WHAT TO DO NOW: The market and big-winning growth stocks from this year remain iffy—today’s drop put our Cabot Tides on the fence and many growth stocks are still in a rough patch. However, there’s also some fresher leadership that’s acting resiliently, looking to take pole position for the market’s next sustained advance. All told, tonight, we’re going to remain cautious, but we are repositioning the portfolio a bit—we’re selling our half position in Spotify (SPOT) but adding a full position in Five Below (FIVE) and half positions in both Pinterest (PINS) and Seattle Genetics (SGEN). We’ll still have about 40% in cash even after these moves. Details below.
Current Market Environment
The market was hit fairly hard today, with the Dow off 130 points and the Nasdaq down 140 points.
Following a short, sharp downdraft two weeks ago—took the S&P 500 down 7.7% and the Nasdaq 11% from its high—the big-cap indexes did bounce a bit, but the recoveries were just OK, with both indexes recouping only 40%-ish (give or take) of their declines before the selling kicked in again. After today’s decline, our Cabot Tides are on the fence, as most indexes are at or (very slightly) below their 50-day lines.
Moreover, a scan of the initial growth leaders that suffered abnormal action shows little ability to bounce, with some hitting lower lows today. Going along with that, the number of stocks hitting new highs on the Nasdaq has remained tame (89 yesterday vs. 260 during the August heyday).
All of the above means we still see a good number of yellow flags out there for the major indexes and for growth stocks, both of which are wading through a rough patch that will probably take some time to complete as big investors move money around.
However, it’s not all doom and gloom—we’re encouraged to see many fresher names show constructive action, including etching solid launching pads, flashing big-volume accumulation or (in a few cases) sporting breakouts to new highs. That doesn’t erase the other worries, but the fact that money has moved into some less-obvious growth plays (as opposed to into defensive stocks … or out of the market altogether) is a plus.
Looking at the total picture, we’re certainly not eager to be heavily invested given the yellow flags and the Tides; we’re glad we pared back ahead of the abnormal action and then threw some stuff overboard as it broke down two weeks ago. That said, this still appears to be a correction/rotation within an overall bull market (around 30 new lows today on the NYSE and Nasdaq combined!), and while more time is likely needed for that correction to finish up, some new leadership could be taking pole position for the next advance.
All in all, we’re going to remain in a cautious stance, but we’re also going to reposition the portfolio a bit into some of the fresher, more resilient situations.
Tonight, on the sell side, we’re going to cut bait with Spotify (SPOT), which is showing us a loss and has slipped below our mental stop. Wingstop (WING) is still a Hold but that’s next on the chopping block if it doesn’t hold up.
On the buy side, though, we’ll add a full position in Five Below (FIVE) and half positions in both Pinterest (PINS) and Seattle Genetics (SGEN). That will leave us with a still-elevated 40% cash position. From here, we could do some more reshuffling, but as always will just see how it goes.
Model Portfolio
As usual, we’ll start with the new additions.
Five Below (FIVE 134) is an old favorite of ours, and we think it’s resuming its major uptrend after two years of trade wars and pandemic shut-ins. There is some old overhead up here from early last year, but we’re thinking the long period of no progress (plus, of course, the crash earlier this year) has knocked out the weak hands. After the early-year, virus-induced hiccups, growth should reaccelerate from here—and long-term, the company should get back to its reliable 20% growth path it had been on before 2019. We’ll add a full (10% sized) position here. BUY.
We’ve been keeping an eye on Pinterest (PINS 37) since it gapped up on earnings at the end of July—and since then, the stock has basically gone sideways as growth stocks have chopped and as the stock has consolidated that big move. But there’s been no major selling during that time, and the Q2 report made it appear that the company is turning the corner into being one of the big advertising platforms out there; growth should accelerate nicely from here while the bottom line leaps into the black this quarter and grows from here. Of course, PINS could be viewed as a pandemic play (a negative right now), and the stock is still in this consolidation mode, so we’ll start with a half-sized position (5% of the portfolio) and use a stop under the 50-day line (currently above 32 and rising). BUY A HALF.
Seattle Genetics (SGEN 176) has long looked like an emerging blue chip in the oncology field, though the stock has been hot and cold, most recently dropping for eight weeks as biotech titles were out of favor. But the stock has flashed a big clue this week, thanks in large part to a deal with pharmaceutical giant Merck, which inked development and commercialization deals for two treatments (one of which is on the market), as well as taking a $1 billion equity stake in SGEN. We’ve always liked the underlying potential here, sales and (in late 2021) earnings are ramping and we think the big volume clue this week means the trend has turned back up. We’ll start with a half-sized position. BUY A HALF.
Dexcom (DXCM 386) is still under pressure, living under its 50-day line and having issues getting back above 400. That said, partially because it wasn’t “hot” coming into this latest pothole, shares haven’t come unglued, either, and we’re willing to give the stock some rope given our profit cushion (including having taken partial profits) and the unique, reliable growth story. If you have a loss or a small profit, you probably want to be relatively tight with DXCM, but given our big cash position we’re using a mental stop in the 340 to 350 area, give or take. HOLD.
ProShares Ultra S&P 500 Fund (SSO 74) has come in with the market of late, testing its 50-day line for the second time in as many weeks. As we wrote last week, we could take partial profits if the bottom falls out of the market, but right here, we’re putting more emphasis on the bullish longer-term trend and background indicators (blastoff measures, some studies we’ve highlighted, etc.). If you don’t own any, we’re fine picking up some shares here, though you might want to keep it on the small side. BUY.
Roku (ROKU 165) remains all over the place; moves of a few points in a day aren’t unusual in this volatile name, especially in this tricky environment. But we continue to think it’s acting pretty well, holding its 50-day line and seeing next to no big-volume selling even when the market turns ugly (like today). Obviously, if the market really tanks then all bets are off, but we think ROKU’s fundamental positioning, recent resilience and some excellent price-volume action in recent weeks and months bodes well. BUY A HALF.
Spotify (SPOT 234) found some good-volume support yesterday, but while it held up today it’s still sitting beneath our mental stop. Bigger picture, we think SPOT will eventually have another upmove, but we have a loss and the stock hasn’t been able to get out of its own way. Throw in some uncertainty regarding competitive matters (battles with Apple) and we’re going to cut the loss here and look for greener pastures. SELL.
Twilio (TWLO 222) doesn’t look great, but we still think the current correction is normal in the grand scheme of things (the breakout in May was around 170) and that the fundamental story is one that will attract big investors. We’re using a looser leash here (down in the 210 area, maybe even a few points below that), thinking TWLO’s correction will eventually give way to higher prices. HOLD.
Wingstop (WING 134) remains right on the edge of being kicked out (we don’t want a decent profit to turn into any sort of meaningful loss) but, so far, shares have been able to hold on to key support. Again, we think the company is on a rapid, reliable growth track, so if WING can fight its way out of this hole, we’re happy to hang on, but we’re just playing it by the book at this point—holding but with a tight stop. HOLD.
Watch List
Beyond Meat (BYND 157): BYND has a good story, excellent growth numbers and the chart shows a nice launching pad forming. After a lot of accumulation off the March lows, we think this can be a leader of the next upmove.
Datadog (DDOG 87): DDOG topped ahead of most growth stocks, but that means it’s now closer to finishing a potential new launching pad. As the leading platform for application performance management, we think the future is bright.
DraftKings (DKNG 53) and Penn National (PENN 73): Both stocks have gone nuts on the upside as new deals are inked and sports betting booms now that the NFL and college football are back. We’d be interested in playing one of them on their first pullback.
Elastic (ESTC 102): ESTC is still being pushed/pulled by the moves in software names (which are lagging), but it’s a fresher name in the group and is holding its breakout from last month.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, September 24. As always, we’ll send a Special Bulletin should we have any changes before then.
