NOTE: We’re sending this a couple of days early as we’ll be busy with Cabot’s Wealth Summit, which is being run this evening through Thursday afternoon. I’ll still be available for emails, so don’t hesitate to get in touch if you have any questions.
WHAT TO DO NOW: Remain a bit cautious. The overall market looks fine, and this week, we’re happy to see some growth stocks find their footing. But overall, our opinion hasn’t changed much from last week’s issue—many growth stocks still look tired after big runs, and while we wouldn’t mind putting a little of our 36% cash position back to work, we’ll stay patient and look for more strength to develop. We have no changes tonight.
Current Market Environment
The market is mixed as of 2:45 pm eastern, with the Dow down 32 points while the Nasdaq is bouncing 77 points.
This week is off to a good start for growth stocks—many of the names that have been acting wobbly during the past couple of weeks bounced decently yesterday and today. We’ll take it, but so far, it doesn’t look decisive; we’re seeing a lot of stocks that fell (for example) from 100 to 82 that are now back to 88, that sort of thing.
That’s good to see and better than the alternative, but it really doesn’t change our overall view: Many growth stocks look ragged after big runs with lots of choppy-to-down action, contributing to a general thinning out of the advance (the number of stocks hitting new highs remains about half of what it was a week or two ago).
Of course, as we wrote in last Thursday’s issue, it’s far from a disaster—the market’s trends look good, some new leadership has emerged, and we’d say there’s been more iffy action (low-volume rallies, quick declines, repeated selling on strength) than outright breakdowns.
Thus, we’re not running for the bunker, but we continue to think paring back on any stocks that are acting funky makes sense, while picking your spots and stocks carefully on the buy side.
The Model Portfolio remains in good shape, up nicely on the year, which is always a good thing. We came into this week with 36% in cash, and we’ll continue to sit tight—we like this week’s initial bump in growth stocks, but want to see more (including some fresh moves to new highs in some names) to conclude big investors are back on the bandwagon. We have no changes tonight.
Model Portfolio
Chegg (CHGG 77) looks like a lot of growth stocks—it was hitting new highs a couple of weeks ago, but then fell sharply (90 to 74) before a modest bounce that already found some sellers. To be fair, there were extenuating circumstances today—the firm is offering $750 million of convertible notes, which usually brings short-term selling pressure (convert owners sell the common stock as a hedge). Still, not much has changed with our thoughts: Big picture, we think CHGG likely has further to run, and we like the fact that shares are still holding their 50-day line. But near-term, shares could easily pull in further. We sold one-third last week and are giving our remaining shares plenty of rope. HOLD.
Most growth stocks have bounced this week, but Cloudflare (NET 40) has been one of the few that’s done so on solid volume, which is always encouraging. Of the stocks we booked partial profits in lately, NET is probably the best positioned chart-wise, so if things do shape up, we could return to a Buy rating for new buyers, especially because the story seems so reliable; management made it a point to say even areas that are usually slow to adopt the cloud (including small business, Europe, industrial companies) are now coming on board in the new reality. If you don’t own any and want to nibble, we won’t argue, but officially we’ll stay on Hold for those that own some and have already booked partial profits. HOLD.
Dexcom (DXCM 440) keeps finding resistance in the 440 to 450 area, but it also keeps finding support quickly after each of its selloffs, bouncing back toward its highs. As we wrote last week, we think the next big move for the stock is likely up following the last three months of rest as the fundamental story and numbers (earnings expected to rise 41% this year and 25% next—both are which are probably low) are as good as ever. Similar to NET, if you don’t own any and want to start with a small position here (or on the next wobble), we won’t argue against it, but we’re waiting for a decisive (big volume) show of strength before restoring our Buy rating. HOLD.
DocuSign (DOCU 209) has bounced about halfway back from its recent decline (230 to 190 to 210), which is better than most growth leaders out there. Again, though, volume has been very light (similar to what we saw in late July), which isn’t ideal. Like most stocks, the intermediate-term picture will probably be revealed after earnings (due out September 3); analysts expect another quarter of fantastic growth (sales up 35%, earnings up 700%), though more recent trends concerning adoption of its e-signature and contract agreement platforms will be key. Given the entire picture, we think a Hold rating remains appropriate as DOCU consolidates its massive year-to-date gains. HOLD.
It’s a similar story with Okta (OKTA 204) as it is with most growth stocks—shares have started to bounce back, and we did like the pickup in volume yesterday, but it’s recouped far less than half of its recent dip. Again, as with all our remaining names, the long-term trend is up, and given that OKTA just emerged from a big “reset” base in April and what’s likely to be huge demand for its identity solutions for years to come (remember the firm’s outlook for 30%-plus revenue growth through 2023, and that was before the pandemic changed the world), we think higher prices are likely down the road. But here and now, sellers continue to show up, and given that earnings are coming up quick (due August 27), we’ll stay on Hold. HOLD.
ProShares Ultra S&P 500 Fund (SSO 75) continues to crawl higher, with volatility dropping off to lower and lower levels (partly due to summertime, but that’s not always the case). Such calm action can lead to short-term dips as the market likes to “shake the tree,” but bigger picture, the positive trends and encouraging background indicators (blastoff indicators and studies) tell us this bull market should have much farther to run. We’re OK buying some here, though we’d prefer to get in after a couple of down days. FYI, the stock split two for one today, hence the lower price, though it has no effect on our holdings or opinion. BUY.
Twilio (TWLO 251) has lifted a bit this week but hasn’t been able to get off its knees very well overall (down from 290 to 240, now up to 250), though it remains north of its 50-day line, which never hurts. A strong move back up to, say, 270 or something would go a long way toward hinting the recent dip was “just” a shakeout, but we continue to think TWLO probably has more shaking and baking ahead of it. We sold one-third of our shares two Friday’s ago and are holding tightly to the rest. HOLD.
Wingstop (WING 161) also isn’t exactly running away on the upside and could bob and weave in the next week or two, but it’s hard to find too much fault here, with shares holding north of their 25-day line. We don’t invest based on economic indicators (they’re lagging, not leading), but it was hard to ignore last week’s retail sales report, where that metric had already fully recouped its pandemic-related decline! Of course, that’s a 10,000-foot view, and WING will dance to its own tune, but it’s a good backdrop to have. Either way, with the stock’s uptrend looking good, we’ll stay on Buy. BUY.
Watch List
Alibaba (BABA 260): Nice, tight basing area, and earnings are due out Thursday – could be buyable on a positive reaction.
DraftKings (DKNG 37): DKNG’s initial reaction to earnings was relatively muted, but it’s perked up this week. Volatility remains very high here, but so does the potential.
Peloton (PTON 71): PTON is definitely one of the best looking of all the glamour stocks, holding its 50-day line (good) and, today, powering back toward its highs (better). The trick is that Q2 earnings are still on the docket, due out September 10.
Pinterest (PINS 36): PINS and SPOT (below) are the two top names on our watch list right now – we wouldn’t mind starting a half position in each if growth stocks stabilize.
Spotify (SPOT 256): SPOT remains tempting, as the first test of its 50-day line (happening now) is usually a high-odds entry point. Still, given the environment, we’d like to see a show of strength before entering.
Zillow (Z 82): Zillow has a few different lines of business, but the overall story is simple: It’s a straightforward play on the new housing boom that’s picking up steam in a hurry (housing starts today easily surpassed expectations).
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, August 27. As always, we’ll send a Special Bulletin should we have any changes before then.
