WHAT TO DO NOW: Stay cautious for now as we wait to see whether growth stocks can find their footing (which they’ve done for a couple days in a row now). The overall market looks good, and after taking partial profits in Pinterest (PINS) and cutting our loss in Datadog (DDOG) this week, our cash position is well over 50%, which is likely too high. However, given the action, we’d like to see a couple more days of stabilization before putting money back to work. Thus, tonight, we’ll stand pat, but we’ll send bulletins if we have any changes going forward.
Current Market Environment
Stocks tried to bounce further today but the sellers again showed up and late in the day all of the major indexes were lower—at 3:10 eastern, the Dow was off 465 points while the Nasdaq was down 111 points.
We’ve been at this game for a few decades, and I’ve personally been here for more than 21 years, and I can’t remember a whippier three weeks than we’ve just seen—from a punishing decline in late October that cracked many stocks, to a straight-up whoosh of buying that produced some blastoff-type signals, to this week, where we’ve seen a vicious rotation (at least for a couple of days) out of growth following Monday morning’s vaccine news.
Instead of giving in to the movements and emotion of the day, now’s the time to focus on the evidence. Happily, for the overall market, that evidence is quite positive—our Cabot Tides turned bullish this week, and the indexes have a good amount of daylight (meaning a pullback of 2% or 3% won’t crack the signal). Meanwhile, our Cabot Trend Lines are still green and the rush higher last week in the broad market and some indexes produced rare, bullish signals that portend nicely higher prices in the months ahead.
In other words, this is still a bull market, and the odds continue to favor higher prices when looking out a few months.
The tricky part comes in the near-term, especially with growth stocks, which have been tossed around like ragdolls in recent weeks, including more than a few that have hit air pockets or cracked down altogether. We’ve done our best to give our holdings as much wiggle room as possible, but we did trim our position in Pinterest (PINS) and were forced to cut our loss in Datadog (DDOG) this week, leaving us with a cash position of around 54%.
We wrote in yesterday’s special bulletin that we think that cash position is too high—but we also wrote that we’re not eager to throw our money into a meat-grinder environment for growth stocks just for the sake of doing some buying. To be fair, we have seen a little stabilization among growth titles the past two days, which is a good start, but we’d like to see a bit more before putting money to work.
Thus, we’re going to sit tight tonight and see how things play out over the next couple of trading days—a bit more support could have us adding a stock or two (we have a couple of new names in the watch list below). As always, we’ll be on the horn with any changes before next Thursday’s (November 19) issue.
Model Portfolio
Datadog (DDOG) looked set for a good run when we entered; if we saw the same evidence again (good story, numbers, fresh big-volume breakout, etc.), we’d take the trade, as most end up working. But this time didn’t, with DDOG getting brought down by the market initially and, yesterday, after a good-not-great Q3 report. The stock has found a little support from its lows, but that’s small potatoes compared to the recent selling. We cut our loss yesterday. SOLD.
Five Below (FIVE) isn’t setting the world on fire, but that’s OK, as the uptrend that kicked off in early September remains intact. Nothing’s changed here with the story, though the post-election possibility of lighter Chinese tariffs has been upped, and any end date to the pandemic will only help perception. In the meantime, FIVE remains in a two-steps-forward, one-step-back type of advance—we’ll stay on Buy, but try to enter on dips of a couple of points. BUY.
NovoCure (NVCR) hasn’t been immune to the market’s shenanigans, but it’s actually down just a couple of points this week and remains north of its 50-day line. We bought a half position last week and are comfortable holding on—and if you didn’t buy, you can grab a few shares here. BUY A HALF.
We decided to take partial profits in Pinterest (PINS) this week because the stock was a good-sized position for us and was extended to the upside. As we usually do, we took one-third of our profit off the table, but we’re aiming to hold the rest through any reasonable correction that comes in an effort to play out a bigger win over time. In a recent interview, CEO Ben Silbermann reinforced the idea that Pinterest allows advertisers to find buyers at a different, earlier stage of the process, where users are looking for ideas (PINS engagement averages 10 minutes per session compared to far less for news feed-type services) and are open to what they find—96% of the searches on Pinterest are unbranded and more general (i.e., fitness routines vs. a Nike sneaker). Really, it’s a whole new area for advertisers to flock to, and Pinterest should be the main beneficiary of that. Back to the stock, it’s bounced decently after a sharp day-and-a-half decline; we’ll stay on Hold here, though a couple of weeks of rest would do a load of good. SOLD ONE-THIRD, HOLDING THE REST.
ProShares Ultra S&P 500 Fund (SSO) has popped out of its 10-week range, coinciding with the fresh green light from the Cabot Tides. Of course, given the action of the past three weeks, nothing would surprise us—maybe the market has another trick or two up its sleeve. But with SSO at new highs, and with some blastoff-type measures speaking up last week, the odds are leaning toward the bull market kicking into gear here. Expect some wiggles, of course, but if you don’t own any, buying some SSO will give you a foothold in the next leg up. BUY.
Roku (ROKU) has gone along for the wild ride of late, moving from 240 to 200 to 255 to 210 and back to 230 … all since mid-October! Still, the stock hasn’t done anything wrong (50-day line is down at 202 and rising) and we think last week’s quarterly report was terrific—not only did all the metrics look great (sales up 73%, platform revenue up 78%, active accounts up 43%, revenue per user up 20%), but management hinted that advertisers are beginning to shift resources from linear TV to streaming platforms like Roku’s. If you don’t own any, you can buy a half-sized position here, but in terms of averaging up, we’ll wait another handful of days to see if the recent gyrations taper off. BUY A HALF.
Twilio (TWLO) has bounced decently the past couple of days, getting back above its 50-day line, but it still has work to do after its recent 80-point correction. Bigger picture, we think the stock is still in good shape, effectively digesting the huge move it enjoyed through July. If growth stocks regain their glory, TWLO should participate, but at the moment shares likely need more time to etch another launching pad. HOLD.
Watch List
Anaplan (PLAN 62): PLAN is sitting at the top of a 16-month consolidation with earnings coming out in a couple of weeks. The firm’s dynamic and predictive planning software is a hit and could be a must-have offering for Fortune 500-types going ahead.
Cloudflare (NET 64): NET is near the top of our watch list—we think it looks like a firm that every big (and many small- and mid-sized) firm is going to gravitate to as the cloud becomes the norm. The stock is very strong but a bit extended, especially given the environment.
Halozyme (HALO 38): HALO has a better drug delivery mousetrap that allows large volumes (relatively speaking) of therapeutics to be delivered in one subcutaneous injection. It’s teamed up with a lot of big players and is getting large milestone payments now, and royalties as these partners come to market. The stock has catapulted out of a good-looking base on earnings.
Shockwave Medical (SWAV 90): SWAV is a bit thin, but it has a borderline revolutionary product that better restores vessel size in calcified arteries, boosting the effectiveness of stents and balloons. The stock is very strong and sales are expected to lift 90% in 2021.
Tesla (TSLA 411): TSLA is now 11 weeks into a sideways, low-volume consolidation. Some more shaking and banking wouldn’t shock us but, until proven otherwise, the next big move is likely up.
Uber (UBER 46): UBER busted loose from a year-long post-IPO base on huge volume on positive election tidings (good news in California) and earnings. There’s solid growth potential from both its Rides (a play on an economic recovery) and Eats (secular shift in food delivery) businesses.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, November 19. As always, we’ll send a Special Bulletin should we have any changes before then.
