Circling The Wagons
Where to begin?
We’ve just been through a harrowing period in the stock market and the path forward remains uncertain. Adding to that uncertainty are the market inefficiencies that occur in periods of extreme, extreme volatility. This is part of why the Fed stepped in yesterday with word that it will inject $1.5 trillion to shore up the market if needed.
If you were watching, I’m sure you witnessed some of these inefficiencies first-hand. While the index declines yesterday were certainly headline worthy, moves in individual stocks, gapping down 10%, 20% or more, were truly exceptional.
While this type of market action is unheard of in normal times, it’s not so unusual during market crashes. That’s what we’re going through now (at least we were yesterday). The history books will record this with similar boldness as Black Monday in 1987 and the financial crisis.
That’s not meant to scare you. It just is what it is. Take some comfort in knowing that you should be feeling on edge because this is a crazy market.
As people oscillate between feeling fearful (yesterday) and bold (Tuesday, and early today) it becomes exceedingly difficult to make the “right” moves because of the emotions involved and uncertainty over how long investors want to (or are able to) hold a position.
The longer your projected holding period, the easier it is to sit on a stock that’s swinging around and not worry too much about it.
In Cabot Early Opportunities, we intend to hold many positions for a long time. That doesn’t mean we will hold all of them, and we may try to take advantage of a trading situation here and there. But for the most part our strategy is to try to get into good stocks early, average in over time, and hold on to them through market ups and downs because, over the long term, they’ll deliver market-beating gains.
That said, we also need to cull weak positions periodically and re-deploy capital into stronger stocks and/or stocks that appear to be trading at fire-sale prices. That’s what we’re going to start doing today.
At some point we will get over the hump and the rate of virus spread will decrease, businesses will start to open, and players will take the field again. Economic activity will jump, and stocks will follow suit.
It’s a little early to try to place bets on when that will start happening, however. Evidence suggests it’s happening in China, but here in the U.S. we’re still on the spread upswing. In the meantime, there are going to be more up days and more down days as the market tries to find a bottom.
What To Do Now
Today we’re dropping a number of positions, all of which will remain on my watch list for inclusion in the future.
My advice is to retain the capital from these sales to deploy in other stocks. This is as much about risk management as it is about preparing to build larger positions in what we expect will be the fastest horses when the gates open again.
As far as next week’s Issue is concerned, suffice to say this is a tough environment to be recommending any stocks with conviction. Still, I have some ideas in the works, some of which are in our current portfolio.
Given what we’ve just been through, doubling down on some terrific stocks that we currently have may be more rational than adding more.
But, let’s focus on one thing at a time. Today, while the market is a little more rational let’s step aside from a few positions.
Sell Recommendations
Frontdoor (FTDR) may easily be challenged to grow home service plans in the first half of 2020 given all that’s going on. Longer-term, as the largest provider of its kind by a wide margin and several growth initiatives being executed well (at least up until recently), Frontdoor is attractive. But we can’t ignore the current weakness in the stock. SELL
Lawson Products (LAWS): This is an economically sensitive company (it distributes parts for maintenance, repair and operations) that will likely face significant disruptions for several quarters. I like the concept, but it’s unlikely to work well for a while. SELL
LeMaitre Vascular (LMAT) took a hit after reporting results in February and looked likely to recover a good bit of ground soon thereafter, but the stock has since been even harder hit. It’s a good company and we’ll probably come back to it at some point, but in the near term this capital could likely be more productive elsewhere. SELL
Lightspeed POS (LSPD.TO) took a pounding yesterday that looks to be the result of market inefficiencies. But even so, big picture, point-of-sale transactions are likely to be negatively impacted for a while and we’ll come back to the stock when the smoke begins to clear. SELL
Varonis (VRNS) is another good company but one that is in a business model transition and that means company-specific uncertainty, which gets amplified when there is so much macro uncertainty. It’s time to step away. SELL
Digital Turbine (APPS) is a stock that we’d love to keep but Android device sales are most likely going to take a hit over the coming quarters and the fact of the matter is that’s not going to help the business. Even though the recent acquisition was encouraging and was helping to move APPS higher, it’s time to step aside now. I’m sure we’ll come back to this one when things improve. SELL
Slack (WORK) reported yesterday and the assumption that more people working from home would represent a bump to the business wasn’t all that well supported by management, at least in the near term. While people are turning to Slack to get things done there are a lot of new use cases that are either free, or low priced. Closing larger deals still requires a sales force, and these folks have been grounded. I do think this stock will work and if you’re feeling exceptionally brave you could dip a toe here. But in the context of our portfolio and potential emerging opportunities, Slack is now a sell. SELL
As far as the rest of our portfolio goes, under the current climate I suggest sitting pat. I’m reviewing all of our positions and working to asses their potential in the near term, but today isn’t the time to be getting aggressive and trying to “buy the dip.”
I’ll have updated ratings on all positions in next week’s Issue. In the meantime, let’s all get outside this weekend, step away from our computers and wash our hands.
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.