Cabot Growth Investor Issue: February 20, 2025

Growth Stocks Not in Favor

When discussing the market environment, one popular investor we’ve heard talks less about general bull and bear markets, and instead focuses on how easy or hard it is to make (and keep) money. In his terms, he calls them easy-dollar versus hard-penny environments, with the former being when most new buys work right away and your holdings move up most days, and the latter when new buys are hit or miss and any gains you do earn can disappear quickly.

We bring that up today because, first, the top-down evidence remains mixed, as it has for a couple of months. There has been some improvement in some indicators—our Cabot Tides aren’t that far from a green light, for instance—but other factors like our Two-Second Indicator (now negative) and Aggression Index (still neutral; see more later in this issue) aren’t exactly telling us big investors are buying.

So, when things are mixed, we put even greater weight on the action of individual stocks: If growth names were lighting up the sky even as the indexes were so-so, we’d have been putting money to work at a steady clip. This describes what we saw last August and September, which was an easy-dollar environment; we purchased many names that ended up being big winners in the months that followed.

Today, though, is much more of a hard-penny situation. Some growth stocks have moved higher in decent fashion and look fine overall, but few (if any) are running away on the upside and most are still struggling near prior highs (lots of selling on strength). And now, this week, we’ve seen a rash of air pockets out there, with a bunch of stocks giving up a chunk (or all) of any recent gains they’ve had.

Don’t get us wrong—it’s not 2022 out there, when growth stocks were cratering left and right and any move higher was met with a wave of selling. And with the long-term trend up and with more than a few big-picture positives, we think there will be another easy-dollar environment this year—possibly soon, as investor sentiment has already come down quite a bit (see more on that later in this issue).

What to Do Now

But until we see big investors actually stepping into growth stocks in a consistent manner (not just for a couple of days), we advise staying patient and relatively cautious. This week, we sold Shift4 (FOUR) after it broke down after earnings, and today we take another round of partial profits in Palantir (PLTR) and cut bait on Reddit (RDDT), leaving us with a cash position of around 58%. We’re not afraid to put that money back to work (we’re not ruling out today being a shakeout of sorts), but we need to see growth stocks snap out of their funk first.

Model Portfolio Update

There have been and remain some encouraging aspects to the market, but our biggest thought remains the hit-and-miss nature of growth stocks—few stocks are really showing much power, with every name that looks peppy offset by a name that is cracking and likely another that’s simply meandering. And this week has been worse, with sellers coming around for many growth titles.

As we’ve written for weeks, such action doesn’t necessarily spell doom, and there are many names out there that look solid even after today’s wobble. However, it’s like walking across an icy driveway: You can get to the car door, but you have to go slow, and there’s a decent chance you’ll fall on your duff on the way.

In the Model Portfolio, we’ve continued to go slow and hold plenty of cash as few names are running away on the upside (and if they do, they often retreat soon after); we’ve been ditching and keeping tight leashes on names that crack while starting positions in fresher, stronger titles. After doing some buying last week, we sold Shift4 after an earnings air pocket this week, and on a special bulletin today, we took another round of partial profits in Palantir and took a small loss in our half-sized stake in Reddit. Our cash position in the upper 50% range is higher than we’d prefer, but given the meat grinder environment, we’re OK waiting for some “real” buying in growth stocks before putting much of that to work.

CURRENT RECOMMENDATIONS

AppLovin (APP)—AppLovin remains one of the top growth stories in the market, with the Q4 report and outlook coming in strong: The firm’s AI-powered advertising engine smashed estimates again, seeing revenues boom another 73% while EBITDA for that segment lifted 85% and sported a ridiculous 78% margin. (Free cash flow for the quarter was $695 million, or a bit over $2 per share, vs. $1.73 in earnings.) The gaming side of the business was again flat-ish (sales down 1%), though profitable (EBITDA up 27%), but the company has decided to sell that outfit to an undisclosed buyer for a nice price ($900 million total consideration including $500 million in cash) to focus on the advertising side of the business. The top brass was clearly bullish, saying that its advertising system has applications in many industries outside of online gaming, with one analyst thinking the e-commerce area already produced a nice chunk of revenue in Q4. Guidance was decent (looking for 4% to 5% sequential growth in Q1, which most think will prove conservative), too, and the stock boomed to new highs above the 500 level. Now, all that said, while the story is good, the stock is clearly not early in its run (up more than five-fold from its September breakout) and, of course, the environment for growth stock is very iffy. Thus, we actually sold a bit more into the strength (one-third of our remaining stake), which gives us some leeway to hold through the current dip, which is normal thus far. HOLD

Argenx (ARGX)—ARGX was in a steady, firm uptrend into early January but has lost steam over the past few weeks and is testing its 50-day line for the second time since last October—normal action so far, but we do think the next week or two (which will include its earnings report February 27) will probably tell the tale: While a dip of a few percent from here wouldn’t be the end of the world, it would represent a change in character compared to the action since ARGX got going last June. Of course, that’s all speculation at this point—shares have set up a very tight (7% from high to low) range in the past few weeks, and a resumption of the advance could actually provide a fresh entry point. We never did average up in this name, so we have a small position at a solid profit; we could average up on a decisive show of strength (likely after earnings), but if ARGX fades like more leaders tend to be doing, we could simply take our profit and move on. For now, we’ll continue to hold on and let the stock tell us what to do next. HOLD A HALF

DoorDash (DASH)—DoorDash certainly has the qualities of a liquid leader in this market, and why shouldn’t it? The firm has a long runway of rapid and reliable growth, which is what most big investors are looking for, with its top-notch logistics and back-end technology (along with the network effect, which favors the leader in the group) attracting about half of new merchant entrants in both restaurants and in its newer categories, such as grocery, convenience, alcohol and more. (All in all, 94 of the top 100 U.S. restaurants and 44 of the top 100 retailers as a whole use DoorDash at least in part for delivery.) And its clients are broadening their purchases, with about one-quarter of its monthly users buying from a non-restaurant client in December. Growth here remains solid (Q4 orders up 19%, order volume was up 21%, revenues lifted 25% and EBITDA boomed 56%, with very healthy free cash flow, too), and while today’s action was ugly, it wasn’t abnormal—the stock had a very modest, tight rest during December and January followed by a fresh move to new highs and a positive reaction to earnings. Obviously, if growth stocks go up in smoke, all bets are off, but while there could be some short-term follow-on weakness after today, the odds still favor higher prices ahead. If you bought with us, hang on, and if not, we’re OK buying a half-sized stake here. BUY A HALF

Duolingo (DUOL)—These days, there aren’t many stocks out there that have the growth story and numbers we lust for, while also featuring a strong (but not very late-stage) chart—but Duolingo is one of them, and the strength it’s shown during the past couple of weeks is just what we like to see (today’s dip looks very normal given the growth stock maelstrom). Fundamentally, the firm has the most popular educational app in the world, mostly used for language learning right now, though the potential for subjects like music and math lessons (which are live, though it’s still early there) very big. The secret sauce here looks to be a fun, engaging format that keeps people coming back, along with a freemium business model (free to use with ads; paid subscribers get more features and no ads) that’s also a plus. Moreover, recent AI integrations (premium subs can live call an AI bot and have a conversation in whatever language they’re learning and get feedback) are only helping. Now, to be fair, DUOL is a very volatile name, and it does have earnings next week (February 27), so we do have a loose loss limit (down near 350, give or take) given the tricky growth stock environment—but we’re obviously optimistic, as the stock’s humungous correction last year cleared out many weak hands and the story, numbers and chart today are all aligned on the upside. We averaged up some last week and will take it as it comes from here. BUY

Flutter Entertainment (FLUT)—It hasn’t been easy with FLUT, which since our entry in the fall has had two sharp dips followed by weeks-long consolidation periods—but the stock never did anything “wrong” and now it’s acting better, breaking out nicely on the upside last week before today’s dip. The rally was partly due to some good tidings around the Super Bowl (looks like another big growth year in terms of bets and handles) and thanks to a solid outlook from peer DraftKings (DKNG) last week. Of course, Flutter has its own report in a couple of weeks (March 4), which will be key, but it’s looking more and more like Q4’s crummy results (because of good luck by bettors) were a one-off, the underlying business is strong and 2025 should be a great year. If you don’t own any, have a lot of cash and want to nibble here, we wouldn’t argue with it, but given the environment, we’ll stay on Hold a bit longer and see if this breakout sticks. HOLD

On Holding (ONON)—We decided to trim our On Holding stake further last week (selling half), partially because of the recent action for the stock, which saw a couple of weeks of heavy-volume selling after the attempted breakout, but also partially due to the group action, which has seen many growth-oriented peers both in apparel and footwear (BootBarn, Deckers) and even restaurants (Cava still toppy, Wingstop cratered this week) get hit hard. That said, we do think the underlying business here is likely intact—it wasn’t long ago that management reiterated 30%-ish growth for many quarters going ahead—but the stock is not the company, and while we have a decent profit and ONON isn’t a go-go name, it also hasn’t made any progress since September and the big-volume selling of late is ominous. We have a small position left with a mental stop in the upper 40s. SOLD HALF, HOLDING THE REST

Palantir (PLTR)—Fundamentally, there’s no question that PLTR has everything going for it, with still-accelerating growth and an AI offering that could be the platform standard used by all the biggest firms and western-friendly government agencies out there. That said, the stock (which was acting about as good as can be) has come under pressure this week due to news that the CEO could be unloading a good-sized chunk of shares, though we view this more symptomatic of the market environment, where any iffy or potentially bad news for growth stocks brings out the sellers. We hate to ping-pong our advice, and we usually don’t just because of a bad day or two, but given the big run in recent months and the outsized selling this week (in both PLTR and most growth names), we decided to one-third of our remaining shares today, while holding the rest and seeing if/when buyers show up. SOLD ONE THIRD, HOLDING THE REST

Reddit (RDDT)—RDDT got off to a good start for us but completely reversed course since earnings, due mostly to worries about user figures, which tend to have an outsized impact (even more than sales and earnings) on these types of names: The end-of-Q4 figures showed great growth from a year ago but, due to some late-year Google shenanigans, hurt the numbers; the top brass didn’t seem worried and said “logged-on” user growth remained about the same (25%, ballpark) in Q4, with Q1 so far being back on track. Meanwhile, the actual sales (up 71%) and earnings (up 227%; 36 cents vs. 25 cents expected) were fantastic, and while top-line growth is expected to decelerate to “only” 52%in Q1, most see that as conservative. All that said, though, we have to take our cues from the stock itself—it’s been basically straight down since the report and even sliced through its 50-day line today, and while a bounce is possible, we’re thinking the stock needs time to form a fresh set-up given the selling. We’ll keep a distant eye on it, as we doubt RDDT has hit its ultimate peak, but we decided to take a small loss today on our half-sized position and hold the cash. SOLD

Shift4 Payments (FOUR)—FOUR was looking pristine heading into this earnings season, hitting new highs after overcoming a tough correction/base-building effort in December and January. But earnings are always a roll of the dice and Shift4 threw craps this week: The Q4 report itself was OK but missed expectations, and the firm also announced its biggest-ever acquisition ($2.5 billion enterprise value) of Global Blue, a technology provider for many European retailers that deal in cross-border sales. In our view, shares worked hard to get comfortable with the idea of the CEO leaving during the past two months, but now investors are looking at those worries plus the digestion of a big buyout and a good-not-great 2025 view (EBITDA up 25% but free cash flow growth likely muted)—which caused big investors to bail out. There is some support just under here, so as we wrote in our special bulletin, if you want to sell some/hold some with a tight stop, that’s fine. But given the overall action of the past few months, we decided to sell our remaining stake, thinking there will be better names to own going ahead. SOLD

Watch List

• Credo Tech (CRDO 71): The AI infrastructure group has had an “echo pullback” of late (a follow-on selloff after a bounce), which has again allowed the wheat to separate from the chaff—and CRDO continues to hold up relatively well as earnings (March 4) approach. It could obviously change, but at this point, the outlook is as good as any out there, with triple-digit sales and earnings on the way for many quarters to come.
• GE Aerospace (GE 209): GE has been quietly moving higher during the past couple of weeks as investors buy into the reliable multi-year free cash flow story. A pullback of a few points would be a tempting entry point.
• GitLab (GTLB 67): We’ve always liked this firm’s steady growth and terrific story, and now the stock is set up just shy of a potential long-term breakout. See more below.
• Guardant Health (GH 47): GH remains in good shape, with its sharp-but-normal dip of late meeting with strong buying pressures. Tonight’s Q4 report and 2025 outlook will be key.
• Nebius Group (NBIS 46): NBIS has a very unusual history and backstory, but the big idea is that it’s positioning itself to be a major AI infrastructure and services firms in the world. Sales are small now ($38 million in Q4), but annualized recurring revenue should leap above $750 million by year-end and get a lot bigger than that down the road. Shares have been very strong, shook out hard this morning on earnings and came all the way back. We’re intrigued.
• Rubrik (RBRK 72): RBRK reminds us a lot of the market as a whole—OK, doing fine, looks good, etc.—but it hasn’t really been able to get going, with low-volume moves to marginal new highs being swatted back. We continue to watch but would love a tighter setup to enter.
• Shopify (SHOP 123): SHOP is another name that’s moved to new highs of late but seems to be struggling to do so, spending a lot of energy (lots of volatility) for it to move up a few percent. Even so, the overall chart looks solid, and if it can settle down, it could be ready for a more sustained move.

Other Stocks of Interest

Expedia (EXPE 205)—There’s been a huge travel boom going on since the pandemic, with relatively limited capacity and huge demand leading to higher prices and booming margins, and most stocks in the group (cruise lines, airlines, hotel chains) have had nice advances at one time or another over the past couple of years. Expedia, though, was an exception, with fears of slowing growth hindering it, but it’s been shaping up in recent months and is now perched at new highs. The firm, of course, is one of the big online travel agents, operating not just its namesake site but Hotels.com, VRBO, Travelocity, Hotwire and more, booking millions of room nights, flights and (increasingly) experiences for personal and business travel. Partially due to intense competition, both from peers like Booking.com and from people preferring to book direct (for loyalty points and to avoid any potential issues with cancellations, which was a big concern during the hecticness of the pandemic), business had crawled along unevenly and big investors weren’t impressed. But recently things have picked up and the future looks even brighter: For the first time in a while, Q4 saw all three of its core brands (Expedia, Hotels.com, VRBO) post bookings growth, with both consumer and business bookings accelerating five percentage points (to 9% and 24%, respectively), helping revenue to lift 10% and EBITDA to rise 21%. Even better than that is the free cash flow, which has always been beefy but totaled a whopping $17-plus per share in 2024 (compared to $12.11 of earnings per share), leading to big share buybacks (the Q4 share count was down a bit over 6% from a year ago)—and the free cash flow figure should grow nicely this year as business picks up steam. After a tedious correction in the first half of last year, EXPE had a nice rally into November before another, more well-controlled rest period that lasted into February—but shares gapped from there on earnings and have held firm near the 200 level. We think the stock could be a steadier play (somewhat similar to GE Aerospace) that does well in what is obviously a tricky growth stock environment.

GitLab (GTLB 67)—We’ve been keeping an eye on GitLab for a couple of years because it seems like a name that, thanks to a great story and consistent growth, will eventually have a big run ... and that time might be approaching as the stock has set up a huge, beautiful launching pad. GitLab‘s main attraction (it has one of the leading DevSecOps platforms on the market) sounds confusing, but the big-picture idea here isn’t: Every good-sized company these days has a good-sized team in place to update and improve their software offerings and apps on a regular basis (think websites, apps, booking platforms, back-end systems, etc.)—but doing so is complex, with big security, testing and deployment challenges along the way. (Something like 80% of software development is spent on non-coding tasks, which obviously boosts costs and time-to-market.) GitLab’s platform dramatically boosts productivity by automating many key facets (especially security and testing), and some of its latest modules have plenty of tools that help clients integrate AI functionality, too—with a big advantage being that clients can implement AI capabilities without their private data leaving the organization (far more secure than others at this point). There’s obviously competition, but GitLab looks like the leader, with clients seeing very quick paybacks on their purchases, and it’s very early days as the vast majority of firms are either doing all of this themselves or using a few different point solutions, which creates issues. At the end of September, GitLab served 9,519 clients (up 16%; more than half of new bookings are in the public space) that sported a same-customer revenue growth rate of 24%, which has driven revenue up at a low-30% rate for many quarters while earnings and free cash flow have begun to take off. GTLB has been base-building for a year and isn’t far from new high ground, with many thinking demand will only accelerate as AI usage becomes widespread. GTLB is on our watch list.

Life Time Holdings (LTH 33)—We’ve written about (and even owned) Planet Fitness in the past, a nationwide fitness center that is meant for the non-workout fanatic, and over the years it’s seen a solid expansion from those looking for a cheap-but-convenient workout place. Life Time Holdings is going after the other end of the market, and with great success: The firm is essentially building huge (some 40,000 square feet, while others are up to 140,000 square feet!) country club-like facilities that have a resort feel, offering gyms, of course, but also personal training, 55-and-over activities, pools, spas, child care and kids camps—though all that comes with an elevated membership price and enrollment fee, averaging $198 per month and rising. (There are even luxury residences for rent, built within the resort area with concierge, indoor and outdoor lounges, gaming areas and more; supposedly churn here is much lower than comparable rental locations.) All told, there were 826,000 members as of September, with 177 centers; now that free cash flow is positive and debt is down to reasonable levels, the firm is focused on expansion of its services and locations—it looks like 10 to 12 new locations will open in 2025 (combination of building from the ground up and taking over existing clubs), with another 12 to 14 in 2026 and slightly more than that number in the years ahead, though the exact number is probably less important here as the resorts come in all shapes and sizes. All in all, sales have been cranking ahead at a mid- to high-teens rate, while EBITDA is growing faster (up 25% in the first nine months of 2025), and the top brass sounds confident those sorts of trends will continue for a long time to come. LTH initially came alive in May of last year, then spent the last five months correcting and consolidating, but a bullish Q4 pre-announcement in January kicked off another strong upmove. The full earnings report is due February 27, but there’s no question the buyers are in control.

Two-and-a-Half-Month Trading Range Wearing on Sentiment

We’ve been relatively cautious now for more than two months, as the action of our indicators (mixed) and growth stocks (OK at times, but little net progress overall and a lot of selling this week) hasn’t drawn us into the market’s waters to a major extent. But the good news is that as time has gone on, we’re continuing to see degradation in some sentiment measures—which should eventually pave the way for the next uptrend.

One example is the AAII weekly survey, which shows many individual investors are worried. Shown here is the eight-week moving average of bulls less bears in the survey, which stands at -4% this week, taking the moving average nearly down to its levels from October 2023 (which was a major low). Admittedly, we almost never see this type of pessimism with the major indexes near highs, so it could be a funky reading—but we always just go with what’s in front of us, and it’s clear some set of people are getting worried.

Another market-based measure we like to look at (and which we talked about a few weeks back) is the number of stocks hitting new 52-week highs. It makes sense that if few stocks are hitting new highs each day over a period of many weeks, it’s a de facto sign that relatively few investors are eager to buy (a sign of pessimism). Shown here is the 50-day moving average of new highs on the S&P 500, and while not as extreme as the AAII survey, it’s at 14-month lows and is closing in on the October 2023 levels as well.

Of course, all the usual caveats apply given that these are sentiment and oversold indicators, the most important being that low readings can get even lower—and that might happen this time, as many growth stocks are back in the soup after this week. But our point is that, as opposed to December (when a lot of euphoria had to be worn off), investors are already showing some intermediate-term discomfort, which is an encouraging sign when looking out a few weeks.

Rates, Aggression Index Near Key Levels

In recent months, the two most important secondary measures out there have been the trend in interest rates as well as our own Aggression Index, which gives us a view into the growth/defense tug of war among big investors. Interestingly, right now both are near key levels—their next decisive move could be telling for the market.

Starting with Treasury rates, shown here is the 10-year note yield, which has been in a firm uptrend since early October, with one test of the 50-day line in early December leading to higher rates. After a recent dip, though, yields are struggling to resume their advance, bobbing and weaving near the 50-day line. A move back up to 4.70% (worrisome) or below 4.40% (bullish) will be telling.

It’s a similar story with our Aggression Index (Nasdaq versus the Consumer Staples Fund, symbol XLP), which was choppy but positive before the DeepSeek selloff caused a big pothole—and since then the Index has meandered nearly straight sideways, moving a bit above and a bit below the (still rising) 50-day line. Obviously, the next meaningful move from here should be telling. Along with the action of leading stocks (good so far in earnings season), both of these should provide a good near-term read of the market’s next move.

Cabot Market Timing Indicators

There are definitely still some positive factors out there, as earnings season has been solid overall and some indexes and growth funds are either at or close to new high ground. That said, most of the evidence remains mixed (including our Aggression Index and Treasury Rates, written about earlier), with growth stocks hit or miss at best. We’re ready to buy if the evidence improves, but we’re once again sitting with plenty of cash after some sales this week.

Cabot Trend Lines – Bullish
The market’s longer-term uptrend continues, with our Cabot Trend Lines remaining bullish—as of today, the S&P 500 (by 5%) and Nasdaq (by 7%) remained clearly about their respective 35-week lines, as they have for more than two years. At some point, of course, that will change, with a longer-term trading range or even a bear phase unfolding, but today the odds continue to favor higher prices in the months ahead.

Cabot Tides – Neutral
Our Cabot Tides are still neutral, but we are seeing some improvement—many of the bigger-cap indexes we watch (like the S&P 500, daily chart shown here) as well as a growth-oriented measure (like the equal-weight Nasdaq 100) recently notched new highs … though just as many are still stuck in the mud. The next few sessions will tell us a lot about the intermedaite-term trend.

Two-Second Indicator – Negative
The overall market has been hit or miss for a couple of months, and we’re again seeing that in our Two-Second Indicator, which after a few good weeks has turned sour, with the number of new lows expanding north of 40 in nine of the past 12 days. Given that the big-cap indexes were recently testing new highs, that makes the indicator negative and is another reason we’re comfortable holding a good-sized cash position right here.

The next Cabot Growth Investor issue will be published on March 6, 2025.

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