WHAT TO DO NOW: The market has been doing OK, though it’s more about addition by subtraction—the fact that growth stocks have avoided any major selling wave after the recent upmove is a plus, but we’re still seeing lots of selling on strength and rotational action that changes by the day. Translation: The evidence has improved from mid-May for sure, but we’re still not seeing any pervasive signs that big investors are really piling in—there’s still a lot more gyrating than trending action out there. We’re not opposed to putting a little money to work in the right stock or two, but tonight we’ll stand pat and see how things progress. The Model Portfolio remains around 56% in cash.
Current Market Environment
The market is higher today, though individual stocks are a bit more of a mixed bag. As of 2:45 p.m. ET, the Dow is up 81 points and the Nasdaq is up 99 points.
We can’t really say anything bad about the market’s action during the past couple of weeks, as the rally has to this point has avoided the type of major potholes or massive rotation that was repeatedly seen from February through mid-May. From a top-down perspective, our trend-following indicators are both positive and, as for secondary evidence, we’re pleased to again see the number of stocks hitting new lows backing off while our Aggression Index (written about last week) has bounced.
Moreover, for individual stocks, the lack of selling has allowed more and more names to extend their launching pads—many are now three to six months into consolidation phases, and some are starting to tighten up a bit, which is usually constructive action.
The missing ingredient, as has been the case for other rally attempts since February, is power: We’re still seeing a lot of action in stocks that are off their highs, whereas stocks that power ahead for a week or two almost always see a few days of tedious selling at the very least, or suffer an outright failure. (One thing we’ve noticed—on any given day, if you look at the charts of a handful of growth stocks that made solid upmoves, they’re usually just bouncing around in the same range they’ve been in for a few weeks.) Said another way, unless you’re jumping in and out of stuff every week or two, not a lot of progress is being made, and what profits are being developed come choppily.
Again, we’re not dumping on the rally per se; up is good, and we’re glad to see things slowly shape up. But when it comes to growth stocks, there remains much more chopping around than trending. We’re not opposed to doing a little buying if the right setup emerges, but tonight we’ll stand pat with our large (56%) cash stake.
Model Portfolio
Devon Energy (DVN) has pulled back a bit from its peak last week on tame volume, but it looks fine to us—and with oil prices hanging around $70 per barrel, we’d expect support to appear on this (or further) weakness as Devon’s cash flow prospects remain some of the top in the sector. Hold on if you own some, and if you don’t, you can grab a position here or on dips of another point or two. BUY
The Five Below (FIVE) growth story remains firmly on track, as was revealed in the Q2 report. The headline sales (up 198%) and earnings (84 cents vs. a loss of 93 cents per share a year ago) were inflated due to easy pandemic comparisons plus a lower tax rate. But both crushed expectations and there’s no question business is surprising on the upside—revenues easily surpassed expectations, as did operating margins, while same-store sales for the subset of stores that remained open in the year-ago quarter boomed a whopping 23%. Management also meaningfully raised the current quarter’s revenue outlook (now up 50% from a year ago) as the store expansion plan (67 new openings last quarter) plows forward. Analysts meaningfully hiked this year’s earnings figure ($$4.73 per share now vs $4.22 prior to the report) and, importantly, also hiked 2022’s figure ($5.51, up from $5.12). Now, despite the good news, FIVE hasn’t taken off—it did have a good reaction but has backed and filled since. We’re optimistic a low might be in, so we’re happy to hold on, but we still want to see more strength before concluding a new uptrend is underway. HOLD
Floor & Décor (FND) remains sluggish, though we will say volume has really dried up and the stock has tightened up—combined with the fact this correction is still normal-ish (it stinks given our buy point, but the overall chart isn’t bad) and the sterling fundamentals, we’re hopeful the next major move is up. Still, hope is a four-letter word in the market, so the plan is what counts: If FND can hold up or advance, we’ll hang on, but a dip into the low 90s would be a red flag. HOLD
Progyny (PGNY) has hacked around during the seven sessions, but we’re actually impressed with the action given the environment—shares have given back very little of their rally during the second half of May. We can’t rule out further weakness in this environment, of course, and frankly a few more days of calm action wouldn’t be the worst thing. Overall, the action is solid and we think this story has rapid and reliable growth written all over it. BUY A HALF
ProShares Ultra S&P 500 Fund (SSO) continues to grind higher, actually eking out to new highs this morning. Granted, the net progress has been small since a month ago, but the S&P 500 and SSO remain in uptrends, so we advise riding it. Looking ahead, a drop under 110 could have us going to Hold, with more weakness possibly having us lighten up. But we’re not anticipating anything—with the trend positive, we’ll stay on Buy. BUY
Roblox (RBLX) is a perfect example of what we’re seeing in the market right now—the stock had a powerful breakout and rallied strong, but quickly gave back half that move and has been under pressure the past few days in a row. That said, it hasn’t done anything wrong, and we continue to see datapoints suggesting the big picture story here is playing out. One of them: Roblox and Warner Brothers are launching a virtual world surrounding the release of In The Heights (based on a musical by the person who created Hamilton), allowing fans to watch behind-the-scenes videos, contribute to murals, collect virtual items in mini-games and experience Latin American art and dance culture. Back to the stock, a drop back to 80 or so would probably tell us this breakout attempt has failed, but at this point, we’re still favoring the current dip being a normal shakeout. Hold on if you own some, and if you don’t, you can start a half-sized position here. BUY A HALF
Watch List
Align Technology (ALGN 607): ALGN isn’t likely to be the fastest horse, but the current four-month rest should eventually resolve to the upside as adoption of the firm’s Invisalign braces and iTero scanners remains strong.
Cloudflare (NET 93): NET is, along with CRWD (below), one of the best looking of the former leaders. We’ve always thought the firm’s new-age cloud platform will drive rapid growth for years as it allows clients (especially big ones) to have best-in-class network and security capabilities. Impressively, the stock is near new highs.
CrowdStrike (CRWD 228): CRWD got hit on earnings, but impressively, has snapped back—it’s not up and out, but it’s looking more and more like the sellers might have left the building. Today’s positive volume clue was encouraging, and the repeated hacks going on in the world certainly bode well.
Dynatrace (DT 54): DT is a name that never really got going during the growth stock move last year, but that might be a good thing—it looks fresher and its application/infrastructure monitoring platform is in high demand. The stock found some volume buying recently and is approaching its old high.
Wayfair (W 325): There’s nothing much new on Wayfair, which continues to hack around in a range. We do generally like the price-volume action, still think Wall Street is underappreciating the earnings power here and a good couple of days could kick off a real advance.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, June 17. As always, we’ll send a Special Bulletin should we have any changes before then.
