WHAT TO DO NOW: The market’s evidence has worsened some this week—our Cabot Tides are now on the fence as the broad market has softened. Growth stocks are still in generally good shape, so we’re happy to hang on, but we are going to take a couple of chips off the table tonight—specifically, we’re selling one-quarter of our remaining shares in both Dexcom (DXCM) and DocuSign (DOCU). We do have a few stocks we’re watching to buy if we see better entry points, but tonight we have just the two partial sales, which will give us around 40% in cash.
Current Market Environment
The market found good support today after a poor open, with the Dow closing up 377 points and the Nasdaq rising 81 points.
As we wrote in last week’s issue, it’s been a very divergent environment in recent weeks, with growth stocks skyrocketing but everything else meandering. Plus, the amazing action of growth stocks felt a bit too good to be true, at least in the near-term.
Despite today’s rebound, those factors could be catching up to the market—the major indexes have hit some turbulence this week, which has placed our Cabot Tides on the fence due to sagging performance from small-caps, mid-caps and the NYSE Composite.
We’ve also seen some leaky action from other broad market measures—the number of new lows on the NYSE has been north of 40 during the past two days (105 today), the first plus-40 readings since the very beginning on April. (New lows have picked up on the Nasdaq as well.) That’s not a death knell, but it’s a change of character compared to the last few weeks.
Even so, it’s not a time to panic assuming you didn’t pile into a bunch of extended names over the past week or two—most leading growth stocks, while taking on a little water, remain in good (sometimes great) shape, with zero meaningful breakdowns. That goes along with the fact that the Nasdaq is still in a solid uptrend (actually above its 25-day line) and our Aggression Index is firmly positive.
The divergent environment is a major reason we haven’t floored the accelerator with new buys—we came into the week with 35% in cash and, thankfully, the Model Portfolio remains solidly in the black for the year. However, given the extended runs in some names and the worsening evidence, we’re going to do a little trimming today.
Specifically, we’re going to sell 25% of our remaining shares in both DocuSign (DOCU) and Dexcom (DXCM); each has had big runs and are standing miles above support. Paring back on these two will leave us with around 40% in cash.
From here, we’ll take it as it comes. We’re certainly open to raising more cash if the market goes completely up in smoke and leading growth stocks come unglued. Maybe this is the start of the much-discussed retest phase following March’s crash, or maybe we start to see a rotation, where the beaten-down areas attract money while strong (but extended) growth pulls in. Either way, if the selling intensifies, we could pare back further.
However, we’re also keeping a close eye on many names that have recently emerged from big consolidations—pullbacks/shakeouts toward support areas could have us starting positions on a new name or two, assuming the market finds support.
At this point, given the evidence, we think paring back a smidge makes sense, but as has been the case for the past couple of months, remaining flexible is key.
Model Portfolio
Chewy (CHWY 41) gradually pulled back from 46 to 38 over the past three weeks even as growth stocks did well, but it didn’t break down—in fact, so far this week, it’s bounced nicely off its 10-week moving average, which is usually a plus. As we wrote in last week’s issue, we prefer to practice patience with names that haven’t done anything wrong, so we’re remaining patient with CHWY, though a dip to our mental stop in the 36 area would change our tune. Right here, we’re still fine picking up a half-sized position if you don’t own any. BUY A HALF.
Cloudflare (NET 28) had been up and down like CHWY until last week, but it soared ahead of its quarterly report last Thursday, and while it’s wobbled since, it’s in good shape. As for the Q1 report, it was steady as she goes (revenues up 48%, customer count up 21% and same-customer revenue growth up north of 15% for the ninth straight quarter), which, combined with a $500 million convertible (dilutive) bond offering, brought out some near-term pressures. We’re up a buck and a half on our initial purchase, and we wouldn’t mind averaging up, but given that (a) NET is a bit extended (25-day line down at 25) and (b) the market is somewhat tumultuous, we’ll just sit with our half position. If you’re not in, though, we’re fine starting with a half position here or on dips of a point or two. BUY A HALF.
Dexcom (DXCM 403) has been an amazing performer, breaking out at 280 in April, rallying to 320-ish ahead of earnings, and then booming to 420 after the report; its addition to the S&P 500 also helped push it higher. We continue to see the stock as a liquid leader of the advance, however, there are some near-term concerns—DXCM is sticking straight up in the air (the 50-day line is down at 295!); stocks often soften a bit after an S&P 500-induced buying boost; and the company, like many others, recently priced a big ($1.05 billion), dilutive convertible bond offering, which can present an overhang. None of these are major worries, but given the environment and the stock’s advance, we’re going to take some partial profits tonight, selling one-quarter (25%) of our remaining shares—i.e., if you currently have 100 shares, sell 25. Meanwhile, we’ll hold on tightly to the rest, giving it plenty of room to consolidate if need be. SELL ONE QUARTER, HOLD THE REST.
DocuSign (DOCU 122) is in a similar position as DXCM, with a big run of late that’s left it well above its moving averages (50-day line down at 94), not to mention the stock has about doubled from its breakout level of last September. The rapid, reliable growth story should play out for a while, but throw in the fact that earnings are likely out in about three weeks and we’re going to ring the register tonight, selling one-quarter of our position, and then sit tight with our remaining position through earnings and (ideally) for a long time to come. SELL ONE QUARTER, HOLD THE REST.
Okta (OKTA 177) continues to march higher, and given the fact that we have a quick, nearly-20% gain, we’ll be moving our mental stop up toward breakeven (probably not all the way to our cost near 150 given the quick move, but into the low/mid 140s); years ago, a study of our stocks showed us letting too many decent profits deteriorate into meaningful losses, so we do what we can to avoid that now. As we wrote last week, though, OKTA’s intermediate-term future will probably come down to earnings, which are due out in two weeks (May 28). We still think Okta is rare merchandise given its huge story and top-notch execution, so we’ll stay on Buy, but if you don’t own any, buying smaller positions (preferably on dips) makes sense. BUY.
Teladoc (TDOC 180) has bounced decently following its earnings plunge, though today’s announcement of a good-sized convertible bond offering ($800 million worth) brought some selling pressure. Stepping back, though, shares are still in the broad 160 to 200 range (ballpark) that they’ve occupied during the past three weeks, and we’re happy to give them room to shake and bake. A drop below 160 would be a short-term character change, though our mental stop remains down in the mid 140s. If you don’t own any, we’re not opposed to a nibble around here, but for our part, we’ll officially we’ll stay on Hold and look for a more solid entry point. HOLD.
Twilio (TWLO 192) is off to a good start for us, following through a bit on its big earnings gap and remaining strong even as the market has wobbled this week. Fundamentally, there’s no question business is picking up in a hurry—the firm’s programmable video platform just inked a deal with Zocdoc, a telehealth solution that helps providers facilitate their virtual appointments. All in all, Twilio’s video platform has seen a 90% increase in usage among its healthcare customers compared to pre-COVID levels. While the stock is obviously extended, the earnings gap bodes well, and the story, numbers and chart all line up; TWLO looks like it’s regained its status as a liquid leader. Hold on if you own some, and if you don’t, we’re OK picking up some shares around here or on dips. BUY.
Vertex Pharmaceuticals (VRTX 277) and partner Crispr Therapeutics announced they received a Regenerative Medicine Advanced Therapy designation (which expedites drug development and reviews) from the FDA for a new stem cell therapy they’re working on to treat severe sickle cell disease. That’s a small plus for Vertex’s pipeline (this treatment has also received Orphan Drug status as well), though its cystic fibrosis treatments remain the main attraction here. Shares remain in a solid uptrend, riding above its 25-day line and hitting new highs on Monday. We’ll stay on Buy. BUY.
Watch List
Atlassian (TEAM 180) or Coupa Software (COUP 210): These look like the two well-traded leaders of the cloud software group, each possessing great stories and growth numbers. Both have broken out and followed through, and the first pullbacks should offer solid entries—assuming the market doesn’t implode.
Chegg (CHGG 65): Chegg is one of the market’s glamour leaders after its big earnings-induced gap to new highs last week. A calm couple of weeks or a shakeout could be buyable.
Inphi (IPHI 109): Inphi’s growth outlook remains very bright, with 40%-ish earnings growth likely for the next couple of years. Any pullback from here would be very tempting.
Pelaton (PTON 45): With a newer, potentially revolutionary consumer-facing product that’s changing the way many exercise, PTON has a lot in common with past big winners. And the stock just broke out from a great-looking post-IPO base last week.
Wingstop (WING 122): WING, which is a favorite short-term (thriving during the shut-in) and long-term (store expansion and heady same-store sales growth) retail story of ours, has been in a persistent uptrend for weeks and is just starting to hiccup a bit. Similar to IPHI, a reasonable retreat would be tempting.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, May 21. As always, we’ll send a Special Bulletin should we have any changes before then.
