WHAT TO DO NOW: Remain optimistic, but keep some powder dry, too. The overall market continues to look good, though this week we’ve seen most growth stocks take hits as money has flowed into the broad market. Still, to this point, the action is normal, with leading stocks holding key support. We could have new buys next week if growth stocks stabilize, but tonight, we have no changes on the buy or sell side. Our cash position stands at 47%.
Current Market Environment
Stocks slipped today despite a barrage of solid quarterly reports last night. At day’s end, the Dow was off 288 points, though the Nasdaq was off a more modest 25 points.
The past few weeks have (mostly) seen growth stocks benefit while the broad market does just OK, but this week has seen mostly the reverse—financials, small caps, transports and most lagging areas have come to life, while most stocks near their highs have pulled in, sometimes sharply.
From a top-down perspective, the broad market rally is probably a good thing for the overall market—our Cabot Tides remain clearly positive, while our Cabot Trend Lines and Aggression Index continue to improve. Moreover, the number of new lows in the market remain well under control, telling us that selling pressures are sporadic.
And even among individual growth stocks, the action hasn’t been crazy bad—in almost all cases, the potholes we’ve seen have been reasonable given the recent runs these stocks have seen.
Still, the sudden pressure in some high-relative-strength growth stocks shouldn’t be swept under the rug—indeed, the fact that not every investor was rowing in the same direction (a bifurcated market) was one reason we started slow on the buy side (still 47% in cash).
It’s really about taking things on a stock-by-stock basis and not succumbing to the “comparison game” (indexes are up this week, our stocks are down). That game worked in the opposite direction for weeks, so some reversal isn’t shocking.
Long story short, we remain optimistic given the evidence out there. That said, given the potholes this week, we’re not quite ready to put more money to work—but a bit of stabilization could have us extending our line next week. Tonight, we’re standing pat, though we’ll shoot out a special bulletin if we have any changes going forward.
Model Portfolio
Chewy (CHWY 43) has just sat there since our recommendation a week and a half ago, but that seems constructive to us—after a huge-volume rip to new highs, the stock has been pulling back grudgingly. That doesn’t mean a sharper dip isn’t possible if growth stocks or the market get hit, but so far, we like the action. BUY A HALF.
Cloudflare (NET 24) is an exceptionally volatile name, and our initial buy is at a near-term high, but the stock has done nothing wrong—it’s edged down close to its 50-day line (now around 22.3) and bounced modestly. We’re generally sticking to our initial plan: A drop into the 21 area (probably more like 21-21.5 at this point) will have us cutting the loss on our half position, but at this point, we still think the action is normal and have high hopes that the firm’s global cloud platform will attract a bunch of big investors going forward. BUY A HALF.
Dexcom (DXCM 335) has had a few wobbles this week, but remains in great shaped after Q1 results wowed—sales (up 44%) and earnings (44 cents per share, up from a loss last year and well above estimates) looked great, with growth strong across the board (inside/outside the U.S., hardware/sensors, etc.). Management did pull its guidance due to the virus impact, but even while new patient additions are trending down sharply in April, they’re coming in well above initial Wall Street expectations. The stock sold off sharply on Tuesday, gapped up nicely on Wednesday and backed off a smidge today. With DXCM extended to the upside, further weakness is possible, but the trend of business and the stock remains sharply up. We’ll stay on Buy, though preferably on dips. BUY.
DocuSign (DOCU 105) remains in fine shape and continues to be quiet on the news front. Like just about every strong name out there, DOCU has stumbled a bit this week, but it’s still well above even its 25-day line (now near 95). While not directly correlated to cloud software names, it’s not a bad thing to see some of those either react well to earnings (ServiceNow) or test new highs (Coupa). All in all, we’ll stay on Buy. BUY.
Okta (OKTA 151) has had two sharp shakes during the past couple of weeks, one last Tuesday (fell from 155 to 143 in a day!) and this Tuesday and Wednesday (159 to 146 over two days). But such action is not unusual in an early leader that’s already moved to new highs—in fact, the stock’s quick bounce back from each selloff is a good sign. Bigger picture, OKTA appears to be getting going again after a nine-month rest, thanks to its unique identity solutions that will be in ever-greater need in the years ahead. BUY.
Teladoc (TDOC 165) is in the midst of another sharp correction, including today’s drop post-earnings. Fundamentally, last night’s report contained only good news—revenues (up 41%) met the expectations it laid out a couple of weeks ago, with a 29% gain in subscription revenue and a 93% leap in visit fees. But equally impressive were some sub-metrics, including the average deal size booked being up more than 50% from the prior year; total visits rose to two million (up 92%); U.S. paid membership totaled 43 million, up 61%; and that 60% of visits came from first-time users, who are more likely to use the service going forward. Management also upped guidance nicely (revenues up 45% or more) for 2020 as a whole.
Thus, there’s no question business remains great and getting better, but the question is what to do with the stock. Near-term, we think there’s a good chance for further tedious action in TDOC, as it’s obviously had a big run and money is coming out of “virus” stocks and moving elsewhere. If you have a “big” position—whatever that means to you—we’re not opposed to paring back some and seeing how it goes.
In the Model Portfolio, though, we’ve already sold 60% of our original shares, and there are other encouraging factors, including that shares are still above their 50-day line (which is approaching 149) and that TDOC broke out from a 15-month consolidation near the start of January, so it’s “only” four months into its run—usually (not always) too soon for a real leader to top.
(Very) long story short, we’re holding on to our remaining shares here, aiming to give it room to find support, gather itself and resume its uptrend. HOLD.
Vertex Pharmaceuticals (VRTX 251) is another stock that’s (a) sold off sharply, but (b) hasn’t done anything wrong, and (c) whose business remains in great shape. Q1 results (sales up 76%, earnings up 125%) trounced estimates, driven mostly by Trikafta, which was taken up more quickly than expected. Management also hiked guidance for the rest of the year. Still, to be fair, the 2021 earnings number (which many are keying off of as Trikafta ramps) of around $10 per share looks stable, so maybe the upside wasn’t quite as meaningful. But even so, Vertex’s path of rapid, reliable growth for the next couple of years at least looks safe. The recent selling could go on for a bit, and a move below 235 would probably have us going to Hold. But right here, VRTX hasn’t broken any key support and fundamental prospects look great. We’ll stay on Buy. BUY.
Watch List
Coupa Software (COUP 176): COUP moved to a new high today on good (not great) volume, and has as good a story as there is in the cloud software space. Earnings aren’t due until June.
Inphi (IPHI 97): IPHI continues to act amazingly well as business is strong and getting stronger. Earnings are due May 7—a shakeout could provide a solid entry point.
Livongo (LVGO 40): As we wrote in last week’s issue, we’re not eager to jump into another health care name, but LVGO has the makings of a new leader with triple-digit growth and a unique offering.
Smartsheet (SMAR 53): Along with COUP, Smartsheet is another software name we’re looking closely at—its project and portfolio management platforms are best-in-class for the mobile workplace. We love the 35% same-customer growth rate, though earnings and cash flow are solidly in the red, which is a blemish.
Wingstop (WING 117): WING has pushed further into new high ground, though given its straight-up advance, we’re looking for a dip or rest (possibly after earnings, which are due May 6) to get in.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, May 7. As always, we’ll send a Special Bulletin should we have any changes before then.
