Cabot Growth Investor Issue: December 12, 2024

Paring Back

We’ve been in the markets for about three decades and studied market decades of market history before that, too, and the last few months definitely rank up there in terms of growth stock performance, with the names we tend to traffic in lighting up the sky. Of course, in recent weeks, that action brought with it some yellow flags, namely that so many stocks were extended (both price-wise and time-wise, with multi-month upmoves) and investors were getting giddy.

Of course, such conditions can continue on for a while, so we took a few partial profits and mostly rode things higher—but this week finally saw some air pockets emerge, with most growth stocks ulling in and with some of the biggest winners falling sharply. Taking our cues from leading stocks, we quickly pared back, leaving us with a good-sized cash position in the 38% range.

To be clear, the handful of sell moves and our cash position isn’t a market-wide call—in fact, our market timing indicators are generally in good shape (the broad market is again sluggish, but the major trends are up), and while just about every growth stock has at least wobbled this week, many have pulled in normally and a few have barely budged. Really, our actions were simply about managing our portfolio and the big gains we have after a humungous run.

The main question here is whether this week’s selling in growth stocks was “only” a tremor that will lead to a fresh leg up (we’re not huge seasonal investors, but the second half of December is usually bullish) or the start of a “real” correction that will bring more stocks down and possibly crack key support. Our guess is that it’s something in the middle—some very hot, extended, frothy names may have peaked for a while (some possibly for a long time), but others likely need to digest a bit more but aren’t done with their runs, eyeing higher highs in the weeks ahead.

Of course, the market doesn’t care what we or anyone else thinks, so we’ll simply take it as it comes. Given our large-ish cash position, we’re certainly open to putting some money back to work, especially in resilient titles; we’ve expanded our official watch list a bit and, if growth stocks steady themselves, we could add a new half position or two in the days ahead.

What to Do Now

However, having pared back a good amount this week, we’re content to stand pat tonight and see how growth stocks handle the recent shot across the bow. In the Model Portfolio, we took partial profits in AppLovin (twice) and Axon Enterprises (once), while cutting bait on Samsara, leaving us with 37% in cash. From here, we’re willing to go in either direction, buy or sell, letting the action from here guide our next move.

Model Portfolio Update

It was an amazing few months (and, for that matter, 2024 as a whole so far has been excellent), but this week has finally seen sellers step up with respect to growth stocks, with many extended names falling sharply and some abnormal intermediate-term action appearing. We hadn’t been flooring the accelerator for a while given the giddiness out there (taking partial profits and keeping some stocks on Hold), but early this week we’ve pared back quickly, selling chunks of two names and ditching another altogether..

As we mentioned in the intro, we’re not throwing in the towel on growth stocks—many are coming in normally, especially those that got going more recently than some of the biggest winners—and our market timing indicators are in good shape, so we’re staying alert. In fact, we’d say that, should growth stabilize and perk up in the next couple of days, we could start a couple of new positions.

For the moment, though, we want to see how leaders handle the recent selling; most of the names that took big hits (as well as broader growth measures) haven’t bounced much, and we’d like to see that change before clicking the buy button. Tonight, then, we have no changes.

CURRENT RECOMMENDATIONS

AppLovin (APP)—APP had one of the biggest, quickest runs we’ve been a part of—it broke out at 94 in September and lifted over 400 last Friday—but that move seems to be over for now, with this week’s sharp decline likely marking a near-term top; we responded by selling a total of just over half our position on a couple of special bulletins Monday, and this comes after we already sold a chunk after the earnings gap in November. As for news, the drop was supposedly due to disappointment the stock wasn’t added to the S&P 500 last Friday, but really, we think it’s simply a matter of APP running out of gas after a euphoric advance. As for the future: We do think there’s a chance APP has reached a major top given the size of the run in both price and time (shares had a big run in total even before the September breakout)—that said, the stock is “only” down to its 25-day line and the fundamentals are obviously pristine; it’s possible AppLovin’s AI-powered marketing engine could become the leading ad system for many industries, which would obviously cause the bottom line to go wild. The odds favor some tedious near-term action, but having unloaded a big chunk of our position, we’re OK giving the rest of our shares a bit of leeway as we see if/how well APP can find support and bounce. HOLD

Argenx (ARGX)—The story remains the same with ARGX, which (a) remains in a mild uptrend and has flashed no abnormal action, but (b) hasn’t been outperforming the market for the past few months, likely due to industry-related sluggishness (medical and biotech stocks are still stuck in the mud). If that changes, this stock should do very well; given the big earnings projections and ramp of Vyvgart in CIDP, any decisive strength for a few days would likely mark a character change and could have us averaging up. In the meantime, we’re remaining patient and following the plan: We’re holding our small-ish position with a mental stop a bit under 550 but are willing to buy more if the bulls really show up. HOLD A HALF

Axon Enterprises (AXON)—We had held onto our entire stake of AXON during its recent run, which was nice—but with the selling early this week, we decided to put some profit in our pocket, selling a third of shares and holding the rest. As with many names, the recent action makes the near-term outlook iffy, with further probes to the downside possible. But beyond that, we’re open to anything—shares haven’t even touched their 25-day line yet and, unlike some of the market’s hottest names, AXON never truly got into nosebleed territory. Plus, it doesn’t hurt that the growth story is one of a kind here, with the firm in the clear lead and with its new AI offerings (along with its slate of other products) likely to drive rapid and reliable growth for many quarters to come. Having trimmed our stake, we’ll sit tight for now and see how the stock acts from here. HOLD

Cava Group (CAVA)—In our view, CAVA looked later on in its run during the past month or two, which is the reason we’ve kept it on Hold for and actually sold a chunk of shares after its big earnings reversal. And now this week we’ve seen some abnormal action, with shares being sharply rejected by the 150 level (round-number resistance) and slicing through their 50-day line. To be clear, if we had a normal (or larger) position, we’d have definitely trimmed earlier this week—but we didn’t, with less than 5% of the portfolio invested here and a big profit, so we’ve stood pat. That doesn’t mean we’re simply going to hold and hope, though: We can’t rule out a deeper correction and multi-month consolidation if perception changes and Cava’s growth slows a bit ... though we also doubt CAVA has hit an ultimate, long-term top, as the runway of growth is too big for that. Translation: We’re gritting our teeth for now but want to see shares find support soon (we have a rough mental stop in the 120 area, give or take)—if they do, we’re happy to be patient with our small position, but if not, we could take the rest of our profit off the table and look for greener pastures. HOLD

Flutter Entertainment (FLUT)—As we’ve mentioned before, FLUT broke out much more recently than some other stocks (the big move out of its consolidation happened just in mid-November), and that’s probably one reason it’s taken the selling this week in stride, holding firm near its highs; one analyst released a bullish report that helped the cause, while state-level November data points suggested FanDuel continues to lead the U.S. market. Even the action last week was impressive, as news that Robinhood might enter the online gambling arena, as well as a report that the CEOs of the industry might get pulled in front of Congress in the months ahead, only caused a couple hours of wobbles before the stock righted itself. Of course, there’s always the potential for more political potholes (taxes, etc.) in the future, but most see the U.S. market expanding 20%-plus next year while margins increase nicely as things like parlays bets (higher hold rates) become more common. There will be dips and shakeouts, but the main trend here remains up. BUY

On Holding (ONON)—ONON is continuing with its choppy-but-bullish ways, with a sharp pullback to start the week before a quick rebound off its 25-day line. There’s been nothing new on the news front, though investors are likely wading through views on secondary factors (U.S. dollar strength, tariffs, etc.) as time goes on. Still, there’s no question the underlying business here remains strong worldwide, with particular strength in Asia, as its various shoes (and, increasingly, apparel and accessories) gain huge market share. We’ll stay on Buy. BUY

Palantir (PLTR)—Like other highfliers, PLTR has taken on water this week, but it found some support yesterday and is still in good shape overall (25-day line is just above 65). Short term, we half-expect further wobbles, as there are likely many investors that are looking to cut back somewhat, but having already trimmed our stake, we’re OK standing pat for now. Fundamentally, nothing has changed here, with the company positioned as the go-to provider of AI platforms for all kinds of enterprises and, increasingly, government agencies, with some excitement about the latter sector given the possibility of a productivity push by Uncle Sam over the next couple of years. If you’ve been following along with us, continue to hold your shares. HOLD

ProShares Russell 2000 Fund (UWM)—While growth stocks have been the focal point of the selling, the broad market has been quietly sluggish for the past couple of weeks. (Interestingly, coming into today, the advance-decline line of the S&P 500 has been negative eight trading days in a row, which has only happened a couple of times in the past decade-plus.) Thus, it’s not a surprise that UWM has pulled in of late, though at this point the decline has been normal, with the fund above intermediate-term support (in the 45 area). It has been tedious, but given the fundamental positives out there (Fed easing, likely deregulation or tax cuts, etc.) for smaller firms and the fact that UWM has held most of its latest push higher, we’re still thinking optimistically; hold on if you own some, and if not, we’re OK entering around here. BUY

Samsara (IOT)—Samsara has a great long-term growth story that will continue to play out over time. But a recent good-not-great quarterly report (management left Q4 guidance alone, which was definitely a disappointment) caused a pullback late last week—and then heavy-volume selling continued this week due to the growth stock air pocket and some other factors (Oracle had a poor reaction to earnings), resulting in a clear breakdown with a bearish volume cluster. A bounce is possible, but we had a loss, and besides, the repeated big-volume selling is a red flag. We cut our loss on a special bulletin Tuesday. SOLD

Shift4 Payments (FOUR)—The out-of-the-blue news that Shift4’s CEO was selected as the next head of NASA for the new administration caused FOUR to sell off hard last Wednesday on more than quadruple normal volume—action that, historically, can mark a turning point when it comes to investor perception. That said, this is admittedly an unusual case, as the news, while not superficial, didn’t directly have to do with business (like an earnings report, Investor Day or outlook given at a conference), and the stock, while under pressure, is putting up a fight near its 50-day line. We did sell a third of our stake last week to repsect the selling squall, but business here remains excellent by all accounts and, while we’re not valuation-centric, it’s not like the stock is priced to perfection (22x next year’s earnings estimates). We’re holding the rest of our stake, with a current mental stop in the low 90s. HOLD

Watch List

• Astera Labs (ALAB 122): ALAB is a newly public stock with a massive valuation ($18.7 billion, 166 times this year’s earnings) that’s had a big run, so you’d expect it to have gotten whacked this week—but it hasn’t, instead holding right at its peak, which is very encouraging. This might be the go-to networking play for AI.
• Coinbase (COIN 313): It’s as wild as can be (if we enter it, we might simply stick with a half-sized stake), but COIN just got going five weeks ago after a huge, deep base-building effort, and the recent dip (in COIN and crypto) looks normal. See more below.
• DoorDash (DASH 176): DASH has been cool as a cucumber despite the selloff in growth stocks, which backs up our view that the stock is likely a liquid leader. A bit more rest or weakness could have us taking a swing at it.
• GE Vernova (GEV 330): GEV is a liquid leader in the electrification trend, with its hands in a few cookie jars that should grow rapidly and steadily for many years. The firm just hiked its near- and longer-term forecast, and shares have been resting just south of new highs for five weeks.
• Rubrik (RBRK 74): RBRK went bananas after a very good quarterly report (subscription-related recurring revenue up 38%, total revenue up 43%, free cash flow turned positive) that solidified the view that the firm is leading a new cybersecurity sector (dubbed resilience). We’re not chasing it here, but the next meaningful correction should provide an opportunity.
• Shopify (SHOP 115)—SHOP is still hanging around its post-earnings highs, which we take as a sign big investors are comfortable growth will remain strong in 2025. It’s not our normal target, but we think Shopify looks like one of the rare former winners (from the pandemic days) that’s regained its leadership status.
  

Other Stocks of Interest

Herc Holdings (HRI 209)—Cyclical stocks obviously aren’t our bailiwick, but after lagging for a couple of years, many began to perk up this fall and showed great power before and after the election—and while there are still some wobbles (like we saw this week—more on that in a minute), some are positioned well as the environment (Fed easing allowing more big projects to start up) turns more positive. Herc Holdings isn’t a household name, but it plays in one of our favorite cyclical fields: Equipment rentals, like earth moving and material handling offerings, which benefit from the long-term shift of firms toward renting over owning (cheaper, less maintenance worries, etc.), its wide variety applications (pretty much any major project is going to need lots of rentals) and from the fact the sector is very fractured, with the Herc being the third largest player in the market but having just a 4% market share … which means there’s plenty of roll-up opportunities (M&A) out there. As for Herc itself, it has a $7.1 billion fleet (12% larger than a year ago), sells via 440 branches in the U.S. and Canada and has been a well-managed outfit, growing faster than the industry (rental growth in Q3 was 13%) thanks to its focus on filling out its presence in big (top 100 metropolitan) markets as well as entering entirely new areas, often via acquisition (51 buyouts completed in the past four years!). That’s also led to solid margins for this type of business; in the first three quarters of the year, Herc’s free cash flow margin was 8.3% and that’s despite spending 21% of revenues on fleet expansion this year. Of course, that doesn’t mean the firm is going to grow like an AI firm, but analysts see a modest acceleration of both sales and earnings growth in the quarters ahead, and we think that could prove conservative if the economy picks up and/or more accretive M&A takes place. Moreover, the big-picture chart certainly points to great things ahead: HRI was a nothingburger for years but started to get going after the August market low and then staged a powerful, long-term breakout on earnings in October, lifting out of a three-year rest. There was a post-election pop that was sold into, and this week saw a dip in the group as a large European peer was clocked on earnings. Even so, the stock is hanging around its 10-week line and its post-earnings levels; we think it could surprise on the upside in 2025.

Snowflake (SNOW 170)—Breakouts that occur months after the market starts an intermediate-term move are often hit or miss—oftentimes they are simply laggards that are having a brief time in the sun, but occasionally they can represent fresh merchandise that’s just starting an accumulation phase from big investors. We think Snowflake has a chance to fit in the latter category as, after a dreadful stock performance past few years, it seems to finally be living up to the fundamental promise it had when it came public in 2020. The company is the next big thing when it comes to enterprise data platforms, providing the advantages of operating in the cloud (accessible anywhere via a browser, etc.) with its own query engine and architecture that provides faster and easier searches, essentially unlimited scalability and storage (it automatically boosts resources when queries increase) along with easy data sharing—and users don’t have to install or update anything, it’s simply all handled by Snowflake, which can dramatically lower costs. Always interesting, too, is that this isn’t much of a subscription offering, with Snowflake instead charging via consumption, which should be a good thing over time as data mining increases. All told, it’s very popular, with 754 of the Global 2000 signed up, and top-line growth has remained solid, but margins have been slipping and the valuation (which was well over $120 billion at the last bull market peak) was up there, both of which caused the stock to lag badly. Now, though, big investors are thinking the tide has turned: The November quarterly saw product revenues grow 29%, free cash flow came in larger than earnings, revenue retention stabilize and remaining performance obligations (the money that’s due to it under contract and one of the key metrics for the firm) total $5.7 billion, up a huge 55% from a year ago. After a punishing decline since February, SNOW gapped up strongly on the report, reached higher highs in the days ahead and, while it’s retrenched this week, hasn’t flashed any red flags. There is plenty of overhead here, which is a risk, but we’re thinking the weak hands may be out and big investors are looking ahead to years of rapid and reliable growth from here. We’re keeping an eye on it.

Coinbase (COIN 313)—The market has certainly been frothy and crypto has been part of that—thanks in large part to bitcoin’s move above the $100,000 level (a move that’s led to some hesitation in recent days). Still, as we write about on the next page, while most crypto assets (others are advancing as well as bitcoin) are hot, all of them “only” got going in a big way in early November, so it’s hard to call them late-stage—and when combined with some bullish fundamentals (the new administration should be crypto-friendly), there are plenty of reasons the intermediate- and long-term uptrend could continue. Coinbase is a name we’ve kept a distant eye on for a while, as it’s basically a hybrid Schwab/NYSE of the crypto trading universe: Trading activity is the big draw, though it’s still hugely volatile (can double or get cut in half from one quarter to the next) and that obviously affects results, but of course, it’s a good bet more trading will occur over time, boosting the top line. Importantly, though, management has also moved into more stable and growing subscription offerings, such as stablecoins, staking services, and a subscription offering that allows for cheaper trading fees and better tools, too; in Q3, the combination of these offerings made up nearly half of revenues and the total was up 66% from a year ago. Just as important is that the top brass continues to clamp down on costs—EBITDA has been in the black seven quarters in a row (even during periods when crypto is out of favor) even as the firm has loosened the reins temporarily on tech development spending. All told, there’s little doubt that Coinbase is a leader in the field and is going to be a beneficiary as crypto continues to become more accepted by small and big users alike. Chart-wise, the stock is super volatile, regularly moving 5% or more each day from high to low, so if you go into it (here or down the road), be sure to keep it small and use a loose leash. But what we’re intrigued by here is what we wrote above: While it’s had a big recent move, COIN just changed character five weeks ago (after the election) following a punishing 48% drop over the prior seven-plus months—and it’s been holding relatively firm of late despite volatilty in bitcoin and the market. It’s certainly not for the faint of heart, but COIN actually has a proper-ish setup here for the first time in a while. See more on crypto as a whole later in this issue.

Leaders vs. Indicators: Both Are Invaluable but at Different Times

When it comes to major intermediate-term and (especially) longer-term market moves, we’ll put our simple, trend-following market timing measures up with anyone’s—they’re not perfect (no indicators are), but they keep us on the right side of the market’s major trends, and in our experience that puts us ahead of the vast majority of investors who often invest solely on feel or emotions.

We still remember our Cabot Trend Lines turning negative in January 2022—and of course, growth stocks proceeded to implode for the next few months. Even more important than prodding us to get more defensive, the Trend Lines (and Tides, which were also negative) kept us from doing much buying for months as everything unraveled. It was a similar story during the 2008 debacle: That was just my second year of running Growth Investor, and these indicators were a reason we were able to avoid so much of the historic bear ... and get back on the bull in the spring of 2009, too. (The arrows below signal where the Cabot Trend Lines turned bearish in 2022 and 2008, respectively.)

That said, more and more in recent years, leading growth stocks have been dancing to their own drummer, which makes taking our cues from them just as important as the top-down indicators. This year has been probably the biggest example of this phenomenon: The indexes and growth stocks were mostly in gear through April (up into March, down in the spring), but then we saw a great May, June and early-July rally in the big-cap indexes … while growth stocks as a whole couldn’t get going. The result was the sharp correction into early August.

But then, right after the August low, growth stocks began to light up the sky, with tons of earnings gaps higher and a slew of breakouts in September—and, of course, many names (like GEV and RDDT, shown below) cranked significantly higher in the weeks that followed. Yet the Nasdaq itself made no net progress from its mid-July high until nearly Thanksgiving!

Of course, all of this leads us to this week, when after some huge runs, we’re seeing pressure on extended growth names, with many flashing intermediate-term yellow flags even as the top-down market timing indicators remain in good shape—which is what’s caused a good amount of selling this week, leaving us with a cash position approaching 40%.

Our point here is that both items—the message of our key market timing indicators, as well as the broad action among leading growth stocks we own or are watching—are invaluable, but they often come into play at different times. For the top-down measures, they’re most useful in telling us when a downtrend has passed (new buy signals after corrections or bad bear phases) and, as mentioned above, in keeping us out during prolonged slides, which is hugely underrated. (It’s a big reason why our portfolio doesn’t start a new bull from 30%, 40% or more off its peak value.)

However, when it comes to exactly where to buy and sell, be it in full or partially, it’s not a big surprise the best clues will often come from the stocks themselves—we’ve seen it more and more over the years, and if 2024 is any clue, it will remain the new norm going forward.

Bitcoin: Hot and Volatile, but Also Earlier-Stage

While most every growth stock has taken a hit this week or in recent days, it’s generally been the very extended names (both price-wise and time-wise) that have seen the most selling. The crypto space—both the coins, but also related stocks—hasn’t escaped the damage, with bitcoin’s much-ballyhooed lift above $100,000 leading to some gyrations and the most liquid crypto-related stocks, like Coinbase (COIN—see more earlier in this issue), pulling in as well.

Even so, the crypto area is one that looks early-stage to us. Shown here is a chart of bitcoin: You can see after a big run from last fall into this spring (similar to growth stocks), it had a long, tedious decline, falling as much as one-third and making no net progress for 34 weeks into late October.

Then came the breakout after the election, leading to a sharp five-week run-up, and while there have been gyrations, bitcoin has held well since then. Of course, it’s always possible things fall apart from here, but as opposed to some huge winners that started running in August or September, we have a hard time saying the move here is mature—bitcoin and crypto will likely never be a major focus of ours, but given the chart and some fundamental positives, we’re eyeing the sector for near-term signs of support.

Cabot Market Timing Indicators

Growth stocks have had a rough week, and as we explained earlier, we’re taking our cues from that, raising cash this week. However, the good news is that our market timing indicators continue to look solid—thus, while the seas have turned stormy for now, the odds favor higher prices (for the indexes and for leaders that have held firm) ahead.

Cabot Trend Lines – Bullish
At some point, our Cabot Trend Lines will turn down, signaling a rougher market period—but that time is not now, as both of the market’s key big-cap indexes remain in good shape. As of this morning, the S&P 500 (by 9%) and Nasdaq (by 12%) continue to stand solidly above their respective 35-week moving averages, which keeps the market’s longer-term trend firmly up.

Cabot Tides – Bullish
Our Cabot Tides are also positive, with all five indexes (including the S&P 400 MidCap, shown here) trading north of their lower (50-day), rising moving averages. To be fair, there’s not a lot of daylight for most indexes, so a 2% to 3% skid from here would be iffy—but we never anticipate things like that (they often never happen). Right now, the intermediate-term is pointed up.

Two-Second Indicator – Neutral
The Two-Second Indicator has improved nicely during the past couple of weeks, continuing its on-again, off-again activity of late—indeed, after nine sub-40 readings, today marked the third day in five over 40. Overall, we’re going to label the measure neutral again, as the broad market is up and down as selling pressures can’t quite seem to go into hibernation for long.

The next Cabot Growth Investor issue will be published on December 26, 2024.

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