WHAT TO DO NOW: It remains a very tricky environment for growth stocks, with most names near new highs finding sellers and earnings reactions (so far) being underwhelming (Pinterest is now on a tight leash). That said, we do see a lot of high-quality setups, so we’re ready to put some money to work, but we need to see buyers actually step up before stepping further into the meat-grinder environment. We have no changes tonight, though we’ll be on the horn if some bullish earnings moves have us putting money to work in the days ahead. Our cash position stands just south of 50%.
Current Market Environment
As of 2:45 pm EST, the major indexes were higher, but it was another rotation day away from growth stocks—the Dow is up 200 points, the Nasdaq up 27 points, but growth stocks that we own and are watching are down 0.5% on average.
While there’s been some good days and bad days, the overall themes of the market remain unchanged: From a top-down perspective, the trends (Cabot Trend Lines and Cabot Tides) remain positive, and bigger picture, this bull market should carry higher over time. Moreover, most cyclical areas remain in good shape, though most are also five to six months into their runs, which means you’re probably not early in the intermediate-term advance.
More important for us, though, growth stocks remain very choppy and challenging—many will do well for a few days before reversing lower (today was a bad day for growth stocks), even if the major indexes have a good show. And few names are really letting loose on the upside; those that approach their old highs usually back off in short order.
Now, to be fair, we continue to see more and more decent-looking setups out there—many growth stocks have put in solid three- to five-month consolidations that have included three distinct selling waves (late February, late March, mid-April), which is usually (not always) enough time to wear/scare out the weak hands. Moreover, a ton of these titles are set to report earnings during the next two to three weeks, and positive reactions could present a multitude of strong buying opportunities.
However, it’s usually better to see it happen (strong breakouts on good volume) before putting a ton of money to work. We’re not opposed to doing a little nibbling in a name or two ahead of their reports, but overall, we think remaining in a “cautious but ready” stance makes sense—have your shopping list ready, but we want to see some decisive breakouts and upside power among individual stocks before diving in.
For our part, we did debate doing a little buying tonight, but instead we’ll sit tight and just let things come to us—if earnings are well received, we could have some new recommendations in the days ahead, but if not, we’ll remain patient until the big investors begin their next buying spree. We have no changes tonight, with a cash position just under 50%.
Model Portfolio
Five Below (FIVE) continues its pattern of higher lows (the low of the latest dip was 188) while hammering away at resistance in the 200-205 area (where it’s sitting now). Some retail names have been strong, though as has been the case across the market, most of that has come in turnaround situations—as a purer growth play, FIVE has been mostly chopping around. We’re not complacent, but given the fundamentals, the early-stage setup and the stock remaining near its highs, we think the next major move is up. BUY.
Floor & Décor (FND) looks good, having broken out just after our recommendation and, while it’s had some choppiness, the stock has pushed higher by a few points since. We’re optimistic the next upmove has begun, driven by both a solid overall cookie-cutter story (15% to 20% store growth annually; 400 total U.S. potential stores vs. 135 or so today) as well as a super-bullish environment for housing and home remodeling that should generally persist for many quarters to come. We wouldn’t mind filling out our position, but like most everything else, FND will report earnings soon (May 6). If you own a half position, hang on, and if you don’t, we’re OK picking up some shares here or on dips of a couple of points. BUY A HALF.
Pinterest (PINS) was walloped on earnings yesterday, mostly due to fears that user growth, which boomed during the pandemic, is set to slow going forward (at least according to management’s guidance). However, what’s interesting is that, not only did the Q1 numbers top estimates (sales up 78%, earnings of 11 cents were four cents above expectations and up from a loss a year ago), but the top brass upped their Q2 outlook as revenue-per-user (a key metric and one where Pinterest has tons of upside) picks up in a big way.
Still, we’re not going to whistle past the graveyard—the combination of yesterday’s reaction and the prior rejection at the old highs gives the chart a questionable look. The low of this correction was back near 60, and we’ve already taken a couple of rounds of partial profits, so we’re not looking to sell here, but the evidence is worsening. We’ll hold for now, but we’ll use a mental stop in the low 60s, and possibly more important, we’d like to see the stock find support during the next couple of days (today was a decent start). HOLD.
ProShares Ultra S&P 500 Fund (SSO) continues to levitate, actually tagging new highs today despite a big rally since late March. Nothing has changed with our thoughts here: A pullback of some sort wouldn’t be surprising given the elongated run and the recent move out of trend on the upside, but we’re trend followers, not trend predictors, so as long as the path of least resistance remains up, we’re sticking with SSO. That said, we still favor new buyers aiming for dips of a few points. BUY.
In the market, things often happen in threes, and indeed, growth stocks as a whole have seen three selling waves in this correction. SelectQuote (SLQT) has followed a similar pattern, with three pullbacks beginning in early March—all of which, though, came at higher levels (24, 26, 28.5) and found support right near the 50-day line. Has this been enough to wear/scare out the weak hands? We’ll find out (earnings are due May 11), but SLQT certainly seems as if it wants to head higher if the meat-grinder growth stock environment dissipates. We’ll stick with our Buy A Half rating. BUY A HALF.
Twilio (TWLO) had a nice rally from its lows near 310 to a recent high of 405, but now the real test begins—shares sold off today on a pickup in volume along with most growth names. The company has been quiet on the news front, but like everything else, the Q1 report (out May 5) will be the key event; a major negative reaction would probably have us selling, but we’re optimistic the next major move is up. If you wanted to roll the dice and nibble ahead of the report, we wouldn’t argue with you, but officially we’ll just stay on Hold and see what comes next week. HOLD.
Uber (UBER) had been settling down smack dab in the middle of its multi-month range, which was fine by us, but today news that the administration favors classifying so-called gig workers (including Uber drivers) as employees (thus raising costs) took a chunk out of the stock. We still think the fundamental (Rides growth accelerating, Delivery growth at triple digits) and technical (higher lows for many months; big volume clue two weeks ago) picture point to an eventual upside breakout, but if today’s weakness spreads, we’ll once again switch back to Hold. The rest test will come on May 5, when Q1 results are due out. For now, we’ll stay on Buy, but keep new positions small this close to the report. BUY.
Watch List
10x Genomics (TXG 199): TXG has now tried twice to break out on the upside, but each attempt came on light volume, and both moves have gone by the wayside. Even so the setup remains solid. Earnings are due May 5.
Cloudflare (NET 85): Cloudflare has long-term winner written all over it, as its network (build from the ground up for the cloud age) should produce rapid, reliable growth for many years. Shares have effectively been consolidating all year. Earnings are due May 6.
Diamondback Energy (FANG 85): FANG is now eight weeks into a rest and, after multiple tests of the 50-day line, popped higher today with most of its peers. The trick is that earnings are due out next Monday (May 3).
Dynatrace (DT 53): DT has been up and down numerous times during the past two months, but it’s again perched near the top of a huge launching pad. The growth story here should produce consistent 25% to 30% sales and cash flow growth for many years. Earnings are coming May 12.
Halozyme (HALO 51): There hasn’t been any big upside volume, but HALO appears to have changed character after seven weeks of correcting and consolidating. Earnings are due May 10.
Inari Medical (NARI 114): NARI continues to bide its time in the mid 110s as it prepares for earnings (May 11). There aren’t many companies out there with triple digit sales and earnings growth, but Inari is one.
Shockwave Medical (SWAV 163): It’s a bit thinly traded for us, but SWAV is one of the first growth stocks to move out to new highs—and it’s held its recent gains. Earnings are out May 10.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, May 6. As always, we’ll send a Special Bulletin should we have any changes before then.
