August 31, 2023

WHAT TO DO NOW: Do a little buying. The market’s evidence has improved somewhat, as have our indicators, though we haven’t seen any fresh green lights just yet (Cabot Tides on the fence, Two-Second Indicator getting there, etc.) and growth stocks are still hit and miss. Given the improvement and the big-picture positives (including our bullish Cabot Trend Lines), we’re putting a little money to work but are still to hold plenty of cash. Tonight, we’ll average up on Noble (NE) and start a half-sized stake in CrowdStrike (CRWD), which will leave us with about 40% on the sideline. If the rally falters, we’ll prune, but obviously if the buyers flex their muscles after Labor Day, we’ll be looking to add more. Details below.

Current Market Environment

The market was fairly quiet today as it takes aim at a long holiday weekend. When the closing bell rang, the S&P 500 was down 0.2% and the Nasdaq was up 0.1%.

After some more-encouraging-than-not action last week, the market has improved further in recent days—and now we’re starting to see some improvement in our indicators. Our Cabot Tides are right on the edge of turning back to positive, with all five indexes we track at or a smidge above their 50-day lines—potentially setting up a “shakeout buy” signal like we wrote about in last week’s issue. Moreover, today was the fourth straight day of sub-40 new lows on the NYSE, while our Aggression Index is looking great, with defensive stocks still struggling even as the Nasdaq perks up.

For the market, then, things are looking better—that said, growth stocks, while improving, still have work to do. Whether you’re looking at individual stocks (many just broke down a couple of weeks ago and have rallied back into resistance), the number of new highs (relatively paltry; we’re not aiming to solely buy stuff at new highs, but the broad figure is a measure of strength), or the action of growth funds (rallied back but not yet in intermediate-term uptrends), there are still a lot of crosscurrents at best.

Put it together and we think the action of late is very encouraging for the market—we’re not ruling out September wiggles (they seem to come most every year), but what we’re seeing certainly plays into the view that we are (or have been) in the midst of a “normal” correction that will give way to higher prices. However, when it comes to growth stocks specifically, things are murkier—certainly better than they were two or three weeks ago, but not exactly a ton of names that look ready to surge right now.

In total, we generally want to see more before thinking the correction is over; at this point, most indexes and stocks have “only” rallied back into some resistance during a pre-holiday week. That said, given the big-picture positives out there (including our Cabot Trend Lines), we’re not ignoring the recent improvement, either.

The Model Portfolio is about half in cash, so tonight we’re going to take a couple of small steps deeper into the market’s waters. First, we’re going to average up on Noble (NE), filling out our position as the stock has perked up and is still at a solid risk/reward zone; and second, we’ll start a half-sized stake in CrowdStrike (CRWD), which looks like it wants to get moving if the market cooperates.

That will leave us with around 40% in cash, and we’ll take it as it comes—if the rally falters, we’ll likely do some selling (starting with DV, which is a hold but has a short leash), but obviously if the buyers flex their muscles after Labor Day and turn our indicators bullish, we won’t hesitate to put more money to work.

Model Portfolio

We wrote up CrowdStrike (CRWD) last week, and earnings last night didn’t disappoint—sales rose 37% and earnings boomed 106% (74 cents vs. 61 cents expected) while free cash flow was even larger (78 cents per share), while annualized recurring revenue also moved up 37%. Probably the best news of the report was that the firm’s newer, more advanced security offerings are going gangbusters (no clear numbers, but one analyst thinks they now make up 20% of business and are growing at triple-digit rates) and margins are perking up, with free cash flow likely to come in at 30% of revenues (!), or nearly $3.70 per share (earnings estimated around $2.80 per share), way ahead of last year. To be fair, the stock chart isn’t a typical one for us, but we like the upside power today after earnings, and the group as a whole may also be kicking into gear after a multi-month rest. We’ll start with a half-sized stake (5% of the portfolio), with a mental stop in the low 140s. BUY A HALF

Celsius (CELH) remains in great shape, racing to higher highs as the selling pressure on the market has subsided. There’s been nothing new from the company since earnings, but obviously big investors are convinced growth is going to remain rapid for a long time to come as the firm leverages its relationship with Pepsi. We’ll stay on Buy, though the stock is extended here in the short-term and oftentimes century marks (in this case, near 200) can provide resistance—we’re holding our position, but if you’re looking to get in, aim for normal dips or shakeouts. BUY

DoubleVerify (DV) has bounced some from its lows and even seen some positive options activity (call buying), though it’s getting close to key near-term levels—shares have moved into their falling 25-day line and haven’t exactly powered ahead with the market of late, either. We’re holding our small remaining position tonight, but the next few days will likely determine whether we hang on a while longer or cut bait and look for greener pastures. HOLD

DraftKings (DKNG) is far from out of the woods, as there should be resistance up in this area and the recent uptick has come on low volume—but, even so, price is the most important factor, and there’s no question that the stock’s snapback is a good sign. (We’d again note that Penn National’s stock (PENN) is languishing, a good sign that big investors aren’t buying any sea change in the industry.) We’ll stick with our Hold rating and see how it goes—if DKNG can continue to improve and growth stocks do the same, we could (finally) fill out our half-sized stake, but let’s see how shares act after the recent upmove. HOLD

Noble (NE) is up a bit since our initial buy last week, and while the stock isn’t completely freewheeling, its overall pattern and the market’s improvement means we’re going to fill out our position tomorrow, adding the other half. The story (huge earnings and cash flow growth, new enticing shareholder return plan) remains bullish, and stock-wise, we think the risk/reward situation is solid here, with a rapidly approaching 50-day line (just under 49) and the prior high not too far down, either (in the 45 to 46 area). Thus, the risk should be in check if something goes amiss, and the upside should be much larger if the story plays out as expected. BUY ANOTHER HALF

ProShares Ultra S&P 500 Fund (SSO) has ripped back above its 50-day line, recouping about 70% of its top-to-bottom decline so far, which is a solid sign. As mentioned above, our Cabot Tides are right there in terms of restoring their green light (we need to see a bit more upside in the broader indexes for that), but there’s no question the evidence has improved and we’ve been thinking this market pullback should lead to good things down the road. Thus, we’re sitting tight with what we have, but we’ll restore our buy rating if you don’t own any and want to start a position in SSO. Looking ahead, a dip to/below the recent lows (near 55) would be iffy and could have us selling a chunk of our (fairly large) position, and act as a stop for any newly bought shares, though right now, we’re thinking positively. BUY

Uber (UBER) held support near 43 on a few different days and has popped higher—though, like many names (especially growth names), volume has been so-so and shares are back into an area of resistance. Near-term, we’re not ruling out more ups and downs, but we’ll stick with our Buy rating, as the action here remains normal, and should lead to good things over time. BUY

Watch List

Axcelis Technologies (ACLS): We wrote that ACLS was showing tennis ball action in last week’s issue, and that has continued, with the stock now having recouped as much as 80% of its correction. To be fair, there is a lot of resistance up here, and the stock’s had a giant run this year, so more time could be needed—but the rebound is certainly bullish.

Boot Barn (BOOT): BOOT has pulled in to its 50-day line, which, after nine weeks up in a row, isn’t abnormal. Now we want to see if it can steady itself and show renewed accumulation.

Confluent (CFLT): The good news is that CFLT has tightened up, which is usually a plus; the not-as-good-news is that tightness is occurring near the correction lows, so shares still haven’t really bounced. It’s still worth watching, and we still think the story oozes 30%-plus growth for many years to come, but you’d like to see the stock start to perk up if the market continues to improve.

Duolingo (DUOL): DUOL has been all over the place in recent months, but we think that will eventually lead to a new move up due to its one-of-a-kind story (most popular way to learn a language) and fantastic growth (strong sales and free cash flow)—and the stock is finally showing some accumulation after a tough 11-week correction.

Freshpet (FRPT): FRPT retested its breakout point and has begun to bounce. We’d prefer to see the stock grow up a bit (more trading volume), but we do think this is a unique consumer story that should do well if management pulls the right strings.

Monday.com (MNDY): MNDY has worked its way back to resistance, but it’s having a hard time getting through it—though a good day or two would make all the difference. While growth is slowing somewhat, it remains rapid (up 42% in Q2) and earnings and free cash flow are picking up in a big way.

Pure Storage (PSTG): Pure Storage released earnings last night, and they were solid, with another 27% gain in remaining performance obligations and recurring (subscription) revenue. Shares had a big wobble this morning but found support. A big breakout would be buyable.

Samsara (IOT): After a tough 30% drawdown (from 31 to 22), IOT has turned around nicely in recent days, regaining half the decline ahead of earnings tonight. The valuation is definitely up there ($14 billion already vs. $875 million of expected revenue this year), but the story could be big enough to handle it. Let’s see what happens on earnings tonight.

Splunk (SPLK): SPLK has been around a while, but after a huge bear market and a transition to a subscription business model (which messes with the numbers for a while), shares have broken out on earnings as demand grows for its data analysis platform for security, observability and more. Top-line growth is solid-ish (mid-teens growth) while free cash flow is exploding and should continue to do so for a long time to come.

Vertiv (VRT): VRTV remains super strong, holding at new high ground despite the market and a secondary offering a couple of weeks ago. Given its run in recent months, we favor looking for a shakeout or correction of some sort to enter, but there’s no question shares are under big accumulation.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, September 7. As always, we’ll send a Special Bulletin should we have any changes before then.