WHAT TO DO NOW: The overall market remains in an uptrend, but we’re seeing more and more unusual action among individual growth names, and thus are making moves mostly on a stock-by-stock basis. After a little buying last week, we trimmed our position in DocuSign yesterday, and on a special bulletin this morning, we sold all our shares in both Chegg (CHGG) and Cloudflare (NET). That leaves us with around 43% in cash, which is a bit more than we’d prefer, but we’ll hold onto it until we see signs that buyers are stepping in.
Current Market Environment
Today was a brutal day for the market as a whole and growth stocks in particular. At the close, the Dow was off 808 points, the Nasdaq fell 598 points (nearly 5%) and the average stock we watch or own was down even more than that.
When it comes to the growth stocks, our antennae are up for this reason: When the market and leading stocks enjoy huge runs for five months without any meaningful pullback and then accelerate higher and move out of trend on the upside (including some climactic-type action in a few of the top leaders out there), followed by a ton of sharp selling, history says you’ll usually see some rough sledding going forward. Not horrific necessarily, but challenging.
Now, at heart, we’re trend followers, not trend predictors—sticking with trends means we’re guaranteed never to miss a major upmove nor stay invested during a prolonged retreat; that alone puts you ahead of 80% of investors. And when it comes to the overall market (Cabot Trend Lines and Cabot Tides are still firmly positive) and many individual stocks, most of their trends remain up, which is encouraging.
Indeed, there have been a couple of bouts of unusual (even some abnormal) action among growth leaders during the past couple of months, but the uptrends never broke, and most names were able to steady themselves and resume their advances. That could certainly happen again, as relatively few stocks have truly broken down.
But at the very least, there’s little question that the environment has become far trickier, with quick rallies and rapid drops, tons of rotation (and re-rotation) and lots of news-driven moves, too. That doesn’t mean you should be in your storm cellar, but we think it’s best to be very selective on the buy side and focusing mostly on managing the stocks you have.
In the Model Portfolio, we did a little buying last week, though we pared back a tad yesterday, taking another round of partial profits in DocuSign. Then, in this morning’s special bulletin, we sold all of our shares in both Chegg (CHGG) and Cloudflare (NET), booking profits in each.
That leaves us with around 43% in cash, which is probably too high given the overall evidence; again, the trends of the market and many areas are still up. Thus, we’re keeping our eyes open to see if the bulls can make another stick save—if so, we could put some money back to work in a fresher leader or two (Pinterest is one name we remain intrigued by).
But we’re likely to hang onto our cash until we see signs the buyers are stepping up to the plate.
Model Portfolio
Chegg (CHGG 70) isn’t the worst stock out there, and if we had a decent profit cushion, we might hang onto it (our average cost is around 69). But at this point it’s one of our weaker stocks, having been unable to bounce off its 50-day line and actually moving to new multi-week lows today (just one day off the Nasdaq’s peak). It could set up again in the weeks ahead, and if it does, we could take a swing at it down the road. But we sold our position today via this morning’s special bulletin and will hold the cash. SELL.
Cloudflare (NET 36) was a tough call for us—we do think the company has a good shot at cranking out rapid, reliable growth for a long time, which, combined with its new-ness (being a recent IPO), means many big investors will probably be building positions over time. However, shares actually started to stall stall out back in early July and today slipped to multi-week lows (under the 50-day line; no net progress since late June) on a pickup in volume. Being one of our weaker names, we decided to book our solid profit and move on. SELL.
Dexcom (DXCM 413) appeared to be showing some strength, with shares perking up yesterday on their heaviest volume in weeks. But today’s market rout drove the stock straight back down (albeit on much lighter volume). Net-net, the stock remains stuck in its range, so we’ll remain on Hold. HOLD.
DocuSign (DOCU 242) has been one of the leading growth stocks of this post-crash advance, and it went bananas on Tuesday in concert with the huge rally in Zoom Video (ZM) before suffering a big reversal yesterday and getting clobbered today. We’re not big fans of calling tops—trends can obviously go farther and last longer than anyone expects—but we did think it prudent to again trim our position, selling one-third of our remaining shares in a special bulletin yesterday and leaving us with a modest (~5% of the portfolio) stake. Now let’s see what happens after earnings tonight; we’d be fine with a middling reaction and some sideways trading, but we’re open to any scenario (good or bad). We’ll be on the horn if we have any changes in advice before next week’s issue. SOLD ONE-THIRD, HOLDING THE REST.
Okta (OKTA 209) is a great company that’s going to get a lot bigger over time, a fact that was confirmed in the firm’s quarterly report last week. The financial numbers, as usual, were great—subscription revenue was up 44% and remaining performance obligations (deferred revenue plus backlog) leapt a huge 56%, while both new signups (number of six-figure accounts grew by 105, and half of those were entire new clients!) and growth from existing customers (same-customer revenue growth rate was 21% during the past year) were excellent. Management hiked expectations for the current quarter, but it’s also keeping its eye on the bigger long-term prize: The CEO talked about making identity one of the “first-class clouds” that every company will have, with Okta the gold standard in digital identity. The stock, though, has been all over the place since the report, first diving, then rallying to new highs, and then getting whacked today on big volume. Overall, OKTA’s consolidation of the past couple of months looks OK, though we do have a mental stop in the mid 180s (under the recent low) in case things really fall apart. HOLD.
ProShares Ultra S&P 500 Fund (SSO 78) was hit hard today along with everything else, but this comes after an accelerated run higher, so it wasn’t wholly unexpected; at this point, the fund is still above its 25-day line (now at 75.6 and rising), so the trend remains up. While we don’t trade on individual studies, we saw one interesting one from Steve Deppe (you can follow him on Twitter @SJD10304) over the weekend: The S&P 500 posted back-to-back monthly gains of at least 5% in July and August, something that’s happened just a handful of other times since 1950, with the average gain looking out over the next year well over 20%. It’s just another signpost that this is a bull market, so while some further weakness/consolidation in the major indexes wouldn’t be surprising, we’re OK using dips as chances to enter a leveraged long fund like SSO. BUY.
Our timing on last week’s buys wasn’t good—Roku (ROKU 167) was off to a good start for us, but today’s sharp decline wiped that away. Still, we actually think the stock looks fine, especially given the wallops among most growth stocks, with some huge-volume rallies last week and tame-volume declines the past two days. Fundamentally, one brokerage house said its checks indicate Roku continues to lead the connected-TV market (beating out Amazon and Apple) with higher satisfaction, too. Meanwhile, another analyst recently said it believes Roku’s active accounts can eventually triple from current levels. We’re OK buying a half-sized position here if you don’t own any. BUY A HALF.
Spotify (SPOT 262) looked ready to tag new high ground earlier this week but the picture has changed for the worse during the past two days—on no specific news (possibly some sell-the-news reaction to Joe Rogan going live?), SPOT was rejected at its old highs and has dived back into the middle of its consolidation (and a bit below its 50-day line, too). Big picture, we still think the huge blastoff in June/July means SPOT’s next major move is up, but we also think the sour action this week means the stock isn’t ready to get going just yet. We’re OK holding on here (mental stop on our half position just under 240, below the August low), but we will quickly switch to a Hold rating and see if/when buyers support the stock. HOLD A HALF.
Twilio (TWLO 248) has a very similar pattern as SPOT (a big run, a sharp correction to the 50-day line, a bounce, and then a rejection near its prior highs) and thus we have a similar interpretation—we still view TWLO has a liquid leader that will head higher down the road, but it probably needs more of a rest and consolidation. Given our view that Twilio is an emerging blue chip-type of name, and because we’ve already booked partial profits, we’re willing to give the stock room to breathe. If you own some with a profit, sit tight. HOLD.
Even Wingstop (WING 150) has been caught up in the growth stock selloff, falling down to its 50-day line. The action isn’t pleasant, of course, but we can’t say it’s abnormal, either—any more weakness and we’ll downgrade the stock to hold (mental stop in the low/mid 130s most likely, above our cost basis), but at this point, the pullback is acceptable given the stock’s prior run and general personality (it’s more of a two-steps-forward, one-step-back type of name). A meaningful break of the 50-day line could have us going to Hold, but at this point, we’re OK taking a stab at WING if you don’t own any. BUY.
Watch List
DraftKings (DKNG 38): DKNG remains very volatile on a day-to-day basis, but the three-month base after the massive April-May advance looks like a solid launching pad.
Elastic (ESTC 102): We don’t want to get too heavy in software, but Elastic looks like a fresh leader with its new-age search platform seeing huge demand for many different services (including Uber and Match), security, application performance management and more. The stock broke out last week.
Five Below (FIVE 127): FIVE has done nothing for nearly two years. Now, though, it might be getting going again as business recovers following the shut-ins; the stock gapped up on earnings today despite the horrid market.
Pinterest (PINS 36): PINS remains near the top of our watch list—we think it acts just fine here, and we like the general month-long rest after its huge earnings-induced coming out party. If growth stocks can stabilize, we could start a position in PINS.
Zillow (Z 85): Z has wobbled with everything the past couple of days but remains in a firm uptrend. We think it’s one of the most straightforward plays on the new housing boom.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, September 10. As always, we’ll send a Special Bulletin should we have any changes before then.
