August 29, 2024

WHAT TO DO NOW: We think the strong action from the mini-panic low in early August is a good sign the next big move is up—but the timing of that move is less certain, possibly getting going soon, but it could also take more time to set up. Our market timing indicators are improving, and so we’ll do a little more buying tonight, but we’re OK going slow here to see how the rally progresses from here. In the Model Portfolio, we’re adding a half-sized stake in Shift4 Payments (FOUR) and putting On Holding (ONON) back on Buy—though we’re also holding on to a cash position of around 32% and want to see further upside soon before putting more cash to work.

Current Market Environment

The market down a bit today, with the S&P 500 essentially flat and the Nasdaq off 0.2%.

The market remains in an interesting spot. Looking at our market timing indicators, our Cabot Trend Lines (long-term trend) remain clearly positive, bolstered by the great-looking rebound off the August lows. Meanwhile, our Two-Second Indicator (which has been off-and-on this year) looks great, with today being the 13^th straight day of sub-40 new lows (eight of which were sub-20). And now, our general Cabot Tides are also positive, with four of the five indexes flashing green.

That said, growth-oriented measures are less peppy—our Growth Tides is mixed, with things like the IBD 50 Index, the equal-weight Nasdaq 100 and others close to seeing their intermediate-term trends turn up … though it’s close. Moreover, our Aggression Index remains sluggish as defensive sectors (consumer staples, “safe” healthcare, etc.) have been outperforming. To be fair, individual stocks look better, but even there, many are still setting up (rather than breaking out).

Stepping back, our general thought on the market of late has been a big-picture vs. near-term situation: Big picture, we think the straight-up recovery in most indexes and especially leading stocks is a strong sign that the next major move likely is up. However, near term, the timing of that move is more of a coin flip—we could certainly see the market and stocks moving up from here, but a week or two or four of retrenchment is also possible until we see more breakouts.

The point here isn’t that the evidence is secretly worrisome but simply that, after a sharp dip and recovery, it’s still very possible the next little while could see some tricky action, which could cause some wild swings among individual stocks. Thus, we’re not holed up in our storm cellar, but we do favor going slow and seeing how growth stocks handle themselves.

The good news is we think we already own some of the leaders of the next advance; the stocks we were able to hold on to during the sharp correction have rebounded very nicely, and of course, we’ve put some money to work since then in two more potential leaders. Tonight, we’ll make one small move as we slowly add to our portfolio—starting a half-sized position in Shift4 (FOUR) as it finally looks ready to emerge from a long up-and-down period. We’ll keep a good-sized cash position of 32% on the sideline.

Model Portfolio

We’ll start with Shift4 (FOUR), which, as we wrote about in last week’s issue, we’ve taken a couple of prior swings at. But we’re going back to the well because it has a unique story and excellent growth numbers—and the huge buying power seen after earnings (and after more than a year of ups and downs), as well as the tight action seen since then, bodes well. We’d also note that some other names in the group (PayPal, Affirm) are perking up as well, which helps the cause. In the conference call, the top brass said that if Shift4 was simply known as the “Toast of hotels and stadiums” the stock would be more appropriately valued—and that goes without saying anything about its huge position in restaurants both here and overseas. Bottom line, the firm has been growing nicely for years, even through poor economic times, and the dramatic move into new industries is just starting to play out when it comes to payment, earnings and free cash flow growth. We’ll start a half-sized (5% of the account) position here. BUY A HALF

Axon Enterprises (AXON) hit a little pothole with the market on Monday, but while further wiggles are possible, the stock remains in fine shape, well above all moving averages and even above the day-of-earnings close (near 350), which could be a short-term waypoint. We think the big earnings-induced breakout is likely to lead to good things, and fundamentally, we like that the long-term picture is bright while the spring launch of Draft One could not only lead to big sales, but growing adoption of many of Axon’s other offerings. BUY

AppLovin (APP) has reached new closing highs, which is obviously good, though the relative performance (RP) line isn’t yet out to new peaks, which could cause some near-term hesitation. Overall, though, it’s certainly looking like investor perception has done an about-face after earnings, with the prospects for years of solid growth and huge free cash flow as its advertising engine continues to take share in mobile gaming—and possibly moves into other verticals within a couple of quarters. We’ll stay on Buy, though ideally, new buyers can enter on weakness. BUY

Cava Group (CAVA) reported another terrific quarter last week, not just with the headline numbers (sales up 35%, earnings nearly triple last year, both figures coming in nicely ahead of estimates) but on the details, too, with same-store sales not just rising a huge 14.4%, but 9.5% of that was from traffic (the rest from pricing mix), which is rarified air in the restaurant industry these days. (It said its recent launch of grilled steak is far surpassing its expectations.) The stock went vertical on the results … though it’s hit some turbulence this week, first on the sale of some closely held shares (there was some insider selling, but those that trimmed still own a bunch of stock), and then today, from a downgrade where the analyst sees the stock as having run too far, too fast. After a three-week move from a low of 72 to a high of 125, we’re half-expecting some more weakness or at least tricky trading in the near term; if you have a big position (whatever that means to you), we’re not opposed to ringing the register with some of your shares. For our part, though, our position size is normal, so we’re going to hang on to our position—though we will keep our Hold rating intact and see how CAVA handles itself in the days ahead. HOLD

On Holding (ONON) has had tons of fits and starts during the past year, and like everything else, some near-term ups and downs are possible—but overall it certainly looks like the stock is starting to let loose on the upside, eclipsing its May high and aiming to notch new weekly closing highs above its post-IPO summit 30-plus months ago. Of course, the retail sector is very mixed these days—go look at Nike (NKE) or Lululemon (LULU) within the athletic shoe/apparel space, and while it’s a totally different area, see what Dollar General (DG) did today—but we see On Holding as benefitting as money moves into a fresher, more powerful growth story. We’ll restore our Buy rating given the breakout and are OK starting a position here or (preferably) on dips of a couple of points. BUY

Palantir (PLTR) pulled back along with most AI and tech stocks this week, but as with most everything, no real damage was done, (the 25-day line is just under 29.5) and shares bounced back decently today. We continue to think the stock can attract big money as its AI platform further becomes the standard among U.S. firms, and increasingly overseas and among government entities, too. We’ll stay on Buy. BUY

ProShares Ultra Russell 2000 Fund (UWM) started the rally off very slowly but has perked up the past couple of weeks, just a couple of percent below its July highs. We’re going to stay on Hold a bit longer because of our general near-term market timing thoughts, but if the rally gains steam and small caps do the same, we’ll likely restore our Buy rating on UWM soon—and possibly add to our half-sized position. HOLD

TransMedics (TMDX) has hit a little road bump this week, and like most things, more of that could be in store—but after four straight up weeks (two on big volume after earnings) and new RP peaks, some hesitation is normal. Of course, the valuation isn’t cheap, but we continue to think the stock is relatively rare merchandise and, given that the breakout was at the start of May, odds favor the stock is still in the middle innings of the overall move. Long story short—we’re holding what we have and are OK picking up a few shares here or on dips if you’re not yet in. BUY

Watch List

Argenx (ARGX): There’s always going to be some event risk with biotechs (go look at NBIX this week), but we think perception has changed with Argenx after the approval of Vyvgart for a new indication (CIDP) in June and the move to profitability in Q2.

Credo Technology (CRDO): If CRDO wasn’t reporting earnings next week (September 4), we’d probably be starting a position in it now given the huge growth and “fresh” AI infrastructure story—as it is, though, we’ll see how the stock reacts to the report.

Freshpet (FRPT): It’s not a name you’ll brag about at cocktail parties, but FRPT continues to crank out amazing and consistent results, with earnings set to turn positive as EBITDA ramps. Shares are hanging around new high ground.

GE Aerospace (GE): Maybe we’re wrong and GE is just a big, stodgy firm again—but that’s not what the growth and free cash flow profile suggests. We continue to think the stock has been playing possum, and the stock is now approaching its highs.

Halozyme (HALO): After a couple of years in the doghouse, HALO has clearly turned the corner, stretching nicely to new highs of late. The next pullback should be buyable.

Samsara (IOT): Samsara continues to nose higher, challenging its May highs (though the RP line is shy of that prior peak). The key will be next week’s quarterly report, due September 5—the setup is there, and if it can get through the report in good shape, we could take a swing at IOT.

ServiceNow (NOW): NOW has essentially been resting for six months and is perched just shy of all-time highs. It’s not the newest name out there, but the growth is very solid, and the firm looks like a leader in integrating AI functionality into its various leading software offerings.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, September 5. As always, we’ll send a Special Bulletin should we have any changes before then.

Model Portfolio

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