WHAT TO DO NOW: Remain defensive. There are certainly indications that a countertrend rally could start at any time, so we’re not anxious to raise more cash, but we’re sticking with the trend, which remains down. In the Model Portfolio, we have no changes tonight—we’re holding four resilient stocks and a cash position of 71%.
Current Market Environment
The market bounced mildly today, with the Dow rising 188 points and the Nasdaq advancing 161 points (2.3%).
If you’ve been reading our slew of bulletins in the past week you pretty much know our thoughts on the market—first and foremost, we’re in a steep downturn, and that should be respected. Our main goal right now is to preserve capital and keep an eye on potential leaders of the next sustained advance.
That said, there’s no question that we’re seeing historic extremes in sentiment and oversold measures, which tells us that a good-sized bounce could get underway at any time. Plus, as we wrote in yesterday’s bulletin, we’re seeing a small bit of resilience in the broad market—the peak number of stocks hitting new lows was last Thursday (~4,400), even though we hit lower lows on the major indexes on both Monday and yesterday (both had ~3,900 to 4,000 new lows).
Combined with our big cash position (71%), the oversold measures and the (minor) new low divergence means we’re not aiming to sell wholesale here. But for buying, we need to see the market get off its knees for more than a few hours, which to this point it hasn’t been able to do. Tonight, we’re again standing pat in the Model Portfolio.
Bigger picture, we wanted to answer the two most common questions we’re getting. First, if you’re stuck with a bunch of bad positions (don’t beat yourself up—you’re not the only one), you should take some action. That doesn’t mean sell left and right, but start trimming to respect what’s going on. The goal is to make back the losses, but you don’t have to make it back in the stocks you own, per se. Don’t let bad situations get much worse.
Conversely, we’re getting a ton of questions on buying. Our general answer: If you have a lot of cash and want to nibble here or there, that’s fine. But don’t get “bargain fever” and grab a ton of beaten-down names; there’s no telling if they’ll go lower, or if they’ll bounce that well if the market does. Remember that the real money is going to be made when the market bottoms out and enters a sustained advance, but that’s likely going to take some time to play out.
If you really want to play the short-term game, we’d suggest waiting for the major indexes to at least rally above their 10-day moving averages (currently 2,625 on the S&P 500, but it’s falling quickly every day), which they haven’t been able to do since the market peak. If that happens, it could be a short-term change in character, which in turn could lead to a solid rally. We’ll see how it goes.
For our part, we’re just sticking with the system that’s gotten us here (we’re still up a smidge on the year), waiting patiently for the next sustained uptrend. In the meantime, we’re watching our remaining four stocks closely, though tonight we’re sitting tight.
Model Portfolio
Dexcom (DXCM 206)
finally came under the gun during last week’s selloff, falling down to its 200-day line (near 190). Since Monday morning, though, despite a lot of volatility, the stock has held that long-term trend line, which is still better than 95% of stocks out there. A decisive drop from here would probably have us getting rid of our remaining shares, but given the recent support and our already-large cash position, we think it’s best to hang on and give DXCM a chance to find buyers.HOLD.
DocuSign (DOCU 76)
is one of the stronger stocks in the entire market, bolstered by its terrific quarterly report last Thursday evening—sales (up 38%), billings (up 40%) and earnings (up 100%) all topped expectations, while same-customer growth of 17% was also impressive. While the core e-signature offering is still the main driver, management said newer contract management offerings (the firm refers to it as the “agreement cloud”) are beginning to get traction. Management also hiked guidance for the year ahead (looking for subscription revenue growth of 32%), which is impressive given the uncertainty out there. As with everything else, DOCU has been incredibly volatile, but it’s been defended at its 200-day line (near 65) a few times. We’ll take it day by day, but so far, DOCU certainly seems to want to head higher if the market can find support. HOLD.We sold the rest of our ProShares Ultra S&P 500 Fund (SSO 79) position in Monday evening’s bulletin. We didn’t handle the position well, of course, as the odds favored this correction being “normal” and it’s been anything but. Down the road, we’ll be interested in re-buying SSO (or another leveraged long fund) for the market’s next meaningful uptrend, which could be very lucrative. But with the market trending down, we’re not touching it.SOLD.
Teladoc (TDOC 139)
is another stock that’s been dizzying, swinging around in 15- to 20-point ranges in recent days. Stepping back, though, shares have remained north of their 50-day line (now around 112), which is rare air indeed. Fundamentally, it looks like the surge toward telemedicine due to the virus is real—on Monday, Teladoc said that last week’s visit volume was up 50% from the prior week and was still rising (up to 15,000 visits requested per day); all in all it provided 100,000 visits for the week. Big picture, Teladoc (and telemedicine in general) could have a big role to play to effectively expand capacity in the hospital system if virus needs surge, and beyond the virus, introducing these offerings to thousands more people can only help. We’re holding on tightly to our remaining shares.HOLD.
Vertex Pharmaceuticals (VRTX 216)
has actually held up well since last Thursday’s market dump, with the stock showing some big-volume support around its 200-day line (near 200). Similar to DXCM, a decisive drop from here could have us cutting bait, but we’re optimistic the firm’s reliable growth outlook and recent statement that it’s leaving 2020 guidance intact will keep big investors interested.HOLD.
Watch List—
please note that it’s still very early to dig in on potential new leaders; we’ll know more when we get a rally of a couple of weeks. But so far here’s what we see.Advanced Micro Devices (AMD 40): We’re not in love with chip stocks, but AMD has held its 200-day line and most indications point toward its growth story being very much intact.
Cloudflare (NET 21): This recent IPO got yanked as low as 15 on Monday but actually closed yesterday above its 50-day line, which is practically heroic in this environment. It needs work like everything else, but is definitely worth watching. It’s probably the top stock on our shopping list right now.
Coupa Software (COUP 142): COUP fell 44% from high to low, but the stock has stormed back this week after a very solid earnings report. Needs work but the story remains great and the recent wipeout likely “reset” the big-picture advance.
Regeneron Pharmaceuticals (REGN 490): Regeneron is a great company that is getting a boost from (a) a competitor’s slip-up that should boost REGN’s blockbuster treatment for macular degeneration and (b) its work on a treatment for COVID-19.
Zoom Video (ZM 124): Zoom remains one of the best growth stocks in the entire market—the virus situation is likely to accelerate the move to its best-in-class platform.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, March 26. As always, we’ll send a Special Bulletin should we have any changes before then.
