What To Do Now: Remain cautious and be sure to keep weak names on tight leashes. Growth stocks have melted down this week, wreaking havoc on a variety of sectors. In the Model Portfolio, we sold half our stake in Ambarella (AMBA) last night, and tonight, we’re going to stand pat, albeit with three names (the rest of AMBA, DDOG and FND) on extremely tight leashes. Our cash position stands just shy of 50%.
Current Market Environment
Stocks failed to even bounce today despite all the selling of late. At day’s end, the Dow was off 171 points and the Nasdaq dropped 19 points.
Well, you can put any label you want on it, but what we’ve seen since the start of the year has basically been a follow-on mini-crash in growth stocks—the meltdown in late November and early December was one, and there was a quick retest in mid-December, but this one is even more intense.
Coming into today, the Nasdaq was down 3.5% on the week, but even that pales in comparison to growth-oriented indexes (QQQJ down 5.3%, FFTY down 6.4%, ARKK down 9.0%!) and individual stocks (many of which have collapsed 15% or more in just three days).
Of course, we’re not here to just wallow in the damage but to make a plan for the future. Here’s what we see and what we’re thinking:
First off, with growth stocks being dismantled, it’s obviously best to stay cautious and/or defensive; we’re never in favor of catching falling knives, and if you’re heavily invested and/or have things tripping loss limits, you should take action.
Second, though, if you have lots of cash and a stock isn’t clearly cracking, we’re not anxious to puke out a ton of names here—we never call bottoms, but it’s clear that a ton of damage has been done and the growth maelstrom is somewhat obvious at this point.
Third, the broad market is faring better than growth (our Cabot Tides are still positive, but it’s getting close), and as we wrote in yesterday’s bulletin, some commodity or cyclical names could be getting going from big bases. We’re not ruling out a small buy in that area, however, few stocks are in great shape and many names (750 stocks on the NYSE and Nasdaq combined hit new lows today!) are clearly struggling.
e came into the week with around 44% in cash, and after selling half of Ambarella (AMBA) yesterday, that rose to just under 50%. Tonight, we’re going to stand pat, but we have three stocks—AMBA, our recent purchase of DDOG and FND—all on extremely tight leashes. If we see any more weakness we’ll likely prune one or more of them (via a special bulletin), but for the moment, we’ll stand pat with our large cash hoard and see what comes
Model Portfolio
Just about every growth stock has been a bummer of late, but Ambarella (AMBA) especially so, as shares went from near-new closing highs on Monday to the outhouse yesterday afternoon. And this was despite a solid Investor Day on Tuesday: Management implied that the computer vision chip business should more than double in 2022, while the next generation of its chips were revealed, with terrific performance benchmarks (likely to be priced much higher than current offerings) that should attract even more automakers. However, the firm did guide margins to be a bit lighter than forecasts, and in this environment, that was all that was needed to punish shares. We’re not whistling past the graveyard, but we also recognize that AMBA was nearly at new highs earlier this week, chip stocks are still strong and the story isn’t one that’s going away. It needs to hold up around here, but after dumping half yesterday, we’ll hold our remaining stake tonight and give it a bit more rope. HOLD
Arista Networks (ANET) hasn’t avoided the growth stock selloff, but it also hasn’t really suffered any real damage, with volume coming in below average this week and shares still north of their 50-day line. Frankly, while we’re not in the mood to plow into most anything, we do think ANET is about as decent a setup as you’ll find out there, backed up by a rapid, reliable growth story (analysts keep nudging up their estimates and see 27% earnings growth this year). We’ll stay on Buy, but only if you already have plenty of cash. BUY
Datadog (DDOG) has obviously been a big disappointment, going from resilient to a dud in the span of three days. That said, the focus is on what to do here: Shares have cratered of late, with its group the weakest of the weak, and today, it was unable to bounce at all. We’re not saying it can’t rebound, though, especially after a partnership was announced with Amazon Web Services last night, which could help perception should growth stocks find support, even in the near-term. At this point, we’re going to turn it over to the rules: DDOG closed today just shy of our maximum loss limit, so any further weakness will force us to sell—that said, right here, given the big decline, we’ll hold for another day and see what comes. Hold for now. HOLD
Devon Energy (DVN) has been a bright spot, as money rotating into commodity and cyclical names have driven oil stocks higher—and oil prices remain very firm, even approaching the $80 level today, which would result in gushing cash flow from the company. Interestingly, some in the industry are getting more bullish on oil prices, too; Pioneer Natural Resources (PXD), another play in the group, disclosed that it’s dumped all its hedges for 2022; whether they prove right or wrong is anyone’s guess (and to be fair, some of the reduced hedging across the industry is because debt levels are down drastically), but the fact that oil prices are so resilient despite the virus variant and a hawkish Fed is encouraging. Earnings (and the next dividend announcement) will come February 15. We’ll stay on Buy, and we could even average up on DVN going forward, but we prefer to do so after some weakness. BUY
Even Floor & Décor (FND) has been caught up in the selling, though after shaking out below its prior low and 200-day line this morning, it closed right near both today. The stock is right at our stop, but we find it interesting that other home-improvement-related retailers look fine; in our view, the odds of a major deceleration in growth is far lower than the opposite as supply chain issues abate. Long story short, we again have FND on a very tight leash, but we advise holding for now. HOLD
ProShares Ultra S&P 500 Fund (SSO) took a hit yesterday and, if the growth stock implosion continues, SSO will probably follow along to some extent. But we’ve been using a take-it-as-it-comes approach here for a while, and at this point, the S&P 500 (and SSO) have “only” pulled back to their 50-day lines and are sitting on top of prior support. If the growth stock selling spreads, this name could pull in, and we’ll adjust—but so far, the S&P has been a port in the storm, so we’ll stay on Buy (though new buyers should keep positions small). BUY
Watch List
Diamondback Energy (FANG): Would we really add another energy name? It’s possible, though only on pullbacks (and we could just opt to average up on DVN instead). But FANG is a big-cap oil name that’s poised to crank out huge cash flow—at $70 oil and $3 natural gas, free cash flow should total something north of $16 per share this year. Along with DVN, the stock is reaching new highs.
Nucor (NUE): NUE tried to break out yesterday and failed, but it’s still positioned well, has monstrous earnings estimates and, if cyclical stocks continue their run, it has a good shot at getting going.
Toll Brothers (TOL): TOL is getting tossed around a bit but is holding well (north of its 50-day line) and should make a move higher as long as interest rates don’t get out of hand.
Snowflake (SNOW): Well, SNOW has been blasted with other growth stocks this week, but we still don’t see anything big-picture abnormal. It’s still worth watching to see if it can round out a fresh launching pad.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, January 13. 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 1/6/22 | Profit | Rating |
| Ambarella (AMBA) | 591 | 186 | 10/14/21 | 169 | -9% | Hold |
| Arista Networks (ANET) | 1626 | 130 | 12/10/21 | 133 | 2% | Buy |
| Datadog (DDOG) | 623 | 180 | 12/31/21 | 144 | -20% | Hold |
| Devon Energy (DVN) | 7,240 | 28 | 5/7/21 | 48 | 72% | Buy |
| Floor & Décor (FND) | 1,845 | 111 | 4/9/21 | 117 | 5% | Hold |
| ProShares Ultra S&P 500 (SSO) | 871 | 60 | 5/29/20 | 142 | 137% | Buy |
| CASH | 1,061,062 |