WHAT TO DO NOW: The sharp dip and rapid snapback in the market is impressive, especially with many growth stocks showing eye-opening strength. However, the bulls still have a lot to prove—our Cabot Tides are neutral at best, most stocks are still under resistance, plus earnings season will surely have a big impact on things. Even so, we’re going to put some money to work tonight, adding three half-sized positions: One in Asana (ASAN), a new addition; and averaging up in both DocuSign (DOCU) and Floor & Décor (FND). Even with these moves, the Model Portfolio will still be 37% in cash, and we have two names on tight leases that we could dump if the market falls apart.
Current Market Environment
The market is mixed so far today—as of 1145 am, the Dow is off 44 points and the Nasdaq is up 25 points, though many growth stocks are again acting well.
In recent issues and updates we’ve written repeatedly about the market’s on-again, off-again, tricky and challenging environment, while at the same time seeing a lot of potential multi-month setups among growth stocks. Oftentimes, what such an environment “needs” is a shakeout on some scary headline news to clear the decks.
It’s too soon to tell, but that might be what occurred during the first half of July—the situation was very ugly, and this Monday morning crushed many stocks and indexes, but (a) growth stocks perked up that day, and (b) the entire market has rebounded beautifully since then, with back-to-back 80% up-volume days on the NYSE (typically a bullish sign).
Now, we’re not getting ahead of ourselves—at best, our Cabot Tides are only back to neutral, and of course this week’s bounce comes after a horrid couple of weeks for many stocks, so we can’t conclude it’s up and away from here. Indeed, only about 40% of all stocks are even above their 50-day lines right now.
What’s caught our eye, besides the obvious snapback, is that many of the growth stocks that perked up in June and pulled in for a couple of weeks with the market in July avoided any major selling (almost all of it on low volume), and now most have bounced sharply off of support (10-week or 25-day lines, the tops of their spring consolidations, etc.). Chart-wise, that make the past two to four weeks (depending on the stock) look like a pause that refreshes.
Of course, earnings season is now underway, and as usual, that will likely tell the tale—a bunch of gaps lower would clearly ruin things, but given the multi-month launching pads and the recent shakeout, upside gaps could prove buyable.
To sum up, our thoughts are: We’re cautiously optimistic that the harsh decline in the first half of July could have been a final shakeout for many growth stocks, but we need to see some real upside power in terms of breakouts (the missing ingredient of the May-June upmove), preferably on earnings before getting overly aggressive.
Today, after selling one position last week, we’re going to put some money back to work. First, we’re buying a half-sized position (5% of the portfolio) in Asana (ASAN); second, we’re going to fill out our position in DocuSign (DOCU), which is acting great; and third, we’re going to buy another half-sized stake in Floor & Décor (FND) which looks to be breaking out of a seven-month consolidation.
These three moves will still leave us with 37% in cash, so we’re not exactly flooring the accelerator. Plus, we have two names on tight leashes (DVN and PGNY), so that cash position could quickly head higher if the market falls apart again. But many growth stocks (including names we own) are starting to make real progress, so increasing our exposure a bit makes sense. Details below.
Model Portfolio
As usual, we’ll start with the new addition. Asana (ASAN) looks like a new leader in the cloud software space as it has a better mousetrap when it comes to helping firms coordinate workflow—spreadsheets, legacy project management systems and other solutions haven’t cut it, especially as today’s mobile work environment has employees talking (or emailing or messaging) past each other more often. But Asana’s offering gets rave reviews from users (and thus higher adoption) as it lets cross-team work, projects and overall goals be seen, shared and updated by everyone who counts. Basically, it’s becoming the system of record for workflows, allowing big firms to do big things in a more efficient manner. Asana has quickly garnered more than 100,000 paying clients, and the same-customer revenue growth rate for those paying at least $5,000 a year (basically anyone worth mentioning) was 23%, while the growth rate for those spending at least $50,000 per year with Asana was up 40%! The stock is certainly smelling something special, with a moonshot advance from the May low and a brief two-week rest as the 25-day line which offered support and today’s pop to new highs. A pullback is possible after today, so if you want to try to grab shares on dips that’s fine. But we think the odds are against a major retreat—we’re buying a half-sized position here and using a loose (15% to 20%) loss limit. BUY A HALF
Cloudflare (NET) looks great, briefly dipping normally down to 100 before snapping right back to its highs. We’d probably average up here, but earnings are due out in a couple of weeks (August 5) and, admittedly, the rebound this week has been on quiet-as-a-mouse volume. Even so, we think NET is well positioned to be a leader of any “real” advance that gets underway. BUY A HALF
Devon Energy (DVN) went through the wringer with the entire energy sector, and we came close to pulling the plug on Monday, but it’s bounced decently since then, which makes sense—while there was a brief panic (so far) about the Delta variant and its possible effect on the economy, oil prices could “only” dip to around $65 before bouncing back above $70 since. Even at $60 and $2.75 natural gas (which is more than dollar below the current price!), Devon will likely be earnings $2.80 per share of free cash flow, a good-sized chunk of which will likely be paid out in dividends. All that said, the stock is not the company, so we still have our guard up—another harsh selling wave could have us pulling the plug. But so far, this bounce looks solid, so we’re happy to give DVN a chance. HOLD
DocuSign (DOCU) actually stopped falling last Thursday, finding good-volume support at its 25-day line, and it’s since spiked to new highs on great volume, which is obviously a good sign. Yes, it’s possible DOCU (and other growth stocks) could pull in again, and if so, we’ll have a mental stop in the mid 250s. But right here, we’re thinking optimistically, as DOCU certainly looks like it’s started another run after a huge 10-month correction. The fact that earnings aren’t out until early September is also a plus. We’ll fill out our stake by adding another half-sized position today. BUY ANOTHER HALF
Five Below (FIVE) sank all the way to its 200-day line on Monday (near 177) but has snapped back nicely since, though once again, volume has been very light on the bump higher. Even so, the action is certainly encouraging, and the stock is just 7% or so off all-time highs—effectively, shares have corrected via time (sideways since March for the most part) rather than price (i.e., a 25% or 30% correction). Any decisive buying or selling power could push the stock out of its range, but until then, we’ll keep our Hold rating intact. HOLD
The writing was on the wall with Floor & Décor (FND) for the prior couple of weeks, as the stock’s tedious correction looked to be coming to an end. And now, partially due to plunging long-term interest rates (always a plus for construction and housing), the stock has come alive, bursting above some resistance on two days of big volume this week. Admittedly, FND is set to report earnings in a couple of weeks (August 5), but we really like the action here, which is essentially a seven-month consolidation resulting in the recent strength. If you already have a good-sized position (whatever that means to you), or don’t want to average up ahead of earnings, it’s fine to just sit tight. But we’re going to fill out our position, buying another 5% stake today. We’ll be using a loss limit on the entire position in the upper 90s in case shares turn tail. BUY ANOTHER HALF
Progyny (PGNY) and Devon are our two weakest stocks, and thus both remain on relatively tight leashes; a dip back to 53 or so would probably have us cutting bait. But to PGNY’s credit, it doesn’t look that bad and, like most names, has rebounded nicely so far this week. We’re OK giving the stock a chance here—the story is pristine and the recent 20%-ish correction may have been enough to clear the weak hands out. Hold for now. HOLD
ProShares Ultra S&P 500 Fund (SSO) looked done for on Monday morning as the S&P 500 nosedived to its 50-day, but for the umpteenth time in this rally, the buyers showed up and have pushed the index (and SSO) back up. Interestingly, while we wouldn’t consider this a true “blastoff” measure, Tuesday and Wednesday both saw 80%-plus up volume (80% of all volume traded was in stocks that rose on the day), which historically is usually a good thing. We’ll continue to follow the trend here, which remains up. BUY
Watch List
Bill.com (BILL 200): BILL eked out new highs yesterday and today, though volume was light. Earnings are likely out in mid-August.
Carvana (CVNA 334): CVNA is another growth name that’s gone dead for a while—no net progress for six months—but is now in a fairly persistent uptrend. Earnings are out August 5.
CrowdStrike (CRWD 263): Like most of the best names, CRWD dipped on very light volume and has snapped back nicely with most growth stocks. Earnings aren’t out until early September.
Dynatrace (DT 62): DT has already pushed back to its highs from a couple of weeks ago. The trick is that earnings are due out next week (July 28), so we’ll hold off for now.
Roku (ROKU 421): Shares are now in the fourth week of a new, shallower, more proper consolidation following some huge-volume support at the lows in early May and early June. Earnings are due August 4.
ZoomInfo (ZI 52): With the addition of ASNA, we’ll have two software names (DOCU is the other), so we’re not sure we want to get too heavy into that sector. But ZI is a name we had on our watch list a few months back, with a great story and a huge post-IPO base.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, July 29. As always, we’ll send a Special Bulletin should we have any changes before then.