What To Do Now: Remain cautious, but given the solid initial thrust off the lows and our huge cash position, we’re going to do a bit of buying tonight—filling out our position in Ambarella (AMBA) by purchasing another half-sized stake, and also buying a new half-sized stake in Arista Networks (ANET). Even after these moves, we’ll still have around 48% in cash, so we’re keeping a bunch of powder dry.
Current Market Environment
After a solid three-day rally, stocks sold off again today—the Dow was actually up a point but the Nasdaq fell 270 points (1.7%) and most growth stocks were down in the 3% to 5% range.
In last week’s issue, we wrote that there’s no question the evidence had deteriorated, with various air pockets, huge amounts of stocks hitting new lows and our Cabot Tides flashing a sell signal. But we also wrote that we’re “not ruling out the fact that this could be a huge shakeout on virus/Fed tapering news. Something similar played out near the end of 2018 … before blasting off in early 2019.” And the snapback that began last Thursday, while early, could point in that direction.
First off, the indexes have perked up so much that last week’s Tides sell signal, while still in effect, could be negated if we see more strength. So far, the big-cap indexes have recouped as much as 70% to 80% of their declines, while the broader indexes have recouped 50% to 60% of their downmoves. More important, even the broader indexes have popped back near their 50-day lines. We’ll see how it goes.
Moreover, when looking under the market’s hood, we’re encouraged by two things. First, the number of new lows has come down nicely during the rally, with NYSE new lows below 25 on Tuesday and Wednesday, and even today the number was around 48 (i.e., not a massive expansion). Moreover, starting last Thursday, the NYSE saw three days out of four (including two in a row) of 80%-plus up volume days—it’s not a blastoff signal, but such a multi-day buying wave often bodes well over time.
To be fair, there are still plenty of reasons for caution, the biggest of which is the position of growth stocks: While many have bounced, the number that are in really solid position remains relatively small. We’re seeing a lot of stocks that fell from, say, 100 to 65, and have “soared” back to 82—nice, but certainly not out of the woods. And there’s no question this is still a news-driven environment, and who knows what reports will pop up to move the market going ahead.
Put it all together and here’s how we’re looking at things: Given the strong snapback, the dry-up in new lows (so far) and powerful up-volume cluster, there looks to be a bid under the market, so it’s possible the worst is over. That said, with the Cabot Tides still iffy and few stocks in great position (today’s weakness saw many names smacked lower after runs into resistance), further reverberations are possible, if not likely.
Long story short, we’re not suddenly turning bullish after just a couple of good days, but given our large cash position and the potential shakeout, we’re going to put a little money back to work—while still holding onto plenty of cash and keeping our laggards on tight leashes.
Tonight, we’re going to fill out our position in Ambarella (AMBA), buying another half-sized stake; and we’re also going to start a half-sized stake in Arista Networks (ANET). After these moves, the Model Portfolio will still have around 48% in cash, giving it both plenty of cushion if another down-leg comes, as well as buying power if this rally gains steam.
Model Portfolio
Arista Networks (ANET) was written up a couple of issues ago, so we won’t rehash the whole story here—suffice it to say that after a couple of so-so years, demand for its top-end networking equipment and software is surging, especially among the giant cloud operators, so much so that the firm has vision into many quarters of big demand as those titans look to lock up supply for expansion. Shares gapped up wildly in early November and then slid grudgingly, dipping about 11% in total (very reasonable), before beginning to pick up steam again. With the 50-day line at 113 and rising, we think starting a small stake in ANET here is a solid risk/reward. BUY A HALF
Ambarella (AMBA) continues to look like a leading glamour stock, and while volatility is extreme, most of it has been on the upside—yes, the stock pulled in with the market after earnings and remains choppy (like today), but it never breached its 50-day line and as soon as the pressure came off the market for a couple of days, AMBA pushed to new closing highs. If you want to try to pinpoint an entry a bit down from here, we wouldn’t argue with you; the 50-day line is down at 181 (rising quickly). But we think the stock’s quick snapback and the sterling fundamentals mean higher prices are likely down the road. We’ll average up here, buying another 5% stake. BUY ANOTHER HALF
Frankly, Cloudflare (NET) doesn’t look great—its bounce has thus far been very modest, and after a good start today the sellers swarmed. That said, we want to play things out a bit more here; via two partial sales, we let go of around half our position recently, we still have a solid profit on the rest and the story/numbers remain rare. We’re open to the possibility that NET’s massive run over the past year and a half is over, but at this point we advise holding your remaining shares and seeing how it goes. A dip much below the recent lows wouldn’t be a good sign. HOLD
Devon Energy (DVN) pulled in today, partly due to yesterday being the ex-dividend date (if you owned shares at yesterday’s close, you’ll get 84 cents per share paid December 30); sometimes there will be dividend chasers that buy ahead of the ex-dividend date and sell after. We’re always on the lookout for potential problems, and as we wrote last week, a decisive breakdown could have us taking partial profits. But while natural gas prices have really come unglued (down to $3.80), oil has bounced to north of $70, which keeps much of Devon’s huge cash flow profile intact. Near-term wobbles are possible, but we continue to think the next big move is up, especially given the stock’s (and sector’s) resilience during the oil price decline of late. BUY
Floor & Décor (FND) hasn’t been exciting recently, but we’re viewing that as a good thing—the stock has actually closed relatively tightly the past few weeks even as the market went haywire. Moreover, it doesn’t hurt that the housing-related sector has perked up, too. Still, we need to see FND get a head of steam going before concluding the next upmove has begun—right here, we’ll hold and continue to follow our plan, with a mental stop in the 120 area. HOLD
ProShares Ultra S&P 500 Fund (SSO) has stormed back, nearly tagging new closing highs before pulling back today. As we wrote in the first section, while we can’t say the correction is over, the up-volume cluster and quick dry-up of new lows (too early to get a definitive read on that, but a good start) give us some confidence that there’s a bid under the market. We don’t like to ping-pong our ratings, but we’ll restore the Buy rating for new buyers, though try to buy on dips if you’re not yet in. BUY
Watch List
Roblox (RBLX): RBLX is super-volatile right now, moving about 10 points per day, but we think it’s held the massive earnings move well. The longer it can hold up, the better the chance of another big rally.
The Trade Desk (TTD): Trade Desk is not early in its overall run, but the underlying growth story (programmatic ad buying) remains as strong as ever, and TTD’s breakout from a 10-month rest is still holding despite the environment.
Snowflake (SNOW): The valuation is up there, but SNOW definitely has the look and feel of a “big stock” that most big institutions will own big positions in. Its data cloud platform is rapidly being adopted by many big firms, and the firm’s triple-digit revenue growth is enticing.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, December 16. As always, we’ll send a Special Bulletin should we have any changes before then.
| Stock | No. of Shares | Price Bought | Date Bought | Price on 12/9/21 | Profit | Rating |
| Ambarella (AMBA) | 655 | 166 | 10/14/21 | 208 | 25% | Buy Another Half |
| Arista Networks (ANET) | New Buy | - | - | - | - | Buy a Half |
| Cloudflare (NET) | 796 | 113 | 6/25/21 | 150 | 33% | Hold |
| Devon Energy (DVN) | 7,240 | 28 | 5/7/21 | 42 | 50% | Buy |
| Floor & Décor (FND) | 1,845 | 111 | 4/9/21 | 127 | 14% | Hold |
| ProShares Ultra S&P 500 (SSO) | 871 | 60 | 5/29/20 | 141 | 134% | Buy |
| CASH | 1,288,630 |