Cabot Growth Investor Issue: February 6, 2025

Resiliently Mixed

From the perspective of a student of the market, it’s hard not to be encouraged by the market during the past couple of weeks. Soon after our last issue, one of the leading groups in the market—AI infrastructure titles—suffered a meltdown after the DeepSeek revelations called into question future capex spending plans … but the market held firm after one bad day, and even that group has bounced back impressively (see more on the sector later in this issue).

Then came this Monday, when tariff threats against Canada and Mexico (quickly pulled back, for a while at least) and China (implemented as far as we can tell), caused another wave of selling … but, again, the market and growth stocks held firm. These two big headline-grabbing worries have also served to dent sentiment (the eight-week average of bulls and bears in the AAII survey reached new 15-month extremes), which is a good sign, too.

Overall, in fact, the nine-week (for growth stocks) consolidation has been pretty par for the course so far—which we take as a good thing, as a calm rest period wasn’t a guarantee given the humungous run-up in leaders late last year that brought with it plenty of euphoria.

So why are we still relatively cautious? Because, for all the encouraging factors and resiliency seen in the face of worrisome news and uncertainties, the primary evidence remains decidedly mixed. Our Cabot Tides, for one, are neutral, with just about every index stuck within seven-to-ten-week ranges; though our Two-Second Indicator, though is positive, as the broad market is hanging in there; yet the Aggression Index is broadly neutral (testing its 50-day line) after the latest wobbles; but then again, interest rates have faded just below intermediate-term support.

To be fair, “mixed” doesn’t mean “bearish”—among individual growth stocks that we own or are watching, we see more good than bad out there, including a bunch of stocks that look ready to run if they can get through earnings season in one piece. But for the here and now, there’s almost nothing running away on the upside, and most of the “action” has come from stocks bouncing off their lows; those at or near new highs usually run into some selling soon after.

Again, that doesn’t mean you should run for your storm cellar; tonight we’re actually making one small move on the buy side given our big cash position. But with a tricky, choppy, news-driven environment, we continue to favor staying relatively close to shore as we see whether earnings season can entice more big investors to cannonball back into the pool.

What to Do Now

We’ve been holding a good amount of cash during the entire market consolidation and we’re going to continue with that—however, with half the portfolio on the sideline, we will start a half-sized position in Duolingo (DUOL), which has a great story and setup, and has recently started to come alive. That will still leave us with around 45% in cash, which is cushion should the market fade but gives us lots of buying power if leaders emerge on earnings during the next couple of weeks. We’re also placing Palantir back on Buy.

Model Portfolio Update

While investors with no system or discipline will get crushed in downtrending markets, for those that do have a methodology, it’s often the trendless, sideways markets that do them in—there are endless temptations from stocks and sectors that start to move higher, but these moves are usually arrested in short order. Long story short, even experienced traders can get chewed up in range-bound environments.

That’s why we’ve been going very slowly in the Model Portfolio for the past couple of months—we’re not bearish or expecting lower prices, per se, but know that many stocks that look good or tempting today will stall out tomorrow. That doesn’t mean there’s no room for new buying given our large cash position, but any serious buying has to wait for a more well-defined uptrend in the major indexes and leading stocks.

Tonight, then, we’re going to start a position in Duolingo (DUOL), a volatile name with a great combination of story, numbers and a peppy chart, but still hang onto 45% cash as we wait for more stocks (and indexes) to let loose on the upside.

CURRENT RECOMMENDATIONS

AppLovin (APP)—One old trading principle is that, after a big run, the longer a stock can hold onto most of its gains, the greater the chance it will eventually extend higher again. That’s our thought (hope?) with APP—after a monstrous run, shares definitely had a chance to give up the ghost in December following a very sharp selloff, but the stock held its own and, in recent weeks, recovered about 70% of its decline. That said, we can’t conclude the stock is out of the woods yet, as (a) there’s plenty of resistance in the 380 to 410 area and (b) earnings are due next week (February 12); estimates call for sales to rise nearly 33% and earnings of $1.79 per share, but the outlook (including any revenue forecast related to its move into the e-commerce ad arena) will be vital. We’re happy to hang onto APP as long as it can hold up; we still think there’s a chance the firm’s AI-powered advertising engine can be applied to numerous sectors and drive business for much longer than expected—but we’re also open to the fact shares have already had their run and could top out for a while on any disappointing news. We wouldn’t argue with any sort of small move (buy or sell) ahead of the report, but having already taken partial profits a few times, we’re content to ride into earnings and see what comes. HOLD

Argenx (ARGX)—ARGX remains in a gradual uptrend, mostly holding its 25-day line as investors continue to discount a great 2025 and beyond—analysts currently see the bottom line lifting from $2.40 or so last year to $10.79 per share this year, with early 2026 estimates looking for another near-doubling of earnings, too, as Vyvgart penetrates both the gMG and CIDP indications while it advances its numerous trial programs. We continue to have nothing new to say about the stock—if we see a “real” change in character, we certainly would be up for adding some more shares, but given the market environment and the fact that ARGX’s advance has been going on for a few months, we’re not force-feeding extra money in here just for the sake of doing it. If you own some, continue to sit tight. HOLD A HALF

Duolingo (DUOL)— Duolingo looked done for last year when it fell 40% to new yearly lows in the summer, but the comeback from there was stunning and it’s finally set up a legitimate launching pad. The story is big and could be gigantic if the platform expands its reach—right now, Duolingo is the leading education app in the world with a focus on language learning. Most of that involves English, though Spanish, French, German, Japanese and many more are popular, too. Importantly, this isn’t a boring college course, but instead, the app focuses on being game-like, emphasizing fun, setting goals and sharing results (boosting engagement), which keeps people coming back. More recently, of course, have come AI-related enhancements, with one popular feature (for the highest paid subscription tier) being the ability to make a video call with an AI bot (disguised as a purple-haired teenager!) to practice real-life conversations and get feedback. All in all, the product works and people like it, and because of the firm’s freemium business model, most people who use Duolingo don’t pay anything, though it is supported by advertising; at the end of September, a whopping 113 million people used the app every month, with 37.2 million (up 54% from a year ago) using it daily. However, the real money is in paid subscriptions, which bring added features; right now, they make up a small fraction of total users (8.6 million) but the total is growing rapidly (up 47%) and driving sales (up 40% in Q3), earnings (49 cents per share up seven-fold from a year ago) and free cash flow (north of $1.15 per share, up 57%) significantly higher. The potential from language learning is huge as they convert more free users to paid, but even bigger could be the move into other educational categories—music and math offerings have been launched, and while they’ll take time to perfect and ramp, it’s not hard to imagine millions people logging on for those lessons down the road. As mentioned above, the stock had a very, very strong comeback from its huge correction, bolting to new highs and continuing northward until early December, when many growth stocks ran into selling. Despite the big run, though, shares have handled themselves very well during the past two months. As a heads up, DUOL is very volatile and does have earnings coming up in three weeks (February 27), so we’re going to buy a half-sized stake here (5% of the account) and use a loose loss limit in the 315 to 320 area to withstand any near-term wobbles. BUY A HALF

Flutter Entertainment (FLUT)—Investors have digested the fact that Q4 was likely a crummy one in terms of betting outcomes for big gambling sites like Flutter/FanDuel—the question is now really about whether that is changing in Q1 (the Super Bowl will have a lot to do with that; it looks like the Eagles and the over are attracting most of the public’s money) and, more importantly, how go the underlying trends in the business (customer acquisition pace and costs in both well-established and newer markets). So far, investors are taking a wait-and-see approach, with FLUT clearly off its lows (just under 250) but stuck mostly in the middle of its two-month consolidation. A break back toward the lows on big volume would be a red flag, but with the fundamentals here so bright (huge runway of growth even in markets that have been legalized for a while), we remain optimistic the next big move will be up. HOLD

Marvell Technology (MRVL)—We’ve been running Growth Investor for 18 years and can’t remember a quicker turnaround than we had with MRVL, which went from peppy leader to tripping our loss limit in a couple of days on the DeepSeek mini-crash. Thus, we followed our rules and cut the loss, which on our half position was around 1% of equity—not fun but nothing that sets us back in a big way. That said, we’re still watching MRVL and others (like Credo (CRDO), which is back on our watch list) given the recent snapback—as we write later in this issue, the group could easily need more time to consolidate, but if that doesn’t happen, it could be a powerful sign that the DeepSeek dip was a huge shakeout on the way to higher prices. For now, though, we’ve sold MRVL and are holding the cash while keeping an eye on the group from here. SOLD

On Holding (ONON)—ONON staged a nice-looking move to new highs last week after a multi-week base, but Deckers’ (DECK) poorly received quarterly report on Friday followed by new tariff fears (extra sensitive given On’s Swiss roots) on Monday brought it back into its prior range—another sign of the choppy market environment. It’s not ideal, but at day’s end the stock is hanging around its 50-day line and it certainly seems like shares want to go higher if the market can get out of its own way. Of course, more peers getting dinged on earnings (like DECK) could call into question whether something is up with the group, but right here the odds continue to favor higher prices down the road. BUY

Palantir (PLTR)—As each quarter goes by, it looks like Palantir is becoming the Microsoft of the AI age—a software provider whose platform becomes a technology foundation for tons of big organizations and government agencies. In Q4, business ramped well past Wall Street expectations, with sales up 36% (the sixth straight quarter of acceleration) and earnings up 75%, but the sub-metrics were even more impressive, with U.S. commercial (up 64%) and government (up 45%) revenue powering ahead; U.S. commercial remaining deal value up 99% from a year ago and 47% (!) from the prior quarter. Even the customer count went wild (up 43%), and free cash flow of around 22 cents per share was much higher than net income (14 cents) and represented a ridiculous 63% margin. The 2025 outlook (U.S. commercial revenue up 54%!) was also great, but possibly just as important (at least in terms of investor perception) is something management talked about a while ago—that large language models will become commoditized (which may be happening quickly, as DeepSeek showed), meaning that more and more, the value will be in platforms like Palantir’s that can actually take the model and apply it securely to a firm’s data hoard to get actionable insights. The stock staged another strong gap up on the report, zooming to new highs; given the strength and the clear breakout, we’re restoring our Buy rating, but given the selling on strength seen in many names out there, you can consider keeping it small and/or aiming for dips. Still, there’s no doubt the main trend is up and, fundamentally, Palantir is rare merchandise. BUY

Reddit (RDDT)—While MRVL fell on its face soon after our buy, RDDT has done well (a reflection of the hit-or-miss market environment), pushing to new highs and clearing round-number resistance near 200, albeit on modest volume. Earnings are due next week (February 12), which will probably make or break the potential for an advance from here; analysts are looking for sales to rise 62% and earnings of 25 cents per share, though user metrics are always key with social media firms. There’s definitely the fundamental juice here to sustain a big run, especially when you consider “only” 422 mutual funds owned shares at year’s end—that was up from 160 nine months before but obviously could double or triple in short order if more believe that Reddit could become the next big mass-market online property. We’re optimistic, but right now we’re sitting tight with our half-sized stake and seeing what earnings brings. If you want in, keep it small this close to the report. BUY A HALF

Shift4 Payments (FOUR)—FOUR remains perched just above its prior (early December) highs, having survived Monday’s tariff-induced shakeout, and looks ready to keep rising if the market can shape up a bit. All the pieces are in place here fundamentally, with a wave of new restaurant customers (using the firm’s SkyTab point-of-sale systems) and continued momentum in the hospitality, stadium and sports sectors likely to lead to many solid years of payment volume, sales and cash flow growth. The Q4 report is due February 18, as is an Investor Day that will probably feature a multi-year outlook for the business and a discussion of Shift4’s succession plans should the CEO head to NASA. As always, if something changes, then we’ll change our view, but there’s little doubt the underlying story is sound, and with the stock having “only’ kicked off a new advance six months ago (following a three-year dead period), we’re optimistic higher prices are ahead. We’ll stay on Buy, but with earnings less than two weeks away, consider keeping any new buy smaller than normal. BUY

Watch List

• Credo Tech (CRDO 80): AI infrastructure stocks still have plenty of proving to do—but if the group continues to quickly shake off the DeepSeek crash, CRDO is one that’s poised to run. See more on CRDO and the AI group later in this issue.
• DoorDash (DASH 196): DASH has moved out to new highs after its tight rest period, though earnings (due February 11) will be key. If it can get through that in one piece, we’d be interested in starting a position.
• Dutch Bros. (BROS 68): BROS remains in a solid uptrend despite a mixed group where stodgy outfits seem to be doing better than growth-ier titles. Earnings are due February 19.
• GE Aerospace (GE 206): It’s not going to be the fastest horse, but GE has always had a long-term, reliable free cash flow growth story, and after a multi-month sideways period, shares have broken out. See more below.
• Guardant Health (GH 46): GH is somewhat speculative, but the underlying business has been sound and now its Shield and Reveal tests could goose results. Plus, unlike many names, shares are holding their recent breakout nicely.
• Rubrik (RBRK 75): RBRK is now eight weeks into a nice consolidation—we think it wants to go higher if the market allows it as big investors continue to build positions.
• Shopify (SHOP 118): SHOP staged a huge, early-stage breakout in November on nearly 10 times average volume—a technical clue that usually leads to a sustained run. That move was interrupted by the growth stock tediousness since December, but now shares are testing new highs ahead of earnings next week (February 11).

Other Stocks of Interest

Eli Lilly (LLY 871)—Eli Lilly needs no introduction, as it’s one of the largest drug makers out there and has obviously been in the news a lot during the past two years thanks to its diabetes and weight loss offering—dubbed Mounjaro (for Type 2 diabetes) and Zepbound (for weight loss), the drug is exceeding even the lofty expectations out there. (It’s the same drug, just marketed under two different names for two different indications.) Indeed, in the just-reported Q4, sales of those two labels totaled a whopping $5.4 billion and are expected to continue growing rapidly from there. Obviously, Lilly isn’t just a one-tricky pony, with drugs like Jayprica (for types of leukemia; peak annual sales likely north of $3 billion), Verzenio (for certain types of breast cancer; sales of nearly $1.6 billion in Q4, up 36%) and Kisunla (early-stage Alzheimer’s; possibly a $2 billion in peak sales within a few years) all helping the cause, but there’s little doubt Mounjaro and Zepbound will be the big drivers in the quarters to come (thanks in part to launches outside the U.S. this year). Indeed, for 2025, the firm’s early outlook is for the overall top-line to lift 32% and for earnings to boom nearly 80% as margins continue to head higher. Just as intriguing as all of that, though, is the stock’s big-picture action—LLY already had a huge, huge run over a few years as investors discounted great results, but the stock effectively topped out last July, double topped in September and proceeded to drop south of its prior lows and live below its long-term 40-week moving average for about three months (no net progress for a full year) … which seems like a pretty solid “re-set” to us, wearing out or scaring out most weak hands. Now LLY is starting to come back, down just 10% from its highs and reacting well to its Q4 report yesterday. We’re not anticipating another many-fold advance like the past couple of years, but we think a bit more constructive action would tell you the larger-, longer-term uptrend is reasserting itself.

GE Aerospace (GE 206)—After a great year for growth stocks that was very trendy, history tells us this year is likely to be choppier … which we’ve already experienced in the first five weeks of 2025 While we’ll take it as it comes, we are spending some time looking for a few more well-seasoned growth outfits as buy candidates; ideally, when the market kicks into gear, we can have a portfolio that’s balanced between shooting stars and more well-situated players. That’s one reason why GE Aerospace is back on our radar: It’s one of the biggest makers of jet engines for commercial and military uses (three of four commercial passengers fly on planes using its engines; commercial makes up about 70% of business here), and while its size (north of $40 billion of revenues this year!) means it’s not going to grow at lightning-fast rates, the business lends itself to steady growth for three reasons. First, there’s simply not that much competition in the industry, with the top few jet engine makers owning nearly all of the global market; second, unless something dramatic happens (like when the pandemic slashed travel), these buying trends from air carriers looking to expand and upgrade their fleets tend to last many years; and third, the recurring revenue (from follow-on services) here is huge, as each engine sold brings in a couple of decades of service revenue that can tally three times as much as the initial sale. Thus, big investors are comfortable holding and building big positions, knowing that sales, earnings and free cash flow should glide higher over time—and that’s exactly what the company sees coming, too. In Q4, sales growth picked up to 14% while free cash flow lifted 21%, and more importantly, new orders boomed 46%, which extends the runway of business going ahead, both this year (low-double-digit sales, 20%-ish earnings growth) and beyond (low/mid-double-digit expansion in free cash flow annually through 2028); a modest dividend and a $7 billion share buyback this year should also help the cause. As for the stock, it took about seven months off after a huge, persistent run into the spring of last year, but GE has come alive after the calendar flipped, with the Q4 report causing a rush to new highs. Again, it won’t be your fastest horse, but it’s on our watch list and could fit well in a portfolio of faster movers.

Klaviyo (KVYO 48)—One of the big challenges now that everything and everyone has gone digital is how to take advantage of that in your marketing efforts—if you’re hunting for new customers or looking to get former customers to come back, you want to be able to use all channels (text, email, notifications, etc.) to deliver personalized, relevant content, ads, coupons and the like to your targeted audience. That said, it’s not easy, with many firms having disjointed campaigns, showing products you’re not interested in or offers that aren’t timely. There are a few firms that are tackling this challenge, and Klavio looks like an emerging leader in the field: The firm’s data/marketing platform coordinates across channels, offers deep segmentation and, of course, has AI-powered insights—and it’s also easy to use for non-techies (one-click customizable templates, AI-powered content creation, etc.) and has clearly measurable results, so clients know their returns (which are usually big). The system works, and the numbers show it, with 157,000 total clients (up 16% from a year ago), including more than 2,600 that pay at least $50,000 per year (up 54%), which has driven 30%-plus revenue growth and solid earnings and free cash flow margins (15% in Q3). From here, it’s a matter of improving and expanding the platform (one new data offering provides far more detailed analysis down to an individual product level), going overseas (about one-third of revenue is international) and even moving into new verticals outside of e-commerce (possibly by integrating into systems from Toast or Square). Shares came public in mid-2023 and could use some more sponsorship (270 funds owned shares at the end of 2024, though that was up from 176 nine months before) but have been acting well—KVYO didn’t really get moving until last August, and while there have been a few potholes with the market here and there, shares have been hitting higher highs and higher lows ever since. Earnings are due February 19.

Eggs, Tennis Balls and AI Stocks

Just after our last issue was sent, the AI infrastructure area was hit with the DeepSeek news that sent shockwaves through the sector—in a nutshell, the performance of the app was so good and (supposedly) was put together for so relatively cheaply that it called into question the massive capex plans in place (only growing in 2025) by huge hyperscaler companies like Meta, Microsoft, Amazon and more.

The ensuing tumble knocked us out of our one AI infrastructure name (MRVL, which we had just started a position in) and caused the group to suffer a mini-crash—and while most names have bounced, the area is still among the most popular questions we’re getting. Right now, we have two main thoughts.

First, huge air pockets after big, high-profile advances (whether it’s the market as a whole or individual stocks and sectors) usually take time to heal … though, if they don’t, it can be a very powerful sign, basically telling you the dip was a “clear the decks” shakeout that paved the way for a fresh, sustained upmove. The obvious example of the latter would be the 2020 pandemic crash for the entire market—seven or eight times out of 10 that sort of meltdown would require at least a few weeks of bottom-building, so when the market simply went straight up after the bottom it was a sign something big was up.

That leads us into our second thought: Instead of trying to game out the exact truth of DeepSeek’s performance, capex spending and the like, it’s best to just keep an eye on a variety of names in the group, especially as earnings season is revving up. Simply put, those that snap back the strongest and on volume (like tennis balls) have likely seen their lows, while those that have trouble getting off their knees (splattered on the ground like eggs) could be in trouble.

At this time, one of those eggs for now is one of the most popular names in the market of the past two years: Nvidia (NVDA). The company continues to sport rapid sales and earnings growth, and analysts see more of the same ahead (Wall Street expects earnings to rise another 51% this year), but the stock never really could decisively break above its June high in recent months, stalled out near the 150 area and has since fallen sharply—closing last week south of its long-term 40-week line, with a modest bounce so far. We’re not bearish on NVDA, and maybe it eventually rights the ship, but it’s certainly not acting like a leader should right now.

On the flip side, you have a name like Celestica (CLS), which is a contract manufacturer that has been an AI play given so much of the increased demand involves building many of the parts needed for power and data center connectivity. Shares were acting well before getting crushed during the DeepSeek selloff, but have stormed all the way back after earnings (sales up 19%, earnings up 44%) topped estimates and the top brass raised guidance for the full year. It’s wild right now, but the strength (including four huge-volume buying days) looks real.

Another tennis ball is Credo Tech (CRDO), the connectivity specialist that leads the way in active electrical cables and some other product lines; growth has been humming for the past three quarters, and the top brass forecast a wild acceleration in December (analysts see triple-digit sales growth each of the next four quarters). Of course, it looked cooked last Monday, but it’s since recouped 80% of its decline (on a closing basis), including five straight days of above-average volume right after the meltdown.

Of course, the infrastructure group as a whole isn’t out of the woods, so there’s nothing that says there won’t be some more wobbles in the days and weeks ahead (Amazon’s quarterly report tonight will likely have some read-through to the group due to its capex plans). Plus, there are other non-infrastructure AI plays (like Palantir, in which we continue to have a position in the Model Portfolio) that might be worth your attention.

But what we’re focused on is how the group acts from here—the odds still favor more time will be needed to repair the damage and sift through what is or isn’t real regarding DeepSeek. But if big investors quickly conclude all is well, names like CLS, CRDO and any others that roar ahead could be just starting fresh intermediate-term advances.

Cabot Market Timing Indicators

Depending on what stock, sector or index you’re looking at, the market is about eight to 10 weeks into a sideways consolidation, which is the main reason we’ve been taking little action—in a choppy environment, less is usually more unless you’re trading every few days. We’re OK with a little new buying (as we’re doing tonight), but still favor a relatively cautious stance for now.

Cabot Trend Lines – Bullish
While the market has been chopping around for weeks, our Cabot Trend Lines tell us the longer-term view is still bullish—while the spreads are gradually narrowing, both the S&P 500 (by 5.5%) and Nasdaq (by 7%) are still solidly above their respective 35-week lines. That can always change, of course, but we’ve learned not to anticipate things; right now, the odds still favor the market resolving this trading range on the upside.

Cabot Tides – Neutral
On an intermediate-term basis, though, the trend is clearly sideways: Our Cabot Tides are neutral here, as all five indexes we track (including the Nasdaq, daily chart shown here) are stuck within multi-week ranges, and the same goes for most growth measures we track. To be fair, we would say things are slightly more bullish than bearish, and a couple of good days could change things, but for now we remain stuck in a trading range.

Two-Second Indicator – Positive
The Two-Second Indicator remains broadly positive here, which is an encouraging sign given the choppiness in the market—while the number of new lows has perked up for a couple of days this week, that comes after a long stretch of sub-40 readings. We’ll see how it goes, but so far we like the broad market’s resilience.

The next Cabot Growth Investor issue will be published on February 20, 2025.

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