WHAT TO DO NOW: You should remain bullish and flexible. Most of the evidence remains positive, including the trends of the major indexes and action of leading growth stocks. That said, the bifurcated environment is still in effect, and few stocks are at attractive entry points after big runs. As we have been all year, we remain open to anything, but tonight we’re standing pat in a heavily invested position (8% cash).
Current Market Environment
Stocks were up and down during the day but finished solidly in the black after a late-day rally. At the close, the Dow had risen 300 points and the Nasdaq was up 108 points.
The topsy-turvy, divergent environment continues. Following the huge selloff back on June 11, the Nasdaq (up eight days in a row to new highs) and growth stocks (many lit up the sky last week) performed very well, and some of that was reflected in broader measures, too—the number of stocks hitting new 52-week highs on the Nasdaq hit 200 on Tuesday, the largest figure since before the crash.
In the big picture, elevated readings of new highs, along with the broad strength in leading growth names, is a good thing. Short-term, though, this sort of evidence often precedes a pullback.
Moreover, as has been the case for a while, what’s been good for growth titles hasn’t necessarily good for the broad market—no other major indexes have come close to their early-June highs, and most are now sagging again. Indeed, a 2% to 3% drop from here could actually flip our Cabot Tides to negative.
(To be clear, the Tides are still positive, and we never anticipate signals. But it’s worth monitoring and, at the very least, tells you how split the market has become.)
As has been the case all year, we remain flexible—maybe the dreaded second-wave fears are enough to sink the three-month rally, or maybe we’re due for another bout of rotation into cyclical names and out of growth stocks to shake things up.
Still, while our eyes are open, we’re staying focused on the core evidence, which remains bullish: The market’s longer-term (Cabot Trend Lines) and intermediate-term (Cabot Tides) trends are up, just about all leading stocks are in good shape (though many are extended to the upside) and some key broad market measures (number of new lows, etc.) are encouraging. Thus, we remain bullish.
At this point, we’re more interested in monitoring what we already own than doing a ton of new buying; we’re not seeing many good entry points among leading stocks at this point. Thus, if you’re putting money to work, go slow and aim to enter on weakness.
As for selling, we have none now, but we’re monitoring all of our holdings—if the selling intensifies and/or our Cabot Tides turn negative, we’ll likely throw out a lagging name and/or take partial profits in a winner. But tonight, we’re standing pat. Our cash position is around 8%.
Model Portfolio
Chegg (CHGG 65) is like one of those roller coasters you eagerly get on at the park but after a few ups and downs you’re wondering if you made the right decision. The stock has done nothing wrong, though we’re a little disappointed that, after a great-looking leap last week, it’s given up nearly half that move this week. Given the story, numbers and chart, we still believe the next big move is up, and if you don’t own any, you can pick up a half-sized position here. But we want to see an orderly upmove before filling out our position. BUY A HALF.
Chewy (CHWY 49), on the other hand, is acting in a controlled manner, hanging around the 50 area (actually 47 to 52) for the past three weeks. We like the story here, and a bit more constructive action will likely have us filling out the rest of our position. That said, given that we’re down to just 8% in cash, we’re not forcing it here—if you want to nibble, we won’t argue with you, but officially we’ll stay on Hold and look for an opportunity to fill out our position. HOLD A HALF.
Cloudflare (NET 36) was one of the first stocks to hit new highs after the market’s crash as big investors saw the virus was likely to cause a huge short- and long-term shift to the cloud—and lead more and more big firms to Cloudflare advanced cloud network platform. The stock had some fits and starts, but NET really let loose last week, with a gigantic move to new highs on its heaviest weekly volume ever (by far). We think the firm is positioned perfectly, with a unique solution, to benefit from the shift that’s going on. Hang on if you own some, and if you don’t, you could nibble here or aim for dips of a couple of points. BUY.
DexCom (DXCM 398) meandered back toward its May high without much power, and now it’s pulling in again—overall, the stock is in the sixth week of consolidating after a monster move, which is fine by us. We are open to the possibility that, after a huge move from its initial breakout last November (180 to 430, round numbers), and with earnings growth potentially crimped this year (up “only” 15% is the current estimate) as fewer new patients go to the doctor and get CGMs, that the stock could have topped out for a while. A drop into the 320 area (give or take a few points), which is meaningfully below the May lows, could be a red flag. Still, while it’s good to have such scenarios in mind in case they happen, the fact is DXCM was a clear leader off the market’s March low and, even with recent wobbles, isn’t far from all-time highs. Continue to hold your shares. HOLD.
We sold a quarter of our remaining shares of DocuSign (DOCU 168) more than a month ago, thinking the stock was extended. Whoops! That was incorrect thinking, but we’re not complaining, as we still hold a core position as the stock has motored higher in a straight line in recent weeks. Given the extended run both short-term (50-day line is down at 130) and longer-term (it’s now nearly tripled from its breakout last September), we could shave off a few more shares if/when the current trend cracks—at some point, DOCU is going to need to pull back and consolidate for a long while. But big picture, the company’s e-signature and broader agreement cloud platform (including document creation and management) should be one the bigger beneficiaries as businesses move everything online. HOLD.
Okta (OKTA 204) continues to act well, hanging near its highs and finding some solid support at its 25-day line today. In a survey a few weeks ago, Morgan Stanley found that spending on identity/access management solutions was set for a huge bump given the business world’s new reality, and as the leader, Okta will surely get its fair share of that. If anything, the firm’s four-year outlook released last year (30%-plus annual revenue growth, faster free cash flow expansion) has likely been accelerated by a couple of quarters at least. Like many growth names, we can’t rule out another wobble or two, but we think OKTA will head higher over time. BUY.
ProShares Ultra S&P 500 Fund (SSO 124) is still in acceptable shape, hanging around our initial entry point from a couple of weeks ago. Should the selling pick up steam, we’d likely go to Hold on a meaningful break of 115 (corresponding to a dip below the 50-day line) and cut our loss in full somewhere in the mid 100s. Still, while it’s good to be prepared for the worst, we’re optimistic higher prices are ahead, as our still-bullish trend-following indicators and the blastoff green lights from late May/early June bode well. BUY.
Teladoc (TDOC 202) has performed very well from its lows earlier this month, with shares actually kissing a new price high earlier this week before pulling back below 200. To be fair, it’s not a perfect picture (volume on the recent upmove has been sub-par and the relative performance (RP) line hasn’t hit new highs), which could easily lead to more stops and starts. But the overall chart suggests TDOC’s multi-week correction is likely over, assuming the market doesn’t keel over. We’ll stay on Buy, though a dip toward 190 would be a better entry. BUY.
Twilio (TWLO 217) stretched into new high ground last week, which is always a good sign, though it also didn’t exactly show a ton of power (below average volume, etc.). Near-term, like many names, we’re sort of 50-50 on TWLO—the 50-day line is still way down at 171, so further consolidation could certainly be in order. But the big-picture chart looks great, and fundamentally, demand for the firm’s communication platform should see buoyant demand from a variety of areas (healthcare, municipalities, education, commerce, etc.) as the move online accelerates. We’ll stay on Buy, though we’d prefer new buyers aim for dips of a few points. BUY.
Vertex Pharmaceuticals (VRTX 295) remains firmly in the good-not-great category—shares perked up to new price highs earlier this week, though relative to the overall market, the stock is no higher today than it was in early April. That’s not a reason to panic by any means; VRTX is a mega-cap name that’s not likely to keep up with the fast-moving growth stocks out there. Plus, fundamentally, everything appears to be on track; next year’s estimates continue to trickle higher (now $10.97 per share for 2021, up from $5.33 last year). If you really want in, we’re not dead set against grabbing a few shares here or (preferably) on dips, but if you already own some, just hang on. We have a relatively loose mental stop in the 250-260 range. HOLD.
Wingstop (WING 139) popped the day after we recommended it as growth stocks went bananas, which was unfortunate; remember, our official buy price for the Model Portfolio is the average of the next day’s high and low, so we’d prefer to get in on a modest downmove if anything. Even so, the stock popped to new highs and remains in good shape today. It won’t be the fastest horse, but we think WING is a great cookie-cutter story that’s emerging both from a short-term (five-week) and a longer-term (~eight months) rest period. A drop into the 110 area would be iffy, but right here, we think the next big move is up. BUY.
Watch List
With 11 stocks already in the Model Portfolio and with the market 13 weeks into its advance, we’re mostly focused on managing our current crop of titles. But should we kick out a name or two, the following are stocks we’ll be looking to fill the void.
Datadog (DDOG 90): Like many of the best stocks, DDOG is extended to the upside, but if the market yanks the stock down, picking up shares would be tempting.
PayPal (PYPL 173): PYPL is a big-cap name, but it has the story, numbers and a catalyst (booming new user growth/spending as e-commerce moves online) to vacuum up massive amounts of institutional money.
Peloton (PTON 58): PTON continues to act well, but again, it’s stretched to the upside and we’d prefer to look for dips toward the 10-week line (now at 44 and rising quickly).
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, July 2. As always, we’ll send a Special Bulletin should we have any changes before then.
