WHAT TO DO NOW: Though we gave it every chance to hold up, Datadog (DDOG) is taking on more water after earnings last night. We’re forced to cut our loss today, which will leave us with north of 50% on the sideline. That’s probably too high, but for the moment, we’ll stand pat and see if the meat grinder environment for growth stocks dissipates.
The major indexes are bouncing this morning, and growth stocks are stabilizing, which is a good first step. As of 9:55 am the Dow is up 75 points and the Nasdaq is up 169 points.
The overall market remains in good shape, and as we mentioned in yesterday’s bulletin, the post-election thrust should portend good things in the months ahead. That said, the question is whether the rotation out of growth stocks during the first two days of the week is a short-term event, or the start of a longer-term repositioning.
As usual, we’ll just take it as it comes, but for now we’re focused on following the plan and identifying growth-oriented names that are holding up well (and may also have exposure to the economic-reopening theme).
Today’s bulletin is about Datadog (DDOG), which bounced nicely last week but has gotten caught up in the growth stock selling this week and, today, is falling sharply after a good-not-great quarterly report. The underlying story—best-in-class application performance and infrastructure monitoring platform—is intact, as are some key sub-metrics (30%-plus same customer revenue growth; customer count itself up 38%) but the bugaboo here looks to be decelerating growth, with sales up 61% in Q3 (down from 68% and 87% growth the prior two quarters) and more slowing expected going forward (35% growth expected in 2021).
Maybe the stock just needs more time to rest, but regardless of the numbers, the stock has tripped our loss limit today, so we’re forced to cut the loss today. SELL.
The sale of DDOG will leave the Model Portfolio with north of 50% (probably something like 53% when all is said and done) on the sideline—frankly, we think that’s too high and will be looking to put some back to work if today’s stabilization in growth stocks can hold for a few days. If this is “just” another week-long rotation, which we’ve seen a few times during the past year, then there should be many enticing leaders to jump on.
However, at this moment, we don’t want to throw money into what’s become a meat-grinder environment for growth stocks. Thus, we’ll sit tight here but, as always, will be on the horn with any updates (including tomorrow’s regularly scheduled update) as need be.
Don’t hesitate to email me directly (mike@cabotwealth.com) with questions.