isn’t as protected—if oil falls to $70 and stays there, producers will still gush cash flow, but service firms may be pinched—but bigger picture, HAL has likely started a new multi-year growth wave.
Inspire Medical (INSP): INSP had a solid Q4 report (revenues up 70%, losses shrunk dramatically), and more important to us, it has a revolutionary-type product for sleep apnea. The stock is in the midst of a giant year-long consolidation.
Planet Fitness (PLNT): PLNT’s long-term setup is fantastic and the stock is perking up (recent RP peak this week) ahead of earnings on February 24. The easing of virus restrictions should help, but that’s just added fuel to the underlying growth story.
Snowflake (SNOW): SNOW has earnings on March 2, which will go a long way toward telling us if it’ll be a leader of the next advance. As it stands now, the story is hard to beat, though the stock (25% off its high) is sort of mid-range, with more work to do—it’s still worth watching.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, February 24. As always, we’ll send a Special Bulletin should we have any changes before then.
| Stock | No. of Shares | Price Bought | Date Bought | Price on 2/16/22 | Profit | Rating |
| Arista Networks (ANET) | 1,626 | 137 | 12/10/21 | 132 | -3% | Hold |
| Devon Energy (DVN) | 7,240 | 28 | 5/7/21 | 54 | 91% | Buy |
| ProShares Ultra S&P 500 (SSO) | 1,741 | 30 | 5/29/20 | 64 | 115% | Hold |
| CASH | 1,423,520 |