Cabot Growth Investor Issue: November 27, 2024

Most Bullish Thing a Market Can Do Is Go Up

First and foremost, all of us at Cabot wish you and your family a happy and restful Thanksgiving weekend—in the market at least, we all have a lot to be thankful for. Our offices will be closed on Friday, but we’ll be back at it Monday, December 2.

It’s been a volatile but overall profitable two weeks since our last issue, though as has been the case since the market’s August mini-crash, the evidence can be split into two buckets. The first is the top-down evidence—meaning the action of the major indexes—which has continued to be positive, but not without some teeth-grinding action along the way. For instance, the post-election rally (which included the breakouts of some key indexes) mostly went up in smoke the following week, only to see the buyers reassert themselves after that. All told, our key market timing indicators (including the longer- and intermediate-term trends) are positive, which is what counts.

But the real “tells” continue to come from leading growth stocks, which started to show strength right after the aforementioned August meltdown, ran up big in September, held up well as the election approached, and many have shown jaw-dropping action in recent weeks. And these names continue to act well, with the occasional wobble (like we saw today) failing to damage the overall trend. As Carlton Lutts (Cabot’s late, great founder) used to say, “There’s nothing more bullish a market can do than go up,” and we’re seeing that from the indexes and from leaders.

About the only thing to be worried about these days is that … not many people are worried about anything. One of the oldest near-term sentiment measures, the Investors Intelligence survey, has bullish advisors above 60%, which after a good-sized run in the market is often a yellow flag. We’re starting to see some speculative and meme-type names run up, too, and there’s little doubt that many stocks are very extended to the upside.

Of course, these are secondary measures, but they do tell us that the market could throw some discomfort our way; maybe we’re seeing some of that begin today, as big-cap tech is selling off. As has been the case for a few weeks, we’re keeping our feet on the ground and managing our collection of stocks, including taking some partial profits in strong but extended names, and when putting money to work, aiming to do so in fresher titles that big investors are still building positions in.

What to Do Now

Thus, we’re bullish because most of the evidence is bullish, though now’s probably not the time to be buying willy-nilly. In the Model Portfolio, we took partial profits in Palantir (PLTR) last week, but we also averaged up in Samsara (IOT), and tonight, we’re going to fill out our position in the ProShares Russell 2000 Fund (UWM), as small caps look to be at a solid risk/reward position. We’re also placing On Holding (ONON) back on Buy. That will leave us with around 13% in cash.

Model Portfolio Update

After a tough post-election pullback, last week was another huge one for leading growth stocks, with many names we own and watch racing to new highs before hesitating a bit in recent days. The big question is whether we’re getting close to some sort of broad pullback in growth stocks (“led” by the weak chip sector); there have been a few minor signs of distribution here and there, but no big red flags, so we’re holding on to our top performers while taking the occasional partial profit, and we could trim back on another winner or two going ahead.

When it comes to our cash and new buying, at this point, we’re more focused on being pulled into the right situations at opportune levels. Last week, that had us averaging up on Samsara, and tonight, that has us filling out our position in ProShares Russell 2000 Fund (UWM), which acts well. That will leave us with 13% cash, which we’re comfortable holding here as we see how the market acts as we approach year-end.

CURRENT RECOMMENDATIONS

AppLovin (APP)—APP has hit a bit of resistance of late, with sellers appearing above 340 a couple of times, and today saw the stock give up some ground—but even so, shares are still in good shape overall, trading well north of the levels it achieved after its big earnings gap. The company has seen a bevy of analyst love, with many significantly hiking price targets (one was up to 400) as earnings estimates do the same (now up to $5.82 per share in 2025, with free cash flow likely being even larger). That said, while it’s nice to see, such target prices don’t affect our thinking at all, as analysts tend to follow a stock higher (not the other way around)—we’d rather just focus on the stock itself, which remains very extended but continues to act well. If you really want to nibble at a small position here or on dips, we wouldn’t shout you down, as APP is the #1 glamour name out there—but officially we’ll stay on Hold, thinking the risk/reward of any sizable new position up here is iffy. HOLD

Argenx (ARGX)—ARGX has shaken off the politics-induced selloff that took down the entire biotech group two weeks ago, which is a good sign—but the stock still hasn’t quite been able to get going, with gyrations occurring just over 600 and with the relative performance (RP) line (not shown here) still meandering sideways. We think there’s a chance biotech names could assert themselves going forward (see a bit more on that later in this issue), and if so, this stock is poised to be a leader as Vyvgart’s sales skyrocket (earnings estimates are up to nearly $9.50 per share for next year). Until then, we’ll follow our plan, which right now means leaving our half-sized stake on Hold and keeping a reasonable stop in place (in the 525 to 530 range) … but being ready to average up should the stock show a bit more strength. HOLD A HALF

Axon Enterprises (AXON)—AXON saw some high-volume distribution on Monday, and that might lead to the long-awaited rest or correction—that said, one day of selling after such a huge move is not the end of the world, and shares remain in overall good shape. There’s a lot of excitement about the firm’s recent AI-powered products that dramatically boost the efficiency of its other offerings, with capabilities that include transcribing body-worn video footage in minutes, reducing redaction time and improving accuracy, better search capabilities within Evidence.com, quicker document prep and even better intelligence for incident response, all of which should keep sales, EBITDA and recurring revenue growth in high gear. Back to the stock, we’re not ruling out taking a few chips off the table (partial profits), especially if the early-week selling reappears, but the stock remains under control here and acts like it wants to go higher. We’ll stay on Buy, but we advise keeping new positions on the small side and/or aiming for dips. BUY

Cava Group (CAVA)—CAVA has steadied itself after a wild earnings reversal and some follow-on selling afterwards, still holding north of its 50-day line ... though also sitting south of 150 resistance. The stock has been a great winner for us and we’re certainly as bullish as ever on the underlying story, with the experienced top brass likely to make Cava one of the next big casual restaurant chains—but given the big run that brought the stock out of trend to the upside (often an intermediate-term yellow flag), we’re comfortable having pared back, holding a small-ish stake, and seeing how the stock handles itself in the weeks ahead. HOLD

Flutter Entertainment (FLUT)—FLUT remains in great shape, basking in the glow of its Q3 report that gapped the stock out of a big launching pad—and shares have continued higher since, bolstered by some positive analyst commentary. Indeed, one investment house sees Flutter doubling its earnings over the next three years as the U.S. business (FanDuel) ramps and share buybacks kick in; the firm announced at its September Investor Day it expects to buy back something like $5 billion in shares over the next three to four years (current market cap is around $49 billion), and the initial $350 million tranche should be executed by the end of Q1 2025. Of course, buybacks are nice, but it’s the underlying growth trends here that are attracting big investors, with FanDuel seeing great customer (23%) and revenue (up 46%) growth among states that it first entered before 2022, which is a sure sign the market is far from saturated. Like most stocks, we can’t rule out a near-term wobble, but given that the stock just broke out, we’re OK taking a position here or on dips of a few points. BUY

On Holding (ONON)—ONON has been volatile, with a lot of movement but no net progress from late September through mid-November—but the latest rush higher looks promising, with shares moving to new price and RP peaks. There are bound to be some macro uncertainties here when it comes to tariffs in the U.S. and possibly elsewhere, but the underlying business continues to crank ahead at a 30%-plus clip, with even faster growth in Asia and with accelerating direct-to-consumer growth as well. While not a traditional breakout, the recent move higher has the feel of a change in character after a couple of choppy months—we’ll go back to Buy. BUY

Palantir (PLTR)—We decided to take partial profits in PLTR last week, as the stock began to wobble after a monstrous run; shares have since steadied themselves, which is good, though we’ll keep our remaining position rated Hold for now. One analyst hiked his target on the stock this week, thinking that U.S. commercial business (driven by AI of course) should grow at a mid-30% rate for each of the next three years, while another analyst sees the firm’s AI platforms as the key to digitizing many government activities. If you’ve been following along with us, sit tight with your remaining position. HOLD

ProShares Russell 2000 Fund (UWM)—UWM’s breakout right after the election ran into a wall, with this leveraged long fund slipping back down to its breakout level—but the rush higher in recent days has been encouraging, with modest new highs being notched. Could small caps again have the rug pulled out from under them? Of course, anything is possible, and if the “old” tech names (chip stocks, etc.) drag down the Nasdaq, it’s likely other areas could get pinched, too. But we see a good risk/reward situation in UWM, with a clear breakout and successful retest, and with support near the 50-day line. We’ll fill out our position here, buying another half-sized stake (5% of the portfolio) and use a stop for the combined position in the 43 to 44 area. BUY ANOTHER HALF

Samsara (IOT)—After its big earnings-induced move in September, IOT effectively hacked around for nearly two months, with a couple of tests of the 50-day line, before ratcheting to new price and RP peaks; the chart is eerily similar to On Holding’s, for whatever that’s worth (not much). We filled out our position last week, thinking the overall risk/reward was solid—we have a loss limit on the combined position near the early-November low (call it 45 to 46) while the upside could be big as the story plays out. Of course, first we have to get through earnings, which are due next Thursday (December 5)—we can’t rule anything out, so if the reaction is very poor, we might have to cut bait, but we’re obviously thinking optimistically that Samsara can see higher prices as big investors (745 funds owned shares at the end of September, up from 379 nine months before) continue to build stakes. The recent dip isn’t pleasant but looks normal given the prior move up; we’re OK buying some here if you’re not yet in. BUY

Shift4 Payments (FOUR)—Pretty much any sort of financial stock has been doing well, with FOUR racing to new highs of late. To be fair, part of that was helped along by the stock’s addition to the S&P 400 MidCap Index, but that usually doesn’t result in a rush of buying—more likely it was just renewed accumulation after what ended up being a normal post-earnings wobble. It’s good to see some of Shift4’s close peers also doing well (Toast (TOST) looks powerful; see more later in this issue), raising the odds of a group move. With the stock extended above its moving averages (50-day line is down near 95), another short-term hiccup is certainly possible, but there’s no doubt the path of least resistance here remains up. BUY

Watch List

• Astera Labs (ALAB 99): ALAB is a wild child but remains strong as it’s in the midst of a hypergrowth phase as its connectivity solutions are integrated into all sorts of AI systems. After popping to new highs it’s beginning to pull in.
• DoorDash (DASH 179): In a world where growth stocks are whipping around every day, DASH remains a liquid leader that continues to crank ahead calmly and steadily. We continue to think the first visit to the 10-week line (now near 160 but rising steadily) should provide a good opportunity.
• Reddit (RDDT 137): RDDT has finally hit a bit of a pothole due to a reported sale of closely held shares. It’s a start, but we’d like to see a couple more weeks of rest to set up a higher-odds entry.
• Rubrik (RBRK 50): RBRK has earnings due next Thursday (December 5), so we’re not going to jump the gun ahead of that—but the stock continues to act great, holding near new highs. We think the firm’s new cybersecurity story (which revolves around resilience as well as prevention) could be big.
• Shopify (SHOP 112)—SHOP’s has held onto all of its gigantic post-earnings move the past couple of weeks, which is a good sign big investors are building positions.

Other Stocks of Interest

Clearwater Analytics (CWAN 31)—Clearwater Analytics is a name we wrote about more than three months ago and have kept a distant eye on in recent months—and we’re writing about it again as the stock’s latest earnings reaction has popped it out of a huge IPO base. As for the story, it’s a down-the-food-chain Bull Market play: Clearwater is a leading cloud software provider to the investment management sector, where clients are being buried by more complex reporting, risk and accounting requirements all while the types of assets owned (such as various alternative and other “Level 3” assets that aren’t priced every day—in various currencies, too) is broadening too. To deal with it, many firms have patched together a collection of legacy systems, but that’s inefficient, and Clearwater’s offering dramatically simplifies accounting and analytics by automatically ingesting, aggregating and reconciling all data and having one central accounting hub for all asset classes, for risk management and performance metrics. It’s been a hit for obvious reasons, with the company claiming an 80% win rate in competitive bids during the past four years, with a 99% (!) gross revenue retention rate and a 14% same-customer revenue growth rate. Clearwater thinks the addressable market is $11 billion and growing, and it’s steadily gaining share, with sales lifting in the 20% range, give or take (Q3 was up 22%), recurring revenue growing a bit faster (up 26%) and with big margins, too (EBITDA was up 31% with a margin of 33%). From here, it’s simply a matter of the top brass continuing to innovate and add offerings to its platform, which will both entice cross-sell opportunities and attract new clients. CWAN broke out in August, just when the market fell apart, and had a solid, steady advance from there. The Q3 report caused shares to spike, and while CWAN has been volatile (there was a secondary offering of closely held shares), it’s holding close to all-time closing highs. It’s a solid story.

Warby Parker (WRBY 22)—Warby Parker is a leading name in the eyewear field, with designer-looking prescription glasses at reasonable prices, and yet has just a tiny morsel of the overall market (1% or so of the $66 billion U.S. market, which itself is growing steadily). The firm has been around for a while but just came public in 2021 … just in time for the market top and, combined with a breakeven-ish bottom line, that resulted in a huge decline for the stock and elongated bottoming effort. But now the stock is in gear, and while growth isn’t rapid, the top brass has made the right moves in terms of marketing and customer acquisition, and on the growth side of things there’s an attractive underlying cookie-cutter story with excellent store economics: At the end of Q3, Warby had 269 locations after opening 32 new shops in the first nine months of the year, with those open more than 12 months showing “strong year-over-year growth” and with new locations continuing to pay back the initial investment in 20 months, on average, which is very solid. Meanwhile, the store expansion and marketing efforts have both the customer count (2.4 million in Q3, up 5.6%) and revenue per customer (up 7.5%) heading higher—and probably most impressive is that once you’re a Warby customer, you tend to stay that way, with a revenue retention rate of 100% when looking out four years. Of course, this is still eyewear, so the growth isn’t wild—sales have risen 13% the past two quarters and low/mid-teens growth is likely going forward, though earnings and EBITDA are lifting off at much faster clips, which has helped the stock to break out: After etching a 31% deep base over 20 weeks, WRBY got going a month ago and has been smoke up a chimney since, reaching two-and-a-half-year price highs. To be fair, the stock is still a bit thinly traded for our tastes, but we think the name could be “growing up” as more institutions (318 funds owned shares at the end of September) build positions.

Toast (TOST 43)—We’re happily riding Shift4 Payments higher and that certainly seems like a leader—but it also looks like a sector move (financials as a whole) and group move (especially new-age peers like Toast) is underway as investors anticipate accelerating bottom line growth ahead. Toast is a name we’ve liked for a while—we actually bought a half position earlier this year but got shaken out in the early summer—and it looks like perception has changed as the firm’s excellent underlying story is now meeting with rapidly rising margins to give the firm an emerging blue chip-sort of feel. Toast is best known as the hands-down new-age cloud leader in payments solutions for restaurants, a gigantic market of 875,000 locations in the U.S. and another 230,000 in Canada, Britain and Ireland—though, really, the story here goes far beyond point-of-sale solutions and order processing, with its platform helping clients with scheduling, tip management, email and text marketing and reservations, invoicing, payroll processing and a ton more. Toast currently has more than doubled its market share in the U.S. during the past three years but has “only” 14% of the market (and many out there are still using inefficient legacy systems, which should be easy targets). It’s also moving into other food and beverage retailers (think convenience stores and the like), which is a huge 220,000-location opportunity. In Q3, the top-line metrics were all to the good—sales up 26% and annualized recurring revenue up 28%—but what caught the market’s eye was the huge beat on the bottom line, with EBITDA of $113 million up more than three-fold from a year ago and leading management to significantly hike estimates for the rest of this year, which adds credibility to its longer-term forecast released back in May. Toast thinks its EBITDA margin can reach 30%-plus within a couple of years and 40% in the long run, up from 26% in 2024; analysts see EBITDA lifting 45% or so each of the next two years. The stock had numerous failures in the mid-to-upper 20s, but TOST finally conquered that area in October and then mushroomed this month, with three straight huge-volume buying weeks after the Q3 report. We’re probably not going to add a second payments firm to the Model Portfolio, but there’s no question TOST looks great.

A Collection of Market Thoughts as we Roll Toward 2025

As volatility has picked up, so too has the number of questions I’ve been getting on a daily basis—often about individual stocks, but also about all things investments, portfolio management, sectors and looking into 2025. So we thought this holiday week issue would be a good time to roll through a brief Q&A so you’re up on our latest thoughts.

Q: Part of the reason you booked partial profits in AppLovin (APP) was because it was a huge-sized position—so does it make sense to repeatedly sell some on the way up to keep the position size “in check?”

A: So, you could do this if you want to pay close attention to things. Say you’re “normal” position size is 10%—you could set up a program where, if it gets to 15%, you trim back to 12% or something similar, to rake in some profits and keep risk in check. However, we’re not huge fans of that for two reasons: First, you’ll be repeatedly selling chunks of what could be your best stock, and second, usually portfolio management moves work best when paired with actual evidence (stock breaks key support or shows short-term climactic action, etc.). Taking partial profits is more of an art than science, but we usually want to hold most of our best performers.

Q: What are your latest thoughts on Nvidia (NVDA)?

A: So, chip stocks in general and NVDA, in particular, have been acting sluggish for months—which, to us, isn’t a surprise, given that these names were “later stage” on the charts, meaning they had big runs over an extended (15 months or so) period of time. When looking at the overall sector, it actually breached some longer-term (40-week/200-day) moving averages today!

That leads us to NVDA, which to be fair, does look better than the group—but there’s been next to no buying volume for months (see chart) and, while not shown here, the relative performance (RP) line has yet to eclipse its June peak. Of course, the long-term trend is up, but our biggest takeaway on NVDA is simply that it’s not a leader during the current upmove, with shares slipping below the 10-week line today. Obviously, the evidence could change, and eventually it might—but right now, the stock seems waterlogged at best.

Q: Since we’re heading into year-end, do you have any stocks or sectors you think could emerge as we move toward 2025?

A: As always, we’ll take it as it comes, but one scenario that’s been in the back of my mind is this: After two big years for the big-cap indexes, mostly driven by some mega-cap names (at least until this August/September), we wouldn’t be shocked if the returns for, say, the S&P 500 were somewhat muted next year … but leaders and the broad market do well, which would be a continuation of what we’re seeing here.

Outside of growth stocks, we think one way to play that is via small-caps—hence our position in a leveraged long fund (UWM) in the Model Portfolio. But we’re also keeping an eye on two other areas, one growth and one cyclical. The first is biotech, which admittedly, we’ve been watching forever … and the group recently hit a huge pothole on regulatory fears with the new administration. Even so, some names in the group (including Argenx and Exelixis (EXEL), shown here) look great, and we’re wondering if the recent dip was the last shakeout before a meaningful upmove.

The other sector is oil and gas, which is obviously as cyclical as they come and has been underperforming for a couple of years as prices have skidded—but if investor perception changes, we wouldn’t be surprised if many cyclical areas do well next year. We continue to watch TechnipFMC (FTI), which has a fantastic deep-sea growth story and its stock remains very impressive, hitting new highs while the oil services sector has made no net progress since the summer of 2022!

Q: With so many growth stocks so extended to the upside, what are you watching near term that might suggest the party could end, even for a few weeks?

A: This one is straightforward: We think our Aggression Index (which compares the growth-y Nasdaq to the defensive consumer staples fund) is key in the days and weeks ahead. Indeed, we’re looking at it on a daily basis—today, the Index has dipped toward its 50-day line for the first time in a few months, which is normal, though much more weakness would be iffy when it comes to growth stocks. Granted, some of this is being affected by chip stocks (mentioned above), but even so, we’d like to see the Index find support soon.

Cabot Market Timing Indicators

The top-down evidence has been volatile since the election, but in terms of the major trends, nothing has changed—they’ve remained up, and when combined with the solid action among leading stocks (and even some recent improvement from our Two-Second Indicator), keeps us bullish. With that said, things are a bit euphoric and some names have wobbled, so we’re managing our current crop of stocks and looking for opportunities as they arise.

Cabot Trend Lines – Bullish
Our Cabot Trend Lines are still singing the same bullish tune, with the post-election volatility not affecting the longer-term trend—as of this morning, the S&P 500 (by 9%) and Nasdaq (by 8%) continued to hold nicely above their respective 35-week lines. There’s no question the near-term could see more volatility, but the odds continue to favor higher prices in the months ahead.

Cabot Tides – Bullish
Our Cabot Tides saw some indexes test key areas during the selloff two weeks ago, but all held up—and all of them (including the NYSE Composite) are currently positive, trading above their lower (50-day lines), which keeps the intermediate-term trend pointed up. To be fair, there’s not a ton of daylight at this point, so a 2% or 3% retreat could get hairy, but we always go with what we see, and right now both of the market’s key trends are pointed up.

Two-Second Indicator – Neutral
The Two-Second Indicator has improved the past three days (likely four including today)—ideally, this means the post-election wave of plus-40 readings may have been due to the crosscurrents seen (the up and down action, especially in the broad market). Officially, we’ll keep our rating at Neutral here, but the action next week will be key.

The next Cabot Growth Investor issue will be published on December 12, 2024.

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