WHAT TO DO NOW: Remain bullish, but pick your spots. Today was a very brutal day, but it hasn’t changed the evidence, at least not yet—our trend-following measures are still bullish and, along with the recent blastoff indicators, tell us the odds still favor higher prices ahead (though further short-term weakness wouldn’t shock us at all). Growth stocks have been trickier, but breakdowns have been few and far between. All in all, we remain optimistic, though we’re holding onto our 18% cash tonight. The only change is our switch of Vertex (VRTX) to Hold.
Current Market Environment
After a huge run over the past few days and weeks, the market took it on the chin today, with the Dow cascading a huge 1,862 points (6.9%) and the Nasdaq sank 528 points (5.3%).
From a top-down perspective, the market is still positive despite today’s whopping decline—combine the positive intermediate-term (Tides) and longer-term (Trend Lines) trends with the 90% and 2-to-1 Blastoff Indicators and the odds favor higher prices down the road. At this point, today was “just” one bad day.
That doesn’t mean the short-term can’t see further weakness—in fact, we’re half-expecting it after the recent prolonged run. As of yesterday’s close, the S&P 500 was a whopping 10.6% above its 50-day line; the Nasdaq was even more stretched, 13.3% above its own 50-day line. Throw in the facts that the market is now 12 weeks off the low (enough time for investors to get comfortable), some good news is appearing (surprising job gains last month; Nasdaq pierced 10,000 yesterday) and some sentiment measures are getting bubbly, and this morning’s selloff could easily see some follow through.
As for growth stocks, they’ve been trickier than the major indexes—most are three to five weeks into consolidations, which have included a couple of sharp selling waves. Still, as has been the case, there’s been little serious damage among the leaders and just about every pullback or rest has been normal in the context of the prior run, with most finding support at logical areas (prior highs, 50-day lines, etc.).
Long story short, when you look at the evidence as a whole (trends of the indexes, action of leading stocks, secondary measures like blastoff indicators, etc.), there’s no question it’s bullish. But it’s important to monitor your holdings to see if the sellers take control (any recent buys that are showing you growing losses should be watched closely), and on the buy side, to look for solid entry points as some further near-term consolidations in growth stocks or the market is possible.
We’re mostly standing pat tonight, though we are placing Vertex Pharmaceuticals (VRTX) on Hold as the stock has been sluggish.
Model Portfolio
Chegg (CHGG 57) has been slowly sliding since mid-May, but it hasn’t come close to breaking down and has actually found some support near a logical area (the stock’s close on the day of the earnings gap). We think the story is very much intact, and if you step back and look at the weekly chart, the past month appears to be a normal rest after a giant earnings gap. To be clear, we’re not whistling past the graveyard; we’ll cut bait if the stock trips our loss limit (53 to 54 area on a closing basis; about a 17% loss on the half position), but right here we’re still OK grabbing a small position if you’re not yet in. BUY A HALF.
Chewy (CHWY 49) has a very bright future, a fact reinforced by Tuesday evening’s earnings report. Sales ($1.62 billion up a huge 46% from a year ago; even without estimated one-time stockpiling demand, revenues were up 40%) and EBITDA (turned positive for the first time ever) easily topped expectations, driven by a big 33% gain in active customers (to 15 million) and a healthy increase in buying among those customers (up 7%). (Once again, autoship sales grew faster than overall sales, now making up 68% of total revenue.) But even better than that was management’s commentary—these new customers are showing excellent buying habits, with larger initial and faster second purchases than “normal” new customers, which led management to hike guidance (40%-plus revenue growth for Q2). All in all, the fundamental story is playing out as expected, with the long-term trend of more pet food/toy/medicine purchasing taking place online likely accelerating due to the shut-in. If the market can settle down, we could look to fill out the other half position. For now, though, we advise sitting tight. HOLD A HALF.
Cloudflare (NET 29) has been hanging around, which could mean it lacks buying power, but we think it might be playing possum—this week is shaping up to be the most compressed (smallest range from high to low) weekly range since early February, and there’s been a lot of tight closes of late, too, both of which are generally constructive signs. A drop back to the 24 to 24.5 area would likely have us cutting the loss, but at this point NET looks good. BUY.
Dexcom (DXCM 363) has had a steep pullback of nearly 22%, but it’s found support near 340 twice (including a tag of its 50-day line last week) and has bounced decently since. If you did buy shares at higher prices, you should probably have a stop under that 340 area in case the sellers do more damage. But with a solid profit, we’re aiming to give DXCM more rope given the reasonable retreat and sterling fundamentals. HOLD.
DocuSign (DOCU 149) released a great quarterly report a week ago, with estimate-beating sales (up 39%), billings (up a huge 59%), earnings (up 71%) and a hiked outlook. The stock had a huge run before the report, and while there have been some wobbles, it actually nosed to new closing highs today! We’re holding on tightly to our shares, but we’re also not advising new buying here given that the stock is extended both short- and intermediate-term. HOLD.
Okta (OKTA 179) is another growth stock that’s in a tedious-but-normal pullback—after spiking to new highs above 200 after earnings, the stock has pulled back 10% or so and is hanging around its 25-day line. On the negative side of things, the firm (like so many out there) did price a good-sized convertible share offering ($1 billion), which is dilutive and usually pressures the stock in the near-term. Still, following its huge rally, shares are well above their prior high (near 143) and their 50-day line (at 163). Short-term, expect more fidgetiness, but the odds favor the next big move being up. BUY.
ProShares Ultra S&P 500 Fund (SSO 118) was smacked upside the head today as the major indexes fell sharply, falling a smidge below our entry points. The question is whether, after a huge multi-week run and some signs of giddiness of late (options traders have gone wild on the buy side), today is the start of a longer retreat; now that some late buyers have piled in, it’s possible the market needs a few weeks to shake them out. We’ll let others pontificate and predict—at this point, while today admittedly looks a bit abnormal, there’s no doubt that the intermediate-term trend remains strongly up for the major indexes (each one is still above even its 25-day line after today), and the blastoff indicators of late are still in effect. Don’t get us wrong, we’re not complacent (it’s always possible the virus crash-and-recovery is knocking some indicators for a loop), but given the evidence we’re going to remain on Buy. BUY.
Teladoc (TDOC 174) corrected 27% from high to low and it’s possible the stock (boosted by some renewed virus fears) is ready for its next advance—shares have popped back above their 50-day line after last Friday’s dip to support near 150. Also likely helping the cause is some analyst love, with JP Morgan hosting a “Teladoc Health Week” that revealed some neat tidbits, including that the company serves 40% of the Fortune 500; that its behavioral health offerings is its fastest growing (up 70% last year); and virtual visits that the firm charges a fee for rose to 227,000 in Q1, up from 125,000 and 62,000 the prior two quarters. The fundamental potential remains massive, and we think the next major move is most likely up, but we’ll stay on Hold for now and see how TDOC (and the market) handle themselves in the days ahead. HOLD.
Twilio (TWLO 188) was hit hard today, though like most growth leaders, the damage was reasonable; shares are above the lows of the two other shakeouts (in the 180-182 area) during the prior three weeks. There’s always a chance TWLO gets yanked lower, but it continues to hold up very well given its huge earnings gap and upside follow through. We’re OK grabbing shares around here or on dips of a few more points if you’re not yet in. BUY.
We’re moving Vertex Pharmaceuticals (VRTX 264) to Hold tonight, not because of any major damage, but more because the stock is falling behind—it’s no higher than it was in mid-April and actually dipped a smidge below its 50-day line today. Of course, the stock isn’t that volatile (it’s about 10% off its peak), so it’s hardly a disaster; we still believe the odds favor big investors supporting shares on dips given the steady growth story. Still, given the action, it’s prudent to go to Hold tonight, though we’ll keep our mental stop relatively loose for now (in the 240 area). HOLD.
Watch List
Coupa Software (COUP 218): COUP’s growth story remains very much intact (solid earnings report this week), and while the stock has gyrated, it’s still perched above its 25-day line.
Datadog (DDOG 76): DDOG has the look and feel of a new market star—rapid revenue growth, positive earnings and a story that should take it far.
Inphi (IPHI 111): IPHI had a big run from the March lows through last week and is now finally pulling in; a tap of the 50-day line (now at 103 and rising) could be interesting.
Peloton (PTON 46): PTON is four weeks into a rest after a humongous-volume breakout in early May. While shares get tossed around by virus-related news, we think highly of the story, which is borderline revolutionary as the leader in connected fitness.
Wingstop (WING 116): WING is now five weeks into a relative tight consolidation that has so far found support at the 50-day line. We’re tempted to get in if the stock (and market) can stabilize.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, June 18. As always, we’ll send a Special Bulletin should we have any changes before then.
