December 19, 2024

First and foremost, all of us here at Cabot wish you a very Merry Christmas and a happy holiday season. Just a heads up that we’ll be publishing our last issue of Growth Investor this year next Thursday (December 26).

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WHAT TO DO NOW: Remain close to shore. Given the huge run, elevated sentiment and some cracks in growth stocks, we pared back fairly aggressively a couple of weeks ago, coming into this week with 37% in cash. And today we’re paring back further as the under-the-hood selling has come to the surface this week—we’ll take the rest of our profit in Cava (CAVA) and cut our loss in ProShares Russell 2000 Fund (UWM), which will leave us with around half in cash. We are flexible and could do a little buying if the bulls pounce on this dip, but right now we’re OK being cautious. Details below.

Current Market Environment

The major indexes were flat today, with the S&P 500 and Nasdaq off a smidge, unable to bounce after yesterday’s drubbing.

Mid-August through November was a great, great stretch for growth stocks and really the entire market, but as we wrote in last week’s issue, December has had a different tune, with some leaders flashed iffy/abnormal action and the broad market weakening despite strength in the big-cap indexes. We pared back fairly aggressively and came into the week with around 37% in cash.

And yesterday (pushed along by a less-dovish Fed, which has kicked Treasury rates to new highs) seemed to bring the under-the-surface selling pressures to the surface, with the major indexes falling 3%-plus and many growth measures down 4% to 5%. (Many broader indexes are off big so far this month—the equal-weight S&P 500 is down 7% for instance.)

That was enough to flip our Cabot Tides (and Growth Tides) to a sell signal, while our Two-Second Indicator is also now negative as new lows are accelerating higher. (Yes, some new lows could be caused by year-end shenanigans, but four straight days of rising, triple-digit figures is a lot.)

Now, to be fair, our Cabot Trend Lines are still clearly bullish, and the longer-term view of most leading stocks is still generally positive (we’d note, too, that our Aggression Index is still bullish), so we’re not thinking this is the start of some multi-month implosion. In fact, because the broad market was so weak to start this month, yesterday brought some extreme readings: Nearly three-quarters of the NYSE closed yesterday south of their 50-day lines, for instance, while the volatility index (VIX) showed massive upside action, which is at least a near-term sign of panic.

Thus, we’re remaining flexible and open to anything, including the fact that many stocks can hold support and rebound from here. That said, given the course of events—a huge, prolonged buoyant stretch for growth stocks; clear signs of speculation in recent weeks; air pockets among leaders earlier this month; and now a sell from our Cabot Tides and more breakdowns from individual names—the odds favor there will be further tremors going forward.

We’re glad to have pared back before this week, and with a good-sized chunk of cash on the sideline, we don’t advise selling wholesale. That said, we’re also not just holding and hoping: Tonight, we’re going to take the rest of our profit in Cava (CAVA) and cut bait with ProShares Russell 2000 Fund (UWM), which will leave us with around half in cash.

We are open to putting some of that back to work if the market and growth stocks show some muscle soon (we have a slightly expanded watch list tonight), but right now we’re comfortable staying close to shore and seeing how this selloff develops.

Model Portfolio

AppLovin’s (APP) latest bout of weakness isn’t a major surprise—to us, the early December drop was likely a near-term top, ushering in some sort of consolidation. Obviously, we’ve sold three chunks of our position since mid-November, so we’re not living and dying with every tick … though, as always, we’re not simply going to hold and hope, either. Right now, we’re comfortable holding our remaining shares, with the latest downdraft much more controlled (so far) and, of course, with the underlying story as strong as ever. HOLD

Argenx (ARGX) looked like the long-awaited change in character might be at hand earlier this week, as shares moved to new highs on good volume, continuing the gradual uptrend (shares have closed north of their 25-day line all but two days since mid-October), but the market selloff pulled it back in a bit. To be clear, the setup is there—and should the market hold up and buying pressures rotate, we wouldn’t be shocked to see biotechs and medicals (which have been lagging for a long time) get moving. At this point, though, we’ll sit tight. HOLD A HALF

Axon Enterprises (AXON) has lost some more ground this week, and with volume picking up, too—that said, the stock is about 12% off its peak, which isn’t pleasant but isn’t a disaster, and the 10-week line (at 574 and rising) is catching up quick. Of course, it’s possible the stock has hit a longer-term top, but we don’t think the odds support that based on the action, or the fact that the story still has a huge runway ahead of it; this month it said Loomis, a cash distribution player (think armored vehicles with cash), is deploying more than 2,000 of Axon’s body cameras (along with licenses to Axon Evidence, the firm’s digital evidence management system) among its service technicians—yet another application that could benefit from video recording and analysis if need be. Like a lot of names, we’d likely be paring back on AXON if we had a “big” position, but having just taken some off the table earlier this month, we’ll hang on here and give shares a chance to round out a fresh launching pad. HOLD

Cava Group (CAVA) has an awesome cookie-cutter story that’s not close to over, which means the stock almost surely hasn’t hit a point of peak investor perception. However, even great growth names can have huge downturns: Looking back, Chipotle’s (CMG) had one deep downturn that wasn’t bear market or food poisoning related … and it took 48% off the stock back in 2012 over many months. We’re not predicting any specific drawdown figure, but after a massive run from its lows late last year (and even from its breakout in March), CAVA is looking weary, with the recent straight-down action through support levels suggesting the intermediate-term tenor has changed. Near term, of course, shares could bounce, but having ridden the stock for months, taken partial profits a couple of times and seen our remaining small position slip, we’ll take the rest of our profit off the table and look for greener pastures when the market firms up. SELL

Flutter Entertainment (FLUT) is one of many growth names that (a) has fallen off of late, but (b) looks fine overall, holding near its earnings gap from November and above its 50-day line and the top of its prior consolidation (both in the low 250s), with light-volume selling thus far. To be fair, we’re not big fans of seeing its closest peer (DraftKings, DKNG) lag badly, but that’s been going on for a while. A drop back below 250 would have us at least going to Hold, but all in all, we think the action here is normal and many of the firm’s recent updates (including starting a share buyback program) should help the cause. Hold on if you own some, and we’re OK starting a position if you’re not yet in. BUY

On Holding (ONON) has pulled somewhat with everything else, but its action has been well within the normal wiggles the stock usually sees. The firm has been quiet on the news front, but beyond the unknowns of tariffs and currency movements, all signs tell us business should remain solid for a while to come. A drop back into the 50 to 52 area would be iffy (could have us going to Hold or possibly trimming), but so far ONON is handling itself well. BUY

On one hand, Palantir (PLTR) has had a huge run and has definitely seen some distribution this month, with three waves of big-volume selling appearing in the 77 to 80 zone. On the other hand, those selling waves haven’t been able to dent the stock much, as it’s still holding north of its 25-day line and looks pretty solid on the chart. Fundamentally, the firm inked a good-sized expansion today with the U.S. Army, delivering its AI and data solutions across the entire organization in a deal that totals at least $400 million over four years (and could be worth as much as $619 million). Don’t get us wrong, we’re not complacent here—we sold a third of our shares just a couple of weeks ago—but we’re encouraged by the recent action. HOLD

ProShares Ultra Russell 2000 Fund (UWM) had the right setup and initial action, but once again, it was not to be, with yesterday’s huge market selloff crushing the intermediate-term chart. Believe it or not, we are a bit conflicted at the moment— the short-term extremes (written about above) combined with the time of year (we’re not seasonal investors, but it’s no secret year-end tends to be decent) imply a bounce of a few percent is possible. Thus, if you want to sell some/hold some that’s fine, but we’re going to keep it simple and make sure our loss doesn’t get any larger—we’ll sell UWM and hold the cash, with fresher leaders likely to do much better once this retreat/correction finds its footing. SELL

Shift4 (FOUR) was one of many growth names that got whacked a couple of weeks ago, mostly due to the CEO-to-NASA news—though it’s been able to hold firm since then, hanging around its 50-day line even as the market has gotten hit this week. We’re optimistic FOUR can see higher prices ahead thanks to a seasoned management team that can take over for the CEO if he leaves, as well as a stock that’s fresher than many, having “just” gotten going in August after a few years in the doldrums. That said, we’re following a similar plan as many of our holdings: We took partial profits (sold a third) in FOUR a couple of weeks ago and are willing to give our remaining shares some room to maneuver, with a mental stop in the lower 90s. HOLD

Watch List

Astera Labs (ALAB): ALAB has had every chance to give up the ghost or suffer some humongous slide like some other hot glamour names—but instead it remains relatively firm, gliding well above even its 25-day line. Of course, it could still tumble, but the longer it holds up, the greater the chance that big investors see continued triple-digit growth ahead.

DoorDash (DASH): DASH fell sharply yesterday … a bit too sharply for our liking. That said, shares are “only” down to their 50-day line, and a strong bounce would make this week look like a scary shakeout.

Dutch Bros. (BROS): We’ve been watching BROS for years, and it finally changed character after earnings in November—and remains resilient today. With CAVA being sold, we’re back in the market for a cookie-cutter story (always among our favorite types of names), and BROS looks great.

GE Vernova (GEV): GEV has gyrated for six weeks and dipped to its 50-day line—all normal action after the big, persistent advance from September into early December. Like other resilient names, a strong bounce from here would be intriguing.

Reddit (RDDT): RDDT is similar to ALAB—it’s very volatile and had a huge run, but the stock has held up well despite the market (and growth stock) slide. We’re still looking for a better risk/reward setup, but we do think Reddit is one of the market’s leading glamour stocks.

Rubrik (RBRK): RBRK is another one of the fresher titles that is acting reasonably well, with this week’s dip very reasonable. A couple more weeks of consolidation would be a good sign.

Shopify (SHOP): SHOP got hit yesterday along with everything else, but that came from new high ground—it’s “only” down to where it closed after its giant earnings gap. We still think this former pandemic winner can have another solid run.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, December 26. As always, we’ll send a Special Bulletin should we have any changes before then.

Model Portfolio

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