WHAT TO DO NOW: Be cautious. Growth stocks have been under pressure since early/mid-October, and our Cabot Tides buy signal has fallen by the wayside. It’s not a disaster out there, of course, but we continue to focus mostly on individual stocks, pruning those that crack while holding those that are pulling back normally. We sold Dexcom (DXCM) and Penn National (PENN) and are sitting with a cash position of 37%. We have no new changes tonight.
Current Market Environment
As of 1 p.m. eastern, the indexes are up on the day—the Dow is up 71 points and the Nasdaq is up a solid 159 points—but growth stocks, which have been under pressure for a while, are mixed.
The weakness in growth stocks we noted in last week’s issue has spread to the rest of the market this week—most major indexes we track have cracked their 50-day lines, erasing the Cabot Tides buy signal from a couple of weeks ago and dragging most stocks (growth or otherwise) lower. Indeed, after yesterday’s implosion, just about 31% of NYSE and Nasdaq stocks were above their 50-day lines, and the number of stocks hitting new lows has picked up steam.
To be fair, the bigger picture isn’t all bad—not only are our Cabot Trend Lines still solidly positive, but taking a step back, the major indexes seem to be continuing their correction/consolidation that began at the very start of September. Given the prior March-August advance, it’s not abnormal for the market to need some time to digest, and we’re now nine weeks into that process.
As for individual stocks, the picture has definitely turned darker, with most of the breakouts seen in late September/early October having failed, and with a few names beginning to bust intermediate-term support. That said, most leaders we own or follow are still pulling back normally (although very tediously) to support, so we can’t say the sellers are in control.
In fact, if the buyers can flex their muscles soon (a couple of days of big-volume buying), we think there could be many good risk/reward entry points among some fresh leaders. But you could have said that a few days ago. Thus, it’s better to wait for the buyers to appear before doing much buying.
Of course, next week’s election results (or contested results) could be one reason for the recent weakness, but we’d be careful about assigning reasons for the selling (or buying), or getting too deep into predictions about who’s going to win and what it means, etc. Let everyone else hash that out—instead, just go with the evidence and take it as it comes.
Right now that means playing some defense and punting on stocks that crack or trip stops and loss limits, but it also means gritting your teeth with names that are pulling back normally.
In the Model Portfolio, we came into this week with 26% in cash, which has helped a bit, and on yesterday’s special bulletin, we dumped Dexcom (DXCM) because it broke down, and cut the loss in our half position of Penn National (PENN), which had tripped our loss limit. That leaves us with 37% on the sideline, which we’ll hold onto for now.
Model Portfolio
Datadog (DDOG) looks like many growth stocks—a two-month correction in the summer and early fall, a rush to new highs on huge volume in September, and then a failure of that breakout move during the past two weeks. However, also like its peers, the stock is now back down to an area of support (50-day line, prior price zone, etc.), and there’s been just one day where volume was above average during this decline. Obviously, we have a loss, so a dip into the low 90s would likely force us to cut bait. But the overall chart and story are intact, so (a) if you own it, we’d hang on here, and (b) if you don’t and are willing to use a tight stop, we’re OK picking up some shares around here. BUY.
Dexcom (DXCM) has decisively broken down this week, which caused us to pull the plug yesterday, taking the rest of our profit. While there are some analysts coming in to defend the stock, we think that the competition question has reared its head again—Dexcom’s sales growth decelerated for the fourth straight quarter, and it looks like this happened while Abbott’s Libre CGM actually picked up steam. Moreover, Dexcom’s next-generation G7 has been delayed because of COVID, which may have eaten into the company’s lead. Dexcom is still a fine company, of course, but the company is not the stock, and after months of stalling out, this week’s breakdown tells us at the very least DXCM is no longer a leader. SOLD.
Five Below (FIVE) is now six weeks into a new consolidation, with mostly light volume as the stock flops around between 125 and 140. One top analyst this week said Five Below’s growth likely picked up steam in September and October and sees a bunch of sales catalysts in Q4 both from product assortment and operations (more registers to increase throughput; same-day delivery in some markets). We’re not complacent, and if the market really gets ugly, FIVE could give up the ghost—but right here, the evidence tells us the next big move is likely up. BUY.
We’ve had some good trades this year, but the timing on Penn National Gaming (PENN) couldn’t have been worse—growth stocks went from hero to zero the day after our entry, and that dragged PENN down to our loss limit. Shares did bounce today after a solid Q3 report, but the stock is still sitting well under its 50-day line and has a lot of ground to make up. We sold on yesterday’s special bulletin and will look for greener pastures once the market finds its footing. SOLD.
We’ve been writing that Pinterest (PINS) has all the characteristics of a winner, and that shined through in last night’s Q3 report, with sales (up 58%) and earnings (13 cents per share, up from a penny a year ago) blowing away estimates, and with management also guiding Q4 (revenues up 60%) miles above expectations. We’ll have more details next week, but suffice it to say that Pinterest looks like one of the next big online/e-commerce hubs for users (up 37% in the quarter) and advertisers. Both in the short- and long-term, there’s tons of upside as revenue per user (just $1.03 today) picks up steam. The stock went crazy today, and near-term, we wouldn’t be surprised to see PINS back off a few points given the market environment; in fact, if the market gets ugly, we could consider taking partial profits given the solid move since we entered our position. (Indeed, the stock sold off a few points from its highs today, mostly as growth stocks remain under pressure.) But overall, we think the stock is a new leader that just got going a couple of months ago. We’ll stay on Buy right here, but if you want in, start small and/or look for dips of three or four points. BUY.
We moved the ProShares Ultra S&P 500 Fund (SSO) back to a hold rating because the Cabot Tides buy signal fell by the wayside. Bigger picture, we’re still bullish—between the long-term trend (up), the past nine weeks (normal consolidation after a big run), secondary indicators (no major red flags early in the decline, which you usually see if things are unraveling) and the blastoff indicators from earlier this year, the odds favor the next major move being up. Thus, we want to play out our SSO position for the rest of this bull market, but whether the next leg up starts in a day, a week or two months is anyone’s guess. Hold for now. HOLD.
Roku (ROKU) has pulled back with everything else during the past couple of weeks, though volume has been extremely light (last five sessions all less than half average volume!) and the stock is just kissing its rising 25-day line here. If it wasn’t for the market environment and the upcoming earnings report (due out next Thursday, November 5), we’d likely average up here—ROKU looks about as good as any growth stock out there (save the few that have gapped on earnings). But with those factors, we’ll just hang onto what we have; if you don’t own any, you can pick up a half-sized position here. BUY A HALF.
Seagen (SGEN) has been slipping on light volume like so many growth stocks, falling back toward its prior high in July (185-190 area). The quarterly report is due out tonight, which will obviously be important; any good (or bad) news on sales for the firm’s three key drugs (especially Padcev and Tukysa) could push the stock around. Obviously anything is possible, but it would be unusual for SGEN to up and die so soon after blasting off on the Merck news, especially with sales and earnings expected to kite higher going forward. Long story short, we’re optimistic and are staying on Buy—but, as always, we’ll have updates post-report if anything changes. BUY.
Twilio (TWLO) has hacked lower with most of its growth stock peers, including a dip following its Q3 report. But the fundamental growth story here remains as good as any—Q3 revenues lifted 52% (an acceleration from last quarter’s 46%), earnings were in the black (four cents a share), same-customer revenue growth continued to amaze (up 37%!) while the customer base (208,000, up 21%) expanded nicely. Short-term, more shenanigans are possible given the market’s grumpiness, but the firm’s solid execution and long-term outlook (30%-plus organic revenue growth and expanding cash flow for the next four years) should keep big investors interested. Hold on if you own some, and if you don’t, you could start a position here. BUY.
Watch List
Beyond Meat (BYND 153): Like most growth stocks, the recent dip has been tedious, but it’s still holding its 50-day line and there’s been no real selling pressure (volume-wise) of late. Earnings are due out November 9.
Bill.com (BILL 107): BILL has retreated very calmly of late after a persistent advance to new price and RP peaks—looking like a normal potential pullback buy. Earnings are due November 5.
Cloudflare (NET 54): NET looks outstanding and has a growth story that should thrive no matter what happens with the virus, shutdowns and the election. If it can get through earnings on November 5, it should be a leader of the next sustained market uptrend.
CrowdStrike (CRWD 127): The straight-down action of late tells us, as it does with many names, CRWD probably needs more time. But the selling pressure has been modest and all indications (story, numbers and chart) tell us the next major move is up.
NovoCure (NVCR 124): The pullback of late has been sharp, but not abnormal, and the story should produce rapid and reliable growth going forward. Last night’s quarterly report looked fine, though we’d like to see the stock (and market) show some support before entering.
Splunk (SPLK 206): SPLK has been a leader in Big Data for years, and its transition to a cloud, subscription-based business model is one that has a long history of success.
Square (SQ 169): SQ tagged its 50-day line for the second time in its advance, which usually marks a decent entry point. That said, earnings are out in a week (November 5), so we’ll wait for that.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, November 5. As always, we’ll send a Special Bulletin should we have any changes before then.
