WHAT TO DO NOW: We remain mostly bullish, but are keeping it small on the buy side in stocks we feel could be early-ish in their overall moves and have shown great power in recent weeks. So far this week, we’ve sold Qorvo (QRVO), bought a half position in Dynatrace (DT), and tonight, we’re going to start a half position in Redfin (RDFN), which will leave us with around 18% in cash. Details below.
Current Market Environment
As a note, I’m on a working vacation for the next week or so. Continue to email me any questions or comments, but I’ll probably only be online for a couple of hours a day, so if I’m a bit delayed getting back, that why. Family, you know! Thanks for understanding.
On to the market, we’ll see if today’s out-of-nowhere selling (more of a rotation into lagging areas) is an early sign of something larger, but just going with what we see today, not much has changed with the market’s overall evidence: The trends of the major indexes and leading stocks remain firmly up, with the big-cap indexes in particular remaining in solid uptrends, and many individual stocks are racing higher. Our Cabot Trend Lines and Cabot Tides are still green.
That said, the same secondary yellow flags are still with us—the S&P 400 MidCap, S&P 600 SmallCap and NYSE Composite are still below their pre-virus highs, the number of stocks hitting new highs is about one-third less than a month ago and, recently, we’ve definitely seen a pickup in frothiness, both in the market and sentiment-wise. In other words, the risk of a pullback or correction (or possibly a bout of rotation) is still up there.
Put it together and our stance hasn’t changed: We’re mostly bullish, and are giving our winners room to keep running, but we’re also still looking for decent entry points in stocks that appear to be early-ish in their advances.
On a special bulletin Tuesday evening, we got stopped out of Qorvo (QRVO) for around a breakeven trade—the stock continues to get tossed around by coronavirus news, but even beyond that, it’s underperforming some of its peers.
That brought our cash up into the upper-20% range, which is too high in general given the market. Thus, on a special bulletin last night (Wednesday), we added a half-sized position in Dynatrace (DT), and tonight, we’re adding a separate half-sized position in Redfin (RDFN), which we write about below.
All told that will bring our cash position back down into the upper-teens. We’re fine with that for now, but could move in either direction (sell or buy) based on what we see going forward from growth stocks.
Model Portfolio
We’ll start with Redfin (RDFN 32), which is mostly known for its popular real estate website. But the story here isn’t just about eyeballs and advertising—instead, Redfin is aiming to upend the brokerage industry on the back of all those eyeballs (33 million monthly average visitors, up 21% from a year ago), with its own team of agents that are charging lower commissions and performing better for customers than the big brokerage outfits. The firm is also dabbling in the home buying business, too, and is rounding out its offerings with mortgages, titles and even concierge services (charging more to spruce up your home pre-sale). And now that the housing market is beginning a new uptrend, it’s all working fantastically: Overall revenue growth has accelerated five straight quarters, and even without the boost from home sales, Redfin’s brokerage business was up 32% in Q4, the fourth straight quarter of accelerating growth. (The value of homes its agents helped sell represented 0.94% of all existing home sales in Q4, up from 0.81% a year ago.) The bottom line is still in the red, but big investors see the writing on the wall, and the stock has turned super-strong since earnings, booming last week out of a giant post-IPO base on its second heaviest weekly volume ever. To be clear, RDFN is definitely extended here, and should the market pull back, it could, too, but we like the power here and think RDFN is a new growth-oriented leader in the housing sector. We’ll start with a half position and use a loose loss limit (15% to 20%). BUY A HALF.
Dexcom (DXCM 303) is still basking in the glow of its blowout Q4 report. While the revenue figure (both for Q4 and 2020 as a whole) was relatively well known due to the firm’s pre-announcement in January, earnings smashed estimates, causing earnings estimates to get hiked in a big way (analysts are now looking for $2.20 per share this year, up from $1.89 before last week’s report). The stock has gone vertical and we continue to think it’s a liquid leader, but there’s no doubt it’s extended to the upside here. We’ll stay on Buy, but we’d keep new positions on the small side up here. If you do have a great profit and want to sell a few shares, we wouldn’t argue with you, but as with most of our stocks, we’re aiming to play DXCM out over time—the breakout in November from a 14-month rest means this advance isn’t likely in the later stages. BUY.
DocuSign (DOCU 90) has been straight-up since late January, motoring higher by around 15 points during that time. Earnings are likely out in early- to mid-March, which will be key. As for the here and now, DOCU is like many stocks—big picture, there’s likely more room to run, but short-term, pullbacks are certainly possible after a long run. If you don’t own any, look for dips of two or three points to get started. BUY.
Dynatrace (DT 35) was added last night, and we have high hopes for it, as it looks like one of the leaders in the “new” field of application performance management, with strong growth in subscription and recurring revenues, as well as earnings and cash flow. The stock was strong today, though the company is still in the midst of pricing a large secondary offering, which could always cause some wiggles. Still, overall, the story/numbers/chart all look good. BUY A HALF.
Inphi (IPHI 86) has been up and down since earnings, and still gets tossed around a bit with virus and Huawei-related news and rumors. But net-net, the stock is doing fine—after a little shakeout on Tuesday, shares hit a new closing high yesterday. A dip into the 77-78 area could have us going to Hold or even taking partial profits, but right now, the trend is up and business is likely to get a whole lot better in the quarters ahead. BUY.
ProShares Ultra S&P 500 Fund (SSO 164) continues to levitate to new highs over the past couple of weeks while fending off any and all bad news. There is no real change in our thoughts here—the S&P 500 is now nearly five months into its intermediate-term advance, which is long in the tooth, but you could have said that a month or two ago as well. Thus, we’re holding what we own, but as with many names, new positions should probably be kept small and/or be bought on dips. BUY.
Qorvo (QRVO 102) was punted on Wednesday (via a Tuesday evening bulletin) as the stock tripped our stop. Too bad—we feel the setup and story and numbers were all lined up, but sometimes the unforeseen (virus) gets in the way. If QRVO sets up again down the road, we could always take a swing at it, but we’re out of it now. SOLD.
Sea Ltd. (SE 53) has pushed nicely higher on great volume, along with many Chinese and Asian stocks (which are getting a bump from expected economic stimulus in that region). Earnings are coming March 4, which is always a risk, but there’s no question buyers are in control here. We’ll stay on Buy. BUY.
Teladoc (TDOC 116) is another name that’s been surging before finally pulling in today. Further dips are certainly possible, especially with two big events coming up—earnings (due out next Wednesday, February 26) and then, possibly more important, an Investor Day on March 5, where the firm is likely to do a deep dive into its prospects and future. Any shakeout of a few points would probably mark a solid buying opportunity; the 25-day line (now at 105 but rising rapidly) could offer support. BUY.
Vertex Pharmaceuticals (VRTX 245) remains a bit choppy, but is also in a solid uptrend, actually nosing to new highs yesterday. We’re fine picking up shares here or (preferably) on dips, as the rapid and reliable growth profile should keep big investors interested, especially on dips. BUY.
Watch List
Axon Enterprise (AAXN 86): AAXN wobbled today on a downgrade but still looks fine. Earnings are due out February 27.
Carvana (CVNA 109): Old friend Carvana has come back to life in a big way, exploding to new highs on huge volume this week. And we like the fact that this move came after months of ups and downs that wore out most investors. The trick is that earnings are due out next Wednesday (February 26)—still, any mini-rest or shakeout could have us starting a position.
Uber (UBER 41): We continue to like the general look of the story, numbers and chart here, though the fact that peer Lyft (LYFT) is struggling isn’t ideal.
Zillow (Z 64): Z gapped up on big volume today after releasing an excellent earnings report (driven by many of the same factors pushing Redfin) and we’ll be watching to see how the stock behaves in the days ahead.
