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Growth Investor
Helping Investors Build Wealth Since 1970

May 4, 2022

The market is mostly down this morning, but its growth stocks that are again unraveling—as of 11:15 am EST, the Dow is up 18 points, but the Nasdaq is down 173 points and growth funds are down much more than that.

WHAT TO DO NOW: Remain defensive. We have nearly two-thirds in cash in the Model Portfolio, but the selling in the market in general (and growth stocks in particular) is unrelenting. Today, we’re going to sell two half-sized positions—Pure Storage (PSTG) and Palo Alto Networks (PANW)—leaving us with 75% on the sideline. Details below.

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The market is mostly down this morning, but its growth stocks that are again unraveling—as of 11:15 am EST, the Dow is up 18 points, but the Nasdaq is down 173 points and growth funds are down much more than that.

From a top-down perspective, the story remains mostly the same, with a few secondary-type indicators offering rays of light, be it the number of new lows (still well below the levels seen in January) or sentiment (with many indicators and anecdotal measures showing great pessimism. We’ve even seen defensive stocks (XLP, XLU, XLV, even REITs) take a hit, which we view as a potentially positive sign.

However, to this point, nothing has changed with the action of the market itself, with our trend-following indicators solidly negative and growth stocks continuing to unravel—we continue to see a near-daily deterioration in most growth names no matter what the indexes do.

Thus, we remain open to an upturn, but right now we remain focused on holding lots of cash and waiting patiently for the buyers to return.

In the Model Portfolio, we came into this week with 65% on the sideline, but most of our remaining names are under pressure with everything else. The exception has been Devon Energy (DVN), which cranked out another excellent quarter, with a beefy dividend, lots of cash flow and even less net debt (which could pave the way toward higher payouts down the road), helping the stock spike back to new highs yesterday. We’re holding what we have.

When it comes to our other names, though, we’re going to pare back further tonight. First, we’re going to our half-sized stake in Pure Storage (PSTG)—frankly, the stock isn’t coming unglued like some others, but our loss is right at our limit. We’ll sell and hold the cash. SELL

We’re also going to sell Palo Alto Networks (PANW), which had been holding up terrifically but is now cracking; a few days down was reasonable but now shares are accelerating on the downside along with other cybersecurity names (CRWD is another one coming unglued today). We’ll sell our half-sized position here. SELL

These moves will give us a huge 75% in cash in the portfolio; we’re not craving more cash, so we’ll hold onto our remaining positions for now, though we won’t just hold and hope if the bloodletting continues. Meanwhile, we’re putting most of our efforts into finding potential fresh leaders if/when the market does turn up—eventually, there will be a lot of money to be made, but right now the goal is to avoid most of the bearish action.

We’ll have a full update in tomorrow’s issue (May 5)—don’t hesitate to email me directly at mike@cabotwealth.com with any questions.