WHAT TO DO NOW: Remain cautious. The market has thrashed around in recent days, which hasn’t changed the overall outlook—most of the market remains in decent shape, but growth stocks and the Nasdaq are mired in a correction and there’s still a chance we see another leg down. That doesn’t mean we couldn’t on something here or there for the most part we think it’s best to stay close to shore until the sellers finish their work. We have no changes tonight and the Model Portfolio remains about 50% in cash.
Current Market Environment
The sellers are out in force today, especially among growth stocks—as of 3:15 pm EST, the Dow was off 64 points but the Nasdaq was down a large 340 points (2.5%), with the average stock we watch down about 4%.
After a solid bounce last week from the correction lows, the major indexes have been thrashing around without much progress in either direction. That leaves us with a similar situation as what we saw a week ago—most of the market remains in fine enough shape, but the Nasdaq (still below its 50-day line) and growth stocks are still mostly struggling.
Truth be told, we are seeing a bit more construction action out there among growth stocks, with many names five to six weeks into new launching pads and many names showing big-volume support near their lows two weeks ago. The longer some of these fresher leaders can hold up, the greater the chance they can help lead the next growth stock advance down the road.
That said, most of the intermediate-term evidence for growth is still on the negative side, with many “old” leaders looking very iffy (DocuSign, Zoom Video, Teladoc, Peloton, Veeva and many more) and, of course, the Nasdaq itself has been struggling in recent days as it ran into resistance.
Honestly, our biggest thought right now is simply this: For growth stocks, making (and keeping) any money has become very difficult, while the daily action has become wild (many stocks moving up or down 10% in a matter of days) and news-driven (with rates and rotation, etc.). At best, that leads to a meat grinder-type of environment, and at worst, it could lead to another leg down in the market—but either way, it’s best not to be overexposed.
A few good days could change our tune a bit, especially if some new leaders kick into gear. And we could have a small move or two (maybe a sell paired with a fresh buy) to reposition things. But right now, we continue to advise a cautious stance (50% cash in the Model Portfolio) while growth stocks work their way through this correction.
Model Portfolio
DraftKings (DKNG) has been volatile as you’d expect, but we still like the chart—the fact that the stock is still near its peaks after a good-sized convertible (dilutive) bond offering and after the market’s wobbles this week is good to see. Meanwhile, more industry reports bode very well: New Jersey (the biggest gambling market in the U.S.) sportsbooks saw a 50% year-on-year leap in activity in February, while one analyst noted that most want to stick with one betting platform, which should help the leaders in the field like DraftKings. Expect more volatility, but we’re OK buying a half-sized position (for us, that’s 5% of the Model Portfolio) in DKNG if you’re not yet in. BUY A HALF.
Five Below (FIVE) reported a fine quarter last night, though that didn’t stop it from losing ground today (thus is life in a weak market). The Q4 numbers were great (sales up 25%, earnings up 12%, same store sales up 13.8%), but far more impressive was guidance and management’s update—about halfway through this quarter, same-store sales were up 12.8%, leading management to predict a booming Q1 (sales up 50%, earnings up 35%-plus), and the top brass said they’ve already opened 34 new stores this quarter with another 26 on the way, all of which will have Five Beyond (items priced up to $10) sections. Of course, some of the Q1 growth could come from the latest round of stimulus checks, but even so, analysts are hiking estimates and the larger, longer-term growth path is clearly back on track. Back to the stock, it reversed lower as investors took the opportunity to sell into strength, which isn’t unusual in a bad market, but still needs to be respected. Right here, we’re OK picking up a few shares if you don’t own any, though we’d like to see it hold up in and around here. BUY.
Pinterest (PINS) had a bad day today, as did most of the “old” winners from the past few months. It’s not pleasant, but it doesn’t really change the overall look of the chart—PINS rallied from 60 to 75, right back into its 50-day line (a solid-not-spectacular bounce), and is now backing off. Near-term, the stock still has issues, hence our Hold rating (and why we’ve booked partial profits). Longer-term, the odds still favor this correction morphing into a new launching pad that leads to another leg up. HOLD.
ProShares Ultra S&P 500 Fund (SSO) hit new highs yesterday, which is hard to argue with—yes, upside momentum has clearly waned somewhat, which can present some issues after a prolonged advance, but the trend is obviously up and much of the broad market remains very firm (and early-ish stage). We’ll stay on Buy, though as always with a leveraged long index fun, aim for dips. BUY.
Roku (ROKU) probably has our worst chart right now, with little ability to bounce during the past week or two; it never approached its 50-day line (still up near 406) during the bounce. One worry that is making the rounds is that Roku might be making a move into having some of its own original content, which would present risks (and likely take a lot of investment) and possibly change the story from a neutral platform to one in the streaming wars. We wouldn’t overreact to that—“bad” news often comes out after a big drop—but it’s something to monitor. For our position, we’ve sold more than 60% of our original stake, so we’re willing to let the stock bob and weave in the near-term. HOLD.
Twilio (TWLO) is in between PINS and ROKU in our mind—on one hand, it’s not as early-stage as PINS in theory (been running since last May, vs. last September/October for PINS), but it also bounced much better than ROKU, running into its 50-day line before today’s very sharp drop. A drop all the way through its recent lows (320-ish) would be a red flat, but as with the other struggling names, we’ve already taken a bunch off the table here and are willing to let the rest of our position gyrate for a while. HOLD.
Uber (UBER) took a hit yesterday after saying it will treat U.K. drivers (more than 70,000 of them!) as employees, going along with a court ruling from a few weeks back, though today it reaffirmed that business continues to pick up, with March business trends stronger than February and January. (Peer Lyft also said last week was its best since the pandemic began.) We still believe UBER can make a nice move higher if/when the pressure comes off the market, but we’ll stick to our Hold rating as the stock continues to thrash around. HOLD.
Watch List
Diamondback Energy (FANG 78): We’re still keeping an eye on energy names like FANG for a possible entry point; shares have eased a bit recently but remain relatively extended.
Dynatrace (DT 50): DT is now in a sixth week of a new launching pad, which is sitting on top of its prior, multi-month consolidation—a pattern that is often seen among future leaders during corrections. Technology stocks aren’t where it’s at right now, but we think demand for Dynatrace’s application and infrastructure monitoring platform should remain strong for a long time to come.
Floor & Décor (FND 96): FND has snapped back nicely, and while rising rates (could hurt housing eventually) are a risk, we think this cookie-cutter story has plenty of growth as it takes market share.
SelectQuote (SLQT 29): SLQT has bounced back nicely from its market- and share offering-induced slip two weeks ago. The numbers here are hard to beat, though there is a big reliance on Medicare Advantage plans, which could present some potholes.
Shake Shack (SHAK 118): SHAK has effectively rested since late January and is now perched just a few points shy of what would be closing highs. The lack of profit growth here isn’t ideal (most successful cookie-cutter stories have sales and earnings growth), but it looks like big investors are looking past that.
Wayfair (W 330): W has actually begun to calm down a bit of late, which is great to see. Earnings estimates still see a huge reduction this year (thinking the pandemic increase last year was a one-time bump), but as we wrote in last week’s issue, that could prove to be very conservative.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, March 25. As always, we’ll send a Special Bulletin should we have any changes before then.
