WHAT TO DO NOW: After weeks of bottom-building action, we’re finally starting to see some buying show up—to be clear, we haven’t received any green lights, but we like the action, and given that we have a huge cash hoard, we’ll nibble on two potential leaders tonight, buying half-sized stakes in Dutch Bros. (BROS) and Globalfoundries (GFS). That will still leave us with around two-thirds of the portfolio in cash, so we’re hardly throwing caution to the wind, but given the action, we think a little buying makes sense.
Current Market Environment
The market put on a good show for the third day in a row – at the close, the Dow was up 418 points and the Nasdaq was up 178 points.
In last week’s issue, we wrote about the market’s many baby steps taken that resulted in a pretty solid overall setup: It’s been four months since most growth stocks topped (mid-November) and two and a half months since the general market fell apart, but we’ve seen the major indexes (mostly) hold their January lows, we’ve seen the number of new lows shrink meaningfully since then and we’ve seen more and more signs that sentiment has gotten pretty bearish.
What was missing was actual buying … but now that may be changing. It’s only been three trading days since Monday’s test of the low (the third test since the late January wipeout by our measure), but the pop has been impressive, bringing some indexes (NYSE Composite, small- and mid-cap indexes) up to their 50-day lines and allowing a choice few stocks to put on good shows.
Again, we consider this to be another step in the right direction—but not enough to flip the trend back to the upside. Our Cabot and Growth Tides are still negative, with most indexes either below their 25-day line or, if above, that moving average is still trending lower. Meanwhile, the longer-term Cabot Trend Lines are still negative and the vast majority of stocks are still south of their 200-day lines.
All in all, here’s how we see it: After months of putting in the work, we think the overall setup here (weeks of bottom building, positive divergences among new lows, some stocks with bottoms or launching pads, horrid sentiment) is solid. Now it’s a matter of seeing if the nascent buying pressure can continue, and if that happens, to see some upside follow-through from there.
Until we see the trends turn, we don’t advise any major new buying—but we also are sitting on a giant cash hoard (north of 75% of the portfolio), which was boosted last week by the partial sale of DVN. Given the possibility that we’ve been in a bottoming process, we’re going to nibble on a couple of names tonight: We’re adding half-sized stakes in Globalfoundries (GFS) and Dutch Bros. (BROS), using loose loss limits on each.
Please note that will still leave us with around two-thirds of the portfolio in cash, so we’re remaining in an overall defensive stance while nibbling on a couple of fresh potential leaders should the market get going. Details below.
Model Portfolio
Dutch Bros. (BROS) has been mentioned a few times by us, so we won’t rehash the entire story here—suffice it to say that its small form beverage shops are proven winners, and the store count show grow rapidly for years to come. The company has changed a few things of late, resulting in more upfront outlays for new store openings, which is one reason why this year’s earnings estimates (up just 7%) are tame. But long-term, it should boost profitability, and the market is focusing on the big picture. BROS itself isn’t super strong yet, but has spent three months bottoming out in the low 40s and has started to show strength, including today’s big-volume bump. The stock is extremely volatile (including today’, so we’ll start with a half-sized stake (5% of the portfolio) and use a loose 15% to 20% loss limit. BUY A HALF.
Globalfoundries (GFS) is another recent new issue (public around Halloween) and is one of the larger chip foundries out there. That can be a rather mundane business, but a couple of things look to be creating a great environment, the main one being the industry’s supply issues, along with this company’s focus on some growth-ier areas. Indeed, the firm is busy expanding capacity (especially in Singapore, where a new fab is being built), which sounds dangerous, but it only does so when it lands some upfront payments and long-term contacts from clients that want guaranteed supply—it inked 30 of these deals last year alone, including in Q4 with AMD (extending an existing wafer deal) and BMW (which needs chips for its cars and future EVs). The stock etched higher lows in recent weeks and has gone ballistic this week—maybe it’s “too high” but we tend to look for excellent strength this early in the advance, and GFS has it in spades. As with BROS, we’ll start with a half-sized position (5% of the account) and use a loose 15% to 20% loss limit. BUY A HALF
Arista Networks (ANET) reminds us a bit of the market’s progress in recent weeks. Has it done anything amazing and noteworthy? No, not really. But, slowly but surely, it’s firmed up in recent weeks, with a reasonable overall correction (27% from high to low; support above the 200-day line), higher lows since the Russian invasion and a pop above the 50-day line today—indeed, the stock’s solid rally (albeit on light volume) since the market bounce started three days ago is a good early sign. As we have all along, we remain optimistic here, with Arista’s rapid and reliable growth story likely to keep big investors interested. We’ll stay on Hold here, but a push into the mid-130s along with a buy signal from some of our market timing measures would be very encouraging. HOLD
We booked partial profits last week in Devon Energy (DVN), thinking a shakeout in energy stocks was close by—and sure enough, the group took a whack on the head Monday and early Tuesday, though today’s action is certainly better. Our take on DVN and the group in general: In the near-term, the highs from last week will probably stick for a while, as the sector’s good tidings became very obvious; on the other hand, we doubt a true unraveling is on the horizon given (a) the pullbacks to this point haven’t been big-picture abnormal, and (b) even at much lower oil prices, DVN is likely trading at 6% to 7% dividend yields, not to mention a good amount of buybacks and debt reduction, too. We still have a good-sized stake here, so we’re all for the stock ratcheting higher from here, but we think the odds favor some more backing-and-filling and news-driven moves in the next few days or weeks. If you don’t own any, we won’t argue with a small buy around here; the snapback so far is encouraging. But officially we’ll stay on Hold and look for a better setup for new buyers. HOLD
ProShares Ultra S&P 500 Fund (SSO) has snapped back nicely after tickling what our mental stop area (in the mid-50s). As we wrote in the intro, we like the action and are encouraged, but we’d like to see one of our Tides trend-following indicators turn positive before advising new buying in a leveraged long index fund. Hold for now. HOLD
Watch List
CarGurus (CARG): CARG had a massive pop on earnings (basically from 30 to 50!) and then a sharp slide during the market’s latest leg down (back to 36), but it’s starting to firm up. We think the CarOffers story here can produce rapid growth for a long time to come, especially as it focuses on the dealer side of the market.
Halliburton (HAL): HAL has pulled back somewhat sharply with most energy stocks, but it’s not broken (near the 25-day line) and the prospects for higher energy spending remains excellent. A few days or so of calm action could offer up an opportunity.
Inspire Medical (INSP): INSP has a great story, with its sleep apnea offering likely to take huge share in the years ahead. The stock is trading in the middle of a year-long consolidation.
Lantheus (LNTH): This little-known firm is a long-time leader in diagnostic imaging agents (80% market share), which help make ultrasounds and the like produce clearer images. The big story here is a new product that makes prostate screens much clearer, with a potential market that’s about twice as large as current sales (earnings are expected to leap this year). The stock exploded to new highs on earnings and has refused to give back any ground.
Nutrien (NTR): Whether it’s NTR or a fertilizer peer like CF or MOS, we’re of the mind that the recent dip is more likely a short-term shake-the-tree event, not a major top given what’s going on in the world. Earnings estimates here are huge, and so far, the selling has been more than reasonable, with NTR not even approaching its 25-day line. A bit more rest would be intriguing.
Palo Alto Networks (PANW): PANW remains in good shape, and the sales/earnings/cash flow numbers look steady and strong for a while to come. Our main hesitation is that it remains something of a lone ranger in the cybersecurity sector.
Sweetgreen (SG): Along with BROS, Sweetgreen is the other new, fresh (though also very wild) cookie-cutter story we’re watching closely. The firm’s healthy salads, warm bowls, plates and the like are a hit, and the firm sees its restaurant count growing from about 150 today to 1,000 by 2030, with 20%-ish growth this year.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, March 24. As always, we’ll send a Special Bulletin should we have any changes before then.
| Stock | No. of Shares | Price Bought | Date Bought | Price on 3/17/22 | Profit | Rating |
| Arista Networks (ANET) | 1,626 | 137 | 12/10/21 | 126 | -8% | Hold |
| Devon Energy (DVN) | 3,620 | 28 | 5/7/21 | 58 | 104% | Hold |
| Dutch Bros. (BROS) | New Buy | Buy a Half | ||||
| Globalfoundries (GFS) | New Buy | Buy a Half | ||||
| ProShares Ultra S&P 500 (SSO) | 1,741 | 30 | 5/29/20 | 62 | 108% | Hold |
| CASH | 1,625,276 |