WHAT TO DO NOW: The market took a hit today, which wasn’t totally unexpected; overall, the damage was contained, with the Cabot Tides remaining positive and most growth stocks still in good shape. We’re still leaning bullish, but we’re also taking things on a stock-by-stock basis. In the Model Portfolio, we’re adding a half-sized position (5% of the portfolio) in Penn National Gaming (PENN), which will leave us with around 18% in cash. Details below.
Current Market Environment
Stocks sold off sharply at the open today, but support showed up and the damage ended up being reasonable. At day’s end, the Dow was down 26 and the Nasdaq lost 56.
Stocks were a bit hot and heavy coming into today, and when that happens, an expected news event can have an outsized impact. That news came last night when glamour stock Fastly (FSLY) preannounced a sour Q3 outlook, which sent many tech-related growth stocks lower today, with the indexes joining the slide.
Today was a shot across the bow, but it hasn’t changed the evidence—our Cabot Tides remain on the positive side of the fence, and while growth stocks took hits, very few broke any sort of key support.
Of course, time will tell if today is the start of a rougher patch for the market and growth stocks, but really, we were half-expecting some unpleasantness—as we wrote in last week’s issue, the evidence has steadily improved, but (a) the picture isn’t perfect (plenty of stocks rallying for a few weeks right into tough resistance, sort of like the big-cap indexes) and (b) the recent rush of new highs in many stocks is good longer-term, but shorter-term often tells you a lot of buying power has been spent.
Thus, today doesn’t appear to be a game changer, either for the market (more positive than not) or individual stocks.
As a result, not much has changed with our overall view: We’re open to buying, but are taking things on a stock-by-stock basis (especially given the barrage of upcoming earnings reports). Tonight, we’re going to put a little more money to work by purchasing a half-sized position in Penn Gaming (PENN), which has rested for four weeks and should be near a good entry point. Our cash position will now be around 18%, though we still have two names (DXCM, WING) on tight leashes.
Model Portfolio
We’ll start with Penn National Gaming (PENN), which we’re buying a half-sized (5% of the portfolio) position in tomorrow. The company is one of the leaders in the new iGaming and online sports betting theme; the recent launch of its Barstool Sports betting app in Pennsylvania has been a hit, and the company is planning to go live in many more states in the months ahead. Penn National also operates more than 40 casinos, and besides the recovery as states open up, there’s growth potential there from cross pollination—getting some of its current 20 million loyalty members to also bet online, while pushing some of the 66 million viewers of Barstool’s various media into its brick-and-mortar casinos. As for the stock, it broke out in late August and had a big run, but has now calmed down for four weeks as the 50-day line (now near 61) catches up. There is risk here—peer DraftKings (DKNG) has flashed a little abnormal selling after a share offering and with the recent COVID positives in the NFL, plus earnings for PENN are due out October 29, which can always change a stock’s landscape. (PENN can also be very volatile on a day-to-day basis.) But we like the story and setup, so we’ll start with a 5% position here, use a loose stop in the mid/upper 50s and look to fill out the position if PENN pushes higher and gets through earnings. BUY A HALF.
Datadog (DDOG) was yanked sharply lower at the open this morning on the FSLY news, but ended up hanging in there well; really, the stock broke out around 95, so anything above there should be OK. (Our mental stop is in that area, too.) Earnings are likely out in early-ish November, which will have an impact, but all indications point to good things, be it the story, the numbers, the chart (record-volume breakout a couple of weeks back) and even the news flow (Datadog’s integration into Microsoft’s Azure could be big). We’re OK grabbing shares here or on further dips. BUY.
Dexcom (DXCM) remains range bound, though that’s not terribly surprising given that the Q3 report is out in just a week and a half (October 27). Nothing has changed with the story, but the key thing on investors’ minds will be whether competition is likely to eat into Dexcom’s growth rate going forward. Right now, analysts are skeptical of that—earnings are expected to rise 41% this year and 25% next, and the firm usually trashes estimates—but we’ll see if any nuggets emerge on the conference call. Elsewhere, we’re seeing some other diabetes stocks that weren’t leaders earlier this year move out to new highs; we take that as a small plus (industry strength), but DXCM’s next major move is likely to come down to the quarterly report. We’ll continue to hang on with a mental stop in the 360 to 370 area. HOLD.
Our timing was a bit off with Five Below (FIVE), but the retreat was normal and now it’s rebounding back toward its highs. Obviously, the market will have a near-term impact on the stock, and as we wrote recently, FIVE could be pushed/pulled by election-related stuff (which could have an impact on tariffs, etc.). But barring a huge change in the environment, we continue to think shares are headed higher after a two-year correction and consolidation as the growth story is back on track. Hang on if you own some, and if not, we’re fine picking up shares here. BUY.
Pinterest (PINS) sloughed off a bit today but looks just fine, holding nearly all of its recent push higher. We think the stock has a bright future, but the near-term will likely come down to the Q3 report (due out October 28); analysts see sales up 35% and earnings of two cents a share, but as with every online operator, the key will be whether the huge growth trends seen in the summer (ad revenue up 50% in July) have completely vanished or if there’s been a sea change among advertisers. We’re optimistic, obviously, but if you’re a new buyer, it’s prudent to keep it small this close to the report. BUY.
ProShares Ultra S&P 500 Fund (SSO) recovered more than 80% of its September decline, which is a strong showing, and the recent three-day slide has (so far) been normal, keeping our Cabot Tides in positive territory. Some further ups and downs wouldn’t be uncalled for when looking at the big picture—the market could need more time to catch its breath after the March-August advance—but there’s little doubt most of the signposts out there continue to point up. Hang on if you’re already in, and if not, SSO remains a good way to get a foothold in the overall bull market. BUY.
Roku (ROKU) has been acting very well, accelerating higher during the past couple of weeks on some good news (Roku Channel now available on Amazon Fire TV, Android and iOS devices) before the latest hiccup—on the weekly chart, shares have moved up and out of their year-long consolidation, which is always a plus. Of course, ROKU did get away from us on the upside before we could fill out our position, though we continue to think patience will pay: The stock has a history of volatile movements and, short-term, ROKU is extended to the upside (the 25-day line is around 194; gap in the chart near 215). All in all, you should hold on if you own it, but we’ll only buy another half-sized position if ROKU can pull in normally for a bit. If you’re not yet in, aim to start a half position on dips of a few more points. BUY A HALF.
Seagen (SGEN) has a new name (changed from Seattle Genetics for whatever reason; stock symbol is unchanged), but there’s no change in the overall story or outlook, with big-time growth likely to continue thanks to its new products. With that said, SGEN has never really been a “runaway” stock, so a rest after the recent advance wouldn’t surprise us, especially with earnings (October 29) approaching. Thus, we feel similar here as with many strong stocks—big picture, a new uptrend is probably underway, but the next week or two could be choppy, so aim to pick up shares on dips. BUY.
Twilio (TWLO) popped after its bullish long-term outlook a couple of weeks ago, and it followed through on that strength this week after making a good-sized acquisition. Twilio spent $3.2 billion to buy a private company named Segment, which puts the company in the newer customer data platform space, allowing Twilio’s total offering to capture customer data via its current tools (messaging, email, etc.) and allows it to be sliced and diced by analytics platforms and the like. Wall Street applauded the move (management said Segment would actually accelerate Twilio’s top-line growth, so it’s obviously growing fast), though shares have pulled back the past couple of days. Like everything else, another few points on the downside are possible with earnings (due October 26). BUY.
Wingstop (WING) remains on thin ice, but it continues to hold key support and is actually tightening up a bit, which could be a sign the sellers have left the building. Of course, much more weakness would have us cutting bait, but we’ll continue to follow the plan and give WING a chance to perk up. HOLD.
Watch List
Beyond Meat (BYND 185): We like the consumer-focused story here, as well as the growth and the strong stock (new multi-month highs this week). Our only rub is that BYND is hard to handle, regularly etching 5%-plus daily ranges.
Bill.com (BILL 116): We’ve always liked Bill’s straightforward, powerful growth story, and now the stock has kicked into gear after months of choppy action. Earnings are due November 5.
Cloudflare (NET 59): NET is back in gear with a ridiculous-volume breakout on Monday. It got tossed around today by FSLY but remains in fine shape. Earnings are due November 5.
CrowdStrike (CRWD 145): CRWD is up eight weeks in a row (not counting this week), so the recent dip isn’t unusual or abnormal. A few more days of resting could reveal a good risk-reward entry point.
Square (SQ 188): Like many stocks, SQ has decisively lifted to new highs of late, so any multi-day pullback should offer up a solid entry point—though earnings (due November 5) will be key.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, October 22. As always, we’ll send a Special Bulletin should we have any changes before then.
