WHAT TO DO NOW: Remain bullish, but keep your antennae up. Technology-related growth stocks have again come under pressure and many are near key intermediate-term inflection points. (Leaders from other groups still generally look fine.) Much more weakness could have us paring back a bit, but tonight we have no changes since even the stocks that have been dinged are holding support. Our cash position is 17%.
Current Market Environment
The market and especially growth stocks got hit early today, but they firmed up reasonably well in the afternoon as the major indexes finished mostly green. At day’s end, the Dow was up 110 points while the Nasdaq nosed ahead 2 points.
The overall market remains in good shape, with both of our trend-following indicators—the Cabot Tides (intermediate-term) and Cabot Trend Lines (longer-term)—currently pointing up. We’re still keeping an eye on small-cap indexes, which have still not eclipsed their late February peaks, as well as the Nasdaq, which has found repeated resistance near 8,000. But overall, there’s no question that the trends are up.
Individual growth stocks (at least those in fields like technology, cybersecurity, cloud software and medical) aren’t looking nearly as good as the major indexes. Many are again testing key intermediate-term support, with more and more beginning to nose below their 50-day lines. And, of course, this is happening while the big-cap indexes are perched near their highs.
This is the third selling wave (or mini-wave) we’ve seen in these growth stocks since March 22, and many names are at a moment of truth: It’s possible that the bouts of selling seen during the past few weeks are normal digestion after solid runs in January, February and the first half of March. But it’s also possible we’ve been witnessing a slow wave of distribution that’s going to lead to deeper corrections and base-building in the weeks ahead.
To be clear, this isn’t to say the rest of the market is under a lot of pressure; the rotation in recent weeks into some cyclical areas (financials, transports, etc.) and even some growth-y areas (retail) has most names looking fine. Thus, it’s more of a stock-by-stock environment for now, though we’ll be on the lookout to see if the selling spreads.
In the Model Portfolio, we came into today with 17% in cash, and we have no changes tonight, though we are keeping a close eye on things—much more weakness could have us taking a few chips off the table, but with none of our holdings breaking down, we’ll sit tight.
Model Portfolio
Carvana (CVNA 63) has been caught up in the growth stock selloff this week, but despite the big day-to-day moves (the stock is very volatile), the uptrend is very much intact; in fact, shares are still above their 25-day line (which are near 60). A major break down into the low 50s would be a red flag, but right here, we continue to think the massive-volume advance in February/early March and the company’s fantastic growth story (it just entered four new markets in Colorado) will result in higher prices. If you don’t own any, we’re OK nabbing a half-sized position here. Earnings are due out on May 8. BUY A HALF.
Chipotle Mexican Grill (CMG 700) finally took a hit yesterday, mostly because of an analyst’s valuation-based downgrade, though the crummy day for all growth stocks and normal jitters ahead of next week’s quarterly report (April 24) likely exacerbated the move. (Indeed, CMG bounced about halfway back today after another analyst boosted his earnings outlook for this year and next.) Yesterday’s dip could lead to further retrenchment, but overall the stock continues to act just fine, hanging around its 25-day line. As always, we’ll see what earnings brings next week, but with the trend up, we’ll stay on Buy—but keep any new positions small this close to the report. BUY.
Five Below (FIVE 142) has acted a lot like PLNT did after its earnings report a couple of months ago—a quick pop on the news, an immediate selloff to shake out the remaining weak hands and then a ramp to new highs. It hasn’t hurt that many growth-oriented retailers have come into favor, either. In the near-term, some weakness is possible given the recent straight-up move and the fact that a bunch of stocks that have leapt to new highs (like OKTA, below) have attracted some sellers. But, bigger picture, it looks like FIVE is getting going after a seven-month rest, with a long-term growth story that remains unique. BUY.
Okta (OKTA 92) pulled back sharply with other tech growth stocks this week, but we’re OK with it so far—shares are still above their breakout level (87.5) and all relevant moving averages. Plus, earnings aren’t likely due out until late May or early June, so that’s not an upcoming uncertainty. A drop back below 85 or so (which would likely coincide with a bunch of breakdowns among most growth titles) could have us dumping the shares we bought last week, but we remain optimistic given the stock’s recent seven-week rest period and the firm’s position as the hands-down leader in identity access services, which are becoming a must-have for mid- and large-sized businesses. We’ll stay on Buy. BUY.
Planet Fitness (PLNT 73) remains relatively quiet on the news front, but that hasn’t stopped the stock from continuing its strong uptrend. Buying volume has tapered off a bit, which could be a sign that shares will finally rest. But the story, numbers and chart all look good to us—we’re still on Buy, but as usual, try to get in during normal weakness. BUY.
ProShares Ultra S&P 500 Fund (SSO 124) is still looking good and provides the portfolio some diversification from the generally fast-moving growth stocks we have elsewhere. The odds do favor the next couple of months being more challenging than the past three and a half, when pullbacks where limited to a couple of percent—that’s just how these “blastoff” markets tend to play out. But the odds also favor meaningfully higher prices down the road, so we’re not advising getting too cute. Sit tight if you own some, and if you don’t, you can start small here or look to enter on a retreat of two or three points. BUY.
Big picture, Twilio (TWLO 122) hasn’t done anything wrong—the stock zoomed up from 75 in December, broke out above 100 in January, tagged 135 in mid March and has since chopped lower to around 120. We still enthuse about the stock’s potential (the company launched an app that makes it easier to send and receive text messages through the Salesforce platform), but it appears that the intermediate-term uptrend is on the fence. Much more weakness from here could have us taking partial profits and holding the rest through earnings (due out April 30), but as we said, TWLO isn’t doing anything “wrong” and a couple of good days would have it back near new highs. We’re keeping a close eye on it, but right now, we’re sticking with our Buy rating. BUY.
Workday (WDAY 188) has now been rejected from the 200 level three times since the start of March, which isn’t ideal; the longer it fails to get going, the greater the chance it breaks below support in the upper 170s. That said, we’re simply going to play this one by the book—all indications are that the company continues to ink some significant deals that will boost growth both near- and longer-term, so if the stock were to eclipse 200 in a big way, it would likely kick off a new uptrend. That said, a close back toward its March low (175-ish) would make the past few weeks look like a topping phase. Right now, we’ll hold on and let the stock tell us what to do. HOLD.
Watch List
DocuSign (DOCU 53): DOCU slipped this week, but we still see a five-week post-earnings consolidation after a persistent three-month run. It needs some work, but a few days of big-volume strength (possibly after some more consolidation) could be the tell that the stock is ready to move.
Invitae (NVTA 23): NVTA got smacked around with just about every medical-related stock on Wednesday, but the action still looks normal to us. In fact, some steadying around here and a push higher could offer a solid entry point, though we’d probably start with a half position given the stock’s volatility.
Shopify (SHOP 221): SHOP has been kiting higher since the start of the year with just one dip below its 25-day line, and it remains resilient during this latest growth stock selling wave. Earnings are due out April 30.
Xilinx (XLNX 135): XLNX continues to look like a big leader, but after a big run, we’ll be interested in seeing how it reacts to earnings, which are set to be released next Wednesday (April 24).
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, April 25. As always, we’ll send a Special Bulletin should we have any changes before then.
