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All three major U.S. indexes were up around 2% yesterday as the Bank of England stepped in to stabilize the pound, but the recovery looks fragile as sentiment remains mixed at best in the short term. Explorer stocks drifted lower this past week and we remain defensive looking for asymmetric plays where the upside potential exceeds downside risk.

Nio (NIO) was up 22% this week though markets face headwinds of inflation and increasingly loose talk of recession by many including Fed Chairman Jerome Powell. With regret, we let go of Sea (SE) but add another favorite selling at a sharp discount to its high—and in the middle of the unstoppable trend of cybersecurity.

This month we are dialing up the risk a little with a small software company that has a potentially disruptive platform that streamlines back-office processes for small and mid-sized businesses.

There are risks. The economy isn’t super strong, and this is a competitive market. But this company has a truly innovative set of solutions, is in one of the market’s most beat-up sectors and has new products and a low-cost customer acquisition strategy.

It’s also profitable and generates positive free cash flow, two attributes that make it an attractive acquisition target.

Enjoy!

A large number of our portfolio stocks are experiencing bullish price action right now. Unless something ugly hits news headlines in the next few days, we’re probably going to enjoy a strong stock market in the first half of July. I hope you’re not sitting on the sidelines!

Current Market Outlook


We don’t want to repeat ourselves too much, but the environment has remained mostly the same during the past few weeks. First, overall, this is a bull market that’s likely to carry nicely higher when looking out a few months; there remains plenty of doubt and uncertainty, which is (contrarily) a good thing. Second, though, making money has become trickier—there are far more news-driven moves, buying pressures seem to come and go for many leading stocks (as opposed to the sustained upmoves seen earlier this year) and there’s no question most indexes are extended to the upside. That’s no reason to get overly worried (most stocks are still acting normally), and in fact, we’re nudging our Market Monitor up a notch this week as leading stocks have perked up a bit. But it remains important to look for good entry points, honor your stops and take some partial profits when the opportunity arises.

Encouragingly, this week’s list is very broad, with all different types of sectors, sizes and growth/value outlook represented. There are many good names to choose from, but our Top Pick is Horizon Pharmaceuticals (HZNP), which has huge earnings estimates and a tight chart.

Stock Name	Price	Buy Range	Loss Limit
Anaplan (PLAN)	61.25	59.5-62.5	53-55
Enphase Energy (ENPH)	77.23	72-76	64-66
FedEx (FDX)	219.84	206-213	184-188
Futu Holdings (FUTU)	32.17	30-32	26-27
Horizon Therapeutics (HZNP)	75.12	72-76	65-67
Lithia Motors Inc. (LAD)	248.96	238-250	215-220
Roku, Inc. (ROKU)	173.48	167-174	147-150
Salesforce.com (CRM)	272.65	263-273	233-239
Trupanion (TRUP)	62.73	60.5-63	53-55
Tupperware Brands (TUP)	16.29	14.5-15.5	12-12.5

Stocks keep reaching new heights, as last week’s concerns about the market starting to show cracks under the surface seem to have been overblown, at least in the near term. Third-quarter earnings season gets underway next week, and expectations are high again, with economists expecting 8% growth. Companies may have to exceed those lofty expectations to keep this rally going. For now, though, the market is rolling.

To account for some possible bumpiness ahead, however, today I’m adding a big-name value stock to our portfolio. It’s one that I recommended to my Cabot Value Investor audience last month, and it’s already off to a fast start. It’s a company that thrives when the global economy is sound – which it is, despite myriad fears to the contrary.

Details inside.

The primary evidence remains bullish, so we’re still thinking mostly positive, especially when looking at the big picture. But there’s no question things are getting more and more divergent: The broad market and even most big-cap stocks are flat to down so far this year, and more recently, as interest rates have backed up and financial stocks get hit, we’re seeing selling pressures start to spread. That doesn’t necessarily portend doom, but coming on the heels of a multi-month advance, this kind of action does raise the risk of a change in character; we’re going to pull our Market Monitor down a notch to level 7—still bullish, but holding a little cash, booking some partial profits on the way up and being more discerning on the buy side makes sense.

This week’s list has its share of hot stocks, and we’re impressed that we’re still seeing some strong earnings winners that are moving on very, very strong volume. For our Top Pick, we’ll go outside the tech space with a name that just lifted out of a multi-month base on earnings and could be leading a new group move. Try to buy on dips.

Most automotive stocks are cheap these days. But they’re cheap for a reason - lack of future growth. That said, there are a few gems in the auto industry.

Yesterday, the House Judiciary Committee approved the Marijuana Opportunity Reinvestment and Expungement Act (MORE Act), which has Democratic Presidential candidate and former prosecutor Kamala Harris as one of its sponsors.

Now is a good time to review what Mike Cintolo considers the #1 rule for growth stock investors--cutting losses short.

So maybe the title of this Cabot Wealth Advisory (The Portfolio Management Manifesto) is a bit much. But with the market in a pullback/correction/retreat/whatever-you-want-to-call-it, I wanted to review a few ways you can go about handling your stocks ... especially your winners. Any growth-stock investor worth his salt cuts all his losses short. Also, any investor who’s going to make good money in the market takes good-sized positions. So then the question becomes ... how do you handle your winning stocks? I’ve been thinking a lot about this subject in recent days and weeks, and I’ve concluded it comes down to a battle between drawdowns and profit potential. Let me explain.

One way we beat the averages is stock selection. We want you to own great stocks in bull markets, like NBTY (NTY).

A few nights ago, as I found myself sitting at a dinner table with a group of strangers, by way of making conversation (and doing research) I asked, “What do you think will happen with the real estate market?” Their answers: “It’ll come back” and “We’ve been here before.” Not wanting to be a wet blanket, I didn’t disagree. But I think they’re wrong. I think there’s a lot more downside ahead, and that getting there will take much longer than most people imagine today.

The potential for an accelerated timetable for the Fed to raise interest rates and the ongoing Russia-Ukraine situation led to volatility this week. As always, other events and news also moved stocks. In particular, Sea (SE), after bouncing back the previous two weeks, was off sharply on Monday following reports that India has banned its popular mobile hit “Free Fire”. The stock has since recovered half of this pullback to close Wednesday trading at 141.

This week’s note includes our comments on earnings from Walgreens Boots Alliance (WBA) and Wells Fargo & Co (WFC). Next Thursday, we get earnings from Nokia (NOK). The deluge starts the following week with eight companies scheduled to report.

WHAT TO DO NOW: Remain cautious, though remain flexible. The market’s initial bounce this week was good to see but it didn’t offset the recent weakness, and today’s Meta-inspired selloff didn’t help the cause. All told, our Cabot Tides remain negative, and most growth stocks are still in rough intermediate-term shape—though the long-term picture is still positive. After selling the rest of our Arista (ANET) position last Friday, our cash position is 44%—we’ll sit tight tonight with our remaining names and our cash and see how earnings season continues to play out.

Note: To accommodate our Thanksgiving week schedule, there will be no issue of Cabot Stock of the Week published next week. The next issue will be published November 28.

As for today, the broad market’s long-term trend remains up, and today my recommendation is an undervalued stock recommended by Azmath Rahiman, chief analyst of Cabot Benjamin Graham Value Investor.

The good news is that four weeks of upside action has brought a new buy signal from Cabot’s intermediate-term market timing indicator. But this doesn’t mean you can jump in with both feet yet; there’s still reason for caution.

One way Cabot Stock of the Week exercises caution is by diversifying widely, not only among industries but also among investment strategies. Today’s recommendation, a big undervalued robotics company in Japan, is an excellent example.



As for the rest of the portfolio, it’s acting well and thus the only change today is a downgrade of one stock—which has got a bit high—from buy to hold.



Full details in the issue.

My favorite mortgage REIT for this low-interest-rate environment is Starwood Property Trust stock. Here are several reasons why.