Cabot Growth Investor Issue: October 31, 2024

Profit Takers Pounce

When the market had a very narrow advance in much of June and early July and then followed that up with a quick, sharp meltdown into early August, few out there (including us) were thinking that the next two to three months would be incredibly fruitful for growth investors that owned the right stocks.

But, thankfully, they have been, with August showing unusual action among growth stocks (tons of earnings gaps on the upside), with a string of major breakouts in September and with fresher breakouts occurring for the next few weeks. Bigger picture, this action looks like “only” the second leg up for growth (the first being last November to March or so) after a horrid three-year stretch of so-so to poor action (2021-2023)—combined with numerous larger-, longer-term positives (including an easier Fed), and we’re optimistic what had been a narrow, stop-start bull market for growth can continue for a while to come.

Near-term, though, our confidence is far more mixed. Part of that is due to what we’ve been writing about for the past few weeks: There are many uncertainties (next week’s election is one) and headwinds (the 10-year Treasury note yield just hit its highest level since early July) that are keeping big investors in check, and much of the top-down evidence remains positive but not powerful, with a bunch of indexes and growth measures unable to surpass their summertime highs to any real degree. Indeed, after today, our Cabot Tides are on the fence as many indexes are toying with their 50-day lines.

Of course, earnings season is now in full swing, which always brings volatility, and today was the first day we saw across-the-board selling in the leadership, many of which were clearly extended to the upside. Put all of it together and we continue to favor going slow right now—we’re not crazy worried at this point and in fact think some dips in leaders are setting up low-risk entries down the road. But it’s been relatively “easy” here for a couple of months, so it would only be natural for the market to shake the tree and raise the fear level, which is one reason why we’ve held some cash of late despite all-up action from most growth stocks.

To be fair, we’re always flexible, and if the nascent selling gains steam and turns our Cabot Tides negative, and if some leaders actually crack or flash abnormal action, we won’t hesitate to move closer to shore. At this point though, our thinking is (a) the overall trend for growth and leading stocks look great, but (b) the next couple of weeks of earnings season is likely to be tricky, with some extended names seeing profit taking while some fresher ideas take off.

What to Do Now

Long story short, we’re mostly focused right now on managing our batch of stocks as earnings are released, while keeping our watch list up to date so we can catch some new leaders if they emerge. In the Model Portfolio tonight, we’re placing On Holding (ONON) on Hold given its recent sluggishness, and we’re cutting bait on our our half-sized position of Robinhood (HOOD) after today’s earnings-induced air pocket. Our cash position will now be in the 24% range.

Model Portfolio Update

Most indexes, growth measures and leading stocks continue to look fine in the intermediate-term, but just recently we’ve seen some selling appear—some of that is due to earnings season (which always brings some ups and downs), but today was the worst day for most leaders since at least early September as profit taking set in.

Our main focus right now is on portfolio management, especially as quarterly reports roll in; this week starts a torrent of earnings for names we own and are watching closely—today, we’re selling one name that cracked on its report (Robinhood) though hanging onto another (Argenx) that was up nicely despite a rough market day.

Of course, the other side of earnings season is that some fresher leadership will likely be launched, and we’re on the lookout for that as well. Thus, there could be some new additions assuming the market hangs in there, but given that we’re not in the habit of plowing right ahead prior to a firm’s earnings report, we’ll hold off new buying tonight. Beyond cutting our loss in HOOD, we’re also placing On Holdings (ONON) on Hold given its recent sluggishness. Our cash position will now be around 24%.

CURRENT RECOMMENDATIONS

AppLovin (APP)—The parade of positive commentary and upgrades for AppLovin has continued, with another couple of analysts releasing positive reports and saying much the same thing as everyone else—that the firm’s AI-enabled advertising system is set for rapid, reliable growth in the years ahead while the small game business is stabilizing and profitable. Big picture, we think the stock is clearly a tiger by the tail … but we’re also not leaving our brain at the door, as a lot of good news has clearly been discounted during the past couple of months as shares have essentially doubled since breaking out in early September. If you wanted to throw some shares overboard here (take partial profits) we wouldn’t argue with you; in fact, with our position size growing (about 15% of the portfolio), the thought has crossed our mind. That said, at this point, we’re leaning toward the view that AppLovin is a real leader, and while it’s not in the first inning of its run, the recent powerful breakout and run “just” started on September 11, so the odds favor (not a sure thing, but playing the odds) that any dip that does come should eventually find support and lead to another leg up. (It’s possible that retreat began today, though frankly, we think APP held up well given the selling.) We’re flexible, but right here, we’ll officially stay on Buy, with all eyes on next week’s report. BUY

Argenx (ARGX)— ARGX released its Q3 report this morning, and results were excellent, highlighted by the fact that Vyvgart’s revenues came in at $573 million (up 69%), well above views of $539 million, while the firm highlighted an array of regulatory submissions for gMG (approved in Switzerland in Q2; Australia and Saudi Arabia expected in Q4 with others coming next year) while fresh CIDP approvals (following the U.S.'s thumbs up in June) in many countries could come in 2025, all of which would obviously expand Vyvgart’s potential. (Earnings seemed to be miles ahead of Wall Street’s breakeven target, but it’s hard to get an exact reading on that given how the firm reports its numbers.) ARGX rallied today on the news, which was especially encoruaging given how many growth stocks took on water. For tonight, we’re going to stand pat, holding our half-sized position, but if the stock can hold or build on these gains and assuming the market hangs in there, we’ll look to fill out our position in the days ahead, as we think ARGX could be starting to join the overall market party. HOLD A HALF

Axon Enterprises (AXON)—Axon’s own quarterly report is due next week, with Wall Street expecting revenue growth of 27% and earnings growth of 17%, though EBITDA (a better profitability measure for the company) trends and metrics such as recurring revenue and remaining contract value will be key. Like most leaders, shares have had a very nice run in recent weeks, so some retrenchment (whether it’s due to earnings, the market or something else) has been possible, and we’ve started to see that of late; round-number resistance near 450 capped the stock during the past couple of weeks and shares sloughed off some today. Still, the story, numbers and chart are all lined up on the bull side, and the firm’s latest offerings (including AI-enabled ones like DraftOne, as well new growth areas like drone responses, dispatch services and more) have the potential to deliver upside surprises. Today’s decline didn’t damage the overall trend, but as is always our preference, keep any new buys small this close to the report. BUY

Cava Group (CAVA)—The restaurant group has definitely become more mixed of late, with growth leader Wingstop cratering this week and blue-chip Chipotle lagging and also souring after earnings. Along with the fact that its own quarterly report is coming up (November 12) and due to its giant run in recent months, that’s likely caused CAVA to ease back some of late—though, so far, the selling prssures haven’t been very strong, as the stock is holding near its 25-day line (around 132). We’ve been somewhat conservative with CAVA in recent weeks, leaving it on Hold, and we think that’s generally been the right call; it’s obviously done fine, though it hasn’t done as well as many other growth leaders since the late-August earnings move. At this point, we see no reason to change anything—we’ll continue to hold our position and see how things go as earnings season progresses. HOLD

Flutter Entertainment (FLUT)—FLUT has had a very choppy month, with the U.K. tax rumors throwing a wrench into what was a great story and strong post-breakout action in September. Interestingly, after testing the 50-day line repeatedly in recent days, the stock got a bit of a lift yesterday on rumors that the U.K. might not implement higher online gaming taxes (they were absent from a key budget speech). We’ll let everyone else try to figure out the puts and takes of foreign tax proposals—but to us, the bottom line is that the stock has held up relatively well despite the potential bad news, telling us big investors are still thinking positively. We still think the upside here could be big given FanDuel’s rapid growth and huge whitespace in the U.S. alone, so we’ll stick with our plan: We’re staying on Buy as the path of least resistance remains up, but a drop below the recent lows (into the 215 area) would be iffy. Earnings are due November 12. BUY

On Holding (ONON)—There’s been basically no meaningful news from On Holding in recent weeks, and little in the way of analyst commentary, too, but the stock has been jerked around by movements in the stocks of its peers. First, there was Nike’s earnings miss at the start of the month (pulled this stock down), then last week saw Deckers gap up (leading to a nice one-day pop), and then this week, Crocs and Boot Barn (the latter of which has been a leader) were clonked on earnings (yanking shares back down). When we step back, we see that ONON hasn’t given up that much ground and isn’t far below its 50-day line ... but it also hasn’t been going up much while the group is mixed. We’re not panicking, but we think it’s prudent to go to Hold and see how it goes from here. HOLD

Palantir (PLTR)—PLTR will report earnings early next week (on November 5, election day), which will obviously be key for the stock’s intermediate-term future. Analysts see sales up 26% and earnings up 27%, though it’s probably fair to say that, similar to other stocks that have had big runs, expectations are probably higher than that, especially when it comes to U.S. commercial AI-related orders. We can’t rule anything out, of course, as the risk of a good-not-great report could easily bring in some sellers; indeed, we’ve seen some retrenchment this week (especially today), though the stock is still hanging around its 25-day line (near 41.5). But while the near-term could be a coin flip, we have a solid profit cushion and continue to see Palantir as the hands-down leader in AI platforms for all sorts of firms and government agencies around the world, which should keep big investors interested. With the evidence positive, we’ll stay on Buy, but will update you next week after earnings if we have any changes. BUY

Robinhood (HOOD)—Robinhood has a good Bull Market story, and the underlying business is sound—revenues in Q3 rose 36% while EBITDA nearly doubled and net deposits came in at $10 billion (down from Q1 and Q2 but more than double the year-ago figure; the annualized growth rate was 29%), driving assets under custody up by 9% from the prior quarter. However, revenues did miss estimates (were supposed to rise 40%), and the stock’s reaction today was abnormal in our view—shares plunged back below their breakout level near 24, and while the 50-day line (near 23.5) could offer some short-term support, the earnings reaction isn’t something that a fresh leader would likely show. We bought a half-sized position a couple of weeks ago and were off to a decent start, but we’ll cut our loss here and look for better names down the road. SELL

Shift4 Payments (FOUR)—Shift4 made an interesting announcement this week, saying it’s now the first major payments operation to allow businesses to accept crypto payments with the click of a button; it’s not going to be a big deal near-term but could add some growth down the road, especially if bitcoin and other cryptocurrencies rally in price. As for the stock, it’s pulled in with many growth titles during the past couple of weeks, even seeing a little higher-volume selling appear, too. Still, while we’re never complacent, the retreat is normal given the prior run, especially as the 50-day line (now nearing 87) catches up. We’re sticking with our buy rating, as the odds favor this dip will result in higher prices. Earnings will be released November 12. BUY

Watch List

• Credo Tech (CRDO 38): We thought CRDO was off to the races earlier this year, but then it suffered a couple of wild dips in the summer and early fall. But now it recently powered back to new highs as the future for its high-end networking and data center gear is very bright. See more later in this issue.
• DoorDash (DASH 156): DASH has been marching steadily higher, and its Q3 report last night—sales (up 25%) and EBITDA (up 52%)—was another good one. Shares were a bit wild today but the trend is clearly up.
• Duolingo (DUOL 293): DUOL looked like it was done for this summer, but it’s staged an abnormally bullish recovery and is hitting new highs ahead of earnings next week. See more later in this issue.
• ProShares Ultra Russell 2000 Fund (UWM 42): Patience is a virtue, and it’s been needed when waiting for small caps to truly kick into gear. The key here could be interest rates—if Treasury rates can come down again (possibly after the election?), a breakout in small caps could come. For now, we’ll simply keep an eye on UWM, waiting for a sustained move to begin.
• Rubrik (RBRK 41): RBRK has started to lift off on the upside, which is obviously encouraging—shares remain volatile (move about 4% from high to low each day) and the group remains just so-so (old leader CHKP imploded this week), but if the stock can settle down we could take a swing at it.
• Samsara (IOT 48): IOT is still in a normal rest period, with shares still living above support near the 50-day line but with upside generally capped by round-number resistance around the 50 level. Odds favor the next big move is up, and earnings here aren’t out until Thanksgiving or so.
  

Other Stocks of Interest

TechnipFMC (FTI 27)—One thing we like to do every few months is to look at a couple of out-of-favor sectors, where the news is bad and the stocks are acting poorly, but then see if there is a specific name in the sector that’s holding up relatively well (and, of course, has a great growth story)—the idea being that, if the sector turns up, that resilient name could really let loose on the upside. That thought process led us to the oil patch this weekend, which has been punished of late: As oil prices have fallen off (now south of $70), oil stocks (both producers and equipment outfits) have done the same, with both groups off nearly 20% from their highs and, really, no higher now than they were a couple of years ago. That backdrop makes TechnipFMC stick out like a sore thumb: The firm is one of (if not the) technology leaders in subsea equipment, with the best precision remote operated vehicles, production controls, flow lines, trees, processing and more to the industry, not to mention design, engineering and exploration services, too. As opposed to onshore activity, the offshore realm is in a steady, long-term up phase following the prior multi-year bust, with many big explorers (especially by international players, which make up more than 90% of the firm’s revenue) launching big projects as the output is steadier and costs for deepwater drilling have come down. All told, the numbers being thrown around are massive: At the end of September, potential global subsea contracts should total at least $26 billion through 2026, and the firm is already collecting huge amounts of orders ($2.5 billion in Q3 alone, up 35% from the year-ago quarter and 20% higher than production) as its backlog booms ($13.7 billion in subsea offerings, up 14% from last year; by comparison, Q3 revenue was $2.35 billion). Translation: Technip’s sales and earnings, which are already booming, should continue to surge for a long time to come as these big, multi-year deepwater projects begin to be drilled … often using the firm’s equipment. Indeed, Wall Street sees earnings lifting form 45 cents per share last year to $1.49 this year and nearly $2 in 2025 and much more beyond that. As for the stock, it’s far from pristine, but unlike nearly everything else in the oil patch, it’s holding up relatively well, north of its 40-week line and finding some big-volume support in the past couple of months. It’s worth keeping a distant eye on—if commodities and oil get moving (obviously a big if), FTI could surprise on the upside.

Procept Biorobotics (PRCT 89)—This small-cap (market cap around $5 billion) company’s name is more than a mouthful, but the potential here is outstanding and big investors are buying in. Procept’s story revolves around the prostate, specifically what’s known as benign prostatic hyperplasia (BPH) (or as it’s more commonly called, an enlarged prostate), which results in urination issues and possibly more severe consequences. BPH is very common, with about 12 million U.S. men having it, including eight million or so that are undergoing some sort of treatment. But the problem is those treatment options aren’t great: Drugs don’t work well (up to 30% taking them stop within two years) and have side effects, while those having surgery (where part of the prostate is cut out) often lead to incontinence, sexual issues and more. That’s where Procept’s aquablation technology comes in, which is essentially a very high-tech (but minimally invasive) waterjet that destroys excess prostate tissue in a much more exact and healthier way, resulting in far, far fewer instances of incontinence or sexual issues after the procedure, all of which is backed by years of studies. The firm is also targeting prostate cancer, thinking aquablation can be a front-line treatment for certain forms of that disease, with clinical trials underway and potential commercialization 12 to 18 months out. Procept’s latest robotic platform, called Hydros (FDA approval in mid-August), should be a big driver, with AI-enabled imaging guidance and even treatment plans based on thousands of real-life ultrasounds; early feedback is good, and the top brass expects record placements in Q4. Not that business isn’t already great today: Q3 saw sales lift 66%, partly due to 45 system placements, but there’s also a big recurring revenue angle here, with that area rising 74% in the quarter and making up nearly half of total sales. To be fair, earnings are in the red, but the market is discounting a bright future: PRCT swung around wildly from early May to last week, but now it’s catapulted higher on earnings. It’s an interesting idea.

Shopify (SHOP 78)—If you’ve been reading us for any length of time, you know that we much prefer “fresher” leadership—simply put, it’s much easier for a stock that’s still being discovered and by big investors to have a long, sustained run as they build positions over many months; the “obvious” names, especially those that have fallen from grace, can move for a few weeks but often have trouble really outperforming. However, some fallen angels do regain their former glory, and headed into earnings we’re intrigued by Shopify, which was one of the biggest winners during the pandemic before the rug was pulled out from it, with shares falling more than 80%! However, the firm’s top-notch commerce platform that’s become the standard for businesses of all sizes and for all channels (business to business, direct to consumer, online or off, etc.). Indeed, some of the newer areas are keeping overall growth strong, with business-to-business gross merchandise volume up 140% in Q2, offline (via its point-of-sale systems) volume was up 27% and payment volume (through its own offerings) up north of 30%. Total volume in the quarter was up 22% by comparison, which drove revenue up 21% while margins expanded nicely and earnings leapt by 86%. Translation: Business is good and the bottom line (including free cash flow) is picking up quickly, but that didn’t stop shares from seeing some punishing action for most of this year—after a valiant recovery into February, SHOP plunged a total of 47% from that high via a few legs lower and lived below its 40-week line for months. However, the stock has acted like a completely different animal since its August low, with a massive turnaround during the bottoming week (from 49 to 69!), strong upside in September and recently a modest dip to the 10-week line. Earnings are due November 12—a powerful gap up could launch a breakout from SHOP’s big multi-month consolidation.

Pay Attention to Unusual Action

Being a student of the market means listening to the market’s message, and one of the lessons we first learned when cutting our teeth at investing is to pay attention to unusual action—when you see it, that’s a sign that perception among big investors is swinging hard, and that sort of action usually persists for at least the intermediate-term.

Of course, “unusual action” is a very general term, but if you’ve been around a while, you know it when you see it. One example comes when a stock changes direction via an abnormally large move on a few days of elevated volume (what we call volume clusters). In fact, that’s one of the reasons we parted ways with TransMedics (TMDX) a couple of months ago: Shares suffered a quick 25% decline in just a few days on elevated volume; while there was an initial bounce, shares have since cratered, with earnings this week bringing another huge leg down.

But another kind of unusual action is far more bullish, though, ironically, it starts when the stock falls apart: In most cases, when a stock or index suffers abnormal selling by crashing through key support and skidding sharply for a few weeks, it either leads to a continued downtrend (a top is in) or a prolonged one only to immediately snap back for many weeks in a persistent manner and often on something that often results in lower prices, and if not, almost always leads to a multi-week (or longer) repair phase.

Thus, the eye opener is when stocks that suffer this action do the opposite—immediately turn around and move into a powerful, persistent uptrend, going right back to new highs with basically zero dips along the way. All of that is a sign that the prior dip was a huge shakeout and/or overreaction, and that basically every weak hand was washed out.

Partially due to the Nasdaq solid snapback from its July/August selloff, we’ve seen that in some names of late, two of which we owned or were watching earlier this year.

One is Duolingo (DUOL), the leading online language learning platform thanks to its unique offering, which is much more game-like and social, with goals, leaderboards and more, leading to rapidly rising engagement and sign-ups—in Q2, the firm had a whopping 104 million monthly active users (up 40%) and 34 million daily active users (up 59%), though most of those use the ad-supported version; the firm’s paid subscriber total was eight million (up 52%), so there’s a huge reservoir of users to upsell going ahead. The firm also has nascent math and music online courses that are reportedly off to good starts, and if they really catch hold, the story could multiply many-fold.

The stock topped out from last December through May and then tanked in the summer, falling more than 40% and living well below its long-term 200-day line—but you can see here the recovery has been jaw-dropping, with DUOL ripping back to new highs and actually trading very tightly in recent weeks before some wild action with the market in recent days. Earnings are out next Wednesday. WATCH

Another similar pattern comes from Credo Technology (CRDO), which is one of a handful of networkers that are showing strength as the AI investment money broadens out from the chip group—the details of its data center products can give you an ice cream headache, but suffice it to say that firm’s offerings and technology better balances speed and power consumption, which has made it a favorite of some hyperscalers like Microsoft and Amazon. (Customer concentration is an issue, with a handful of clients making up two-thirds of revenue, but (a) that’s been a good thing of late, as revenues have ramped the past two quarters (up 89% and 70%), and (b) the firm said it would be adding another major hyperscaler customer this year.)

CRDO got whacked during the summer market air pocket, and after rallying all the way back suffered an even more damaging decline after earnings in early September—the combination of both dips suggested something was amiss. But it wasn’t! CRDO immediately moved straight back up, zooming to new highs this month before finally giving up some ground with growth stocks this week. Earnings here aren’t likely out until Thanksgiving. WATCH

Of course, the upcoming quarterly reports for each stock will be key, but the fact that each stock came back from abnormal selling so quickly and persistently is a good sign that big investors are thinking the best is yet to come.

Cabot Market Timing Indicators

There’s been some stalling out during the past two weeks, and then we saw today’s decline, which was the first major selling wave seen since early September, which definitely dented some stocks and has even put our Cabot Tides on the fence. With that said, most of the evidence (both top-down, and among individual stocks) is still more positive than not, so we’re mostly bullish, but are staying flexible as earnings season rolls on and next week’s election approaches.

Cabot Trend Lines – Bullish
Our Cabot Trend Lines are still in positive territory, though the gaps between the big-cap indexes and their respective 35-week lines have diminished somewhat, with the S&P 500 and Nasdaq both about 5.5% above their respective trend lines even after today’s selling wave. Further near-term earnings season or post-election wobbles are certainly possible, but with the long-term trend clearly up, we continue to see higher prices in the months down the road.

Cabot Tides – On the Fence
Our Cabot Tides have been what we’ve been terming “positive but not powerful” for a few weeks now—every index (including the S&P 400 Midcap, shown here) has been holding north of its lower (50-day) moving average ... but most indexes were range bound, too, unable to overcome their summertime highs. And that means the recent dip actually has put the indicator on the fence, with many indexes not far from their 50-day lines. To be fair, we haven’t seen a decisive character change, but the next few sessions will be key.

Two-Second Indicator – Positive
The Two-Second Indicator remains positive, but like a lot of things in the past couple of weeks, things need to be closely watched from here—the number of new lows has been gradually picking up, with today (not shown in the chart below) being the third time in seven trading days readings were 40 and above. That’s not a death knell by any stretch, but it’s looking like the broad market is beginning to come under some strain.

The next Cabot Growth Investor issue will be published on November 14, 2024.

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