December 8, 2022

WHAT TO DO NOW: Stay cautious and alert. Growth stocks and the market took a hit earlier this week, though so far most potential leaders have held support and bounced back somewhat. Overall, not much has changed—our Cabot Tides are positive, and more names are acting properly, but the rest of our indicators are negative, and few stocks are moving higher with any consistency. We sold Albemarle (ALB) from the Model Portfolio earlier this week, leaving us with 73% in cash—we could add a bit more if opportunities arise, but we’ll stand pat tonight.

Current Market Environment
Stocks are higher today, albeit on mostly quiet volume—near 1 pm EST, the Dow is up 161 points and the Nasdaq is up 110 points.

It’s been a rough week for the major indexes thus far, with most down in the 2.5% to 3% range—and, probably more important, the first couple of days this week saw another round of potholes for many high relative strength stocks, knocking them lower. That said, it’s encouraging to see many bounce back over the past day or two, with most avoiding follow-on selling and some ripping right back to recent highs.

Even so, net-net, nothing has really changed from our point of view: Our Cabot Tides are still positive and there are a good number of stocks still hanging in there. Plus, sentiment remains iffy at best (we saw this week that 98% of CEOs surveyed by the Conference Board expect a recession next year—maybe they’re right, but the question is if it’s that obvious, has most of it been factored in?) and we’ve seen improvement in other indicators (not enough for green lights, but steps in the right direction). Thus, we’re open to the fact the bulls could retake control if a few things actually go right.

Still, we have to see it to believe it, and with most of our indicators still negative and with this year’s biggest bugaboo (selling on strength, with few names able to sustain upside) still with us, we’re picking our spots—we’d like to continue starting/building positions in potential leaders, but starting small and aiming for decent entry points is key.

In the Model Portfolio, we ditched Albemarle (ALB) on a special bulletin on Tuesday, leaving us with around 73% in cash. We’re not opposed to another nibble or two, especially if we see more names holding up—but, again, we don’t see much of a rush as few (if any) stocks are running away on the upside. We’ll sit tight tonight, though we’ll be on the horn if we do have any changes in the days ahead.

Model Portfolio
Albemarle (ALB) had a failed breakout a couple of weeks ago, which is basically the norm these days, but it was the action after that was worse, with the stock unable to get off its knees for more than a day or two before another wave of selling. Yes, lithium prices (and this firm’s earnings) should remain elevated, though we’d note that commodities in general seem to finally be pricing in some sort of economic slowdown—we offer no predictions, but it appears investor perception has shifted here, thinking upside will be limited and downside possible if the economy slips. At the very least, we think there will be better names to own when the bull market finally kicks off—we cut bait on Tuesday and are holding the cash. SOLD

We added a half-sized stake in Dexcom (DXCM) last week, and in recent days the stock has been a port in the storm, holding near its recent highs and, today, lifting to new multi-month highs. On the news front, it sounds like Japan’s insurance system gave the firm’s G6 CGM device an expanded coverage label, making a wider range of diabetics eligible to get reimbursement, which is obviously a plus. And today was even better, with the FDA giving approval for the new G7 device, which was expected but is good news nonetheless. Back to the stock, we can’t rule out a wobble after this move to new highs, which would be the norm in this environment. But if DXCM can extend higher and hold its gains, we’ll be looking to average up. For now, we’ll sit tight; if you don’t own any, you could nibble here or on dips. BUY A HALF

Enphase Energy (ENPH) ran to new highs last Friday on solid (not amazing) volume, but shares turtled after, with an ugly decline back into its base as sellers again hit anything near multi-month highs. (Solar stocks in general got hit, too.) That said, ENPH has bounced back decently so far, holding above its 25-day line and the 300 level, so we’re not reading too much into it—plus, of course, there’s little doubt demand is going to outrun supply as projects in the U.S. and Europe plow ahead. We’ll be watching to see if there’s any follow-on selling; if there is, we’ll probably go to Hold—but right here, we’re still OK picking up a few shares if you don’t own any. BUY A HALF

Halozyme (HALO) also got caught up in the selling spree earlier this week, but it wasn’t abnormal after the recent run, and like many others, shares have steadied themselves. Near term, we half expect some further consolidation given the recent move (the 25-day line is under 54, with the 50-day down at 49—though both are rising quickly), but there’s no doubt the trend is up, and the firm’s future royalty stream is in great shape. We’re looking to fill out our position but are content waiting for a higher-odds entry point. BUY A HALF

Wingstop (WING) has followed the same script as many growth stocks this week—it was looking great coming into Monday, fell sharply but didn’t crack (in fact it held its 50-day line, currently near 145) and has bounced fairly well since. We’re not complacent, and a break under support would have us going to Hold, but for now, the stock is holding its post-earnings gains well (it’s etched a good looking month-long rest)—we’ll stay on Buy. BUY

Watch List
Academy Sports (ASO): ASO reported a good quarter this week (though same-store sales fell more than expected), which led to a big-volume breakout yesterday. We’d like to add shares, though breakouts haven’t been high-odds plays of late—we’ll watch for a bit longer.

Arista Networks (ANET): ANET is a good example of what we’ve seen recently, as it acted well and nudged higher for a month before giving back all of those gains in one week. Overall, though, the chart is fine, and growth continues to top expectations as the big boys gobble up its cloud networking gear.

Axon Enterprises (AXON): AXON finally hit an air pocket after announcing a convertible offering, and with the 50-day line down at 153, some further consolidation is certainly possible. But if we see another week or two of controlled action it could set up a nice opportunity.

Celsius (CELH): CELH is having trouble getting over the 120 area, including a fade today after testing that level, but we like the four-month consolidation, the recent strength and, of course, the fundamental story.

DR Horton (DHI): DR Horton is anything but a true growth stock; it’s the biggest homebuilder in the U.S. But we remain with the building theme, as the stocks have been showing great relative strength and business continues to outdo expectations despite a surge in mortgage rates.

Impinj (PI): PI is a bit thin and, as written about last issue, does have a bit of customer concentration, which carries risk. But it also has a super-strong chart, excellent growth and some surety (if you believe management’s outlook and commentary) for the next couple of quarters at least with its endpoint ICs.

Schlumberger (SLB): We’re not in the mood to pick a bottom, but SLB is still holding up fine despite a sharp slide in energy prices. If it can continue to do so and the sector firms up, we think it can continue its advance.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, December 15. As always, we’ll send a Special Bulletin should we have any changes before then.