WHAT TO DO NOW: There remain a few yellow flags in this environment, especially as many indexes are chopping around and trends in individual stocks and sectors remain fleeting. But there’s no question that the action in growth stocks has improved, so we’re going to put a bit more of our large cash hoard to work—we’re going to add half-sized positions in both DocuSign (DOCU) and Cloudflare (NET), which are two of the best-looking growth names in terms of story, numbers and charts. That will leave us with around 47% in cash. Details below.
Current Market Environment
The major indexes were higher today, but that masked another day of crosscurrents as news of an infrastructure agreement in Washington caused many growth names to stall while industrial stocks perked up. At day’s end, the Dow was up 323 points while the Nasdaq was up 98 points.
It’s been a very interesting past week (and, really, past month) in the overall market—it’s really an “on the one hand, on the other hand” type of situation.
For instance, from a top-down perspective, our Cabot Tides are technically positive, but it’s close and depends on the day. This coincides with many intermediate-term breakdowns in all sorts of cyclical areas (industrials, financials, transports) after huge, prolonged runs from last November.
Moreover, making (and keeping) any money remains difficult as rotation into and out of sectors and themes is a near-daily occurrence. In general, stocks that look good and peppy today generally look iffy a couple of weeks later, while things that pull back sharply tend to bounce. We’re seeing that in the Model Portfolio, with DVN and RBLX bouncing after dips, and FIVE is perking back up to its highs, while PGNY, which was looking great a few days ago, is pulling in to its 50-day line this week.
That said, on the positive side of the equation, we continue to see improvement among most growth stocks, indexes and funds. Even better, we’ve seen some upside power show up in a handful of names, with a few breakouts and a growing number of stocks that are just south of new high ground. To be fair, much of the bullish action is concentrated in the leaders from 2020, while other growth-oriented names are still chopping around, but there’s little doubt things are headed in the right direction.
So, given it all—the good and bad—where does that leave us? We’re still not in the mood to floor the accelerator given the on-again, off-again nature of the market and most stocks … but there’s no question the evidence for growth stocks has improved, and if nothing else, we’re evidence followers.
If you’re already mostly invested, we don’t advise pushing it. But with 57% cash in the Model Portfolio, we’re going to do a little buying tonight—again, we’re going slow and will add if we get traction.
The new buys are DocuSign (DOCU) and Cloudflare (NET), two of last year’s winners that have shown the best action of late in terms of price and volume—and of course both have unique fundamental stories and rapid, reliable growth numbers that, if all goes well, should keep big investors buying for many months. We’ll start with half positions in each (for us, that means 5% positions for each in the Model Portfolio). That will leave us with around 47% in cash; details below.
Model Portfolio
As usual, we’ll start with the two new additions. DocuSign (DOCU) was just written up in last week’s issue, so we won’t rehash it all here—suffice it to say that investors thought its growth would slow as the pandemic eased, but the company has proved the doubters wrong, as sales growth is still accelerating, earnings are going through the roof (and topping expectations every quarter) and management sounded very bullish after the Q1 report. The stock has had a big move in the past month, so some sort of shakeout is possible; if you want to try to pinpoint an entry down a bit, that’s fine. But we like to go with the strongest names early in the rally, and the big volume on the way up and the fact that DOCU has just had 10 months of generally ugly action (wearing out the weak hands) should bode well. BUY A HALF
Cloudflare (NET) is our second new addition, and in some ways, the story is as big as any out there—the company has effectively built a network from the ground up that is perfectly suited for the cloud age, replacing the need for on-premise hardware boxes and offering clients top-notch security and performance for their websites, apps and more. 17% of the Fortune 1,000 are paying customers (it offers a lot of free stuff too), partially because 99% of the developed world is within 100 milliseconds of its network and because Cloudflare offers a unified platform with no trade-offs. Growth has been very rapid and reliable in the 50% range, and same-customer revenue growth has accelerated in recent quarters as big customers use more services. The stock effectively topped out in December and sloshed around for five months (at its lows, NET had made no net progress for six months), but the action since then has been persistent and powerful. As with DOCU, a shakeout wouldn’t shock us, so if you want to aim lower, that’s fine, but we’re taking a half-sized position today. BUY A HALF
Devon Energy (DVN) was hit the prior two weeks along with the entire sector as money flowed out of cyclical stocks and into some growth titles. However, energy prices themselves didn’t budge (oil still north of $70, natural gas in the $3.30 range), which has led to some stabilization as the sector’s underlying cash flows should remain huge—one analyst thinks the energy sector’s free cash flow total this year will be about 10% above the prior high-water mark in 2008, when oil was above $100. As for DVN itself, the stock fell about four points (31 to 27) and has bounced a bit more than halfway back, remaining above its rising 50-day line (now near 26) the whole time. Meanwhile, even at $60 oil and $2.75 natural gas, Devon’s after-CapEx cash flow is expected to total nearly 10% of the current market cap, with more upside at current prices. (FYI, if you’ve been holding, the 34 cent per share dividend will be paid June 30.) Back to the stock, we half-expect some further wobbles, but until proven otherwise, we think DVN’s path of least resistance is up. BUY
Knock on wood, but our patience seems to be paying off with Five Below (FIVE), which has raced toward its old highs in recent days. Fundamentally, the company continues to make moves—today it announced the expansion of its partnership with Instacart across 1,100 locations, compared to 400 or so previously. We’re obviously encouraged by the action, and if you want to buy a small amount here or on a little weakness, we’re not going to argue with it; we continue to think FIVE is an early-stage situation that can move nicely higher over time. That said, having just spiked into resistance near 200 on low volume, we’ll officially stay on Hold a bit longer to see if the sellers step up. HOLD
Floor & Décor (FND) has also bounced of late, though it’s bumping up against its 50-day line now (near 103.5). Despite the tedious action since April, we’re still optimistic FND will be a good winner for us—it’s not unusual for a cookie-cutter name like this to pull back 20% and find support near longer-term support (the 200-day line, which is now around 93) before resuming its major advance, which describes the past few months. Speaking of cookie cutter, the company’s warehouse expansion plan continues to plow ahead, with four new openings this month alone (one in California, Indiana, Oklahoma and Iowa). If we see some power (good volume upside), we’d like to go back to Buy, but right now Hold remains the appropriate rating. HOLD
As mentioned in the first section, many good-looking stocks one day start corrections the next in this environment, and Progyny (PGNY) is an example of that, with the stock having a tough week. We’re not complacent here, as volume has been elevated during the last few days of slippage, but given the May-June advance for the stock (47 to 65), the recent dip isn’t out of the ordinary, especially as the 50-day line (at 57.5 and rising) catches up. Long story short, we’ll cut bait if the selling really gets out of hand, but at this point, we think the dip is an opportunity to start a position if you don’t own any. BUY A HALF
ProShares Ultra S&P 500 Fund (SSO) fell a smidge below its 50-day line last Friday as cyclical and reopening stocks plunged, but once again, the fund has snapped back and actually hit a new high today! We wouldn’t take that action as some sort of pound-the-table buy signal, but the trend remains up and the sellers have been unable to make much headway, even when some sectors fall by the wayside. Hang on if you own some, and if you don’t, we’re OK nibbling here or (preferably) on weakness. BUY
Roblox (RBLX) has bounced in recent days just where it “should,” holding the 50-day line (it actually shook a bit below it Monday morning) on the pullback. We’re not popping any champagne quite yet—rebounding back into the mid/upper 80s is fine, but it’s recouped far less than half of its prior decline. The question going forward is how business will be as the pandemic lessens; were the poor May numbers a one-off or a sign of things to come? As usual, we’ll let the stock decide—a dip back into the upper 70s would probably have us pulling the plug, but as long as RBLX can hold it together, we’re fine holding our half-sized position. HOLD
Watch List
10x Genomics (TXG 194): TXG was rejected at new highs (like so many other names of late) today but remains in good shape overall.
Align Technology (ALGN 617): ALGN is still futzing around in its consolidation, but we think the next big move is up.
CrowdStrike (CRWD 254): CRWD pushed to new highs this week on good volume after an analyst released a very bullish long-term view. Like most stocks, it could shake out a bit near term, but we think a new uptrend is likely underway.
Dynatrace (DT 60): DT has changed character since the May low, finally pushing out to new price (but not RP) highs. A modest pullback could be intriguing.
Snap (SNAP 68): SNAP was one of the more resilient growth stocks during the spring correction, and now it’s started to perk up again. The company has a long-term forecast for 50%-plus annual revenue growth
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, July 1. As always, we’ll send a Special Bulletin should we have any changes before then.