WHAT TO DO NOW: Remain bullish, but continue to keep your antennae up. The Nasdaq has pushed to new highs, our trend-following indicators are positive and most leading stocks remain in uptrends, so we’re still in a bullish frame of mind. But things are becoming more challenging with repeated bouts of rotation and some earnings hiccups, too. We’re not opposed to doing a little buying as we’re seeing some decent setups, but tonight, we’ll hold off. Our only change is we’re placing Teladoc (TDOC) on Hold and throwing up a mental stop after today’s sharp acquisition-induced decline. Our cash position remains around 19%.
Current Market Environment
The market rallied again today, led by cyclical titles. Around 3 p.m., the Dow was up 307 points and the Nasdaq was up 50 points. (All stock prices below are as of 3 p.m. ET.)
The market has pushed higher since last week, which is always good to see—the Nasdaq has hit new all-time highs while the rest of the indexes have hit multi-week highs, too. That keeps our Cabot Trend Lines and Cabot Tides pointed up.
That said, we are still seeing plenty of tricky action—positive, but not as powerful or persistent as before. As earnings season has progressed, we’re happy to see a good number of positive reactions, but this week, we’ve seen our share of selling on “good” reports, too (among stocks we own and watch). Moreover, bouts of rotation are becoming more frequent, with cyclical-type stocks.
All in all, we remain mostly bullish and think most of the rubber-meets-the-road evidence is positive—the odds strongly favor higher prices when looking out a few months. In the near-term, though, we think it’s a bit more of a coin flip, especially with individual growth stocks that have had good runs.
Thus, we’re content to focus mostly on managing the stocks we already own, while being discerning on new buys. Tonight, we’re moving Teladoc (TDOC) to Hold after today’s sharp plunge on its acquisition announcement. Our cash position remains around 19%.
Model Portfolio
Chegg (CHGG 86) reported a terrific quarter earlier this week—both sales (up 63%) and earnings (up 61%) easily topped estimates, thanks mostly to a 58% gain in subscribers to its Services learning platform. Moreover, management meaningfully hiked guidance and alluded to the current move to online learning being a permanent shift as opposed to a one-time boost. Analysts now see earnings up 34% this year and 21% next, though it’s certainly possible those figures prove low as virtual learning becomes more of the norm in high school and college. CHGG has hesitated since the report, but this comes after a big run to new highs in recent days. Some further selling is possible but the trend is up. BUY.
Cloudflare (NET 42) will report earnings tomorrow (August 6) evening; estimates are for revenue growth of nearly 40% and a loss of six cents per share, though it’s likely “real” expectations are higher given a rash of analyst upgrades of late. We’ve been impressed with the stock’s recent rebound to new highs, though buying volume has been drying up some in recent weeks. We’ll stay on Buy but see what the quarterly report brings. BUY.
Dexcom (DXCM 452) nosed to new highs on light volume today, though its relative performance (RP) line is doing more meandering than rising (no higher than early May). The Q2 report was excellent, and earnings estimates are back (more or less) to where they were earlier in the year (up 36% this year, up 28% for 2021), which is great to see. If you don’t own any, we’re not dead set against nibbling here; picking up a small position with a stop around 400 is an idea. But officially we’re staying on Hold for a bit longer given the lack of power (just two up days on above-average volume since early May). HOLD.
DocuSign (DOCU 229) continues to amaze, ripping right back to new highs of late, though like many stocks we’re seeing, volume has been extremely light on this latest upmove (a yellow flag, though hardly a major clue). Overall, then, the story remains the same—DOCU is in a steep uptrend, but not really near any sort of high-odds entry point. HOLD.
Okta (OKTA 225) has a bit of that Dexcom feel to it—it has a great story, is a leader and looks fine overall, but has lost some steam, with the RP line no higher now than mid-May while the stock experiences a lot of ups and downs. That said, we do think OKTA is a bit fresher (got going from a “reset” base in April) and it’s been riding its 10-week line higher in recent weeks, which is completely normal. We’re staying on Hold right here, but we’re close to restoring our Buy rating. HOLD.
After a six-day rest, the S&P 500 has enjoyed another leg up, reaching its highest level since March. That’s helped the ProShares Ultra S&P 500 Fund (SSO 144) do the same, ratcheting gradually higher. Looking ahead, we wouldn’t be shocked to see the S&P stretch toward or slightly above its prior highs near 3,400 before pulling back (that’s a pattern that often plays out), though that’s just a total guess. With the picture looking good we’ll stay on Buy, though we’d advise getting in after a couple of down days. BUY.
Teladoc (TDOC 208) was slammed today after announcing a big (it was $18 billion before today’s plunge), mostly-stock buyout of Livongo Health (LVGO), which has been a big winner this year. There are definitely potential positives here—it’s not like Teladoc bought some old, stodgy operation, as Livongo is growing at triple-digit rates and is already profitable, too, thanks to its “coaching” platforms, support and alerts for those with chronic conditions.
That said, our mind’s eye says that such a big purchase after a big run (Teladoc is paying top dollar) both (a) muddies Teladoc’s story, which before this was pristine and easy to grasp, and (b) will obviously greatly increase the share count, which often brings added selling pressure. Thus, we’re frankly a bit skeptical and wondering if big investors that have been riding it higher will use this uncertainty as a reason to cash in.
As usual, we’ll just take our cues from the stock. On that front, TDOC broke out of a big base around 85 in January and rallied as high as 250 this week before today’s knock to the gut … though TDOC did find a little support at its 50-day line this morning.
If you have a huge position in TDOC, we’d probably lighten up here; it’s been a great run and today’s selling does look somewhat abnormal. For our part, we’ve already trimmed a bunch (60% of our original shares) and have a reasonably sized position (7%-ish of the portfolio), so we’re OK giving the stock a little wiggle room to right itself—but we are moving to Hold to respect the possibility that today’s news was a perception-changer among big investors. We’re looking at something in the 190 range (give or take two or three points) as a rough mental stop area, at least for now. HOLD.
(As an aside, if you also own LVGO, which is a name we’ve written up a couple of times in Growth Investor, we’d probably sell that position, as we usually do with stocks that are bought out. Holding it effectively means you’re buying a bunch more of TDOC here.)
Twilio (TWLO 278) also took a hit today, but it was far more modest and we still think it’s in good shape. The company reported a fine Q2 last night, with total revenues up 46%, same-customer revenue growth of 32% (the company has consistently excelled in this metric) while its customer count lifted 24% and earnings of nine cents tripled estimates. The outlook was raised, though it wasn’t super inspiring (revenues up 37% for Q3), which was probably the reason for the selling today, but we think the story is as good as it gets as the world moves online. As for the stock, even at today’s low, TWLO is still 20-ish points above even its 25-day line, so we’re looking at today’s (and any near-term) post-earnings selling as normal and likely buyable. BUY.
Wingstop (WING 164) continues to bask in the glow of its big earnings report (and rally) last week. We don’t view this as a go-go stock, but we feel similarly about this as we do the entire market—near-term, it’s a bit of a coin flip, as WING could easily pull in some, but we think higher prices are likely down the road. BUY.
Watch List
Alibaba (BABA 265): It’s not the young bucking bronco it was once, but it’s a possible liquid leader that’s perking up after a breakout three weeks ago.
Datadog (DDOG 95) & Peloton (PTON 72): We’re still keeping an eye on both stocks ahead of their earnings, which will be August 6 for DDOG, but not until September 10 for PTON.
Inphi (IPHI 129): IPHI had a sell-the-good-news reaction on earnings, though it’s still not broken and business is cranking ahead very nicely. If it can stabilize here it could be buyable.
Ollie’s Bargain Outlet (OLLI 102): We already have one cookie-cutter story that’s doing well (WING), and OLLI is another one that’s in the midst of a powerful turnaround. The stock has effectively been consolidating for six weeks as the 50-day line approaches.
Spotify (SPOT 249): SPOT continues to drift lower, but the pullback looks normal to us so far. Still, we’d like to see some stabilization/buying before diving in.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, August 13. As always, we’ll send a Special Bulletin should we have any changes before then.
