WHAT TO DO NOW: Continue to take steps into the market, but pick your spots and keep some dry powder available. The overall market remains mostly sideways and most stocks are still stuck in the chop (good few days followed by a bad few days), but we’re also seeing more growth stocks act well. We’re making one new addition tonight, adding a full-sized stake in Dynatrace (DT), which will leave us with a still-healthy 30% in cash. Details below.
Current Market Environment
Stocks enjoyed a good rally today, with growth stocks in the lead—at day’s end, the Dow was up 271 points while the Nasdaq lifted 115 points.
Not much has changed with the overall environment over the past week. From a top-down point of view, things remain mostly choppy and challenging, with our Cabot Tides remaining effectively neutral, relatively few stocks hitting new highs (though there has been a bit of improvement of late) and even growth-oriented indexes (IWO, IVOG, ARKK) mostly stuck in the mud.
Yet, from a bottoms-up perspective, we’re still seeing a gradual increase in the number of breakouts among growth stocks, along with more bullish “markers” such as many weeks up in a row and big-volume clues. Call it a slow improvement in the evidence when looking at individual growth stocks.
Of course, what we’d really like to see is some sort of “whoosh” higher that not only produces a ton of breakouts among growth stocks but also takes the broad market (and Cabot Tides) along for the ride. But what we want and what the market provides are two different things—right now, we’re dealing with the environment we have, which is providing some more opportunities but also has plenty of landmines, too.
The Model Portfolio has mostly reflected that—we think we have some real leaders, but there’s the occasional pothole (PGNY knocked us out last week; DVN not far from our mental stop), plenty of chop (ASAN’s out-of-nowhere drop early last week) and we still have earnings reports coming up (FND, NET out tonight).
Thus, we’re still inclined to go slow, but with 40% in cash we’re going to put some to work tonight—we’re adding a full-sized position in Dynatrace (DT), which has emerged from a very long post-IPO launching pad and has a straightforward technology story that should produce 30%-plus annual growth for many years. That will leave us with around 30% in cash. Details below.
Model Portfolio
We’ll start with Dynatrace (DT), which has a straightforward (for a tech company), powerful growth story. The company’s all-in-one platform helps thousands of mid- and large-sized companies that are transitioning their systems and apps to the cloud (and for massive firms, this is a process that can take years) to get data, context and information about their apps, infrastructure and even the end user experience, thanks in part to its first-class automation and artificial intelligence capabilities. And it works no matter what cloud platform(s) a client uses, too. Because of that, the company has garnered a who’s who list of big customers, who on average are boosting their spending with the company by north of 20% per year, while new clients are hopping onboard (135 new logos in Q2; total customers just over 3,000), all of which is creating 30%-plus recurring revenue growth and booming remaining performance obligations (all money owed to it under contract), which rose 46%. Profits are solidly in the black, but heavy spending means the focus is on capturing business, which Wall Street seems fine with—after a long consolidation, DT has been persistently pushing higher for a few weeks, moving to new highs. It’s not the most volatile name, so we’re going to add a full-sized (10% of the portfolio) position here and use a 15%-ish loss limit. BUY
Asana (ASAN) gave us quite the scare early last week, but it’s acted well since, surging to new price highs today. To be fair, there is usually some sort of reverberation after a shot across the bow like we saw, plus volume during the last few days has been extremely light. The rebound is all to the good, but we’re going to hold off averaging up here for a few more days and see how things go—another (more modest) dip or some tightness would likely have us filling out our position. Earnings are due out September 1. If you don’t own any, we’re OK starting a position here or preferably on weakness toward the 25-day line (now at 69 and rising quickly). BUY A HALF
Cloudflare (NET) looks perfectly fine, though earnings tonight will obviously move the stock. Given NET’s recent run and the fact it’s extended above its moving averages (50-day line is down near 103), a near-term dip (be it on earnings or something else) wouldn’t surprise us at all—though if such a dip comes and is controlled, we could use it to fill out our position since we see NET as a leader. Right here, we’ll just stick with our Buy a Half rating and see what comes in the days ahead. BUY A HALF
Devon Energy (DVN) dipped after earnings yesterday but rebounded well today, holding above our mental stop in the 24.5 to 25 area (give or take). Fundamentally, the numbers here are borderline unreal: With prices and production moving up, Devon’s free cash flow totaled around 87 cents per share in Q2, and it will pay out 49 cents (~1.8% quarterly yield) at the end of September. And there’s more where that came from—even if oil slips to $60 ($69 now) and natural gas is $3.50 ($4.20 now), Devon believes it will earn around $1 per share of free cash flow each of the next couple of quarters, leading to more beefy dividends (likely in the 55- to 65-cent per share range). And 2022 would see even greater free cash flow totals than that due to merger synergies and more.
Now, with all of that said, our thesis for owning DVN is that such a sea change in the company’s (and the entire industry’s) fundamentals—far less risky, far more cash flow even at modest energy prices—would entice big investors to build positions. At this point, that hasn’t really happened, with DVN and others still getting tossed around by daily movements in oil prices. We’re still optimistic that this stock has a very bright future as the “new” story gets out, but as always, we’ll play it by the book: A close much under 25 could have us cutting bait, but above there, we’re happy to hold and give the stock a chance to shape up. HOLD
DocuSign (DOCU) has been all quiet on the news front, but it continues to act fine, again bouncing off its 25-day line this week, albeit on light volume. At some point, shares will have a deeper retreat or shakeout, though we’d expect the 10-week line (now around 280) to offer support if the sellers showed up. Right here, it acts as well as could be hoped for. BUY
Five Below (FIVE) is making another, low-volume run at resistance near 200. Will this time be the charm? We won’t predict, but we will simply say that resistance is weakened every time it’s tested, and it certainly feels like most sellers have been worn out here. Still, we don’t invest based on how things feel, so we’ll continue to follow the plan: If FIVE can really bust loose, we’ll restore our Buy rating, but with it stuck in this range, we advise sitting tight, with new buying focused on other, stronger situations. HOLD
Floor & Décor (FND) is our second name reporting earnings tonight, and like NET, it’s also extended to the upside, so a wobble wouldn’t be shocking (though we’re not predicting that). Sector-wise, we’re cautiously optimistic the building stocks are coming out of their two-month correction, and the tumble in interest rates (and mortgage rates) can only help. If FND can get through the report in decent shape, we think the nascent breakout of a seven-month zone can take it far, but as always, we’ll see how it goes. We’ll stay on Buy but will have updates if need be in the days ahead. BUY
ProShares Ultra S&P 500 Fund (SSO) has been resting over the past eight trading sessions, which we view as constructive given that it follows the big shakeout-and-recovery pattern from early July. A dip under 119 or so would probably have us going to Hold, but right here the path of least resistance remains up. BUY
Watch List
Carvana (CVNA 335): CVNA is known for being pretty wild, but it’s settled down really nicely the past couple of weeks. Earnings are due out tonight.
CrowdStrike (CRWD 266): After a great multi-week run that featured some big-volume buying, CRWD has tested its 10-week line in recent days and bounced. Earnings are out August 31.
Dexcom (DXCM 524): Old friend DXCM is having a bit of a transition year as it ramps spending and prepares for the launch of its next-generation G7 continue glucose monitor. But investors are looking ahead to big earnings growth next year and shares have ripped to new highs and are working on their 12th week up in a row—short-term, pullbacks are possible, but big picture that’s a very bullish change of character.
ZoomInfo (ZI 67): ZI reported a fantastic quarter and absorbed a good-sized secondary offering (closely-held shares; no dilution). Our only issue is that we already have three software names, and the stock is acting very wildly.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, August 12. As always, we’ll send a Special Bulletin should we have any changes before then.
