Cabot Growth Investor Issue: December 26, 2024

A Great Year Ends on a (Somewhat) Cautious Note

First off, this being our last issue of 2024, we wanted to wish you and yours a great rest of the holiday season, including a happy, healthy and prosperous New Year. We’ll send out a brief update next Thursday as we flip the calendar to 2025.

On to the market, we’ve been at this for a little while, and usually every three to four years we get an environment where growth stocks really let loose on the upside—and 2024 certainly qualifies, with the mid-August to early-December time frame being the stuff dreams are made of. There are still a few trading days so we’ll see how things finish up, but the Model Portfolio is on pace for its second-best return of the past 18 years (when I began to run things), eclipsed only by the wild 2020 boom.

While we’re thrilled with the gains, our focus is always on the present and future, so though the year as a whole was fantastic, we’re heading into 2025 in a somewhat cautious stance for a couple of reasons: First and foremost, growth stocks are in something of a consolidation, with more than a few shots across the bow seen earlier this month; and second, most of the broad market has really taken it on the chin, so much so that our Cabot Tides and Two-Second Indicator are waving yellow flags.

To be fair, later in this issue we go into some detail talking about how breadth has been so bad that it’s possible that is a good thing—that a lot of selling has already been done, which could pave the way for another leg up. If that happens (which could possibly coincide with a turn down in Treasury rates, which have been spiking), we’d not only think many wobbly leaders would perk up, but possibly some names that have been resting for a couple of months could emerge (or re-emerge).

However, in the near term anyway, we’d rather be a bit late than a bit early given all the evidence—and especially when you remember the wild crosscurrents often seen in early January as investors big and small take profits and reposition their portfolios. Thus, we’d categorize us as cautious but flexible, very willing to put money to work should growth start a new leg higher, but wanting to see the buyers flex first before starting another major buying spree.

What to Do Now

We’re fine-tuning our watch list and keeping our eye on many relatively recent new issues (see more later in this issue), but tonight, we’re going to stand pat—last week we cut bait on the rest of our small Cava (CAVA) position as well as our ProShares Russell 2000 Fund (UWM) shares, leaving us with around half in cash, which provides us plenty of cushion if the sellers re-appear, but also lots of buying power in fresh ideas if growth stocks get going.

Model Portfolio Update

No investing system is perfect, and ours certainly has its ups and downs, but the key is that it puts the odds in your favor over time, partially by using market timing to stay out of horrid situations (we tend to keep any losses under control in prolonged bear markets like 2000-2003, 2008 and 2022) while using stock selection and time-tested rules and tools to take advantage of good years (like 2007, 2010, 2013, 2017, 2020 and, now, 2024). It’s been a great year and we’re glad to have you onboard.

For the here and now, though, we’re content to play some defense: The first half of December brought some rough action from the broad market and definitely saw some dents and intermediate-term red flags for many leaders; along with our Cabot Tides turning negative, we’ve pared back a good amount.

We do think there’s a chance that dip was just a temporary air pocket, especially given the surprisingly deep oversold readings out there (see more later in this issue), so we’re ready to do some buying—but only if our Tides and more growth stocks catch a bullish wave going ahead. Tonight, we have no changes, with around half the portfolio in cash.

CURRENT RECOMMENDATIONS

AppLovin (APP)—APP was one of, if not the, #1 leading glamour stock this year, posting huge gains that helped the Model Portfolio—but that’s the past, and the question in our minds is whether AppLovin has gas left in the tank going forward or whether it’s going to need some time (possibly a long time) to re-set: The recent decline off the top was very sharp (26%) but was also brief (eight days so far, including only one down week to this point); to us, it smelled short-term abnormal (which is why we took a chunk of our profit off the table), but we’re not willing to go beyond that at this point as APP has steadied itself. A move back into the upper 300s would be bullish and likely tell us the overall uptrend is intact—but so far, the stock hasn’t bounced much, so we think the prudent play is to stay on Hold and see how things shake out as we roll into the New Year. HOLD

Argenx (ARGX)—We could pretty much cut and paste any of our recent write-ups on ARGX here as the thinking hasn’t changed, with the stock enjoying a slow, steady uptrend while the relative performance (RP) line is slightly tilting upward. We do think there’s a good chance that, should the broad market get off its duff soon, ARGX and some biotech peers could rev up; it would take just a couple of strong days for us to consider averaging up here, especially as perception of the firm’s earnings power continues to pick up. Right now, though, the evidence hasn’t changed much, so we’ll stick with our Hold rating. HOLD A HALF

Axon Enterprises (AXON)—As we’ve written before, the selloff in AXON wasn’t as dramatic as many leaders that hit air pockets—it’s currently sitting 11% or so off its highs, which is hardly a disaster given the prior advance—but shares have suffered a couple of waves of high-volume selling and haven’t been able to bounce much even in recent days. Frankly, another couple weeks of consolidation wouldn’t be the worst thing, especially as the 10-week line (now around 593) catches up, as that could bring in the buyers, especially if the new year brings any news regarding the firm’s uptake on its AI-powered bundles. Even so, right now, we have similar thoughts with AXON as we do with many growth stocks: We favor patience, waiting to see how this rest period plays out in the days to come. HOLD

Cava Group (CAVA)—We’re going to be keeping a distant eye on Cava, as we have a hard time believing the stock has hit an ultimate top—the story here is too good (and, in the big scheme of things, too young) to think that investor perception has reached its nadir. That said, the stock is not the company, and after a prolonged run, CAVA has flashed some abnormal action on both the upside (big gap up out of trend on the upside right after earnings) and downside (big selling pressure on that gap, and again two weeks ago), and with the lack of any bounce, we decided to take the rest of our profit. Ideally, the stock takes at least a couple of months (possibly longer) to re-set, form a firm foundation and then re-emerge—providing a fresh lower-risk entry. At this point, though, we sold and are simply watching it from the sideline. SOLD

Flutter Entertainment (FLUT)—FLUT’s pullback during the past couple of weeks has been tedious, with shares steadily losing altitude (about 9% from high to low), but shares are still north of their 50-day line and volume has been light. While the industry group is touch and go and quarterly results can vary based on betting outcomes, there’s little doubt the trend for both the stock and business is up, with FanDuel leading a U.S. market that should continue to expand at a good clip for many years. A decisive break of the 50-day line would probably cause us to go to Hold, but with a modest profit and an acceptable correction, we’re hanging on and are OK with new buyers starting a position on this weakness. BUY

On Holding (ONON)—ONON looked iffy late last week, with yet another poor earnings report from Nike briefly hitting the stock and group, but shares found support at the 50-day line and remain in good shape. (The tight-ish closes on the weekly chart are also a constructive sign.) Nothing has changed with our thoughts here—if the stock decisively breaks down, we could pare back or even nail down our profit, but given the projected growth both next year (analysts see sales up in the upper 20% range, give or take, next year) and longer term, the odds favor the next big move being up. We’ll stay on Buy. BUY

Palantir (PLTR)—Compared to many of the hottest stocks, PLTR held up relatively well during the recent selloff (above its 25-day line and mostly rangebound) and then spurted ahead once again, reaching new highs earlier this week. That’s not a fresh buy signal, per se, as the stock is still vulnerable to a swoon if the broad market can’t get off its knees, but it’s obviously a sign that institutions see good things ahead. Helping the cause recently was an expansion of a technology deal with the U.S. Army valued at up to $619 million over four years, along with continued hubbub about its AI platforms landing enterprise deals. If you’re not yet in and want to nibble on dips, we wouldn’t argue with it, but officially we’ll just stay on Hold. HOLD

ProShares Russell 2000 Fund (UWM)—Historically we’ve done well with leveraged long funds here and there, but we’ve struck out a couple of times with UWM this year (one time with a half position, this time a full position) as small-cap stocks have refused to really get moving despite all sorts of positives, with the recent, decisive break of their 50-day line putting a fork in the breakout attempt. At some point, of course, the small-cap area of the market will come alive, but having been tossed off the bucking bronco twice, we’d have to see a much more legitimate setup (possibly along with some “blastoff” indicators that pop up at rare market turning points) before getting involved—and in the meantime, there should be better names to own among individual titles. SOLD

Shift4 Payments (FOUR)—On the one hand, Shift4 was one of the first growth names to get whacked (on news its CEO was nominated to lead NASA) and hasn’t bounced much—but on the other hand, FOUR held firm during the recent growth stock selloff, staying north of its 50-day line when it could have easily retreated further. We’re encouraged by that show of resilience, and in our heart remain optimistic, thinking shares can do well as the out-of-the-blue news gets digested (the CEO says he plans on holding the majority of his equity stake if he can, and will be front and center at the company’s Investor Day in February) and as the fundament story continues to play out (including a move into Australia, New Zealand and possibly Latin America in the next couple of quarters). Of course, we’re still taking it as it comes—if the stock really keels over, we could change our tune—but right here we advise sitting tight. HOLD

Watch List

• Astera Labs (ALAB 147): ALAB is one of a handful of names that is new, strong and extended to the upside … but has also refused to give ground during the growth stock dump and has since roared back to new highs. We’re not chasing it here, but it’s clear big investors are accumulating.
• DoorDash (DASH 171): DASH shook out fairly hard last week, but has so far found support near the 50-day line, where it “should.” We continue to think this steady growth story will play out for years as delivery becomes more commonplace. If DASH can steady itself for a bit longer, we could take a swing at it.
• GE Vernova (GEV 345): GEV has held up beautifully in recent weeks after a huge run—and looks ready to resume its rally if growth stocks power ahead. See more below.
• Reddit (RDDT 180): RDDT is a hot potato, but similar to ALAB, we’re enamored of the strength in the chart and in the story—the company has a one-of-a-kind Internet property with rapidly growing metrics and huge monetization opportunities ... and the market cap is just 2% of Meta’s by comparison.
• Rubrik (RBRK 69): RBRK is probably our favorite glamour name right now, with a new and differentiated cybersecurity story and the stock has had a huge run and only reasonable wobbles of late. Another week or two of resting would present an interesting risk/reward situation.
• Viking Holdings (VIK 46): Cruise liners aren’t our normal cup of tea, but Viking looks like a follow-on play in the group as it strives to become one of the big boys in the sector. See more below.

Other Stocks of Interest

GE Vernova (GEV 345)—We’re not huge into diversification, as our Model Portfolio is pretty concentrated (usually 9 to 12 stocks when fully invested), but we do like to balance our holdings among more liquid leadership names (well-traded and well-sponsored) and so-called fastballs, which are quicker-moving titles that can be a bit more hit and miss. GE Vernova quacks like a liquid leader, providing big investors a direct way to play the mega-trend of greater electricity demand for AI, data centers and more; the firm says that its clients produce about 25% of the world’s electricity using its offerings, so it’s already the go-to player in the field. Vernova operates in three segments: The weakest is wind power, which is barely profitable and struggling as higher interest rates have slowed demand for big projects, but that is a footnote compared to the firm’s Power (mostly generation, including natural gas engines as well some nuclear work) and Electrification (grid solutions for both greater capacity and handling renewables) segments, which are seeing such high demand that Vernova’s current capacity is booked for a few years. Moreover, a lot of business is service-based, which effectively provides a long-term stream of recurring revenue. To be fair, this is a huge firm ($33 billion in revenue this year) and so it isn’t a hypergrowth operation (the top line is likely to grow in the upper single digits in the years ahead), but margins are exploding and the underlying business trends are fantastic. Through Q3, EBITDA from the Power and Electrification divisions combined lifted 87%, while backlog totaled a ridiculous $93 billion (much of it service-based, which provides a ton of visibility) and, in Q3 itself, orders remained strong (up 26% in the two key segments). But the real attraction here is that the company is very likely to see its cash flow and EBITDA soar consistently for many years as business scales and efficiencies grow. In Vernova’s early-December update, it forecast boom times through 2028, with EBITDA more than tripling between now and then while free cash flow will likely grow even faster—and most analysts think management here is still lowballing expectations. The stock is certainly hinting things will remain buoyant: After a huge run from September through October, GEV has gone straight sideways for seven weeks as the 50-day line has caught up. The 350 area has been resistance, but if the market rights itself, we could hop on board.

Viking Holdings (VIK 46)—A bit later in the issue we write a quick note that, given that tons of stocks have had good runs for a prolonged time (and some over a year), we’re monitoring recent IPOs as closely as ever, thinking many will take the leadership baton from other names in 2025. Viking Holdings is one of the names, looking like a follow-on play in the cruise sector: The firm has around 100 ships on the water and is best known for its river cruises in Europe, Egypt and elsewhere (21 rivers in all), which usually are heavy on culture (including food and classes onboard), light on kids and gambling and, business-wise, feature less competition—though the firm also does great business with ocean cruises as well, with its offerings again positioned more in the luxury end of the market. People who travel with Viking tend to come back (53% of passengers this year had vacationed with Viking before, up from 27% a decade ago) and business is healthy and getting stronger: In Q3, revenues were up 11%, EBITDA lifted 15% while earnings surged to 89 cents per share (up from a loss a year ago), but even more encouraging was order flow, with 70% of next year’s rooms already sold out as of the end of September, as advanced bookings were up 22% (river) to 30% (ocean) from a year ago. And management is leaning into this trend, aiming to make Viking a bigger player in the sector (revenues are just one-fifth the size of Carnival’s)—capacity was up 5% this year and should grow 12% in 2025 as 11 new ships hit the water, while 2026 should see the fleet expand by another eight vessels. Of course, we are talking about the vacation sector, so a real economic wobble would likely cause issues, but right now demand is clearly picking up steam. As for the stock, VIK just came public in May and etched its first real launching pad from July through September before kicking off on the upside. There’s been some resistance in the upper 40s for a few weeks, but we like how shares have tightened up of late and held the 50-day line. It’s a good story that should attract more big investors (just 207 funds owned shares in September) going forward.

Breadth: Bad? Or So Bad That It’s Good?

I started at Cabot back in 1999, and one of my first real treats was heading to the Contrary Opinion Forum that year, which was up on the shores of Lake Champlain in Vermont and attracted a few dozen great investors from all over the country for plenty of hobnobbing and some great presentations. (It was held in the fall, too, so the drive up was fantastic, too.)

Anyway, while many remember the market that year and into early 2000 as the last stages of the Internet bubble—and it was—what’s less talked about is that the middle of 1999 was a grind: Internet stocks did OK, but in a three steps forward, two steps back sort of way, and the broad market was awful, with popular technical indicators (advance-decline lines, new lows) showing horrible market breadth.

Back to Vermont, one speaker was known as a sharp technician and everyone figured he’d be super bearish given the horrible breadth—but surprisingly, he was very bullish, saying that breadth had been so bad it was good ... in other words, the sellers were likely sold out despite the worries out there. And he was right, as growth stocks had a ridiculous run for the next six months and the broad market did surprisingly well (mid-caps up 35% November through August) before the bear market hit everything.

While the two situations have differences, we’re writing about this story today because we’ve just come through a briefer but very unusual stretch in the market: After the calendar flipped to December, the broad market basically went into a tailspin, falling persistently until last Friday, action that was largely masked by the action of a few mega-cap stocks.

Probably the most glaring stat was that for the first 14 trading days of this month (through last Thursday), decliners outnumbered advancers within the S&P 500 every day—something that hasn’t been seen in at least a few decades! Indeed, earlier last week the percent of stocks in the S&P 500 above their 50-day lines dipped to 20%, the lowest in over a year. Other breadth measures (like the 15-day average of the number of new highs in that index) are also approaching extreme territory.

Oftentimes, when you see such extreme weakness after a prolonged run in the market with elevated sentiment—especially when some leading stocks also come under the knife—it marks a negative change in character; that’s a big reason we’ve pared back this month and are sitting in a cautious stance with around half the portfolio in cash.

However, we’re also keeping in mind the lesson from 1999: Plenty of breadth measures (well beyond those mentioned above) recently flashed legitimate extremes, and that could actually be setting up a “so bad that it’s good” scenario as we head into 2025. Indeed, according to Ryan Detrick of Carson Financial, there have been five other times in the past 40 years that saw at least 10 straight days of negative S&P 500 breadth, and while the near term (next month) was iffy, the median returns three (up 3% on average), six (up 9%) and 12 months (up 17%) later were all very good.

Of course, the next couple of weeks (year end, and then early January) have a lot of crosscurrents, but our thinking is this: Right now, given the action following a big run, it’s logical to stay close to shore—but it’s also vital to remain flexible, as the three-week air pocket to hit the broad market at a time when the long-term trend is pointed up might be setting up the market’s next leg up.

Peering into 2025: Keep an Eye on Recent New Issues

Even if the market does take a longer breather, we’re still thinking that, while some growth stocks may have topped for a while, many are still likely in the mid-stages of their overall runs. We’re specifically keeping a close eye on many new issues, the best of which we think can be big-time leaders sometime next year.

Some, like Astera Labs (ALAB) and Reddit (RDDT), have already had big runs and will likely need time to rest up—but almost certainly haven’t hit their ultimate peaks. Others, like Rubrik (RBRK) and Viking Holdings (VIK), are strong but fresher, having broken out “only” two-ish months ago, and could provide an opportunity after a bit more of a rest period. And then there are stil others like Birkenstock (BIRK) that have been base-building in recent months and have just begun to show some earnings-induced power.

Whether it’s these or others, we think some relatively recent new names and new issues will be taking the leadership baton in 2025.

Cabot Market Timing Indicators

From a big-picture perspective, it’s been a fantastic year for growth stocks and our Model Portfolio, and the long-term trend of the market and many leaders look good. For the here and now, though, the evidence has worsened, with our Tides and Two-Second Indicator negative and many hot stocks cracking intermediate-term support. We’re not bearish, but at this point we favor playing things cautiously and waiting for the buyers to return.

Cabot Trend Lines – Bullish
Our Cabot Trend Lines are closing in on the two-year anniversary of their last signal (a buy in January 2023), and the long-term trend remains clearly up as we roll into 2025—as of this morning, the S&P 500 (by 7%) and Nasdaq (by 11%) are clearly above their 35-week lines. Of course, at some point, the indicator will turn negative, ushering in either a bear phase or long correction/consolidation, but at this point, the major trend is still pointed up.

Cabot Tides – Bearish
On an intermediate-term basis, though, the story has changed: Our Cabot Tides flashed a sell signal last week when three of the five indexes we track (including the NYSE Composite, shown here) nosedived decisively below their lower (50-day) moving averages—and many growth measures did the same. As we’ve written earlier in this issue, we’re open to this being a shakeout, but the bulls need to step up first to make up for the recent damage.

Two-Second Indicator – Negative
The Two-Second Indicator is negative here, and there’s little doubt the broad market’s recent weakness is part of the reason for that—though, to be fair, it’s also year-end, which means the indicator is probably suffering from tax-loss selling distortions. Either way, there’s little doubt the market broad market isn’t in great health here.

The next Cabot Growth Investor issue will be published on January 9, 2025.

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