WHAT TO DO NOW: Remain defensive. Growth stocks remain under severe pressure, and today notwithstanding, that selling is starting to spread to the broad market (our Cabot Tides are on the fence). We’ve been cautious for a couple of months and have pared back further as more stocks have cracked—we sold the half position in SelectQuote on yesterday’s special bulletin, leaving us with a bit over 70% in cash. We’re holding our remaining names tonight.
Current Market Environment
So far today, the major indexes were doing decently but growth stocks were still under pressure—as of 1:35 pm eastern, the Dow was up 280 points, but the Nasdaq was down 9 points and the average growth stock was down more than 2%.
Overall, the levee has broken when it comes to growth stocks—while many had set up nicely ahead of earnings, this has been one of the worst earnings seasons (in terms of stock reactions) that we can remember, with even solid beat-and-raise reports bringing major gaps lower. We’ve been north of 45% in cash for months, and we’ve continued to ditch stocks in the portfolio and are up to around 70% on the sideline.
Moreover, the selling has begun to spread to the broad market—our Cabot Tides are on the fence as more indexes sag to (or slightly below) their 50-day lines.
The bottom line is that the sellers are certainly in control of growth stocks (just 25% of Nasdaq stocks were above their 50-day lines coming into today), and in recent days more and more names even in cyclical areas are hitting air pockets (just 53% of NYSE stocks are north of their 50-day lines, despite many indexes hitting new highs a few days back). And that means we’re going to stay mostly on the sideline, waiting patiently for things to set up again.
If you’re looking for some rays of light, there are a couple. First, after four months of mostly sour action, some of the growth/glamour names that have been hit the hardest are trying to find a little support near longer-term moving averages (200-day lines). And second, for the market as a whole, we’re finally seeing some bad news (higher inflation readings; Druckenmiller on TV talking bearish; long gas lines in parts of the country, etc.). We’re even seeing some early signs that things are getting a bit washed out (very few stocks hitting new highs three days running), though we wouldn’t trade on that per se.
Bigger picture, then, the last four months of tedious/painful action among growth stocks isn’t unusual given the massive rally last year and early this year. There’s every reason to expect another great sustained rally (or two!) for growth stocks this year, but that time is not now: Continued patience remains the order of the day, as the odds are against a sustained upmove launching from here, and it’s still possible more pain is coming before the selling pressures abate.
As mentioned above, the purge of names this week (including SelectQuote on yesterday’s special bulletin) leaves us with 70% in cash. If we do find some support for a few days (not a few hours, but a few days), it’s possible we could nibble on something showing relative strength. But the plan is to stay mostly defensive until we see some legitimate setups and breakouts down the road. We have no changes tonight.
Model Portfolio
Devon Energy (DVN) has been tossed around a bit in recent days, but on the chart it all looks very normal so far. While DVN and other energy names will still be impacted by movements in oil prices, the fact is even a decent-sized drop (15% to 20%) would still be at levels that would produce huge cash flow. As always, we’re not complacent, but we think DVN looks like it wants to head higher if the market can find its footing. We’re holding our half-sized position, and are OK grabbing a few shares here or on dips if you’re not yet in. BUY A HALF
Five Below (FIVE) finally got caught up in the broadening selling out there, sinking about 10% in a couple of days, which was enough for us to go to Hold. If you have a loss or a huge position (whatever that means to you), we’d probably consider taking a few chips off the table; the volume on the selloff, while not outrageous, points to some further near-term issues. That said, the weekly chart isn’t bad at all and nothing’s changing with the story—given the fact that we’ve already taken partial profits and our massive cash position, we’re OK holding longer, as we still think there’s another good-sized uptrend coming after this correction. HOLD
Floor & Décor (FND) has also fallen sharply, though it’s still hanging around the upper reaches of its prior three-month rest. Business here remains awesome, as was revealed in last week’s Q1 report—sales (up 41%) and earnings (up 100%) crushed expectations, while same-store sales were up more than 30%! Analysts responded by hiking estimates (now see a 51% bottom line bump this year), though like everything else, there are worries that Fed tightening could crimp the housing sector. We doubt that, as there are other factors at play, but we’ll just see how it goes. We switched to a Hold rating and have a stop in the mid-90s for now. HOLD
ProShares Ultra S&P 500 Fund (SSO) got hit hard earlier this week, though it found support at its 50-day line and bounced today, keeping the intermediate-term uptrend intact. Should the Tides turn negative (likely coinciding with a break of the 50-day line here), we could take a few more chips off the table of this leveraged long fund. That said, we’re not going to anticipate that—the fact that SSO has held up relatively well after this many months of degradation among growth stocks is a good thing. Right here, we’ll stay on Buy if you don’t own any and want to pick up shares on this dip, but we’ll let you know if anything changes in the days ahead. BUY
SelectQuote (SLQT) was the latest earnings dud, and the report wasn’t even that bad—sales (up 57%) and earnings (up 80%) were solid, and metrics for the firm’s key senior health-related sales were strong (up triple digits again). But management also cut cash flow guidance because of higher spending, as it’s set to attack a larger market (which we wrote about in last week’s issue). Analysts still think the firm will earn 83 cents per share this fiscal year (ending in June) and $1.27 in fiscal 2022, but none of that mattered—SLQT completely disintegrated after the report as any bad news attracted the bears. If you want to hold onto a piece of the stock for a possible bounce, that’s fine, but in these rare instances the main focus should be on making sure a bad situation doesn’t get much worse. We sold our half-sized stake on a special bulletin yesterday. SOLD
Watch List
Hubspot (HUBS 472): HUBS has always been a fickle stock, but it’s hard to ignore its recent relative strength, with shares holding up near their 50-day line. The company’s marketing platform could be the next big thing for small and mid-sized businesses.
Progeny (PGNY 48): It’s still a bit thinly traded for our tastes, but this HMO has a true growth story, with its innovative plans and offerings for those trying to conceive. Sales and earnings growth (and projections) are excellent, and the stock has been forming higher lows in recent months.
Shockwave Medical (SWAV 145): SWAV is one of the few growth stocks to have reacted well to earnings after a massive raise in guidance (from $155 million revenue this year to about $200 million). The stock remains very volatile, but the longer it can hold its gains, the better the chance it enjoys a good run once the market rights itself.
Yeti (YETI 84): YETI has a top-notch brand, top-notch management and dependable growth, all of which is keeping big investors interested. This morning’s quarterly report (sales up 42%, earnings up 245%) was miles better than expectations.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, May 20. As always, we’ll send a Special Bulletin should we have any changes before then.
