NOTE: This week’s update is being sent out a day early as I’ll be out of touch tomorrow—but back at it Friday and beyond.
WHAT TO DO NOW: Continue to go slow but have your shopping list ready. Growth stocks are gradually improving their standing, with more popping toward their highs, many holding their gains and a few finding some good-volume buying. That said, most potential leaders are still sitting on the runway, so we’re content to stand pat tonight and look for decisive strength to pull us into a heavily invested position. Our cash position stands at 45%.
Current Market Environment
Around noontime eastern, the market is mixed, with the Dow rebounding 204 points but the Nasdaq is down 28 points.
Growth stocks continue to slowly, steadily improve their standing—many lagging names have bounced, others that had held up better have pushed toward their highs and we’ve even seen a few move out to new highs. Plus, for the first time in a while, we’re starting to see a handful of liquid names find big-volume buying for a day or two—nothing definitive yet, but a small sign that some big investors are beginning to click the buy button.
That said, there are still issues to work through. For the most part, the market is still choppy and challenging, with near-daily rotation into and out of various groups and stocks (today materials stocks saw buying, growth mostly pulled in)—something of a meat-grinder situation. Beyond that, among growth stocks, there’s still a lot more setting up going on (names hovering near their highs from seven to 12 weeks ago) than breaking out and advancing—and we’re still seeing a fair amount of selling on strength as stocks approach their old highs.
That’s more descriptive than predictive (read: breakouts could come soon if all goes well), but to this point few names are in defined uptrends and super-strong buying pressure has been rare. Thus, we’re content to sit tight tonight, holding around 45% cash while giving our holdings a chance to gather steam.
However, we do think it’s important to have your shopping list ready, especially as earnings season revs up. A few weeks ago, we were cautious/defensive, and while we’re always open to any scenario, the odds of a fresh blastoff with many stocks just three or four weeks off their highs after big runs was pretty low. Today, with stocks now two to three months into their consolidations (and with most having a couple of shakeouts during that time), names are in much better position to resume their overall uptrends.
From here it’s just a matter of seeing the buyers really step up to the plate. If they do, we’ll extend our line, either with new buys or by filling out existing positions. For now, we’ll hang on to our 45% cash hoard.
Model Portfolio
DraftKings (DKNG) came very close to our loss limit earlier this week before bouncing a bit. If we thought the stock was clearly broken, or if we thought the fundamental story had changed, we wouldn’t hesitate to cut bait. But we don’t—the stock’s action, while tedious, is far from abnormal, and fundamentally every arrow continues to point up, with Maryland and Arizona moving legislation forward (online sports betting could be up and running for the NFL season in the fall), and DraftKings quickly responded by expanding its deal with the PGA to include Arizona. (It’s already the official betting operator of the PGA Tour.) If our maximum loss limit in the 57 area is tripped, we’ll take our medicine—but above there, we want to give our half-sized position every chance to move up. We’ll stick with a Buy a Half rating if you don’t own any, though be willing to use a relatively tight loss limit if you enter here. BUY A HALF.
Five Below (FIVE) is again testing the 200 to 205 area, which has basically capped the stock over the past few months, but each dip from that level has become less and less intense, which backs our thought that the stock is steadily absorbing all the selling. Of course, we could be wrong—a dip into the 180s from here would be iffy in the intermediate term, likely having us going back to Hold. But right now, the vast majority of evidence remains bullish. One intermediate-term tidbit we wanted to touch on is that Five below has been spending a lot of money to expand and upgrade its supply chain in recent years, opening a distribution center last year, opening two more this year, with the last one (in Indiana) opening in 2022. After that, spending should ease, so as we get closer to the completion of these projects, margins likely will have more upside as spending drops off and efficiencies increase. Back to the here and now, FIVE remains choppy, but until proven otherwise, we think the next big move is up. BUY.
Floor & Décor (FND) popped a couple of days right after our recommendation late last week, but as we mentioned in the first section, we’re still seeing selling on strength (few stocks are running away on the upside), and FND has been caught up in that the past two sessions, falling back into the top of its base. Still, overall, we’re not too worried—the stock is in good shape, its housing-related peers are also doing well and both the short- and long-term outlook for the business is great. We’re OK starting a position here if you’re not yet in. BUY A HALF.
Sticking with the selling-on-strength theme, Pinterest (PINS) actually tested all-time highs this morning before meeting with selling pressures, but as with FND, we think the stock is acting well—the recent run-up from 70 to the upper 80s will likely require a bit of rest, especially with earnings coming up soon (April 27). If the sellers really come back with a vengeance, we’ll change our tune, but at this point it appears PINS has turned the corner after a five month stretch of no net progress. We’ll stay on Buy, but it’s best to keep new buys on the smaller side this close to earnings. BUY.
ProShares Ultra S&P 500 Fund (SSO) looks great, though admittedly we’re wondering if it’s a bit of a too-good-to-be-true situation—after a five-month run, SSO has pushed out of trend on the upside, rising nine of the past 10 days, something you often see near intermediate-term tops. If you want to shave off some shares up here, we wouldn’t blame you, especially if you have a good-sized position (whatever that means to you). For our part, we’ll continue to follow the plan—with the trend clearly up, we’ll hang on, but we advise new buyers aim for weakness of a few points. BUY.
SelectQuote (SLQT) has been mostly quiet since our recommendation late last week, testing new high ground but (like most everything else) unable to really get a head of steam going. Even so, we like the chart clues we see, including (a) the fact that the stock held its 50-day line twice during the growth stock correction, and (b) as the selling pressure has come off the market, SLQT advanced nine of 10 days, a decent show of persistency. A pullback wouldn’t shock us here, especially if today’s rotation back into reopening stocks continues, but the stock acts well and the story and growth numbers are hard to beat. BUY A HALF.
Twilio (TWLO) has been rallying nicely with many of the former growth winners from last year, but as we wrote in last week’s issue, the stock hasn’t decisively changed course—TWLO is currently sitting right in the middle of consolidation that began in February. Don’t get us wrong, the bounce is a good thing, but we need to see more to conclude a new uptrend is getting underway. HOLD.
Uber (UBER) has teased us before, but it certainly looks like the stock could be ready to move if the market cooperates. On Monday, the firm released a very bullish business update: After solid sequential gains in January and February, Uber’s Mobility business (Rides) grew another 9% from the prior month, with bookings rising to north of $30 billion on an annual run-rate basis. Moreover, Delivery continues to impress, with run-rate bookings above $52 billion in March, with every month in Q1 showing bookings up at least 150% from a year ago! Both figures were ahead of analyst estimates, and the company also reiterated that it expects to reach EBITDA breakeven later this year. All in all, it appears the big-picture thesis is playing out, with a huge gain in Rides this year while Delivery has shown no signs of slowing despite the easing pandemic. UBER flashed a great-looking volume clue on Monday, though it’s also just sitting in an area of resistance (60 to 63). Maybe this will turn out to be yet another head fake, but given the rally and some other evidence (last week was the smallest range for the stock in months, usually a constructive sign), we’re restoring our buy rating here. BUY.
Watch List
10x Genomics (TXG 194): TXG toyed with new highs today before (you guessed it) falling back. We’d like to see the stock calm down for a while to create a good setup, but the story is about as good as it gets. Earnings are due May 5.
Diamondback Energy (FANG 81): FANG is now six weeks into a rest. Frankly, we were hoping for more of a shakeout in the group given the massive post-election run, so we’ll see how it goes. Earnings are due May 3.
Inari Medical (NARI 114): NARI is a bit of a bottle rocket, but the firm has triple-digit sales and earnings growth, reacted well to its Q4 report in early March and is consolidating just fine.
Shake Shack (SHAK 120): SHAK has tightened up nicely as it attempts to round out its base. We’re not sure we’ll add a third retailer (FIVE and FND) but we still think this name is worth keeping an eye on.
Wayfair (W 331): W continues to gradually tighten up on extremely light volume, which is a good sign. Earnings are due May 6.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, April 22. As always, we’ll send a Special Bulletin should we have any changes before then.
