Cabot Growth Investor Issue: September 19, 2024

Market’s Biggest Tells Are Bullish

Back in the dark days of 2022, in the midst of a bear phase for the market as a whole and an outright disaster for growth stocks (especially the hottest pandemic-era winners), there were more than a couple of times that growth stocks would find some support, that the market would rally and we’d even see the intermediate-term trend turn up.

However, we clearly remember two main market tells during these rallies that told us to go very slow: First, that the long-term trend never turned up, and second, that individual growth stocks, despite showing some tempting action here and there, never could really break out on the upside—there was constant, endless selling on strength at key resistance areas. Those were two big reasons we averaged something around two-thirds in cash during that entire bear year.

We mention that here because in the last few months, and even more so in the past few weeks, we’ve seen something of the opposite situation play out. Much of the market has been rangebound since March, yet the long-term trend has never faltered, even surviving the big test seen in early August, which tells us the odds continue to favor higher prices down the road.

Even more important, while there’s been a ton of disjointed, volatile action in the market and among popular names in recent weeks, the piece of evidence that stands out the most is the peppy action of potential leaders: Many gapped up on earnings after the August mini-crash, and while they wobbled when the market took the occasional hit (like at the start of September), they’ve also roared back close to or out to new high ground whenever the pressure comes off the indexes. We’re happy to own a few names in the portfolio that have been great performers.

These two factors look like key tells for the market that point higher—though, to be fair, that doesn’t mean all the evidence is in perfect shape. Growth-oriented measures like our Growth Tides and Aggression Index are still neutral-ish, and defensive sectors remain in very good shape. That said, even those two indicators are improving some, and our others are flashing green, with our Cabot Tides and Two-Second Indicator (now five straight days of single-digit readings, which is very intriguing) having returned to bullish territory. Plus, of course, it’s hard to ignore the Fed’s aggressive rate cut yesterday (and hints more are to come), which is certainly a plus.

Put it all together and we continue to think the next big move is up and that many stocks are grabbing leadership batons for the race … and some have clearly already started their race. Thus, we’re extending our line a bit more today—but are still going in piecemeal fashion given the fact that most growth measures are still shaping up.

What to Do Now

Do a bit more buying. We’re pleased with the performance of our current crop of stocks—we think we own some real leaders—and are aiming to home in on more top-performing names that can break out if/when growth stocks kick into gear en masse. Tonight we’re going to start a new half-sized stake in Flutter Entertainment (FLUT), which is starting to break free from a long consolidation, and we’re going to average up on Shift4 (FOUR), filling out our position as the path of least resistance looks higher. Our cash position will be around 31% after the moves.

Model Portfolio Update

As we wrote above, the biggest characteristic we’ve seen in the market during the past month and a half is that, when the selling pressure comes off the general list, many individual growth titles have spiked, approaching or hitting new high ground. Just looking at a handful of names tempts us to get overly aggressive, but there are still many pieces of evidence that aren’t yet lined up. Moreover, while not seasonality investors—if making money was as easy as checking the calendar, we’d all be rich—we’d note that it’s the second half of September and it’s a fact that it tends to be the worst period of time for the stock market.

Put it together and we’re sticking with a general view that (a) many growth stocks look ready to get going now or soon (some have already launched of course), but (b) the market, while definitely improving, still has a few flies in the ointment (especially among growth measures). Overall, we’re putting more money to work tonight, filling out our stake in FOUR and starting a new one in FLUT, but will still hang onto a cash position of around 31%.

Given the large number of names that are threatening breakouts, we could be putting that to work quickly if things go well, but tonight we’ll take another couple of steps into the market’s waters and see how things go from here.

CURRENT RECOMMENDATIONS

AppLovin (APP)—Most winners will throw you a few curveballs during their uptrends, and AppLovin has been no exception, with an 18% dip in the May/June period and a harsh 34% pullback during the market’s July/August selling storm; near the lows, the stock had made no net progress since March. However, APP held long-term support (200-day line, etc.) and immediately snapped back … and kept on snapping back, a sign perception was doing a 180 after earnings. And now we see the roof has blown clean off, with a huge-volume breakout and follow-through, sparked by a series of analyst upgrades that all revolve around two key growth angles we’ve been writing about: First, just within mobile games, AppLovin’s advertising engine should be able to sustain 20%-ish growth for many years, and second (and more important), that the advertising engine should start to penetrate the e-commerce arena next year and contribute nicely to sales, earnings and cash flow growth from there. Obviously, after the huge move (both recently, as well as during the past year), some retrenchment is possible, especially if the overall environment remains on-again, off-again. But while there’s always the chance this proves to be a top, we think the odds favor any pullback will find support as more big investors look ahead to further big growth and cash flow ahead. We’ll stay on Buy, but we suggest aiming to enter on dips of a few points. BUY

Argenx (ARGX)—We started a half-sized position (5% of the overall account) last week, mostly because we think it has emerging blue chip written all over it: Vyvgart is likely to produce revenues from its first indication (gMG) north of $1.5 billion this year (up from zero a few years ago), with the second approved indication (CIDP, FDA thumbs up in June) also having blockbuster potential down the road. (The top brass estimates there are 24,000 people with CIDP that are getting treatment, yet half of those are not responding well or have side effects; some see it as a $2 billion market today and growing.) Throw in another indication approved in Japan and with the bottom line in the black, that should be enough to keep up interest—but, of course, the even larger potential is that Vyvgart can become a pipeline in a product, getting approved for numerous more autoimmune indications down the road. ARGX ran into some low-volume selling earlier this week on no news, but we’re just following the plan: A dip into the 475-ish area could have us cutting the loss on the small position and moving on to greener pastures, but at this point we think ARGX is in good shape and has very solid upside potential, with a breakout north of 560 (ballpark) possibly offering an opportunity to average up. Right now, we’ll stick with what we have; if you don’t own any you can start a position around here. BUY A HALF

Axon Enterprises (AXON)—AXON presented at a couple of conferences last week, and while no major new news came out, some analysts were impressed; one upped his target price while saying the firm’s management sees a 20% annual growth rate even beyond 2024 thanks to its best-in-class brand and solutions for its core state/local law enforcement agencies, with beefy EBITDA margins (25%, up from 23% this year), too. Near term, we’ll be interested in seeing if any further data points on the uptake of Axon’s newer, AI-powered Draft One offering are released, which could move the stock. All in all, shares remain in good shape, with the action relatively classic (big-volume earnings breakout in August, shakeout to support after Labor Day, rebound back to new highs), indicating the buyers remain in control. We’ll stay on Buy, though as with everything, near-term gyrations wouldn’t be surprising. BUY

Cava Group (CAVA)—CAVA has been a great performer for us, and we’ve written many times about the long-term growth potential here, as the restaurant count is likely to grow 15% annually for many years (likely for the next decade) while same-store sales rise, partially thanks to having the input from someone who’s done it before. That said, near term, we remain comfortable with a Hold rating—after the late August retrenchment, shares have rallied back on very light volume right into some resistance near the August high, and of course, this comes after a huge run this year. To be clear, that is certainly not any sort of red flag, and in fact, another wiggle on the chart could potentially set up a higher-odds entry point. For now, though, we’ll simply hold what we have. HOLD

Flutter Entertainment (FLUT)—As we wrote about in Other Stocks of Interest in the last issue, we’re still big fans of the online sports betting story, as there remains huge growth potential going forward. Indeed, the biggest statistic that’s caught our eye is that for Flutter (and other big players like DraftKings), even the most mature markets are still showing solid growth in users and gambling volume; in Q2, the states in which Flutter (via FanDuel) initially entered before 2020 saw revenues grow a very healthy 27% in Q2, with newer locations growing at more rapid rates. Thus, even without a ton of launches in new states, there should be plenty of upside in business as adoption gradually increases—and, of course, Flutter is very likely to grab a big chunk of that given its #1 position in online sports betting in the states it operates in. As we write about a bit more later in this issue, FLUT is one of many stocks that’s threatening a longer-term (multi-year) breakout on its chart, with the more recent action (earnings gap in August, tight trading for a few weeks and now a move to new highs) very encouraging. We’ll start with a half-sized stake (5% of the account) here with a loss limit near the 50-day line (at 205 and rising). BUY A HALF

On Holding (ONON)—ONON got hit with some selling today after attempting to surpass round number resistance near 50, but overall it continues to act well, hitting new highs yesterday after a brokerage house hiked their price target and trading well above even its 25-day line (near 46). There are no sure things, of course, but to us it looks like this name just broke out three weeks ago from a huge rest period (you can call it a base-on-base, or simply go with the fact that ONON made no net progress from July 2023 to August 2024), so if the market cooperates, shares should be relatively early in their overall run given the long runway of growth that should be ahead. Obviously, then, we remain optimistic that the path of least resistance is up, though given the still-tricky market, another wobble into support (mid-to-upper 40s) isn’t out of the question. BUY

Palantir (PLTR)—PLTR was in the midst of a normal retreat when news broke the next day that the stock would be added to the S&P 500—which kicked off a solid move, and shares have continued to act well since. Beyond the index move (which tends to be a short-term positive, but can lead to a little hangover after the addition), the firm has been releasing some positive news: The company announced an expanded AI deal with long-time client BP (formerly British Petroleum), signed a multi-year deal with Nebraska Medicine and reportedly has inked a couple of $100 million-ish AI-related deals with the Army. After a year-plus of anticipation, testing and ramping, we continue to think the firm’s AI platforms for U.S. and international businesses, as well as for Uncle Sam and friendly governments, are becoming the standard, which should keep big investors interested. BUY

ProShares Ultra Russell 2000 Fund (UWM)—We decided to cut our loss in UWM just after our last issue was published—though, from today’s perspective, that was the wrong move, as small caps have bounced back a bit above their start-of-September levels. We are still keeping an eye on UWM and other small-cap funds, as a breakout from this multi-year range (possibly egged on by the Fed’s surprisingly easy stance) could prove very bullish. If you still own some, you can hang on and see how it goes, but having sold, we’re more focused on peppier leading stocks. SOLD

Shift4 Payments (FOUR)—FOUR was hit relatively hard during the selloff that followed Labor Day … but then rebounded just as sharply, toying with new recovery highs in recent days and finally pushing out to multi-month highs today. As we’ve written numerous times, we think the pieces are in place (big sales, earnings, cash flow, dominance in many industries like hospitality and sports/entertainment, etc.) for a sustained run, and an easier Fed should certainly help when it comes to consumer spending. (Rate cuts also help financial stocks in most cases, so that’s another plus.) To be fair, there is some resistance up in this area, but we’re thinking the Q2 earnings report that caused a wave of buying changed the stock’s character, with institutions finally discounting the avalanche of big deals Shift4 has been inking in recent quarters, which will continue to boost payment volumes. We’re going to fill out our position here, adding another half-sized stake (5% of the account) and using a loss limit in the mid 70s for the combined position. BUY ANOTHER HALF

Watch List

• Arista Networks (ANET 379): ANET has had every reason to take on water in recent weeks as big-cap tech, AI and chip names have sagged (and continue to lag), but instead, the stock actually moved out to new highs today as big investors look ahead to accelerating AI demand in 2025 and beyond.
• Blackstone (BX 160): We prefer smaller, more dynamic operations, but BX has broken out on the upside and seems like an “easy” way to play an easier money environment.
• DoorDash (DASH 137): DoorDash is the King of Delivery, easily leading the pack in meals and now growing quickly in areas like convenience store and grocery deliveries as well. See more below.
• Freshpet (FRPT 141): You’re not going to brag about a high-end pet food stock at your neighborhood get-together, but FRPT has a long runway of rapid and reliable growth (what we call the Three R’s), and the stock is trading calmly, perched near new high ground.
• Halozyme (HALO 59): HALO has essentially been consolidating this month after a nice run the prior few weeks, though it did get pushed around today by a downgrade. It’s one of an increasing number of names that are trying to stage a long-term breakout (see a bit more on that later in this issue).
• Rocket Cos. (RKT 19): RKT looks like a classic turnaround, cyclical play in the mortgage industry, having come through the dry times leaner and meaner, and is ready to enjoy what could be a fruitful, multi-year upturn in mortgage activity. Shares have been hectic of late (down, then right back up, and then some post-Fed selling) but remain above support.
• Samsara (IOT 48): IOT has decisively broken out on the upside, which is obviously bullish—though the stock remains as crazy as can be on a daily basis, whipping up and down. A bit of calmness could have us testing the waters here, as the story remains one of the best out there.

Other Stocks of Interest

Affirm Holdings (AFRM 45)—Affirm is a wild stock and operates in a competitive field, but it might be one of the biggest plays on the economy picking up steam as the Fed turns easier. Affirm is a leading player in the buy now, pay later (BNPL) field, which allows consumers to pay off things over time—often with 0% interest, though some longer-term and larger loans will carry interests—at nearly every retailer (Affirm has deals with 303,000 merchants!) and it’s all individually based and completely transparent, with no late, hidden or prepayment fees. Not surprisingly, the industry has taken off in recent years with many big firms offering their own BNPL offerings (often through co-branded credit cards), but Affirm is one of the leaders and continues to grow rapidly—and after going through the sector’s initial boom and bust, management tightened the reins and the firm is showing some signs of life on the bottom line. In fiscal Q4 (which ended in June), gross merchandise volume was up a strong 31% to $7.2 billion, while total revenue lifted 48% and revenue less transaction costs soared 70%—while “adjusted operating income” was strongly positive once again. Equally impressive are most of the sub-metrics, with same-merchant volume growth of 14% in the latest quarter, while re-order growth among users is big, both in terms of activity (transaction per user up 22%) and dollar volume. (Overall user growth was 19%, totaling 18.6 million at the end of June.) Of course, there are risks here, not the least of which is that Affirm is providing the financing for the purchase—so if the economy tanks and consumers’ balance sheets worsen, Affirm could be left holding the bag. However, it’s likely things go in the other direction, as the Fed’s rate cut(s) should ease the cost of funds for Affirm, and at this point, 30-day delinquency rates are pretty tame, in the 2.5% range, with recent cohorts paying at far higher rates. All in all, management had a great outlook (gross merchandise volume up at least 33% in the coming 12 months), and after a brutal past few months (more than a 50% drop), shares reacted well to earnings and have held up in recent weeks. AFRM is a bit wild for our taste (moves about 6% per day!) and there are risks, but if all goes well there could be big upside.

Astera Labs (ALAB 47)—As we did in the last issue with Reddit, we’re spending more time sniffing around some IPOs, thinking some may kick into gear down the road—even if, for the here and now, the stocks need a bit more seasoning. Astera Labs has a story that could be at the heart of the new data center (driven by AI) boom: The firm’s connectivity solutions have been built from the ground up for cloud and AI infrastructure needs, allowing hyperscalers and major AI platform providers (many of which are Astera customers) to easily connect all the GPUs and AI accelerators while providing top speeds and supporting quick, huge deployments. The firm’s Cosmos software system seems to be a big differentiator, giving clients the capability to monitor, configure and manage the entire system (observability is big here, so that one faulty chip doesn’t halt the entire AI learning process); using management’s words, the combination makes Astera’s offerings the eyes and ears of a system’s connectivity infrastructure. Throw in some other factors (demand should get a boost once Nvidia’s Blackwell chips hit the market; it’s possible the firm’s wares could find their way into the general server market) and it’s easy to see why Astera has been growing like mad—in the past four quarters, revenues have gone from $37 to $51 to $65 to $77 million (Q2 was up seven-fold from the year before), and earnings have been in the black three quarters in a row (very solid pre-tax margins of 38% in Q2) and should grow from here. So what’s the problem? Probably valuation—soon after its IPO, the market cap was something north of $13 billion (!), and while the decline since then has cut that back to around $7 billion, that’s still about 20 times this year’s revenue estimate! Even so, profits are rising quickly, recent results have trashed estimates and what’s caught our eye on the chart is the “reverse churning,” as volume has picked up in a big way during the past few weeks (really ever since the Q2 report came out), and yet ALB has stopped going down, a sign of buying support—and now the stock is nosing above its falling 50-day line. Like Reddit last week, ALAB needs time—even if it does rally a few points here, it would almost surely be part of a larger bottoming process. But new IPOs often lead to new leadership, and if the top brass makes the right moves, we think Astera has a bright future.

DoorDash (DASH 137)—DoorDash needs no introduction—despite a bevy of competition (especially from Uber Eats), the company remains the King of Delivery, an industry that, up until a few years ago, was basically non-existent or at least only run by local operators (getting the local pizza place to deliver to your house, for instance), but the pandemic accelerated what should be a multi-year trend in the sector, and as the leader (about three times the market share of Uber in meal deliveries), DoorDash is going to benefit. Part of that is thanks to the network effect—the firm has the broadest selection by far, which attracts even more merchants to its platform. Indeed, more than half the restaurants that come into the industry select DoorDash—and part of that is the firm’s advanced logistics network, which it says has the lowest costs in most locations in the U.S. Importantly, while meal delivery is by far the biggest category, items from grocery stores, convenience stores and more are seeing great growth (and, by the way, the firm is getting about half of new merchant entrants in these industries as well). Throw in an international angle (it owns Wolt, which has the service up and running in 500 cities overseas) and a popular subscription product (DashPass is about $100 per year and provides free delivery on meal orders over $12 and grocery orders over $25; there were reportedly over 18 million subscribers at the end of 2023), and the firm oozes steady, reliable growth for many years to come. Q2 showed a continuation of all recent trends, with orders volume up 20%, revenues rising 23% (revenues came in at 13.3% of order volume) and EBITDA (the most meaningful profit metric here) of $430 million, up a big 54% from a year ago while total users were up double digits in June. Shares had a nice run through March before suffering a tough downturn (31% deep)—but the summer earnings report brought in the buyers and DASH has since traded strongly since as it rounds out a fresh launching pad. We’re intrigued.

Longer-Term Breakouts Emerging

While all of us get caught up in the day-to-day and week-to-week action, it’s important to step back every now and then and take a look at the big picture. In fact, when we do this, it’s one reason we remain very optimistic when thinking about the market down the road. Looking at the chart here of the equal-weight Nasdaq 100 (where all 100 stocks have a 1% weighting every day), you can see that the index peaked near 7,350 back in late 2021—and earlier this month, it was at the same level, so nearly three full years of no net progress.

Based on this and other broad indexes and measures, 2022 brought a big bear, 2023 saw some bottoming action and November through March or so brought a great rally—with the last few months seeing a choppy sideways consolidation.

So what? Well, many stocks obviously traced out similar patterns … and despite the wild action in the market over the past couple of months, the beefy action among individual stocks is starting to produce some long-term breakouts in some interesting names and sectors, which can prove very lucrative over time.

For instance, check out Blackstone (BX), the granddaddy of Bull Market stocks, with more than $1 trillion of assets under management in real estate, private equity and credit and insurance. Business has been crawling higher during the tighter money environment of the past couple of years, but obviously, there’s optimism that assets (and inflows) will crank up as money becomes looser. BX showed some great strength in July and now is moving out to all-time highs; short-term, it’s extended, but long-term, it looks to be just getting going.

Then there’s CBRE Group (CBRE), the gigantic, worldwide real estate management operation that offers leasing, advisory services and real estate sales services, facilities and project management and even owns some real estate investments itself. Obviously, after the pandemic boom, real estate hasn’t been the place to be since the 2021 top, but CBRE staged a powerful earnings-induced breakout in July and, while not the fastest mover, has traded well since.

On the growth-ier side of things, old friend Halozyme (HALO) looks similar after a three-and-a-half-year, up-and-down consolidation, with shares recently nosing above long-term resistance near 60. The big idea here remains the firm’s Enhanze drug delivery technology that’s being adopted by many big-selling drugs, and the fact that its patent position seems more secure has big investors discounting a bright future.

There’s also Flutter Entertainment (FLUT), which we’re adding to the portfolio today—as the owner of FanDuel, Betfair and other gambling properties, the firm is growing rapidly (especially in the U.S.), and with even mature states it operates in expanding quickly, and with the state tax issue seemingly settling down for at least a while, buyers are retaking control; FLUT has etched deep but good looking multi-year structure, and now it’s attacking its highs.

There are others (On Holding (ONON) in the portfolio has a similar pattern), but the point here is less about the individual names and more about the potential pattern playing out: If the past few months of choppy market action give way to decisive upside, it’s possible we’ll see a bunch more longer-term breakouts, which would bode well for those names and for the bull market. We’ll be watching.

A Couple of Quick Points

Maybe it’s because people are back from summer vacation, or maybe it’s because growth stocks have perked up—but we’ve received a handful of topical questions of late from subscribers surrounding stock selection and handling positions, so we figured we’d write about a couple here.

First, and this comes from a note we had when we added Argenx (ARGX) last week, it’s usually best not to simply place overnight buy orders, as the market makers will often bid up the stock a bit at the open, giving you a worse price. Of course, we’re not short-term traders, so in the big picture, it shouldn’t matter much, but over time you’ll likely be better off buying sometime the next day. As a reminder, if our advice comes out when the market is closed, our official entry price is the average of the next day’s high and low for that stock.

Second, we’ve been fortunate to have a few stocks like APP and CAVA do very well in recent weeks, spiking on earnings and other good news—which has led to questions surrounding taking some shares off the table. Our overall thoughts on this are pragmatic: We’re all in the market to make money, and we know big winners can often be elusive, so if you want to shave off a few shares, we certainly won’t argue with it.

That said, we’d advise against automatically or repeatedly selling shares in your best stock or two—or, if you do, make sure you’re selling just small amounts (5% or 10% of your position) so you’re retaining a good-sized chunk. In other words, having a meaningful position in a winner is what counts most—whether you stick with all of it or trim a bit here or there is more of a personal decision.

Cabot Market Timing Indicators

Much of the market and growth stocks ran into issues back in March, with six months of slogging up and down since then. But during the past few weeks, there’s no doubt we’ve seen some potential leaders start to separate from the crowd, and now the market as a whole is beginning to tilt higher. We’re not cannonballing into the pool but are putting more money to work in resilient stocks.

Cabot Trend Lines – Bullish
Our Cabot Trend Lines has been a bright, bullish beacon for 20 months at this point, surviving three major tests (March 2023, October 2023, and then August 2024) and remaining bullish throughout. Today, the indicator is in good shape, with the S&P 500 and Nasdaq (both by around 8%) clearly above their respective 35-week moving averages, which keeps the long-term trend pointed up. Translation: Odds favor the next big move being up.

Cabot Tides – Positive
Our Cabot Tides have been ping-ponging back and forth, but we’re calling them positive in this issue, as many of the five we track (including the S&P 400 MidCap, shown here) are either close or out to new high ground. Our Growth Tides continue to lag some—we’d call them neutral—but some of those indexes are also challenging new high ground after months chopping around, too. All told, the intermediate-term trend is leaning up, and a bit more strength would be decisive.

Two-Second Indicator – Positive
As with the Tides and other stuff out there, the Two-Second Indicator has been on-again, off-again in recent months, but the recent action really does raise an eyebrow: Today was the fifth straight day not just of sub-40 readings, but of single-digit readings. We saw that in June, so it’s not definitive yet, but a few more days like this would be a sure sign the broad market has turned the corner.

The next Cabot Growth Investor issue will be published on October 3, 2024.

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