Cabot Growth Investor Issue: October 17, 2024

Bulls Start to Flex

In our last issue we wrote about how, despite a bevy of headline news, the top-down evidence really hadn’t changed much—the major indexes were positive but not powerful, with many areas improving but still battling with their prior highs from the summer or (in the case of many growth stocks) back in the spring.

While it’s not a complete sea change, the last two weeks have definitely shown an improvement on all fronts. First, when looking at the major indexes, we’ve seen one of the rangebound indexes (mid-caps) stretch to new highs, while the other two (small caps, Nasdaq) are banging on the door of fresh breakouts. (As we’ve written about before, small caps are also near the top of a multi-year rest—and could be enticing on their own. See more later in this issue.)

Second, even among growth measures, we’re now seeing things like the equal-weight Nasdaq 100 and IBD Mutual Fund Index test or nose to new highs, while our Aggression Index has turned positive again on an intermediate-term basis as defensive stocks have cooled off after a straight-up couple of months.

And third and most important are individual stocks: Really, beginning in August after the brief, sharp selling storm, leading growth titles began to change character, zooming higher on earnings and often kissing new high ground by month’s end. September definitely brought some wobbles and tricky trading, but during the past couple of week many strong names (including many of our own) have continued higher while other names emerged from consolidations. Simply put, buyers are flexing their muscle, which is all to the good.

Now, we’re also not leaving our brains at the door in the short-term, as the election is less than three weeks away (we don’t trade on that, but some hedging/positioning is to be expected), Treasury rates continue to perk up since the Fed cut rates (the intermediate-term downtrend in rates has definitely been snapped) and near-term sentiment is certainly elevated according to a variety of measures, be it the number of new highs or weekly surveys. Throw in the fact that earnings season is just ramping up for growth titles and we’re still picking our stocks and buy points carefully.

What to Do Now

That said, make no mistake: We’re encouraged and optimistic, and big picture, think many names are in the midst of their second legs up (the first being November of last year through March or so this year). For now, though, we continue to hold what we have while looking to gradually add exposure. Tonight, we’re going to start a half position in Robinhood (HOOD), which we think has great upside if the Bull Market and easier money trends continue. Our cash position will now be around 20%, give or take.

Model Portfolio Update

It’s been a good couple of weeks since the last issue, with many already-strong growth stocks rallying further, though we are seeing the occasional wobble and bout of rotation (even within growth, as some AI names perk up while other areas mark time) as time has gone on. We’re glad we own some real leaders and are putting a bit more money to work this week, following our step-by-step script.

As we wrote above, though, with earnings season getting underway and some uncertainties upcoming, we wouldn’t be surprised if some names that have had good runs since August see some selling (we’ve seen that early on as reports roll in) while some of the fresher breakouts catch a bid. No predictions, per se, but just keeping an open mind that big investors could shake the treein some extended names.

Last week, we filled out our position in Flutter (FLUT), which wobbled on some news immediately but is holding up. Tonight, we’ll start a half position in Robinhood (HOOD), which we took a swing at earlier this year, but now, after a big base-building effort, it looks like the leading glamour Bull Market stock. That will leave us with around 20% in cash.

CURRENT RECOMMENDATIONS

AppLovin (APP)—APP finally received a bit of “bad news” this week, as an analyst downgraded shares (while raising the price target) because he believes a lot of good news has likely been discounted. Whether it has or not is anyone’s guess, but so far shares have held up just fine despite obviously remaining extended to the upside (50-day line near 110). The firm will report earnings after the close on November 6, which will be key; as we wrote in the intro above, it’s certainly possible some selling occurs before or after the report as big investors hedge or take a few chips off the table in names that have had good runs. However, while we’ll never rule out making a move if need be, we’re more focused on the bigger picture—that sales and (especially) earnings and free cash flow could go bananas as the firm’s AI-powered advertising engine penetrates the e-commerce field next year. With shares acting very well, we’ll stay on Buy, but keeping new positions small and/or aiming for dips makes the most sense. BUY

Argenx (ARGX)—We moved ARGX to Hold last week simply because the stock dipped toward the lower end of its range and a bit below its 50-day line. Happily, shares have bounced since and are again near the top of their very tight range—frankly, if we didn’t own any, the stock would be on our watch list, as the very flat trading during the past few weeks after a big run is usually a good sign. (ARGX and other biotechs could also benefit if there’s more of a move into the broader market, as that sector often trends differently than tech names.) Like many stocks, the Q3 report will be key—the firm is set to release results on Halloween—but earnings or no, we’re continuing to play it by the book, with a break much below 500 likely causing us to get out, while a decisive move above the 550 to 560 area probably have us averaging up. For now, we’re simply hanging on to our half-sized stake. HOLD A HALF

Axon Enterprises (AXON)—Like many growth stocks, AXON has finally hesitated this week after a big run (basically from 350 in early September to 440 last week); shares have earned the right to back off some if they want (50-day line is just south of 390), but the trend is firmly up. The company’s latest blog post has some interesting nuggets, including the fact that its Evidence cloud offering now stores two billion evidence files and 400 petabytes of data, the equivalent of 100 million 4K movies. Moreover, Axon’s Justice offering plays into that boom in data by centralizing case files and providing one platform to organize and view all evidence; it saves huge money for lawyer organizations and DA departments that don’t have to hire as many video technicians. (The AI-powered Draft One offering, which automates police reports, is another time-saving boon.) We’ll stay on Buy, but ideally, new buyers can get in on dips of 10 or 20 points. Earnings are likely due in early November. BUY

Cava Group (CAVA)—CAVA has definitely lost upside momentum since its huge earnings move in August—but as we’ve written of late, the action certainly hasn’t been bad, with shares making a modest higher high in September and again last week, albeit on tame volume. Interestingly, the few weeks of calmer, slightly higher trading has allowed the moving averages to start catching up (50-day near 118). To be fair, there has been some so-so performance among faster-growing restaurant peers (Wingstop and Sweetgreen are both having issues getting above prior highs), and Wingstop and Chipotle report their quarters in two weeks, which could have an impact on the sector as a whole. (Cava’s own report likely isn’t out until closer to Thanksgiving.) Still, the longer CAVA can hold up here, the greater the odds it aims to extend its gains. We’ll remain on Hold, but another few days of tight trading could present a better entry point. HOLD

Flutter Entertainment (FLUT)—FLUT had a normal pullback following a run before and right after its Investor Day, and we decided to average up a week ago given that action. Unfortunately, on the afternoon of the next day (last Friday), reports came out that the U.K. may look to hike taxes on sports betting, which caused the stock to fall sharply late in the day … though it found support near its 50-day line and has bounced decently this week. At least one analyst came to the stock’s defense, saying fears and/or the impact of such a tax move is overblown (the top brass certainly wasn’t ignorant of the tax risk when announcing their long-term outlook a couple of weeks before), and we don’t think the underlying story has changed—though, admittedly, there’s a chance investor perception may stay down on fears other countries (or U.S. states) jump on the tax-hike bandwagon. We think we’ll get an answer within a couple of weeks—if we see a lot of follow-on selling in the stock, we’ll have to conclude the issue is going to be on big investors’ minds for a while, which could cause us to change our stance. For now, though, the evidence remains mostly positive, with last week looking like a shakeout to support. Thus, we’ll stay on Buy, though we’ll also stay flexible, willing to cut bait if the stock falls into the 210 area. BUY

On Holding (ONON)—ONON continues to futz around the 50 level, sneaking below its 25-day line in recent days but not really seeing any damaging action; so far, it looks like a normal rest after a solid August/September post-earnings run. The firm has been all quiet on the news and conference front since early September, so there’s been no hints as to how Nike’s continued struggles may be playing into its favor, as seems likely. Of course, we’re not complacent here—a drop into the 45 or 46 area could be iffy—but overall, the stock’s post-breakout run (from 43 to 52, ballpark) was solid, and this recent weakness is acceptable. Hold on if you own some, and if not, we’re OK taking a position here. BUY

Palantir (PLTR)—PLTR shook out a bit with other AI stocks this week (ASML’s earnings miss whacked chip stocks and a lot of tech names), but the damage has been limited, with little volume and the stock still holding north of even its 25-day line (now near 39). Like many things out there, things have been relatively quiet here news-wise, with the rush after earnings (August) and some conferences and announcements (September) in the rearview mirror. Thus, earnings, which are due November 4, will likely be the next big event; revenue growth has been accelerating here (13%, 17%, 20%, 21%, 27%) as the firm’s AI platforms have gotten a foothold in the (mostly U.S.) commercial market, and another quarter of that (official expectations are for 26% top-line growth) along with booming earnings would be a good sign. Right here, our advice is similar to that of other strong stocks—we’re staying on Buy and think the stock can move higher from here, though near term, it’s more of a coin flip as to whether we see some pre-earnings hesitation. BUY

Robinhood (HOOD)—As we often say, in the market, timing is everything, and while HOOD had all of the characteristics of a winner back in the spring/early summer when we owned shares, but the timing wasn’t right, with the market’s narrow rally leading to the summer correction and, for much of the market, a few more weeks of base-building. Now, though, we’re going to take another swing at it: While tons of Bull Market stocks act well (which, by the way, is a good sign for the overall market), we think Robinhood has as much potential as any should the risk-on mentality generally continue, and as big-picture sentiment (more “men/women-on-the-street” getting back into trading and the markets) improves, egged on by easier money. We dove into many of the numbers in the last issue so we won’t do that here, but suffice it to say that business here has been picking up in a big way this year, and that could accelerate if all goes well. Of course, that’s a big “if,” and HOOD is definitely a volatile stock, moving nearly 4% per day from high to low. Plus, earnings are out soon (October 30, about two weeks), which could cause some volatility. Thus, we’ll start with a half sized stake (5% of the account) and use an initial loss limit in the 22 to 22.5 area. BUY A HALF

Shift4 Payments (FOUR)—FOUR doesn’t get a lot of headlines given the many giants in the payments space, but it’s definitely a leader both technically (tagging three-year highs this week) and fundamentally, where gross payment volume, sales and earnings have been growing rapidly for years, and that’s before the full effects of many recent hospitality and entertainment (stadiums, ticketing, etc.) deals go into effect. Basically, the draw here is that Shift4 is still among the top few players in attracting new restaurant clients (previously, this was by far its core market) but is the lead dog in the newer areas mentioned above (as well as things like non-profit organizations), and the combination of the two is creating a stream of big growth and big projections for the years ahead. Round-number resistance at the century market could cause some hesitation, but FOUR looks to us like it “just” broke out near 85 in late September from a big up-and-down consolidation, so we’re optimistic the best is yet to come. BUY

Watch List

• DoorDash (DASH 151): DASH continues to act very well, kissing new recovery highs today. We’d note that others in the broad group (like Uber and Maplebear, which owns Instacart) are also perking up. Earnings are due October 30.
• Freshpet (FRPT 140): FRPT doesn’t get many headlines—which we like, especially as the stock quietly sits near new price and RP highs. Earnings are likely out in early November.
• ProShares Ultra Russell 2000 Fund (UWM 45): The summertime small-cap boomlet didn’t work, but that area of the market is again set up just shy of near-term and multi-year highs. See more later in this issue.
• Rubrik (RBRK 39): RBRK has a very interesting cybersecurity story that should have years of growth ahead. See more below.
• Samsara (IOT 49): After three big-volume weeks of buying that moved IOT to new price and relative performance (RP) peaks, shares have effectively hacked around near round-number resistance at 50 for three weeks. The story remains as good as ever.
  

Other Stocks of Interest

Mercado Libre (MELI 2067)—OK, let me get this out of the way first: We know that many of your will never touch a stock as high priced as MELI—north of $2,000!—but we’re writing about it now because, if you ignore that one fact (which, at day’s end, really isn’t that meaningful, especially to the big investors that drive the market), the story, numbers and chart are all pristine. Mercado Libre is the leading e-commerce and fintech player in Latin America; Mexico, Argentina and Brazil are the biggest markets, and all together it operates in areas that have north of 500 million people and $5 trillion of GDP. On the e-commerce side, it offers everything you’d think of, including online auctions and direct sales, plus shipping, fulfillment, payment and credit services, along with an advertising business for its merchants (a recent big move into video ads has big promise). On the fintech side is Mercado Pago, which reminds us a lot of PayPal a decade ago, with payment services, of course, but also remunerated accounts (providing immediate interest), banking services (it’s aiming to be the biggest digital bank in Mexico) and credit card offerings (1.6 million new cards issued in Q2 alone). Most important, just about every aspect of the business is firing on all cylinders: Not only are sales (up 36% and 42% the past two quarters) and earnings (up 71% and 103%) soaring, but an endless string of sub-metrics are just as impressive: Unique buyers on the e-commerce platform rose 19% in Q2 (fastest growth since 2021), while items sold were up 29%, and over on the fintech side of things, active users lifted 37% and assets under management boomed 86%. The bottom line is that, no matter where you look, growth is huge and is expected to continue (analysts see U.S. dollar earnings per share up 93% this year and another 34% in 2025), and impressively, north of 3,000 mutual funds own shares ($105 billion market cap), so this is no speculative outfit. As for the stock, it built a picture-perfect base from February through July, then broke out and enjoyed a nice run before some downs and ups of late. If you’re game, it looks like a nice risk-reward situation near the 50-day line, though a tight-ish stop (percentage-wise) makes sense, too. Earnings are likely out in early November.

Insulet (PODD 229)—We’ve always kept a distant eye on diabetes-related stocks because, unfortunately, it’s a big growth industry. That said, the group has been so-so at best during the past couple of years; Dexcom, which has long been a leader, completely imploded in July, for instance, while Insulet itself had a rough second half of 2023 (down from a peak of 340 in May of that year)—but now the stock is shaping up while the story remains enticing. Insulet is one of the leaders in the insulin pump sector thanks to its Omnipod pump, which has an estimated 425,000 users, including 250,000 or so using its latest version (Omnipod 5), which has no needles or tubes, is disposable, has many payment options (i.e., not solely dependent on certain insurance) and has shown great clinical outcomes. The big potential here comes from the facts that, first, so many diabetics don’t use pumps, and second, that the firm is getting approval and moving into new insulin indications. Right now, only 40% of U.S. type 1 and 20% of international type 1 diabetics use pumps at all, and when it comes to type 2, it’s 5% or less—though Omnipod recently launched its type 2 pump in the U.S. following August approval, so that could be big. All told, Insulet thinks its addressable market is something like 14 million people now, so if the top brass continues to innovate and pull the right marketing levers, there’s no reason growth—eight straight years of 20% revenue growth, with solid profitability, too—won’t continue for a long time. PODD has built a big base since last December, but has shown signs of a change in character recently, rallying nicely on solid volume in September to 12-month highs … and trading very tightly for the past month or so. There is some old overhead to chew through (from 18 to 24 months ago), but it’s a solid setup here. Earnings are out November 7.

Rubrik (RBRK 39)—Here’s a recent IPO with a unique cybersecurity story: For years, the focus has been on preventing cyber attacks for good reason, but despite huge advancements in technology, cyber attacks are only increasing—and, maybe more important, often fail at providing recovery from such attacks. Rubrik sees a massive opportunity in combining the two functions, developing what it calls a zero-trust data security platform, where it assumes IT infrastructure will be breached and thus uses its cloud offering to combine all sorts of data points (user ID, application lineage and context, etc.) from all different applications, and then adds in plenty of AI to authenticate everything. The result is that a firm’s data is always available (regardless of cyber attacks, bad faith insiders or operational disruptions), remediated (impacted data sets are recovered quickly without infecting everything else) and is constantly monitored (leading to fewer breaches in the first place). Because Rubrik focuses on data, its offering can be used by just about every firm out there, and demand is often linked to data and application growth, which consistently expands. Also interesting is it’s not a direct competitor to the big players like CrowdStrike, Palo Alto Networks and the like, instead seeing its offering integrated into those platforms. Growth here has been rapid and at scale—in the quarter ending in July, sales were up 35% to a healthy $205 million, annualized recurring revenue boomed 40%, while six-figure customers were up 35%. To be fair, earnings and free cash flow are still in the red, but we think the firm’s offering is early in its adoption phase. RBRK came public in April and has basically built one long, flat-ish consolidation between 28 and 40, with the recent action seeing shares attacking the high end of the range (very similar to what we’re seeing across the growth space). Interestingly, it appears the lock-up phase (where closely-held shares can’t be sold) has expired, and those sales have only served to increase liquidity ($80 million per day). It’ll probably be a hot potato, but we think RBRK can do very well if it breaks out.

“Re-Sets” in AI Names Leading to Fresh Setups

Onto Innovation (ONTO)

A lot of times many months into a bull phase you’ll see a name that has great numbers, a big outlook, an excellent story and a generally strong stock … though, at the same time, it’s been uptrending for a long time (over a year), which makes it more vulnerable to some sort of “re-set”—which is a fancy way of saying a sharp correction that shakes out most weak hands.

We don’t have an exact definition of a “re-set” correction, but you’ll usually see the stock dive below its long-term 40-week line for at least a short time; shares will fall 35% or more off their highs; and at the lows, the stock will be no higher than it was many months before. You sort of know it when you see it on the chart.

We have seen that in the AI space of late, especially when it comes to infrastructure titles: The overall AI growth story there is still intact, of course, with years of increasing demand for next-generation chips, networking and other equipment likely. But most names in that theme got going in the spring of 2023 and had big runs during that time, which left them extended time-wise—and led to some big shakeouts in August and follow-on selling last month.

That leads us to Onto Innovation (ONTO), a little-known chip equipment firm based here in Massachusetts that’s long done a good business in various metrology, defect inspection and advanced semiconductor packaging—though, as with most chip equipment firms, business has been up and down (mostly up but with slow times every couple of year) as it rides the chip sector’s demand trends.

However, AI is obviously a huge boost to the entire industry, where, essentially, more advanced and powerful chips require more complex and exacting inspection and packaging, and Onto seems to have something special with its Dragonfly platform, which is seeing booming demand as it looks like one of the best systems to perform these functions on new AI chips, though its other systems are also benefitting from the overall move toward more complex, high-bandwidth chips as well.

After a four-quarter shrinking trend (partly due to some China-related hiccups), Onto’s sales (up 15% and 27%) and earnings (up 28% and 67%) have turned up nicely the past two quarters, and analysts see the bottom line up 40% this year and another 30% next, both of which are very likely conservative.

Back to the stock, the original breakout was back in May 2023, and shares nearly tripled over the following year—and then came the re-set, with shares stalling out for a while before nosediving as much as 39%, dipping below the 40-week line and, at the lows, shares were no higher than they were 10 months before. The recovery from there hasn’t been smooth, but ONTO did get back to within 6% of its prior high … before this week’s selloff in the sector dented the stock due to ASML accidentally releasing a dud of a Q3 report a day earlier than expected!

So why write about ONTO now? First, because the stock has found some support and this week’s dip hasn’t destroyed the overall consolidation—but more important is that Onto’s own earnings report is coming on Halloween, and a positive reaction could make this week’s dip look like a last-minute shakeout before a fresh advance gets underway. WATCH

Bigger picture, between ONTO and some other AI names, it’s possible some of the sharp corrections and sloppy action in recent months has re-set their long-term advances, setting up fresher opportunities ahead.

Are Small Caps Finally Ready to Get Going (For Real this Time)?

Back in July, we wrote about the thrust higher that was being seen in the broad market—which marked the start of the rotation out of tech stocks. Of course, we also said we had seen the rug get pulled out from potential small-cap liftoffs many times, so we kept our buying in that area small … and then got out when the entire market keeled over in late July and early August. Obviously, the Russell 2000 (IWM) followed along, dipping back into its prior base.

However, the fund also found support during the August selling, did so again in the follow-on selling in September—and at this point, it’s set up a proper-looking 12-week rest and is marching back toward its highs. Far more important than that is the long-term picture, as this 12-week rest comes after three-plus-years of consolidation; small caps as a whole are no higher now than March 2021!

When you throw in an easier Fed that almost surely has more rate cuts in front of it, the environment may finally be ripe for the broad market to kick into gear. While our first stab at it didn’t work, we have ProShares Ultra Russell 2000 Fund (UWM), which moves twice the underlying index, back on our watch and could start a position if the latest strength continues.

Cabot Market Timing Indicators

Most top-down indicators, whether be it the major indexes, the broad market or growth measures, remain positive have improved during the past couple of weeks for sure. That said, near-term sentiment is buoyant and earnings season is cranking up, so we’re overall bullish, but continue to think picking your stocks carefully and looking for decent entries is key.

Cabot Trend Lines – Bullish
The big-cap indexes haven’t made tons of progress during the past three months, but there’s been no change with our Cabot Trend Lines, which remain clearly positive as the Nasdaq and S&P 500 (both by around 7% to 8%) continue to hover north of their long-term moving averages. That doesn’t preclude some short-term shaking and baking, but as has been the case since early last year, the odds continue to favor higher prices in the months ahead.

Cabot Tides – Bullish
Our Cabot Tides are still bullish, and as we wrote on page 1, the major indexes have stretched higher a bit—all five major indexes (including the NYSE Composite, shown here and the strongest of all the indexes) remain above their key moving averages, and the three indexes that had been lagging some are beginning to move out to, or test, new high ground. (Growth measures are also trying to stretch higher, similar to the Nasdaq.) The bottom line is that the intermediate-term trend is up, though some areas are still battling with resistance.

Two-Second Indicator – Positive
The Two-Second Indicator continues to impress—despite so-so action from the broad market and various external influences (wild swings in Treasury rates and oil prices, among other things), the number of new lows has been fewer than 40 every day since September 11. That can always chance, but the readings clearly tell us that the sellers remain in hibernation for now.

The next Cabot Growth Investor issue will be published on October 31, 2024.

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