June 20, 2024

WHAT TO DO NOW: Today is an ugly day for growth stocks, with sellers driving many stocks lower as the Nasdaq and some mega-cap winners wobbled. That said, the evidence is basically the same—very mixed and divergent on an intermediate-term basis, with some names doing well but much of the market chopping sideways. We think holding a good-sized chunk of cash makes sense given that risk is elevated, but we’re also holding on to our stocks and giving them some room to wiggle around. In the Model Portfolio, we’re watching things closely, but will sit tight tonight, holding our 30% cash position.

Current Market Environment

Today the sellers came around for many growth stocks, especially those that have marched higher in recent days and weeks. As of 230 EST, the S&P 500 is off 0.1%, the Nasdaq is down 0.7% but many growth stocks are off 2% to 4%.

The story remains mostly the same when looking at the evidence: The longer term looks very bullish when looking at the trend, the overall foundation (a huge growth bear where growth measures made no net progress for 3.5 to 4 years) and some big-picture sentiment measures. The odds continue to favor higher prices in the months down the road.

However, intermediate-term, things are decidedly mixed and divergent. Our Cabot Tides remain neutral, and our Two-Second Indicator has recorded 40-plus new lows on the NYSE on all but three days since May 22—clearly a sign the broad market is under stress. Individual stocks also remain hit-and-miss, with relatively few new highs and plenty of wobbles and selling on strength when things approach resistance; today was a good example of that, with many names testing new high ground finding somewhat strong selling.

To us, this action—where many investors are rowing in different directions—raises the risk of a character change, whether that’s a meaningful market selloff (as the few stocks doing well “catch up” with the rest of the market) or a violent rotation (out of strong stuff and into lagging names).

Now, one thing that has changed a bit lately is the fact that many growth measures we track—like the iShares Momentum Fund (MTUM), the IBD Mutual Fund Index and the IBD 50 Index—have tagged new highs in recent days, lifting above resistance that started in March. And it’s important to note that most stocks here are simply sideways, so it’s not like selling pressures have been humongous.

Altogether, we continue to think our current stance makes sense: With things so narrow and divergent, holding a chunk of cash makes sense as “cushion” for the portfolio, as the risk of a character change (market decline, big rotation) is elevated. That said, for the rest of the portfolio, we continue to hunt for early-ish stage leadership.

We currently sit with 30% in cash. Tonight, we’re going to hold onto that, though we could move in either direction going ahead – possibly paring back further if the divergence comes back to bite (like today), or putting money to work if the right setup appears. Right now, we’re sitting tight.

Model Portfolio

AppLovin (APP) was tossed around on fears that some changes from Apple in its advertising rules would dent the company. Numerous analysts came to the stock’s defense, saying the changes were likely a nothing-burger, and the stock has stabilized and bounced somewhat ... though today was again ugly with the sellers taking shots as the market wobbled. Having already sold a third of our stake, we’re comfortable holding here and giving shares a chance to move around; fundamentally, we think everything is on track, but as with everything, a lot will come down to the market’s action in the weeks ahead. If you’ve followed our advice, we advise sitting tight with your remaining shares. HOLD

Cava (CAVA) looks fine overall but remains wild, and today it fell victim to what we’re seeing more and more out there—selling on strength as a name approaches resistance, in this case the prior high. Obviously, if the market keels over all bets are off, but at this point even today’s tedious fall didn’t do much damage, with the 25-day line down near 87 and volume about average. Translation: We’re not complacent and we’ll see if and how this dip progresses, but the path of least resistance remains up. BUY

We decided to stay on Hold with CrowdStrike (CRWD) last week since the catalyst for the latest move to new highs was its addition to the S&P 500. Of course, we’ll certainly take it and are holding on, but we’d like to see how the stock acts after its addition to the index at the start of next week (typically there’s some selling). Bigger picture, though, we’re optimistic, as the latest quarterly report basically flew in the face of many recent reports from big tech firms, with demand for CrowdStrike’s platform solid and steady as sales, recurring revenue, earnings and free cash flow all continue to ramp. If you really want to nibble here, we wouldn’t argue with you, but officially we’ll stay on Hold and see where things stand next week. HOLD

On Holding (ONON) has come under some pressure of late on no obvious news, likely just a symptom of the divergent market. Even so, the stock is “only” down to its 25-day line and the one day that saw elevated volume saw the stock find support after a (weird) morning selloff. There’s been nothing new on the company, but the potential remains huge as On is just a fraction of the size of players like Nike, Adidas or even Lululemon and still has huge opportunities as it moves into other sports and boosts its non-shoe businesses (apparel, accessories). BUY

For the first time in months, we’ve seen some interest rate-sensitive sectors like homebuilders (as well as small caps, regional banks, etc.) fail to rally after a dip in rates—a bit of a recession (or economic slowdown) trade. PulteGroup (PHM) is on the edge for us, as it’s revisiting multi-week lows after a modest bounce earlier this month. The April low near 105 is a hard line in the sand for us, but frankly, if the stock can’t hold up around here, we’re likely to book the rest of our profit and look elsewhere. Hold for now, but PHM is on a very tight leash. HOLD

Pure Storage (PSTG) got slapped around today after nosing to new price highs on Tuesday (again, selling on strength is appearing more and more in the market), which is something to watch—but like most things that took hits today, PSTG is still in good shape overall, above even its rising 25-day line (near 63). We’re open to anything, but with business gradually accelerating and AI and hyperscaler demand doing the same, we think PSTG can do very well over time, especially as the stock only recently got going from a big base-on-base launching pad. BUY

TransMedics (TMDX) is a smaller-cap medical name, which clearly isn’t where the action’s been in recent weeks. Even so, the stock has actually been doing fine, nosing to new highs earlier this week and hugging its 25-day line in recent days. Essentially, the past few weeks have been a rest period for TMDX, which is fine by us—we obviously can’t rule out a shakeout in this fast-moving name, and a drop below 120 (and the 50-day line) would look abnormal, but right here, we’re staying on Buy, thinking the story, numbers and chart will attract more big investors. BUY

Uber (UBER) has exhaled a bit on very light volume after its off-the-bottom bounce, still holding north of its 50-day line. With a small position, we still have a stop near the recent lows (call it 62-64 or so), but what we’re really looking for is a resumption of the recent push higher, which would signal a fresh base-building effort is underway. As has been the case all along, Uber’s free cash flow story continues to look great, so if the stock can round out, we’d be intrigued. Still, it has proving to do—we’ll stay on Hold and watch the action carefully. HOLD

Watch List

ASML Inc. (ASML): Thousand-dollar stocks aren’t ideal, but ASML is basically a monopoly on the highest-end chip equipment systems—and business is very likely to soar next year after a few quarters of slowdown. Shares have etched a nice launching pad since early March and look ready to get moving if the market cooperates.

First Solar (FSLR): FSLR surged to the 300 level last week before the sell-on-strength crowd appeared, pulling the name back about 40 points. Thus, the stock may need some time to set up, but overall, the drop didn’t do much damage and the story and projected growth are huge.

Halozyme (HALO): HALO has held up nicely after its big patent-related pop. The longer it can hold up here, the better the odds perception has changed for the better—and can result in a good run higher.

Hims & Hers Health (HIMS): HIMS was clonked today, but this comes after a ridiculously strong run, so until proven otherwise, this looks more like a trend knockout-type action. Business here has been strong for a while, but the GLP-1 sales going ahead could supercharge things. A few more days of rest could be interesting if the market hangs in there.

Pinterest (PINS): PINS isn’t setting the world on fire, but it’s holding well (and has shown nice price/volume action) since gapping on earnings in early May. Growth here is picking up steam and has been trashing expectations in recent quarters.

Robinhood (HOOD): HOOD is still a crazy character, but the latest five-day dip has come on very light volume and taken the stock “only” to its 25-day line.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, June 27. As always, we’ll send a Special Bulletin should we have any changes before then.

Model Portfolio

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