August 15, 2024

WHAT TO DO NOW: The market’s rebound has been very encouraging, especially when looking at individual growth names—we’re seeing more constructive action now than we were during the narrow advance of June and July, including among all of our holdings. That said, the intermediate-term trend for most everything is still neutral at best (negative for lots of stuff), so the possibility of a partial or full retest still exists. Given our large cash position, we’re going to add half-sized positions tonight in Palantir (PLTR) and Axon Enterprises (AXON), two strong potential leading titles, but we’ll also still hold a 50%-ish cash position as we watch to see how things play out from here. Details below.

Current Market Environment

Stocks had another good day today, with the broad market participating this time, too. Near day’s end, the S&P 500 was up 1.6%, the Nasdaq was up 2.3% and many growth stocks were acting well.

The market’s snapback from the Monday, August 5 mini-panic has been very encouraging, with most major indexes and sectors pushing higher and some leaping to or slightly above key moving averages. That said, the evidence remains mostly mixed at this point, which is an improvement for sure, but there aren’t a ton of green lights.

On the positive side of things, you have the Cabot Trend Lines, which were tested and held nicely during the early-August wipeout. We’ve also seen some encouraging action from the Two-Second Indicator, with today being the third straight day of fewer than 40 new lows and a very low reading.

However, the best thing we’re seeing is the constructive action of many individual growth stocks—while top-down growth indexes are so-so (more on that in a second), tons of names have snapped back beautifully (often after earnings) and held their own and are within shouting distance of their old highs. Indeed, all of the common stocks in the Model Portfolio are either back to or testing new high ground.

That said, the intermediate-term, top-down measures are neutral to negative, including our Cabot Tides, Growth Tides and Aggression Index. Now, it’s possible we receive some “whipsaw buy” signals from the Tides (both versions) in the days ahead if the strength continues, but there’s no green light yet.

All in all, the snapback is certainly a plus and backs up the fact that the overall bull market is still intact. But with so many stocks, sectors and indexes having run right back into resistance areas, the possibility of near-term wobbles or another leg lower (possibly a retest) is still there.

Happily, we think we likely already own some of the leaders of the next sustained upturn, though given our big cash position, we’re going to do a little nibbling tonight in two names that are poised to help lead the next advance—while also keeping half of the portfolio in cash for now, as the risk of reverberations from the recent selloff remains.

In the Model Portfolio, we’ll add stakes in two strong names, Palantir (PLTR) and Axon Enterprises (AXON), that definitely look like they want to go higher if the market cooperates. Given the mixed evidence, we’ll start small (half-sized positions) and use loose stops, but if things do kick into gear, we’ll look to fill out the positions in the near future.

Our cash position will still be around 50% after the buys, giving us plenty of cushion as well as lots of buying power if things go well.

Model Portfolio

We’ll start with our two new additions. The first is Palantir (PLTR), which we’ve written about recently (check out the July 11 issue) and have been watching on and off for the better part of a year—during which the stock had a lot of movement but, as of a week ago, little net progress. But we’re thinking a change in investor perception has finally come as the Q2 report showed a continued boom in AI adoption among U.S. businesses: 295 U.S. firms are now customers, up 83% (but still small given all the big players out there), driving revenues in this segment up 55% and remaining deal value up 103%. The company also recently inked a deal with Microsoft to integrate its AI offerings with that firm’s large language models on Azure OpenAI, which should help it penetrate the government space. The upside here is that Palantir will become the gold-standard AI platform for all kinds of businesses and organizations, which of course would be huge. Chart-wise, we love the strength after earnings moving the stock to new highs. Is it a pristine entry point? No, but we’d rather go after the peppiest names (with good stories and numbers) after a mini-meltdown like we’ve seen. We’ll start small, with a half-sized stake (5% of the portfolio) and use a loose stop in the 25 to 26 area for now. BUY A HALF

Our second addition is also a familiar name if you’ve read us for a while: Axon Enterprises (AXON) is essentially the go-to technology provider for law enforcement and related agencies in the U.S. and overseas—Tasers (non-lethal electrical weapons) are still a big part of the business, and the latest version of that product is selling very well, but the story has become a recurring revenue-based one, with body and dashboard cameras (even some drones) recording video, which is usually uploaded to an evidence and records cloud storage suite (for easy sharing, analyzing and the like), as well as dispatch and situational awareness offerings, too. Interestingly, management talked up Draft One, an AI product launched three months ago that takes audio from the body cam and automatically writes up reports for officers, saving huge time and money—the firm said it’s booked $100 million in the pipeline already, faster than any software product it’s ever had, and there should be more stuff like this coming out in the months ahead. After basing out for five months, AXON staged a classic big-volume breakout on earnings and is holding well. Again, it’s extended to the upside, so if you want to try to pinpoint a lower entry, you can—but we’ll start a half-sized stake around here with an initial loss limit in the 315 to 320 range. BUY A HALF

AppLovin (APP) looked like it was done for in the hour or two after it reported earnings, with shares tanking for no obvious reason, but the stock was back to breakeven after the conference call, and since trading opened the following day, the stock has staged a fantastic rebound, pushing back above its 50-day line and within a few points of its prior highs. The fact that management talked about sustainable 20%-plus revenue (and faster cash flow growth) for the next few years just from the mobile gaming advertising area was an eye-opener, while tests within the broader Internet/e-commerce area are going well, which means the overall potential here is huge. Like a lot of things, the rapid rebound is likely a good sign over time, but right this second, APP is back into a lot of resistance, as is the market. We wouldn’t argue with a small buy if you’re not yet in, but officially we’ll stay on Hold for now. HOLD

Cava Group (CAVA) has pretty much the same chart action as APP, only stronger, as CAVA has stormed back from last Monday’s lows to notch new closing price highs today. The trick here, of course, is that the firm has yet to report earnings—Cava’s Q2 report is due next Thursday (August 22), with analysts looking for sales to rise 26% with earnings of 12 cents per share, up from six cents the year before. We’re obviously happy with the rebound—it’s just the type of tennis ball-type action that leaders show when the pressure comes off the market—but we’ll stay on Hold and see how things go into and after the earnings report. HOLD

On Holding (ONON) reported a solid second quarter, with currency-neutral revenue growth of 29% (bolstered by Asia-Pacific revenues up 74%, while apparel sales boomed 67%), while EBITDA lifted 45% and margins continued to expand (EBITDA margin up to 16% from 14.1% a year ago). Those numbers were just above or below expectations, which caused the stock to initially wobble, but management sounded a confident tone for the second half of the year (reiterated 30% currency-neutral revenue growth, which implies some acceleration in Q3 and Q4) as recent issues have mostly surrounded the Swiss Franc and some one-time transitions to a bigger manufacturing facility. Shares have risen since the report, though like so many things, ONON is still battling with resistance in the 42 to 44 area. Overall, we like it, and a breakout could be very bullish, but we’ll be prudent and stick with our Hold rating given the chart and the still-tricky environment. HOLD

Small caps hadn’t bounced much at all during the rally phase, though today was a good day, helping the ProShares Ultra Russell 2000 Fund (UWM) get off its duff. Ideally, the initial rally is broadening out and the breakout attempt in July can resume—we’re willing to give UWM a little wiggle room to see if that plays out. That said, we do have this name on a relatively tight leash given the lagging action and failed breakout, with a move back to 37 or so likely having us moving on. For now, we advise patience. HOLD

TransMedics (TMDX) continues to act well in the wake of yet another blowout quarterly report, tagging new closing highs today. The near-term path will likely be determined by the market—a partial or full retest of the August 5 lows would put pressure on TMDX—but the story, numbers and recent strength all tell us that the stock wants to head higher if the market allows it. We’ll stay on Buy, but it’s best to keep new positions on the small side given the environment. BUY

Watch List

Argenx (ARGX): ARGX spent three years making no net progress (including a big false start a year ago), but its huge-selling drug (which is on track to get many label expansions) is growing like mad, earnings have flipped into the black and the stock is acting very strong.

Freshpet (FRPT): It can still be thinly traded at times, which isn’t ideal, but Freshpet has a rapid, reliable growth story that more big investors are signing up for (559, 526, 479 the past three quarters). The stock hasn’t gone anywhere net-net for three months and, of course, recently survived a big shakeout.

GE Aerospace (GE): It’s not at the top of our watch list, but we continue to monitor GE, which we think is playing possum, moving mostly sideways (outside of the recent volatility) since the start of May. The free cash flow story here is very big.

Halozyme (HALO): While there hasn’t been tons of buying power of late, HALO remains in fine shape, nosing to new highs yesterday. Growth isn’t expected to be off the charts going ahead, but 20% to 25% bottom-line expansion through 2028 sounds fine by us.

Neurocrine Biosciences (NBIX): NBIX is a bit sloppy here, but is still within shouting distance of its old highs while the current core business and future estimates look pristine.

Samsara (IOT): Samsara has quietly moved back to its old highs in the low 40s following a big May/June slide that may have kicked out the remaining weak hands. The only trick here is that earnings are still coming in about three weeks.

ServiceNow (NOW): It’s clearly not going to be the most dynamic name, but with a few fastballs in the Model Portfolio already, ServiceNow offers steady growth and a resilient chart that’s been basing out since February.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, August 22. As always, we’ll send a Special Bulletin should we have any changes before then.

Model Portfolio

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