What To Do Now: Remain cautious, but don’t ignore the action of individual stocks. Our Cabot Tides remain negative (neutral at best), but as opposed to much of this year, growth stocks are showing great strength. We still mostly favor staying close to shore, as the market correction could have further to go. But today we’re going to buy a half-sized position in Ambarella (AMBA), which we think is a leading glamour name. That will leave us with around 38% in cash. We’re also restoring our Buy rating on Cloudflare (NET). Read further for details.
Current Market Environment
As of 10 a.m. ET this morning, the market is solidly green, with a broad advance taking both the Dow (up 386 points) and Nasdaq (up 192 points) nicely higher.
From a top-down perspective, though, not much has changed over the past week—in last week’s issue, we wrote that the near-term was a 50-50 bet, as our Cabot Tides were still negative, though the month-long correction has certainly gotten rid of some weak hands. And since then, we’ve seen a lot of chop, with this morning’s upmove very good to see, but it “only” brings most indexes back to where they were last Thursday/Friday.
Thus, our Cabot Tides remain negative (or at least not positive), which leaves the door open to another leg down in this correction, or possibly another bout of rotation (out of growth and into cyclicals, etc.).
However, the real eye opener in recent days has been growth stocks. We’re now seeing more than a few names flex their muscles even as the major indexes flail. It’s basically the opposite of what we saw earlier this year, when the big-cap indexes thrived while most glamour names corrected and consolidated.
As we’ve written before, good stocks can go bad in a hurry in a bad market, so as long as the Tides are negative, it’s important not to ignore them. In mid-September, for instance, we saw a lot of resilience, but the leg down after that did damage more than a few growth names. Combine that with earnings season being upon us and you shouldn’t be doing too much buying.
That said, we also wouldn’t ignore the action of individual stocks, many of which (a) broke out of big, early-stage consolidations in August, (b) had solid upside follow through and (c) have held up well (or snapped back fiercely). Indeed, many names we still own look great.
All in all, because we have around 45% in cash and because many stocks look tempting, we’re going to dip a toe back in the water tonight—we’ll add a half-sized position in Ambarella (AMBA), which we think could be a leading glamour stock of the next advance. We’re starting small and using a loose leash given the environment. That will leave us with around 38% in cash.
Model Portfolio
Ambarella (AMBA) is our new addition, and nothing much has changed with the story since we wrote it up in Growth Investor back on September 9: The firm spent a few years and a ton of money developing new computer vision chips (including an artificial intelligence architecture and video processors) that allow machines to better “perceive” and make decisions, boosting automation in fields like security cameras and, most important, automobiles. The new chips are still a minority of revenues but revenues are exploding, and the Q2 report (on September 1) crushed estimates and looks like a coming out party for the stock. It’s not all sunshine and roses here—the sector (semiconductors) remains wobbly, but AMBA’s pullback was completely normal and now we’re seeing another round of big-volume buying show up. We can’t rule out further wobbles, of course, but today we’re going to add a half-sized position (5% of the Model Portfolio) and use a loose loss limit in the mid-to-upper 130s. BUY A HALF
Asana (ASAN) still has what will likely be some decent resistance up around 120, but like many other names, its bounce in recent days is great to see, with a strong push off support in the 100 area following another round of big insider buying by the CEO. We feel similar about both ASAN and the market—near-term, another dip (maybe to retest support in the 100 to 105 area?) would be normal and could even bring about a test of the 50-day line (now nearing 95 and rising rapidly), but bigger picture, the powerful prior advance and reasonable correction (not to mention the fact that business trends are still accelerating) tell us the next big move is up. We’d like to average up in the near future, but given the market, we’ll just stick with our Buy a Half rating right here. BUY A HALF
Cloudflare (NET) was close to being sold a couple of weeks ago, but the action since then has been nothing short of jaw-dropping, with a massive-volume rally that has seen the stock leap more than 50 points (and more than 25 points above its prior high) in just a few days! Clearly, the action is bullish and completely wipes away the negative volume cluster we mentioned in last week’s issue. The stock is a leader, and we will restore our Buy rating; as trend followers, we’re not in the business of fighting what we see. That said, we’re also not going to leave our brain at the door, either—after such a big move, some sort of dip is likely, especially if the market does wobble or if another round of rotation shows up. If you own some, hang on, but if you’re looking to get in, we think starting small, preferably on dips of a few points, makes sense. BUY
Devon Energy (DVN) has shown some day-to-day volatility of late but looks totally fine—if anything, shares have had trouble pulling back much as they hack around in the 37 to 40 area. Obviously, energy prices will have a big say in the near-term path of DVN and its peers, but (a) those prices remain elevated ($80 for oil and $5.60 for natural gas), and (b) we still think investor perception is changing for the better as the prospects of these names becoming true cash cows improve. Hold on if you own some, and if not, we’re OK starting a small position here or on dips. Earnings (and the next dividend announcement) are due November 2. BUY
Dynatrace (DT) is acting great, with a tame pullback during the market’s late-September drop and, now, a push to new all-time highs as growth stocks perk up. On the news front, Dynatrace’s offering is now available as a native software-as-a-service on the Google Cloud platform, making it easier for Google Cloud clients to sign up for and use Dynatrace. Meanwhile, more and more industry research outfits (ISG is the latest) are releasing reports confirming that the company’s platform is best in class. The strength is obviously a good thing, and we’re holding on tightly to our shares, though as always new buyers should start small and/or aim for weakness to get in. Note that earnings are out in less than two weeks (October 27) as well. BUY
Floor & Décor’s (FND) sharp dip that started late last month wasn’t pleasant, but given the stock’s trading history (lots of ups and downs), we don’t view it as a death knell, and the recent show of support leads us to believe the major uptrend is still intact. The company will be opening another new warehouse later this month (in Tacoma, Washington), which will be the second new opening this month (Oxnard, California opened today), so the cookie-cutter story remains intact. If shares don’t keep advancing from here, we’ll likely to go Hold, but having ridden through the correction thus far, we’ll stick with our Buy rating and see what comes. BUY
ProShares Ultra S&P 500 Fund (SSO) is chopping around with the S&P 500—not bad (support has shown up three times in the 120 to 122 area during this correction), but still has work to do (today’s rally still leaves the fund a few points below its 50-day line). Our thoughts here remain the same, with the near-term uncertain but the longer-term likely to lead to another upmove. If you have a huge position, we wouldn’t be opposed to trimming some here in case this correction has further to run, but if you’ve been following our advice, just hold tight. HOLD
Watch List
Affirm Holdings (AFRM 149): AFRM is definitely one of the leading glamour stocks out there, though finding an entry point is the hard part. The next rest or shakeout could have us taking a swing at it.
Dexcom (DXCM 505): DXCM is beginning to bounce off its 50-day line, its first test of that key support area since its summer breakout. The trick is that earnings are due two weeks from today (October 28).
DoorDash (DASH 211): DASH may be putting the finishing touches on a big post-IPO base, and the support near the 50-day line recently is a good sign.
Snowflake (SNOW 336): SNOW is highly valued, but its Data Cloud platform looks like a one-of-a-kind offering. Shares have pushed out to new recovery highs.
Zscaler (ZS 292): Cybersecurity stocks are a mixed bag, but ZS’s six-week rest looks normal and it’s quickly spurted back to its old highs. Growth here should be rapid and reliable for years to come.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, October 21. As always, we’ll send a Special Bulletin should we have any changes before then.
| Stock | No. of Shares | Price Bought | Date Bought | Price on 10/14/21 | Profit | Rating |
| Ambarella (AMBA) | New Buy | - | - | - | - | Buy a Half |
| Asana (ASAN) | 1,354 | 73 | 7/22/21 | 117 | 62% | Buy a Half |
| Cloudflare (NET) | 1,790 | 113 | 6/25/21 | 162 | 44% | Buy |
| Devon Energy (DVN) | 7,240 | 28 | 5/7/21 | 40 | 40% | Buy |
| Dynatrace (DT) | 3,114 | 65 | 8/6/21 | 78 | 19% | Buy |
| Floor & Décor (FND) | 1,845 | 111 | 4/9/21 | 122 | 10% | Buy |
| ProShares Ultra S&P 500 (SSO) | 871 | 60 | 5/29/20 | 126 | 110% | Hold |