Cabot Growth Investor Issue: March 20, 2025

Patience Required

After a punishing three-week decline that saw the major indexes fall 10% (S&P 500) to 14% (Nasdaq), the market has stabilized a bit in recent days, allowing investors to catch their breath even as eye-catching headlines hit the wires from a variety of angles (politics, interest rates, tariffs, peace negotiations) every day.

Halting the rapid decline is obviously a first step, and encouragingly, we have quickly seen some secondary-type positives emerge of late. The first comes from our Two-Second Indicator, which actually recorded a near-term positive divergence during the decline (the peak in new lows came seven trading days ahead of the S&P’s low), and it’s shown solid action during this bounce phase, with new lows drying up fairly quickly, which is a positive sign.

Then there’s sentiment, where we’re seeing some legitimate green flags: The Investors Intelligence survey, which has a solid 60-year history, has seen two straight weeks of more bears than bulls, something that often occurs near a low (and sometimes the low) of a downturn. And finally, let’s not forget that Treasury rates are now trending lower, which should eventually be a tailwind for stocks.

Those are some rays of light, but when looking at the primary evidence (trends of the major indexes and action of potential leading growth stocks), nothing has really changed: Our Cabot Tides and Aggression Index remain clearly negative, and after two-plus years on the bullish side of the fence, our Cabot Trend Lines have turned negative, a sign that even the longer-term trend isn’t in the market’s favor anymore. Formerly leading growth stocks are in the same spot as the overall market, trading well beneath moving averages.

Bigger picture, a market re-set (a tedious correction that sees a major shift in leadership, with fresher names and sectors getting going) is quite common after a couple of good years in the market, so what we’ve seen so far doesn’t necessarily portend doom. As always, we’re open to anything, including a V-shaped recovery, and we’re keeping our eyes on the main prize, which will be owning fresh winners once this nasty correction finishes up.

Right now, though, the fact is that our key market timing indicators are negative and most old leadership has cracked. That the intermediate-term trends of most everything are so clearly down tells us that the odds favor more patience will be required before we get to the next lucrative, sustained uptrend.

What to Do Now

Remain in a defensive stance while we wait for some definitive buying pressures to emerge. If we do see some strong upside follow-through in the near term, we could do a little nibbling in a resilient growth stock or two; happily, there are a decent number resisting the decline so far. But we’ll stand pat tonight, staying mostly (80%-plus cash position) on the sideline as we look to see how this bounce develops.

Model Portfolio Update

The market has shown a few rays of light during the past week or so, with the indexes stabilizing, the Two-Second Indicator showing improvement (both from a near-term positive divergence and some drying up of new lows this week) and with sentiment fading, too. Ideally, then, the market is beginning to repair the damage and embark on a bottoming process after the mini-crash of the past month.

What does that mean in terms of fresh buying or selling? Probably not much—given our huge cash position, we could probe a couple resilient names if this bounce shows some power, but the fact remains that the intermediate- to longer-term evidence is still pointed down, so we aren’t anxious to throw more money into the blender

Put it together and we’re mostly content to bide our time on the sideline and build a watch list of resilient names while the market attempts to etch a low area. We’ll be on the horn if we do have any changes (possibly swapping a name or two we currently have for some stronger half-sized stakes), but tonight, we’ll continue to stand pat with our 80%-plus cash hoard.

CURRENT RECOMMENDATIONS

Argenx (ARGX)—ARGX got hit during the last few days of the recent market plunge, but it’s shown solid tennis ball-like action since, bouncing off its 40-week line and nearly tagging its 50-day line (near its prior trading range) before hesitating. (Last week’s bounce came on its heaviest weekly volume since August, too, which is obviously a good show of support.) There was some trial data released this week from a potential competitor in the autoimmune field; the general view was that it was nothing to write home about, but either way, ARGX didn’t react to the report much. Big picture, there’s not much doubt that the firm’s blockbuster Vyvgart drug will continue to grow nicely for years to come thanks to already-approved indications (gMG and CIDP in many countries; ITP in Japan), with likely FDA approvals for pre-filled syringes and autoinjectors (self-dosing) in the U.S. (in April) and three other countries (later this year), which should boost uptake and entice more prescribers to pull the trigger. Ideally, ARGX is readying itself for another leg up, and if it can truly get going whenever the market comes out of its correction, we’ll likely aim to add to our position. But there’s a long way between here and there—for now, we advise sitting tight. HOLD A HALF

Flutter Entertainment (FLUT)—FLUT cascaded into a panicky low on March 10, though (a) that low came three trading days before the low in the S&P 500 and Dow, and (b) shares found buying near their 200-day line, which is a logical support area. One of the firm’s international subsidiaries recently put in one of the top two bids to help manage the Italian lottery system (decision should come within a month), and closer to home, all eyes (starting today) will be on March Madness, which is one of FanDuel’s busier times, of course. Still, while the stabilization of late (similar to the major indexes) has given the stock a little breathing room, FLUT hasn’t been able to bounce much yet; we’d like to see that change, with further strength probably indicating a bottoming process is underway. If the stock can’t get going, we could cut bait (and possibly replace it with something more resilient if the market shows some life), but at this point, we think it’s best to hold your small position and give FLUT a bit more rope. HOLD

On Holding (ONON)—ONON is another stock where all indications (including relatively recent commentary from management earlier this month) are that business remains in good shape—the top brass released solid Q1 and 2025 guidance on its conference call on March 4 (currency-neutral sales growth of at least 27% this year, with continued EBITDA margin expansion), partly due to the near-term order book looking bullish for its various offerings. That said, the stock continues to languish a hair below its 200-day line, though it has warded off the sellers in recent days like most growth stocks. We do think a good couple of days here could change ONON’s vibe in a big way, as the stock does have a history of going out of favor for a few weeks and then coming back to life, but as always, we have to see it happen. Similar to FLUT, we advise hanging on to your small-ish position here, but if the stock doesn’t at least bounce soon, we could let the rest of our shares go and look for greener pastures when the market turns healthy. HOLD

Palantir (PLTR)—While they were the hardest hit stocks as the correction unfolded, we did notice some of the technology highfliers—including Palantir—begin finding support back in late February, with the 80 level generally bringing in some support over the past three weeks. (The weekly chart shows some tight closes, which is also a constructive sign.) Fundamentally, the firm hosted its annual AI conference with many current clients giving presentations and with the firm announcing a few more deals and expansions (no financial impact posted); there has also been some hubbub about a potential Defense Department contract, though again, no real details have been announced. Overall, we continue to think the story here is one-of-a-kind and, unlike many AI infrastructure (chip/networking) players, shouldn’t be overly subject to the whims of the volatile CapEx cycle—and the stock has taken a first step by starting to etch a low area. We’ll continue to hold our remaining position, though as with most names we own and are watching, we want to see follow-on buying arrive in the near future. HOLD

Watch List

• Antero Resources (AR 41), EQT Corp (EQT 54) or Range Resources (RRC 40): Commodity stocks will never be the core of the Model Portfolio, but natural gas stocks are set up well as prices spike and cash flow is set to boom, with the need for more electricty likely to keep demand buoyant. See more later in this issue.
• Axsome Therapeutics (AXSM 126): AXSM saw some slippage during the prior three weeks, but the damage was more than reasonable given its January-February strength. While unprofitable, sales growth is expected to remain north of 60% both this year and next, while the bottom line should reach the black in early 2026.
• Dutch Bros (BROS 66): We can’t say BROS is currently near the top of our watch list given its sharp decline of late. But we still don’t see the recent dip as long-term abnormal (unlike, say, CAVA, which was cut in half in one month’s time) and think the growth story is intact. Let’s see if shares can begin to round out a fresh launching pad.
• GE Aerospace (GE 204): It doesn’t make many headlines, but GE continues to hang in there (new relative performance highs this week) as the solid multi-year growth outlook for new jet engines keeps big investors interested.
• GeneDX (WGS 96): WGS is a leader in genome and exome testing, a booming business that’s can identify many rare diseases earlier than traditional testing. See more later in this issue.
• Rubrik (RBRK 70): RBRK got hit hard with every other growth stock during the plunge, but last week’s earnings-induced rebound was eye-opening, as this new cybersecurity story drives huge growth. See more below.
• TG Therapeutics (TGTX 42): TGTX remains a beacon of strength, tagging new highs despite the market mess of the past month. The firm is tied to just one drug (Briumvi), but it looks like a great one, with huge improvements for patients with relapsing multiple sclerosis.

Other Stocks of Interest

Rubrik (RBRK 70)—It might be a bit early to see the market’s true tennis balls (the stocks that bounce back the strongest after getting hit with the market since mid-February), but with the market finding support starting late last week, that process has started—and in pole position for future leadership is Rubrik, a name we first dug into last fall and remain enthusiastic about. Rubrik is a cybersecurity play, but its emphasis is different than traditional protection-based players: While protection is obviously part of the firm’s platform, it’s also been built from the ground up for what’s being called cyber resilience, which combines protection as well as cyber recovery efforts to ensure businesses can very quickly get back up and running after a breach, often within hours, which dramatically caps the cost and downside of any attacks. (A big part of this theme is that, despite advances in protection, cyberattacks are becoming more frequent, so many CTOs are becoming resigned to some breaches happening here or there.) Rubrik says it offers the fastest cyber recovery thanks to what it dubs its AI-powered, zero-trust architecture, while also offering clients a single system that can manage all of their data and security controls across all workloads and cloud environments (big for clients that want to move away from managing dozens of point solutions). Importantly, Rubrik is really differentiated in the industry, with many protection players like CrowdStike, Palo Alto Networks and Okta partnering with this company, as opposed to competing directly with them. All in all, Rubrik keeps data safe, allows users to spot risks and threats sooner and recover data quickly and securely if and when a breach occurs. The idea has been a hit and the numbers are superb, with revenue growth accelerating (up 35%, 43% and 47% the past three quarters), with current clients buying more (same-customer revenue growth rate of 20%-plus) and with free cash flow in the black and growing. As for the stock, it “only” got going in October, so we don’t consider it late stage, and while it did get clonked (on low weekly volume) with growth stocks, last week’s dramatic recovery on big volume thanks to earnings is an eye-opener; the tight action this week is also constructive. We like it, and RBRK is near the top of our watch list.

Alibaba (BABA 137) or iShares China (FXI 37)—One trend that’s been going on forever is the outperformance by the U.S. compared to stocks in the rest of the world, and that goes double for Chinese equities, where interest vanished due mistrust from investors (both of some accounting, but also fears of the government stepping in and changing the laws overnight) and economic problems in that country. But now we’re seeing a move into international names, with Chinese titles looking the best—and there’s more than just relative strength here, too, as the Chinese government is going ahead with big stimulus measures (everything from looser monetary controls to housing reforms to job hiring incentives) to goose what’s been a sluggish post-Covid recovery. Given the shenanigans in the sector, our favorite two ways to play what could be a fresh Chinese economic boom are big, liquid instruments: Alibaba (BABA) is one of the country’s e-commerce, cloud and payment giants, with its tentacles spreading all over the world; growth has been slow of late (single-digit top- and bottom-line) but is expected to pick up a bit this year, and many think estimates are too conservative, all while the valuation (17x trailing earnings) is attractive. The second idea is simply the most liquid Chinese ETF—the iShares China Fund (FXI) has Alibaba as its largest position but also owns many other blue-chip players in that country, including JD.com, Tencent, Boyd, Bank of China and more. Both BABA and FXI have similar charts, with a big spike last September (when the stimulus measures were initially announced), a deep consolidation afterwards and, since mid-January, a sharp uptrend. It’s not a classic growth stock situation, of course, but this looks like a potential fresh uptrend after years in the doghouse; we’d guess the next pullback or shakeout will provide an opportunity.

GeneDX (WGS 96)—Most stocks that have had giant runs during the past year have fallen on hard times, often flashing big-picture abnormal action—but that makes those that are holding stick out. That’s what initially caught our eye with GeneDX, a medical testing outfit that looks to have something special: The firm is a leader in genome (complete set of DNA) and exome (protein-coding regions of the DNA) testing, mostly for people (especially kids) with rare diseases. According to the company, kids with rare diseases are often sent on a testing odyssey with three misdiagnoses and more than a dozen ineffective tests. GeneDX’s offerings can help, as its database of 750,000-plus genomes and exomes and hundreds of disease-gene relationships can help better identify things like epilepsy, autism and developmental delays. The company is also aiming to make a bigger move into neonatal intensive care (NICU) units, where it believes a quarter of patients likely have a genetic disorder but less than 5% are tested; in the outpatient area, the top brass thinks it’s just scratching the surface, with a move into testing for cerebral palsy (launched this month) and hearing loss likely to ramp this year. GeneDX does have some legacy testing businesses, but genome and exome testing is what’s driving the growth (the firm says 80% of clinicians that order genome or exome testing order from GeneDX): Overall sales grew 67% in Q4, with genome/exome testing making up 38% of all test results (up from 27% a year ago), all while margins boomed and profits (60 cents per share) obliterated estimates. (Analysts see the bottom line totaling 89 cents this year, though that could prove hugely conservative.) As mentioned earlier, WGS had a monstrous run last year and remains crazy-volatile (it moves 8% or so each day), but after a plunge into early February, shares gapped up on the Q4 report and are still holding relatively firm, with some tight weekly closes of late. It’s a hot potato, but the longer WGS can remain resilient, the greater the chance it will see upside once the market correction finishes up.

Big Picture, a Market Re-Set Every Couple of Years Is Normal

One of the strengths of our system is that we avoid predictions of what’s going to happen—we do like to run through scenarios of what’s possible so we’re ready for anything, but we always take it as it comes. That’s the main thrust of our market timing indicators and it’s one of the main reasons we’re able to ride most of any big bull markets while avoiding prolonged downtrends.

In 2008, we certainly didn’t forecast a global financial crisis; we simply followed the action of the market and leading stocks, which is why we were heavy in cash all year and 90% on the sideline when Lehman went under that September. It was a similar story in 2022: You didn’t need a set of secret black box indicators to know growth stocks had topped, so by following the trends, we averaged something like 60% cash that year as leaders imploded. And today we’ll again simply follow the evidence on a week-to-week basis; today, the sellers clearly remain in control of most stocks, sectors and indexes, which is why we’re mostly on the sideline.

That said, we’re not just trend followers but also students of the market, and from a big-picture point of view, we don’t look at what’s happening these days as some hugely unusual event. Yes, some of the leaders of the past couple of years have likely topped out, but when looking at the market as a whole, a tedious re-set (where extended leaders top out, a sharp correction unfolds and fresh leadership sets up) is pretty normal to see every couple of years.

For instance, following the generational low in March 2009, the market had a great couple of rebound-type years—but 2011 saw stocks top out for a few months in the first half of the year and then plunge in the second half, with the Nasdaq falling as much as 20% from its highs.

Then, following the excellent 2013 and solid 2014 run, 2015 saw yet another summer plunge, with a second dip to retest lows in early 2016 … with the Nasdaq again losing right around 20% from its peak

Similarly, the big run from the 2016 presidential election into the middle of 2018 eventually gave way to a plunge in the fourth quarter of that year, with the Nasdaq quickly imploding 24% from high to low.

Of course, during each correction, there was scary news that supposedly caused the drop: in 2011 it was the threat of a debt default in the U.S. and a double-dip recession in Europe; 2015’s decline was kicked off by some currency shenanigans and a market plunge in China; and 2018 ‘s plunge was mostly due to the beginning of the initial U.S.-China trade spate and a tightening Fed. But after each downturn, the market headed higher once more, often with newer names that were being accumulated by big investors leading the way higher.

This year, of course, the news has focused on tariffs that could be put up against many countries—but we think the reasons for the declines are less important than the fact the market had enjoyed a great two-year run, sentiment was elevated and numerous stocks had risen many-fold, discounting lots of good news.

Of course, none of this guarantees this year’s downturn is going to mimic those three examples; again, we’re not going to predict exactly what’s to come. But our main point is that, after a couple of good years from the major indexes and a big run in leading growth stocks, a sharp market re-set isn’t all that unusual—in fact, it’s normal and, despite the worrisome news, will lay the groundwork for the next set of big winners,

The upshot: Play defense for now, but keep your head up and your watch list up to date for whenever the buyers return.

Non-Growth Idea: Natural Gas Stocks Are Set Up Well

If you’ve been following us for any length of time, you know we’re not huge on commodity-type names, whose fortunes can shift rapidly as things outside their control (commodity prices) rise or fall. That said, in recent years, some commodity areas—mostly energy—have been following a new playbook, keeping CapEx in check, boosting production only marginally even if prices are healthy and collecting huge cash flow to pay off debt (if need be), pay dividends (regular or special) and buy back shares. That was our reasoning behind owning Devon Energy (DVN) back in 2021 and 2022, which ended up being a nice winner for us.

Looking ahead there are a few reasons why, after a two-year period of low prices and cost cuts, we’re thinking it could be time for natural gas stocks to make their move following the same playbook. First, of course, are gas prices themselves, which averaged about $2.60 per unit in 2023 and 2024, about half of the average of the prior two years. But now natural gas is in an uptrend; while very volatile, it’s averaged around $4 so far this year.

Second comes the fundamentals. Macro-wise, demand is rising after the dry spell, with electricity demands (from AI) expected to elevate in a big way. And for individual names—we’ll use EQT Corp. (EQT) as an example, though there are a few—most have at least a couple decades of drilling inventory that has very low breakeven rates ($2.19 gas breakeven for EQT!) with very little debt (no maturities until 2029), which means free cash flow and earnings (estimates call for $3.27 this year) should soar if current gas prices hold.

And third are the charts: EQT (and most peers) got going last fall and approached their old highs from the prior boom in 2022 and then spent the last couple of months etching jagged double-bottom launching pads, with two good-sized shakeouts during that time—followed by a strong snapback since. They’re set up well for a sustained run if the market can hold together. WATCH

Cabot Market Timing Indicators

The market has finally found some near-term support, and we have seen some rays of light from some secondary measures and our own Two-Second Indicator. Even so, both of the market’s main trends are now down, as our Cabot Trend Lines flashed a red light last week, and most individual stocks are in the same boat, which means we’ll have to see some real, definitive buying before putting a large amount of cash to work.

Cabot Trend Lines – Negative
Our Cabot Trend Lines turned bullish in January 2023, soon after the Nasdaq got off its bear market lows, but that long green light came to an end last week when both the S&P 500 and Nasdaq closed their second straight weeks south of their respective 35-week moving averages. That doesn’t affect our current stance—we were already clearly defensive—and it doesn’t predict months of lower prices, either. But it reinforces the view that the current environment is unhealthy and that the buyers need to step up for more than a few days before we put any meaningful money back to work.

Cabot Tides – Negative
Our Cabot Tides are also negative, as all five indexes (including the S&P 600 SmallCap, shown here) remain clearly south of their moving averages, telling us the intermediate-term trend is pointed down. Ideally, the stabilization process has begun in recent days, though given that a fresh buy signal effectively comes when the indexes rally to a five-week high (above a rising 25-day moving average), more patience will be needed for the next uptrend to get underway.

Two-Second Indicator – Negative
Our Two-Second Indicator is still negative, but the near-term action has definitely been encouraging: First, the number of new lows during the latest slide peaked seven trading days before the recent low (at 289 on March 4), and as the indexes have bounced, the number of new lows has dried up very nicely, with three readings south of 40 (if you include today’s action, which isn’t in the chart below)). That’s not enough to conclude the correction is over, but it’s an initial indication the broad market is finding support.

The next Cabot Growth Investor issue will be published on April 3, 2025.

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