WHAT TO DO NOW: Remain cautious. The market has been gyrating wildly this week, holding above its lows from last Friday. That said, our Cabot Tides are negative and the sellers are in control of most stocks, so we’re holding plenty of cash and waiting patiently for the next sustained uptrend. In the Model Portfolio, we have one very unusual change tonight—we’re going to “sell/drop coverage” of Sea Ltd. (SE), not because of performance (the stock looks great), but because of a publishing error in last week’s issue. (More details on that below.) All in all, the Portfolio will now have around 53% in cash.
Current Market Environment
The market slid sharply today, with the sellers taking advantage of yesterday’s rally to unload shares. At day’s end, the Dow was off 972 points while the Nasdaq had skidded 279 points.
Stepping back a bit, the market could be following the “normal” script following waterfall-type declines, at least for now—a panicky short-term low with many extreme oversold readings (in this case, last Friday’s intraday lows), a news-driven, volatile bounce phase, and then, eventually, a retest (one or more) of the low. Of course, the market can change scripts at any time, and we have to say the wild ups and downs this week isn’t ideal. But to this point, the general action isn’t unexpected given last week’s unraveling.
Still, while having a rough sketch for how things might go is fine, you should just take it day-to-day and follow the evidence. Right now, our Cabot Tides remain clearly negative and the sellers are in control of most stocks. Our longer-term Cabot Trend Lines are still positive, so we’re not sticking our head in the sand, but you should be in a cautious stance, pruning laggards and holding plenty of cash, while giving your resilient stocks a chance to hold up.
Most of all, flexibility is key. If things deteriorate from here, we’ll pare back further. But if not, we’ll try to stick with our resilient stocks.
In the Model Portfolio, we have around 45% in cash after having pared back last week, and happily, are still sitting on some decent profits for the year. Tonight, our only change is really due to our publication error in last week’s issue—we’re “selling/dropping coverage” Sea Ltd (SE), not because of performance (the stock looks great), but because of some publishing errors that had the stock listed in a few places as a Sell. Moving on from this, the portfolio will now be around 53% in cash.
Model Portfolio
Dexcom (DXCM 287) continues to hold up very well compared to the vast majority of stocks out there—it’s still hovering nicely above its 25-day line (now near 267 and rising). The company presented at a conference earlier this week, and while no major new ground was broken, one slide highlighted the company’s (and the entire industry’s) potential; continuous glucose monitors are used by just 35% to 40% of Type 1 patients and just 15% or so of eligible Type 2 patients in the U.S. alone, with far less penetration overseas, so the current wave of growth (as diabetics switch from multiple daily injections) should continue for years. Back to the stock, a fresh round of selling wouldn’t shock us, but given DXCM’s resilience, we’ll stay on Buy. Still, keep new positions small and aim for weakness. BUY.
DocuSign (DOCU 89) is another resilient actor, hanging out a few percent below all-time highs and north of its 50-day line. So far, so good, but the real test will be a week from today (March 12), when the firm releases earnings—analysts see revenues of $266 million (up 33%) and earnings of five cents, though as always, the forecast and some sub-metrics (same-customer growth rate, bookings, customer count) will be key as well. Bigger picture, we think the fact that DocuSign actually saves clients a ton of time and money will make the growth story more resilient to economic fears, but we’ll just take it as it comes. As with DXCM, we’ll stay on Buy, but keep it small and look for dips. BUY.
Dynatrace (DT 33) held its 50-day line during last Friday’s market nadir, and it’s bounced mildly this week thanks in part to a couple of positive analyst pieces. (We also like the fact that peer Datadog (DDOG) is also acting well.) Dynatrace has the makings of a fresh leader during the market’s next uptrend, with a great story, excellent growth numbers and a resilient chart. But for the here and now, we’re just going to play this by the book—a drop much below 30 or so would likely have us selling, but above there, we’re happy to give it a shot. HOLD HALF.
ProShares Ultra S&P 500 Fund (SSO 131) has gyrated with the market in recent days, though it’s up decently on the week. Given that we just had a rolling crash in the market, that last Friday was probably (no sure things) a low that stocks can work off of and that, after today, we’ll have north of 50% in cash, we’re OK holding our remaining shares here. That said, depending on how things progress, we could trim this position further going forward if the situation calls for it. For now, we’re holding. HOLD.
We were forced to cut our loss last Friday in Redfin (RDFN 29), as we bought the stock the day before the market began to unwind. Shares have bounced decently since then, and housing stocks in general have found some buyers as mortgage rates plunge through the floor. (Someone in the office just refinanced at 2.99% for a 30-year fixed. Imagine!) We’ll keep an eye on it, but having sold last week, we’re holding the cash. SOLD.
Sea Ltd. (SE 53) is being moved to a “Sell/Drop Coverage” today, which is a first for us—the reason has nothing to do with the stock, which acts great (it’s reacted very well to earnings this week), but due to a publishing error in the issue last week. We’ve been working through some new processes, and they obviously weren’t ready for prime time. While we meant to have our remaining SE shares rated HOLD, we published a few paragraphs (written a day earlier!) that listed our recommendation as a SELL—and that advice was read by the vast majority of subscribers.
We can’t remember this occurring at all during our 50 years in business, and definitely not in the 20-plus years I’ve been here. But it happened, so the question is the fair way to move forward. To us, it’s best to own up to it and, for our records, assume we sold the rest of our SE last week, as many likely did. Because of that, we’ll also drop coverage of SE from the Model Portfolio.
That said, for your portfolio (which is what counts!), if you happen to still own SE, it’s fine to hold on—albeit with a stop in the 43 to 44 area (near last week’s lows). And don’t hesitate to email or call with questions on the stock at any time; we’ll be keeping an eye on it. But we’ve always prided ourselves on being very transparent and straightforward, and we feel that this is the best way to handle this unusual snafu. SELL/DROP COVERAGE.
We sold one-third of our position in Teladoc (TDOC 134) last week, booking some of our large profit, not because the stock was doing much wrong, but because it was extended and likely to pull in as the market works its way through this downturn. That did happen for a couple of days, though today’s action was encouraging—with Teladoc hosting an Investor Day, shares surged a few points on good volume. TDOC is certainly one of the stronger growth names in the market, but we’re fine staying on Hold until the market gets its act together. HOLD.
Vertex Pharmaceuticals (VRTX 237) popped nicely to within a few points of its old high, though it gave up a chunk of that move today. Some of the movement is sector-based, with healthcare names rallying after Tuesday’s election results, though who knows if that will last. Bigger picture, we think VRTX is likely to find support on dips and see higher highs down the road, but right now, we’re staying on Hold as shares are likely to get tossed around by the overall market. HOLD.
Watch List
Atlassian (TEAM 152): We have mixed emotions about cloud software names, many of which are iffy. But TEAM has a fantastic history of growth, excellent projections and shares are holding up very well.
Cloudflare (NET 23): The story is a bit of an ice cream headache, but Cloudflare has a vast global network built for the cloud era, providing everything (security, flexibility, etc.) that web operators need. (18% of the top 10,000 websites in the world use it.) The stock is showing excellent strength despite the market’s wobbles.
Inphi (IPHI 83): We dumped IPHI last week when it imploded through all support, but impressively, the stock has snapped back strongly. We wouldn’t jump in here, but if this bounce can hold (still a big if), there’s a good chance last week’s plunge was a shakeout.
Luckin Coffee (LK 41): This Chinese bare-bones coffee store operator is posting mind-boggling growth, and while the chart still needs some work, we like the (much) higher low recently and the relative tightness, too.
Square (SQ 76): The fundamentals here remain pristine, and while the stock has slipped this week, it’s shown good strength overall this year as it moves toward the top of its 18-month consolidation.
Tesla (TSLA 725): Shares bounced off their 50-day line last Friday, though, like most things, probably need more time to rest. But the odds continue to favor another sustained uptrend coming down the road.
Zoom Video (ZM 125): Some of its strength is virus-related (more people video conferencing than going into the office), but the company has always had a great story, growth remains buoyant and the stock hit a new high today after earnings.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, March 12. As always, we’ll send a Special Bulletin should we have any changes before then.
