WHAT TO DO NOW: Overall, the evidence for growth stocks continues to slowly improve, but we’re still seeing some stocks and sectors hit major potholes every couple of weeks. In the Model Portfolio, we’re going to sell Five Below (FIVE) today, which has flashed clearly abnormal action, and we’re also placing DocuSign (DOCU) on Hold. Our cash position will now be around 34%.
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The major indexes finished mixed yesterday, with the Dow off 269 points while the Nasdaq was up 11 points, though growth stocks were actually hit fairly hard, with a few more names showing potholes.
Big picture, most growth stocks are acting better, and we actually see a lot of titles (and the Nasdaq itself) extended to the upside. Thus, a near-term pullback wouldn’t be surprising (September is often a tricky month), though in general we’re more optimistic than we were a month ago.
That said, we’re still seeing plenty of potholes out there—every week or two it seems like another individual name or group of stocks comes under pressure, making it harder to play offense.
For us, Five Below (FIVE) has been the big disappointment—after a great-looking breakout and upside follow-through, the stock has been hammered as investors fear slowing growth and rising shipping costs. Fundamentally, we doubt the major story has changed, but it’s hard to ignore the stock’s action—not only has the breakout completely failed, but volume was enormous on the selloff and the stock closed yesterday below its long-term 200-day line. We can’t argue with that; we’re selling our position in FIVE today. SELL
DocuSign (DOCU) is the other stock we wanted to briefly comment on. After making no progress for a couple of months, Friday’s bullish earnings reaction was encouraging, but DOCU gave that move back yesterday and closed below its 50-day line. We’re not panicking and are willing to give shares some rope, especially given the still-bullish growth story, but given the lack of progress and yesterday’s reversal, we’ll go to Hold. HOLD
The sale of Five Below will leave us with around 34% in cash, which we’ll hold onto for now, though barring a meltdown, we’re thinking a week or two of rest/pullback in some strong growth stocks could offer up some solid entry points in a bit.
We’ll have more in Thursday’s issue of Growth Investor—until then, don’t hesitate to email me mike@cabotwealth.com with any questions.