WHAT TO DO NOW: Stay cautious, but it’s OK to do a little buying. The evidence has improved of late, and given our huge cash position, that’s enough to tip-toe back into the market. That said, we consider the past few sessions as a good first step or two, but there’s a lot more work to be done before growth stocks are really in gear. Tonight we’ll add half-sized positions in both Progyny (PGNY) and Roblox (RBLX)—both are smaller and volatile (especially RBLX), but both also look like potential new leaders if the market kicks into gear. We’ll give them rope and we’ll still be holding around 60% in cash even after the buys. Details below.
Current Market Environment
The market was mixed today with cyclical stocks outperforming—at day’s end, the Dow was up 139 points while the Nasdaq was down 2 points.
The past couple of weeks have shown a slow, steady improvement in a few key things we watch. First, when it comes to the major indexes, all five that we track are back above their 50-day lines—it’s not clearly decisive (one bad day could change things), but it’s an improvement.
Next is growth stocks, both individually and key growth-y funds, with a couple of stocks moving steadily off their lows, some positive earnings reactions and even a couple of decent-looking breakouts.
And third, as we wrote in last week’s issue, sentiment has finally improved; today’s AAII survey data again showed a tame amount of bullishness, while the 15-day average of the equity put-call ratio is just coming off its highest (most worried) levels since last October.
All of that is to the good, but we wouldn’t consider the action any type of pound-the-table buy signal. Most of the action of late has been among the worst performers of the prior few weeks (and months), with a bunch running right up into key resistance (downsloping moving averages, etc.), while clear bullish action (new highs, big-volume breakouts, etc.) are still relatively rare.
That’s not to pooh-pooh the progress made, but simply to say that we consider this more of a good first step or two for growth stocks; it’s far too soon to conclude whether there’s been a real change in character.
In the Model Portfolio, if we were 50% or so in cash, we’d almost surely sit tight and see how things go. But we’re not—we’ve been holding a bit more than 70% cash for a couple of weeks as growth stocks were being blown out of the water left and right. But we like to stay in gear with the evidence, and with some steps in the right direction, we’ll make a couple of small moves, adding half-sized positions in Progeny (PGNY) and Roblox (RBLX), two newer, volatile names that should do well if this rally morphs into the real McCoy.
Even after these moves, we’ll still be around 60% in cash, so we’re hardly flooring the accelerator. But they’ll give us two more footholds in potential leaders. As always, we’ll just take it day by day—if these and other stocks show signs of failing, we’ll cut bait, but if we develop some profits, we’ll extend our line.
Model Portfolio
Progyny (PGNY) has a story we’ve really liked since we first dug into it back in January, and it’s not a traditional tech/biotech/chip outfit that’s been struggling. The firm is basically an HMO of sorts, with plans that work for couples trying to conceive a growing issue for both want-to-be parents (who are starting families later in life, which increases the odds of problems) and companies (who want a more productive workforce and not stressed-out employees missing time with unsuccessful techniques). The solutions are popular (100% client retention!), and while it’s possible some big boy comes in and tries to compete, Progyny has such a big lead (nearly 200 clients) and has 800-plus fertility experts and 600 clinic locations (30% of which don’t even participate in carrier networks). The stock was tossed around for a few months, but etched higher lows during the correction, and as the pressure came off during the past two weeks PGNY has zoomed straight up to new highs. Importantly, shares can be a little thinly traded (we don’t advise placing overnight orders FYI), but we’re OK taking a half position (5% of the portfolio) and averaging up if all goes well. We’ll likely use a stop near 50 or so, give or take. BUY A HALF.
Roblox (RBLX) is a hot potato right now, and frankly, it’s a bit extended to the upside—if you prefer to start really small (even less than a half position) or look for dips of a few points, that’s fine. But this is really one of the few breakouts in growth world of late that (a) showed a lot of power and (b) has followed through nicely; it’s now working on its third straight big-volume week coming out of its IPO base, so while pullbacks (possibly sharp ones) are possible, we think the odds strongly favor shakeouts finding support. Plus, of course, there’s the story and growth numbers, which we’ve detailed each of the past couple of issues. If you want to try to sharpshoot an entry down a few points from here, there’s nothing wrong with that, but we think there’s a chance RBLX could be a new leading glamour stock if all goes well. We’ll start with a half position (5% stake) and use a loose leash near 80. BUY A HALF.
Oil stocks are in the midst of a consolidation, but Devon Energy (DVN) is still acting well, nosing back near its highs on light volume while oil prices remain elevated. Big picture, the stock is hacking around on top of its prior two-month zone, which looks normal for now. With oil prices still in the mid-60s, the cash flow angle remains tempting, and some big investors seem to be taking notice—while not overwhelming, Cabot’s options expert Jacob Mintz (Cabot Options Trader) says there’s been a steady stream of bullish options activity in DVN of late; we wouldn’t trade on that but it’s usually a plus. We’ll stand pat for now—a move under 23 would be a yellow flag, but a strong-volume upmove from here could have us filling out our position. BUY A HALF.
Five Below (FIVE) had a sharp selloff with the market in early May, but it’s done a good job of finding support and starting to bounce. We’ve been giving the stock plenty of rope due to our profit (and partial profits already taken) and the reliable growth story—a move below the 40-week line (now near 168.5 but rising steadily every week) would be a no-no, but right here, we advise continued patience. HOLD.
Floor & Décor (FND) has also bounced, but if we’re being honest, it hasn’t been impressive—it’s recouped just a few points after its prior early-May decline. With just a half position we can give it room, but some will depend on the market; if things really kick into gear, we’ll be looking for stuff that’s participating. For now, though, this has been a rotational market, and housing-related names have been pulling in for about three weeks now. Let’s see if money comes back into FND and the group after this pullback. HOLD.
ProShares Ultra S&P 500 Fund (SSO) again bounced off its 50-day line and has meandered up toward its highs near 115. There’s no question it’s lost some momentum in recent weeks (S&P 500 is basically no higher now than it was five-plus weeks ago), but the trend remains up, and that’s where we’re keeping our focus. Looking ahead, we do think that, if the S&P 500 were to hit a wall, it would likely be around here, so we always have our eyes open, but we’re just sticking with the plan. Hold on if you own some; if you don’t, you could nibble here or (preferably) on dips. BUY.
Watch List
CrowdStrike (CRWD 223): CRWD is “only” 12% off its highs, which is practically heroic compared to most growth names, and we’ve seen some positive earnings reactions in the group of late. We still think the stock has emerging blue chip written all over it—earnings are due out a week from today (June 3).
Shockwave Medical (SWAV 176): SWAV continues to act well, pulling back just modestly after a big run to new highs. Has the stock worn out enough weak hand given its big run not only over the past year but since the start of April? Time will tell, but right now it’s actually extended to the upside.
Yeti (YETI 88): YETI looks solid, though our main hesitation is the growth profile—it could do well, but it’s historically had lots of ups and downs, making it harder to hang onto.
Wayfair (W 320): Wayfair has been up and down for months, but now it’s in the 9th week of shaping a nice-looking base. We still think business (and profitability) here has changed in a big way that will help investor perception improve.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, June 3. As always, we’ll send a Special Bulletin should we have any changes before then.
