Model Portfolio Update

After a very solid three-week stretch that brought many growth stocks back to their old highs (or out to new highs), we’ve now seen a couple of weeks of choppy, pothole-filled action. To us, it’s not surprising and is the reason why we didn’t go whole hog during the past couple of weeks—earnings season (whether caution ahead of the report or a reaction to the report) has dented a few names.

Still, any damage has been reasonable to this point, with most stocks simply pulling back after good runs. We do think the wobbles (and continued spate of earnings reports coming) is a reason not to get fully invested, but until proven otherwise, we remain bullish.

In the Model Portfolio, we’ve had a couple of discouraging moves, including with our most recent buy (CRWD), but again, nothing that makes us believe we’ve seen a major character change. Tonight, we’re going to start a half-sized position in Dexcom (DXCM), leaving us with around 18% in cash.

Current Recommendations

Ambarella (AMBA)—AMBA will likely report earnings late this month or at the start of December, which is always a risk, especially given the stock’s recent run. However, we’re pleased to see many chip stocks (including those that have exposure to the auto market and electric vehicles, like Ambarella) react well to earnings, and any further announcements of deals with auto makers should help perception. (A deal with Dongfeng Motor Group in China caused the stock to pop in late September.) Moreover, chart-wise, AMBA’s huge blastoff on September 1 usually kicks off uptrends that don’t up and die after just three months. We are open to a shakeout given that shares are extended to the upside (50-day line at 156 but rising fast), but we remain optimistic that both the stock and the firm’s bottom line have only recently kicked off a big uptrend. We’re OK buying a half-sized position on dips of a few points. BUY A HALF

Asana (ASAN)—Software stocks have been a bit of a mixed bag, with some names (both new and old) acting well and others stuck in the mud. But ASAN continues to act just fine, with some sharp volatility of late (one 7- and one 10-point drop during the past two weeks) looking normal in the context of its overall advance. Now, it’s a fact that shares have had a big run since the summer, so we’re not complacent—earnings are due out in a month (December 2) and we’re always on the lookout for abnormal action. But so far, both big investors and insiders (mostly the CEO) are clearly bullish, and we’re open to the possibility that the relatively new cloud workflow management area (which Asana leads, though there are a few other successful players) could be one of the next must-have capabilities given how the work-from-home trend isn’t going away. Long story short, we’re holding on to what we own, though new buyers should either start small or aim to enter on the occasional dip. BUY

Cloudflare (NET)—Cloudflare reports earnings tonight, with analysts looking for $166 million in revenue (up 61%) and a loss of four cents per share—though, given the monstrous upmove last month, it wouldn’t shock us if expectations were meaningfully higher than that. We toyed with taking partial profits ahead of the report, as a pullback of some sort is obviously possible, but we decided to stick with what is our strongest stock (and one of the strongest growth stocks in the entire market) until the sellers are at least able to put up a fight. An outsized retreat on earnings could have us shaving off some shares, but we continue to believe the unique story here and out-of-this-world upside volume after the October low will carry NET higher over time. We’ll stay on Buy but will have updates following tonight’s report if need be. BUY

CrowdStrike (CRWD)—As we mention briefly later in this issue, timing is vital in this environment, especially when it comes to entry points, and there’s little doubt our timing is off so far when it comes to CRWD—two days after we entered, the stock was powering ahead to new highs, but some weakness in growth stocks and an analyst downgrade (which raised the specter of competition and slowing growth) have caused a buyers strike. Fundamentally, we’ll have to see it to believe it when it comes to competition; in the last conference call, management was openly discussing how, while CrowdStrike has 13,000-ish clients now, the best legacy players have around 100,000, implying a massive runway of growth in the years ahead. Plus, the firm’s latest batch of new product announcements should attract new customers and provide plenty of cross-sell opportunities to its client base. That said, we’re not ignoring what the stock has done; the failed breakout wasn’t good to see, and even today’s bounce came on tepid volume compared to the downgrade-inspired retreat. A drop to 250 or below could have us cutting the loss, but tonight we’re going to stay on Buy, believing the weight of the evidence remains tilted to the upside. BUY

Devon Energy (DVN)—DVN is still getting yanked around by oil prices on a day-to-day basis, but the Q3 report left little doubt that the future is bright. In the quarter, the company produced a whopping $1.1 billion of free cash flow (about $1.60 per share), which led to a fixed-plus-variable dividend of 84 cents per share in the quarter (to be paid out December 30), up from 49 cents in Q2. Just as bullish was the early 2022 outlook—at $70 oil and $4 natural gas (both solidly below today’s prices), Devon believes it will earn about $6 per share of free cash flow next year, which would lead to big dividends and, as was announced yesterday, a likely beefy share repurchase program as well ($1 billion authorization, equal to nearly 4% of the outstanding stock). Shares didn’t react much to the news as oil prices have been a bit weak in recent days, but the overall chart looks fine, with the stock holding near its highs even after a big move. With DVN and other peers (like FANG—see Other Stocks of Interest) reporting jaw-dropping cash flow numbers and offering bullish projections and spending discipline, we think investor perception is steadily coming around to the view that the oil group, after years in the doghouse, could be in a sustained rally. Hold on if you own some, and if not, you can enter here or on dips of a couple of points. BUY

Dexcom (DXCM)—Dexcom is a familiar name if you’ve been with us for a while—the company has long been a leader in continuous glucose monitoring systems (CGMs), an industry that has definitely caught on but has tons of growth potential going forward, with just 40% of Type 1 diabetics and half of insulin intensive Type 2 diabetics in the U.S. (and less overseas) currently using a CGM. Competition (mainly from Abbott) and other factors occasionally affects this stock, which has a history of cooling off for a year or more before getting going again (often because of a fresh catalyst). And that seems to be happening now—sales growth has remained solid in the 25% to 30% range, but DXCM began to emerge in June as investors looked ahead toward the launch of its G7 device later this year (in Europe) and likely early next year (in the U.S.). Earnings are expected to lift nearly 30% next year, and the stock reacted well to earnings after a six-week rest. It won’t be the fastest horse, but we think another major uptrend in DXCM is underway—we’ll start with a half-sized position here. BUY A HALF

Dynatrace (DT)—We can’t say DT is completely out of the woods yet, but the stock has done a very good job of bouncing following Q3 results. Helping the cause was likely much of management’s commentary on the conference call, where it again touched on the fact that it’s seeing more and more opportunities as so many big companies need better visibility into all their apps and systems even as they operate in different cloud environments. (The average new client deal has crept up from $90,000 to $105,000 during the past couple of years.) Moreover, among current clients, the top brass sees tons of upside (14 straight quarters of 20%-plus same-customer revenue growth) as they sign up for more modules and have more apps covered by Dynatrace’s platform. Back to the stock, we’re not going to lose money on our trade (cost basis in the 66 area), so if we do see a big batch of fresh selling, that will be our line in the sand. But right now, we’re keeping our optimist’s hat on, thinking the earnings-induced dip was a shakeout. BUY

Floor & Décor (FND)—Floor & Décor is the second of our names that will report earnings tonight. As we’ve written before, a lot of attention will be paid to supply chain and cost issues (earnings are expected to be roughly flat in Q3 and Q4 despite nicely higher revenues) and whether they’re short- or intermediate-term problems. Encouragingly, earnings estimates have been crawling higher in recent days, and the stock certainly seems to be looking ahead to a re-acceleration in the bottom line—FND has rebounded beautifully from its early-October slide, notching new highs on good volume today. A plunge on earnings back to the October lows (call it 115 or so) would look abnormal on the chart, but after so many pullbacks and shakeouts in recent months (FND has struggled through four retreats of 16% to 25% since February!), there’s no reason the buyers can’t stay in control for a while if the Q3 report is pleasing. We’ll stay on Buy but will be on the horn with any changes after the report. BUY

ProShares Ultra S&P 500 Fund (SSO)—The usual caveats apply to the S&P 500, as it’s had an extended overall run and the recent recovery has brought about some jubilant sentiment readings, which often (not always) leads to some near-term rough sledding. But, bigger picture, the odds favor higher prices ahead—as we write later in this issue, a couple of seasonality-related studies (not usually our favorite things, but these look solid) bode well for the next few months, effectively backing the view of our trend-following indicators that the bull market has legs. Encouragingly, other indexes (Russell 2000) are joining the party, emerging from multi-month consolidations that should lead to higher prices. We’re sticking with our Buy rating on SSO, though as with many strong stocks and indexes, some sort of pullback wouldn’t shock us in the days ahead. BUY

Watch List

• Affirm Holdings (AFRM 169): AFRM has seen buying pressures dry up a bit, but the stock remains perched near its highs as earnings approach (November 10). See more below.
• Coinbase (COIN 344): COIN remains very strong, though it still is affected by crypto movements and has earnings on November 9. We like it but aren’t chasing it here.
• Snowflake (SNOW 357): SNOW’s had a low-volume rally to new recovery highs in recent weeks, but there’s still overhead to chew through and earnings out in early December. We like it but want to see a better setup.
• ZoomInfo (ZI 72): ZI might be starting to break through resistance in the 70 area thanks to another fantastic earnings report this week. If it can get moving, we’ll likely take a position. See more later in this issue.