This may just go down on record as one of the worst earnings seasons ever for growth stocks. Two weeks ago, things were “fine.” Since May began, not.
Inflation is the bogeyman spooking investors and his shadow has crept out from below desks and up the walls of those with growth-heavy portfolios. The sell orders picked up steam early this week, and while the last two days have been far better, the divergent action between growth stocks (cloud, MedTech, Internet, etc.) and other areas of the market is crystal clear.
In our portfolio we’ve felt some pain for sure. Eargo (EAR), Sonos (SONO), Shift4 Payments (FOUR) and 10x Genomics (TXG) all come to mind. But we’ve also seen some resilient action – look at Sprout Social (SPT) and Altair (ALTR). And some stocks have done quite nicely lately, namely Endava (DAVA) and Vail Resorts (MTN). After a scary drop early this week Bentley Systems (BSY) is also looking decent.
There are three ways to handle this. The first is to assume that the sky is falling and that it’s time to run for cover (i.e. sell out of growth entirely). The second is to stubbornly hold the line and take whatever comes, regardless of how much it hurts (not a fan). The third is to find some middle ground.
It should come as no surprise that I prefer door number three.
We’ve already been adding positions that give exposure to more reopening, recovery and economically sensitive trends (BSY, ALTR, MTN, etc.), and we’ve been consistently trimming pure rapid growth positions as well (CHWY, DDOG, FTCH, NET, SPCE, etc.). So there’s no big-picture change in strategy here. It’s simply a matter of continuing to take measured steps and being aware of our surroundings as market conditions evolve.
Inflation is running hot right now, but it could easily prove to be “transitory,” so we don’t want to go all in based on assumptions that may or may not prove to reflect future realities. A year ago the world was crumbling, then it shut down, now it’s starting up again. It’s not like a switch can be thrown and everything goes back to normal. While the digital world took care of us all during the worst of the pandemic the physical world is harder to scale. It will take some time.
Also, should inflation start to look really concerning the Fed can increase rates. It would be very interesting to see how the market would react if that were to happen sooner rather than later, and exactly how raising rates would impact the recovery.
Finally, while growth stocks have sold off a lot of these “digital economy” companies are much stronger now and have larger customer bases than they did pre-pandemic. Some reset is reasonable, but I’m not in the camp that says “growth is dead.” It’s taking a breather for sure, but as it does opportunities are showing up.
Naturally, that will be the subject of discussion next week when the May Issue of Cabot Early Opportunities comes out.
Today, we’re going to trim another position that isn’t acting as well as I’d like. This will free up capital for new opportunities next week. There are others that I’m watching closely so we may make a few more adjustments early next week, but I’d like to see how we close out today and open Monday first.
Sonos (SONO) Moves to Sell
Sonos (SONO) reported this week and the earnings were good (beat expectations), but guidance was conservative, there are likely to be cost increases and there are items out of stock. Long term I think the company will be fine but in the near term it feels like the downside risk has increased. Let’s step aside. SELL