WHAT TO DO NOW: Growth stocks remain very strong, and our market timing indicators remain positive, so you should remain mostly bullish. Of course, you should also keep your feet on the ground, as there’s little doubt things are fairly frothy here so some potholes could occur at any time. That said, we’ll continue to mostly ride things higher and look for opportunities to put money to work. Tonight, we’ll fill out our position in Chegg (CHGG) by adding another 5% stake. We’re also restoring a buy rating on Dexcom (DXCM). That will leave us with around 9% in cash.
Current Market Environment
The market’s divergence continued today, with the Dow off 361 points but the strong Nasdaq up again, this time by 55 points.
The environment remains mostly unchanged since last week, with the Nasdaq and growth stocks lighting up the sky while the rest of the market puts on a positive-but-not-powerful performance.
First, on the Nasdaq and growth stocks, the situation remains strong but increasingly frothy, with many stocks very extended in both the short- and intermediate-term. There’s no question many stocks could pull back sharply or rest for a while after their recent runs.
That said, we’re certainly not ones to call tops—we’re trend followers, as moves can often go to extremes, be it in the short-term or over many months—and bigger picture, we continue to think many stocks just got going from early-stage launching pads back in April/May. Thus, whether we see some potholes or not, we remain optimistic many names are only mid-way through their overall runs.
The broad market, though, remains iffy—in fact, after today, our Cabot Tides are effectively on the fence, with the broader indexes (S&P 600, S&P 400 and NYSE Composite) all testing their 50-day lines. On the plus side, most of our other key indicators (Cabot Trend Lines, Aggression Index, Two-Second Indicator) remain in good shape.
Thus, we’re keeping our feet on the ground—we don’t advise piling into a bunch of stocks right now with the market 15 weeks into its advance and with many growth stocks 20% to 35% above intermediate-term support. Indeed, we could prune here or there going forward, especially if the Tides turn negative.
However, looking at the entire plate of evidence, we’re sticking with a heavily invested stance—simply put, it’s a strong bull market, at least for our kind of stocks, and as we wrote above, many names are likely just two or three months into what could turn into much longer moves. We’re putting a little more money to work tonight, filling out our position in Chegg (CHGG), which will leave us with around 9% in cash.
Model Portfolio
Chegg (CHGG 73) has been tricky to hold onto given our elevated entry price (as it turned out) and the stock’s wild volatility. Still, after a few tests, shares have shown great strength of late, and the 10x volume breakout back in May is usually a good sign a bigger advance has gotten going. Throw in solid fundamentals, and we’re going to fill out our position, adding another 5% stake. BUY ANOTHER HALF.
Cloudflare (NET 40) continues to act well, hitting new highs a couple of times this week. As with most every growth stock, it’s extended to the upside right here (the 50-day line is under 31), but (a) as a recent IPO, the stock’s breakout this year was its first, and (b) the massive-volume takeoff three weeks ago should offer support (all else equal) if the stock dips a couple of points. All told, we’ll stay on Buy, but consider starting small or aiming for dips if you’re not yet in. BUY.
Dexcom (DXCM 441) has gathered a head of steam of late, pushing out to new highs. It’s not all peaches and cream, though, as this latest move higher has come on very light volume, and relative to the market, DXCM is still shy of its peak from mid-May. Still, new highs are new highs, and the fact that the stock just corrected and consolidated for about two months is a good thing. We’ll respect the action and go back to Buy. BUY.
Up, up, up … DocuSign (DOCU 212) continues to amaze, bolting above the 200 area earlier this week and pushing ever higher. It’s really the same story as we’ve been writing for the past three weeks—DOCU is a leader, but it’s extended both in the short- and intermediate-term. We’re happy to hold our remaining shares, but unless you’re aiming to shave a few points from it, we’d focus new buying elsewhere. HOLD.
Okta (OKTA 223) has levitated to new highs of late, helped along by a couple of analysts who believe sales and earnings will continue to top expectations and that the pandemic may have accelerated the move online by five full years! Of course, that sentiment is why the stock is already up big over the past few months, but OKTA is one of many stocks that “reset” itself via a multi-month consolidation (including the March implosion), so we see higher prices ahead, albeit with some sharp-but-normal corrections along the way. BUY.
ProShares Ultra S&P 500 Fund (SSO 130) has been up and down, but net-net, we’re up a few percent since our entry point. Nearly as important, the S&P 500 continues to act in a “normal” manner following its blastoff signals—and, while we’re not anticipating it, any rotational action out of growth and into the broad market (certainly possible given how stretched things have become) would likely give SSO a boost. Long story short, the path of least resistance remains up, so we’re staying on Buy. BUY.
Teladoc (TDOC 228) has officially completed the buyout of InTouch Health, which was a leader in provider-to-provider telehealth services (often consults within a hospital among professionals). That makes Teladoc the only global provider with such a comprehensive solution—just as virtual medical care hits the mainstream because of the pandemic. Shares have accelerated to the upside, though there’s been next to no big-volume buying of late; that’s fine for now, but if we saw some large selling off the top, it would be more iffy. Still, we’re not going to anticipate worst-case scenarios—TDOC looks like rare merchandise fundamentally, and the stock is acting well, so we’re sticking with a Buy rating, but try to get in on dips of a few points. BUY.
Twilio (TWLO 245) looks great, pushing solidly higher of late, and volume hasn’t been too bad on the upmove, either. Like everything else, a sharp retreat or prolonged rest is possible once the current upmove cracks, but given that TWLO had a multi-month consolidation and a massive blastoff on earnings in early May (eight times average volume), we’d expect any sharp dip to find support as Twilio looks like one of the key platforms that will enable the acceleration of mobile work and communications. Our advice is similar to our other Buy-rated names—you could start small here, though we’d prefer to get in after a couple of bad days. BUY.
Vertex Pharmaceuticals (VRTX 295) briefly poked to new highs earlier this week before turtling back below 300. Still, nothing’s really changed—the two-steps-forward, one-step-back advance remains intact, but we wouldn’t say big investors are piling into shares, either. Thus, if you own some, hang on, but we’d focus buying elsewhere. HOLD.
Wingstop (WING 138) was downgraded today by one analyst, probably based on valuation (we didn’t see the actual report), though another upped his price target. That’s what makes a market! Either way, we care about the action of the stock, and despite a little selloff today WING remains in good shape. We’re optimistic the stock can be a strong, steady performer, with business doing well despite the exact ups and downs of the U.S. reopening process. We’re fine buying some here. BUY.
Watch List
Alibaba (BABA 262): We’re not big fans of breakouts that occur three and a half months after a market bottom, but BABA has shown great power as it emerges from a two-year launching pad. Chinese stocks as a whole are also going nuts.
Bill.com (BILL 92): We really like the simple, straightforward, powerful growth story with Bill.com, but it is a bit thinly traded, which can toss around a stock (especially if the market hits a pothole). Shares are sitting near their highs.
Datadog (DDOG 96), Peloton (PTON 64), PayPal (PYPL 183): All three look like leaders to us, and all three appear to be early-stage, with fresh breakouts from either post-IPO bases (DDOG, PTON) or long “wear/scare you out” bases (PYPL) in April/May. That said, after prolonged runs, we’re looking for a few weeks of rest or dips, possibly to their respective 50-day lines.
Spotify (SPOT 275): SPOT is definitely the #1 stock we want that we don’t own. As we wrote last issue, it has liquid leader written all over it, and its Double Skyscraper pattern tells us big investors are thinking the same thing. As opposed to the names above, we’re willing to reach for SPOT on any minor weakness or rest of a few days.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, July 16. As always, we’ll send a Special Bulletin should we have any changes before then.
