WHAT TO DO NOW: Remain bullish. The market’s snapback has been impressive, pushing our Cabot Tides back to a green light and pulling most stocks up after short, sharp pullbacks. That said, volatility remains extreme, and there aren’t many good buy points out there, especially among stocks that have already reported results. Thus, we’ll sit tight tonight (around 19% cash in the Model Portfolio), although we will restore Buy ratings on both DocuSign (DOCU) and ProShares S&P 500 Fund (SSO), respecting the impressive rebound in both.
Current Market Environment
The major indexes are up again today, though growth stocks are relatively mixed for the second day in a row. Around 2 p.m. eastern, the Dow was up 87 points and the Nasdaq was up 57 points.
It’s obviously been a wild couple of weeks, with three big “moves” occurring during that time. The first, of course, was last week’s virus-induced plunge that quickly dampened sentiment, took the big-cap indexes down 4%-ish, broad market indexes more and put our Cabot Tides on the fence.
The second is this week’s immediate snapback, where big-cap indexes have ripped back to new highs and, while small- and mid-cap indexes haven’t matched that, they have easily pushed back above their 50-day lines, restoring the Cabot Tides’ green light.
And the third thing that we’ve seen early signs of is some rotation, with a chunk of money moving into metals, industrials and commodity sectors. Of course, one day isn’t enough to call a trend, but it’s something to watch.
That’s a big reason why the advance is narrower right now than it was two to three weeks ago. When the Nasdaq was kiting higher in mid-January, we regularly saw 250 to 300 stocks hitting new highs, with a peak of nearly 400 on January 17! This week, though, that new high total has been less than 200. That doesn’t necessarily portend doom, but, along with the volatility and rotation, is a sign that the environment is getting a bit trickier.
Even so, we don’t advise overthinking it—sure, maybe this latest rally will lead to another big swoon on the virus or some other fear that hits the headlines, but the snapback is at the very least a good big-picture sign that there’s plenty of buying support under the market, not to mention a good current sign that the uptrend has a lot of moxie.
Finding good entry points remains challenging, though, especially with stocks flopping all over the place and with many still set to report earnings during the next couple of weeks. Thus, we’ll again stand pat on the buy side tonight, with around 19% in cash in the Model Portfolio. Should this recent rally stick, though, we’d expect to be doing some buying as earnings season rolls on. Our only changes tonight are restoring Buy ratings on DocuSign and the ProShares S&P 500 Fund, both of which have kicked back into gear.
Model Portfolio
Dexcom (DXCM 239) has mostly sat around the past two weeks, staying calm despite the market’s big dip and rebound; it’s still trading north of its 25-day line, which is fine by us. While a shakeout wouldn’t shock us, the intermediate-term tale will likely be told next Thursday (February 13) when earnings are released—the firm has already pre-announced top-line Q4 results (revenues up 35% from a year ago) and the outlook for 2020 (revenues up 19%—likely conservative), but color on the firm’s progress so far this year will be important. We’ll stay on Buy, but keep new positions small this close to the report. BUY.
We’re going back to Buy on DocuSign (DOCU 82), which has surged to new highs on a few days of solid volume. And coming after a nice-looking shakeout a week and a half ago, the path of least resistance is clearly up. Obviously, we wish we had that one-third of our shares back that we sold, but we still have a good position (7.5% or so of the account) and are enjoying the ride. To be clear, we’re not anticipating a straight-up move from here, especially as many software-related names are beginning to wobble. But the shakeout-and-go pattern is usually a bullish one, so if you don’t own any, grabbing a few shares here or on dips should work. BUY.
Inphi (IPHI 84) reported another fine quarter on Tuesday evening—while sales (up 19% from a year ago) and earnings (up 4%) didn’t wow, they both topped estimates. But more important were management’s comments that confirmed the demand environment for the company’s various high-speed wares should pick up meaningfully going forward; the fact that the accretive buyout of eSilicon closed in early January was also a plus. At this point, analysts see earnings now surging 40% this year and another 48% in 2021 as upgrade cycles and further telecom/data center buildouts accelerate. The stock was all over the place before (virus selloff) and after (up, down, then back up) the report, which isn’t ideal. We’re watching the action closely, but right now, shares remain in an overall uptrend (50-day line is near 76.5) so we’re fine staying on Buy. BUY.
ProShares Ultra S&P 500 Fund (SSO 161) has snapped right back with the S&P 500, leaping above 160 this week. We have mixed thoughts on the market in the short-term—the up-down-up-down action is often a sign that buyers and sellers are fighting it out, for instance, but there’s no doubt that the rebound is an overall positive. We’ll respect the action and go back to Buy, though we’d prefer taking stabs at SSO on dips. The prior low of around 150 should hold on any retreat if all’s well. BUY.
Qorvo (QRVO 110) remains our weakest stock after its huge reversal and retreat after earnings last week. Fundamentally, we don’t think the 5G smartphone story has anywhere to go but up, and the stock’s overall advance is likely still in the early-ish stages, with the multi-year breakout occurring just four months ago. Thus, we’re willing to give the stock a chance, but we’ll just play it by the book—a close much below the 104-105 area would likely have us cutting bait, though above there, we’re happy to hold on, giving QRVO a chance to gather strength for a new upmove. HOLD.
Sea Ltd. (SE 46) continues to act well, suffering only modest bouts of selling here and there, but holding near its high. There has been a bit of selling on strength this week, and with the 50-day line down near 40.5, some sort of shakeout is possible. But there’s no doubt the trend is strongly up and that any modest dip has brought in support. We’ll stay on Buy, though like many names, we’d prefer new buyers enter on a dip of a point or two. Earnings are due out March 4. BUY.
Teladoc (TDOC 108) has been all quiet on the news front since pre-announcing Q4 results and buying out InTouch in early January, but that hasn’t hurt the stock—it’s continued to reach higher highs as buying interest remains intense. Short-term, our thoughts are similar to those we wrote for SE above—a short-term dip is definitely possible given the big run and the upcoming quarterly report (no set date yet; likely release toward the end of February), but we like the powerful breakout and upside follow-through since early January. We’ll stick with a Buy rating, though dips of a few points would offer better entries. BUY.
Vertex Pharmaceuticals (VRTX 239) reported a great Q4 last Thursday evening, with sales up 62%, earnings up 31% (both smashing estimates) and hiking guidance for 2020 as a whole. That said, the stock followed the script that’s becoming commonplace—it reversed big gains on Friday, but so far this week, the stock has snapped back, keeping its uptrend very much intact. We’ll have a few more details for you in next week’s issue, but suffice it to say that Vertex confirmed the next couple of years at least should be lucrative (earnings expected to rise 44% this year and 31% in 2021) as Trikafta sales boom, which should keep big investors interested. We’re OK buying some here or on any dips. BUY.
Watch List
Alibaba (BABA 221): BABA has done a nice job of rebounding from its virus-induced plunge. Like most stocks and indexes, it’s all over the place, but if it can generally hold up here (within a few points), it would be a plus. Earnings are due February 13.
Axon Enterprises (AAXN 83): AAXN continues to hold near its highs, which is rare these days, as many stocks approaching virgin turf have been met with selling. Earnings are likely out later this month.
Datadog (DDOG 46): We love this theme (infrastructure monitoring, application performance management) and the company’s growth (north of 80% on revenues; earnings approaching breakeven), but the stock has turned super wild, with 7% to 10% daily ranges! Worth watching but we’d like it to settle down at least a little bit.
Yeti (YETI 37): Yeti’s high-end coolers, mugs and drinkware aren’t changing the world, but we think the story here is as much about Yeti becoming one of the next big global consumer brands. The stock is near the top of a 10-month rest; earnings are due out February 13.
Zillow (Z 50): Z still has some overhead in the 50 to 51 area to chew through, and it also has earnings coming on February 19. But we continue to like its calm, cool and collected uptrend of the past few months, as well as the improving housing market and (most importantly) the big potential of the firm’s Offers business.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, February 13. As always, we’ll send a Special Bulletin should we have any changes before then.
