September 12, 2024

WHAT TO DO NOW: Remain cautious but stay flexible. From a top-down perspective, the market and growth stocks are basically in the confines of correction/consolidation, though many individual names continue to handle themselves well, with many we own surging to new highs in the past couple of days. Last week, we pruned two names, but tonight we’ll add a half-sized position in Argenx (ARGX), a name that’s been on our watch list and is set up well for higher prices if the market cooperates. Our cash position will now be around 41%.

Current Market Environment

It was another good day for growth stocks today following yesterday’s big rally. Near day’s end, the S&P 500 was up more than 0.7% and the Nasdaq was in the green by 1%.

After a tedious first few sessions after Labor Day, growth stocks bounced nicely yesterday and did well today, which is obviously a good thing. That said, our biggest thought when it comes to the market right now is that most things are in no-man’s land: Our Cabot Tides are essentially neutral, our Growth Tides are in a similar boat while our Two-Second Indicator has weakened of late. Moreover, just in terms of the overall action, there’s lots of rotation every few days, with sectors and themes coming into and out of favor every week or two. In other words, it’s relatively neutral from a top-down perspective.

That said, our thoughts on individual growth stocks are different: While growth as a whole is still mucking around, there are definitely many names out there that are popping strongly higher whenever the pressure comes off the market. We’ve seen that in the past two days, with many of the names we still hold ripping back to (or close to) new highs.

We’re as flexible as can be, but our overall view is that (a) the correction/consolidation that began in mid-July (for the Nasdaq) and March (for most growth stocks) is still ongoing, with a possible bottoming process taking place. However, (b) we also see many growth stocks holding support during weak spells and popping on rallies as they aim to grab pole position for the next advance.

Of course, good-looking stocks can go bad in a hurry in an iffy market, so we don’t want to assume anything; when growth stocks do go out of favor, many can hit good-sized potholes, as we saw last week.

That said, after pruning TMDX and UWM last week, we’re going to nibble on one new name tonight—Argenx (ARGX), which continues to act well, has a great story and has a good risk/reward setup here. We’ll go with a half-sized stake (5% of the portfolio), leaving us with around 41% on the sideline.

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We wrote in detail about Argenx (ARGX) in the August 22 issue, so you can go back and read all the details there—suffice it to say that the firm’s Vyvgart drug is a huge seller already (quarterly revenue well over $400 million just three years after launch!), and a new approval in June and further penetration into its core markets should keep growth humming for many years. The stock showed outsized accumulation from mid-June to early August and has acted well since—there is some overhead above 550 to contend with, but we like the risk/reward situation. We’ll add a half-sized position here with a reasonable (10% to 12%) loss limit, while we think the upside is much bigger than that if/when the market kicks into gear. NOTE: While ARGX trades plenty of volume (nearly $200 million per day) overall, the stock can trade relatively thinly early in the day, so it may be best to try to avoid overnight orders if possible. Either way, we’re starting a position here. BUY A HALF

AppLovin (APP) has had a jaw-dropping move to new highs this week, decisively breaking out on the upside thanks to a bounce in growth stocks and, more important, thanks to an analyst upgrade that basically hit all the right notes. After meeting with management, the analyst goes along with the view that 20%-plus growth is sustainable just from the mobile gaming, and that the advertising engine should begin to penetrate the e-commerce area next year, making up 10% of total revenues in 2025 and 16% in 2026. (Presumably, free cash flow and earnings would follow along, too.) There’s not much to say about the action—it’s all good—so we’ll stay on Buy, though near-term shenanigans are certainly possible until the market truly confirms a new uptrend. BUY

Axon Enterprises (AXON) tested the 350 level (round-number support and the close of the earnings day) and has bounced very nicely this week, bolstered by some positive analyst commentary (and possibly from some attention given the arrest/controversy surrounding a star Miami Dolphins player before last Sunday’s game). Like a lot of names out there, the breakout has held so far, and AXON certainly looks like it wants to head higher if growth stocks kick into gear. We’ll stay on Buy, but don’t be surprised to see further wobbles given the on-again, off-again market. BUY

Cava Group (CAVA) remains in fine shape, actually testing new price and relative performance peaks today, though to be fair, we’d note the move up in recent days has been on low volume. One thing that stands out from the firm’s earnings presentation was that, while same-store sales bounce around, the two-year stack (total same-store sales change over two years) has been accelerating of late, from a still-strong low of 23.3% in Q3 last year to 32.6% in the just-reported Q2. Looking ahead, the company is testing out and is aiming to launch in October a revamped rewards program that it says is boosting awareness from both low- and high-frequency customers, which should be a help as the nationwide expansion continues. Back to the stock, we like the action, and while we won’t argue with a small nibble here, we’re going to stay on Hold, seeing if a higher-odds setup appears as the market continues to gyrate. HOLD

On Holding (ONON) had a weird wobble last week during a weak spell in the market when shares cascaded at the open—but they quickly found support, held their 25-day line and, today, lifted to new price and relative performance highs. Like our other names, we think the action is a sign ONON wants to head higher if the growth stock environment clears up, with big investors looking ahead to the firm taking huge share in footwear and athletic apparel/accessories in the years ahead. We’ll stay on Buy, but given the environment, try to buy on a little weakness if you’re not yet in. BUY

Palantir (PLTR) has popped this week after it was announced after the close on Friday that the stock would be added to the S&P 500 the morning of September 23. We’ll certainly take it, though as we’ve written before, these S&P 500 additions tend to help short-term but have a bit of a hangover effect in most cases. None of this changes the underlying story (aiming to be the Microsoft of AI platforms for businesses and friendly governments) and, of course, the stock was acting fine during the recent pullback, too. We’ll stay on Buy, though try to grab some on dips given the recent pop to new highs. BUY

We ran out of patience with our half-sized stake in ProShares Ultra Russell 2000 Fund (UWM) late last week as the fund’s action (and market’s sluggishness) had us cutting the small loss. Don’t get us wrong: Eventually, there will be an upside breakout in small-cap names, and given the years-long dead period, it should make for an excellent opportunity—but our timing wasn’t right, and at this point, we think there are peppier potential leaders to target. SOLD

Our timing with Shift4 (FOUR) was unfortunate, coming at the end of August—right before the market and growth stocks had their post-Labor Day slide. Still, shares have done nothing wrong, found some support near logical levels (10-week line, prior highs from June/July) and have bounced nicely the past couple of sessions. Financial stocks, which are loosely tied with payment operators, are something to watch, as JPMorgan and Goldman Sachs cracked support this week. Still, we think investor perception here has likely finally turned up after a long up-and-down period, bolstered by the continued outstanding results, reasonable valuation and buoyant projections, not to mention easier money from the Fed (which should help the economy). A drop into the 70 to 72 range would be very iffy, but right now we’re holding on and are OK picking up a few shares if you’re not yet in. BUY A HALF

Watch List

Flutter Entertainment (FLUT): The owner of FanDuel is set up very nicely, threatening new highs after a tidy multi-month consolidation, all while every key business trend and metric is pointed strongly up.

Freshpet (FRPT): FRPT can be thinly traded at times, which is the biggest knock against it—fundamentally, though, the rapid, reliable growth story should continue to attract more big investors (565 funds owned shares at the end of June, up from 480 six months before).

Halozyme (HALO): HALO broke out from a low-level rest in early June and ran up nicely through August before pulling back this month. So far, the action is normal, but we’d like to see the stock find support around here.

Rocket Cos. (RKT): RKT, which is heavily leveraged to all things mortgage lending, is likely to be news-driven with the Fed coming up next week. But we think it could be setting up an interesting entry point as it exhales from a big-volume, post-earnings move.

Samsara (IOT): IOT released another terrific quarterly report (37% sales growth, 36% recurring revenue growth, earnings in the black and above expectations) and the stock responded with a strong move … before some hectic price action yesterday and today. Given its history of false moves, we want to see how it goes for a few days, but if IOT can tighten up a bit, we could take a swing at it.

ServiceNow (NOW): NOW isn’t an unknown name—but it’s acting like it wants to be a liquid leader of the next advance, with persistent relative strength in recent weeks. The story (including being one of the first big beneficiaries of integrating AI functionality into its offerings) and growth numbers remain very solid.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, September 19. As always, we’ll send a Special Bulletin should we have any changes before then.

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