WHAT TO DO NOW: Remain defensive. There are good and bad aspects to the market’s short-term action; overall, we’re optimistic a bottom-building process is underway, but we’ll see how it goes. We’re not ruling out nibbling on one or two stocks if the buyers show some mettle, but with our market timing indicators negative, we’re content to hold plenty of cash and patiently wait for the next move up. Happily, the Model Portfolio remains in good shape; we have no changes tonight and are holding 70% in cash.
Current Market Environment
As of 1:30 pm EST on Thursday, the market is up modestly, with the best action is being seen the most beaten-down areas. The Dow is up around 100 points and the Nasdaq is up 23 points (0.3%).
Nothing has really changed during the past week when looking at rubber-meets-the-road indicators. Despite the ups, downs and news-driven moves since the market’s March 23 low, our Cabot Tides remain clearly negative, our Cabot Trend Lines are also pointed down and the vast majority of stocks are in the same boat (only 6% of NYSE and 11% of Nasdaq stocks are actually their longer-term 200-day lines).
Thus, we continue to advise a defensive stance, focusing on preserving capital for the next sustained bull run, which is where the big money will be made.
Looking at the near-term tea leaves, there’s some good and bad. On the good side of things, the market is pretty much acting as expected during a bottoming process—lots of volatility and not overreacting to awful news (10 million new jobless claims during the past two weeks alone!) as it hacks around. We also like the good number of growth stocks that bounced on huge volume last week and the fact that, despite some punches to the gut this week, the number of stocks hitting new lows has remained relatively tame.
On the flip side, we’re a bit disappointed with the bounce seen in the major indexes to this point—the S&P 500 only recouped about 35% of its crash decline before falling back a bit (the Nasdaq was close to 40%), which doesn’t exactly suggest intense buying power. Indeed, the Nasdaq was rejected as soon as it hit its falling 25-day moving average earlier this week.
Really, though, while it’s tempting to look at the wild news and action, you shouldn’t overemphasize the near-term gyrations—if all goes well, in fact, we’ll see a few weeks of up-down-up-down action (preferably more up than down), a successful retest of the March 23 low and then a strong rally phase as the market looks ahead toward an economic recovery. We’re optimistic that the market has started a bottom-building process, but as always we’ll see how it goes.
Going forward, we could put a little (5% or 10% out of our 70%-ish cash hoard) money to work if the buyers show some more mettle. But with the main evidence remaining bearish, we’re comfortable holding plenty of cash and patiently waiting for the market (and next round of leaders) to set up and blast off.
As for the Model Portfolio, it thankfully remains in solid shape—while good stocks can go bad in a hurry in a downtrending market, we think there’s a decent chance we own some of the leaders of the next sustained upturn already.
Model Portfolio
Dexcom (DXCM 268)
has certainly been impressive during the past couple of weeks, with the stock rallying eight days in a row off its bottom and recouping around three-quarters of its decline in the process. It’s backed off just a tad since then and still remains north of its 50-day line. As we wrote last week, Dexcom has said that it’s still taking and filling most orders (including repeat orders), so any business interruption is likely to be mild. And there’s no question the longer-term outlook is as bright as ever. It wouldn’t be unusual for the stock to shed some of these recent gains (either with the market or should things rotate into beaten-down areas like today), but the overall chart and fundamental outlook tell us DXCM is still in pole position to be a leader of the next bull phase.HOLD.
DocuSign (DOCU 85)
did what few stocks could even dream up these days—it hit a new high earlier this week! Of course, in a down market, “breakouts” like this almost always fail, and sure enough, DOCU has pulled in relatively sharply (software stocks are getting hit fairly hard across the board today). Still, the firm’s recent better-than-expected quarterly report and management’s bullish guidance (along with the huge big-picture potential) should continue to give big investors confidence to support the stock on dips. Obviously, we’ll keep our eyes peeled, but so far, so good for DOCU.HOLD.
Teladoc (TDOC 159)
has so far done a nice job of shaking off last week’s wave of distribution, though the bounce has come on very low volume, so we’ll see how it goes. Either way, we’ve already trimmed about 60% of our original shares, so barring something truly abnormal, we’ll give what we have left plenty of room to maneuver. There haven’t been any updates from the company over the past couple of weeks, but (a) Teladoc said visit volume was soaring in the early/middle part of March and (b) there’s a very good chance trends have only accelerated with tens of thousands infected with the virus in the U.S. and elsewhere. Sit tight with your remaining position.HOLD.
Vertex Pharmaceuticals (VRTX 235)
saw its first business update (March 9) get mostly ignored by investors, so the company was on the horn again last week (March 27) to re-re-confirm that its supply chain is intact and it will be able to supply all of the cystic fibrosis patients that need its medications. Most important for investors, management again stood by the buoyant guidance for 2020 it gave earlier this year. (On the flip side, some clinical studies have been put on hold for a while.) As for the stock, we like the action—the overall high-to-low correction (20%, ballpark) was more than reasonable given the market’s crash, and it recouped more than three-quarters of that by Tuesday before backing off a bit. Nothing is out of the woods yet given the market, but VRTX is acting about as well as any growth stock.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.Chewy (CHWY 35): CHWY is getting some love now because of its defensive (pet supplies) business, but there’s a great long-term growth story here. Earnings are due out tonight.
Cloudflare (NET 23): NET is probably at the top of our watch list—it has the look and feel of a new leader that big investors are accumulating.
Inphi (IPHI 77): Old friend Inphi has actually benefited from the virus shut-in, with demand for its high-speed data interconnects picking up as more people work/play/learn from home. The chart is showing strong tennis ball-like action.
Netflix (NFLX 365): Not sure we’ll go there, but NFLX does have a very big 21-month launching pad setup and has been acting well. Earnings are estimated to rise north of 40% both this year and next.
Okta (OKTA 115): OKTA is one of many cloud security players that’s shown strength, and the firm had a bullish Investor Day on Wednesday, reaffirming both its 2020 and longer-term outlook.
Seattle Genetics (SGEN 117): We’re not huge fans of the low-growth projections this year, but this firm looks like a budding oncology powerhouse and the stock is perched near its peak.
Zoom Video (ZM 122): There’s been some news on the competition front (from RingCentral) and worries about security that have dented the stock, but so far ZM’s retreat has been acceptable. The next few days will likely be key.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, April 9. As always, we’ll send a Special Bulletin should we have any changes before then.
