WHAT TO DO NOW: Remain defensive. The market has continued to make some positive baby steps, and believe it or not, a couple of strong up days from here could bring some green lights from an intermediate-term perspective. But at this point, the majority of evidence and our indicators remain negative—we’re as ready as anyone to hop on some fresh leaders, but tonight, we’ll once again sit on our hands and let the buyers prove that they can take control. Our cash position remains just shy of 70%.
Current Market Environment
The market fell today, led by growth stocks, with many resilient names taking on water. At day’s end, the Dow fell 97 points but the Nasdaq was off 214 points and most growth funds were off more than 2%, with some much more.
Stocks clearly aren’t in great shape, but just looking at the evidence (as opposed to the headlines), we continue to see the market taking some positive baby steps in recent weeks.
First came the climactic low in late January. Then came a four-week rally-and-retest phase that featured a few positive divergences from the broad market—especially on the Nasdaq, where the number of stocks hitting new lows fell by a quarter while the percent of stocks on that exchange north of their 50-day line came in six percentage points higher … all while the Nasdaq pierced its prior low by 500 points.
Along with that has been a growing number of bearish sentiment readings, including this week, where Investor’s Intelligence (the granddaddy of sentiment survey measures) saw more bears than bulls, which is relatively rare.
Then, in recent days, we’ve unfortunately seen daily reports of death and destruction, a near-daily increase in economic sanctions, plenty of saber rattling and skyrocketing commodity prices—and yet the major indexes have hung in there just fine. And believe it or not, both our Cabot Tides and Growth Tides aren’t far away from a green light—a solid couple of up days could do the trick.
Of course, there’s still lots of iffy action as well, especially among growth stocks, where there are plenty of “accidents” occurring most days—old friend Ambarella (AMBA) was an example earlier this week, while Snowflake (SNOW) was today’s blowup du jour. It’s also not a great sign to see continued leadership in defensive areas (like XLP), and let’s not forget that our longer-term Cabot Trend Lines are clearly negative.
All in all, the market has been taking baby steps in recent weeks as it repairs the damage from the crash-like action in many stocks and sectors, which is a plus, but we can’t conclude the bulls are in control at this point. If we do get some buy signals, we’ll likely start slow (buying two or three half-sized stakes, something like that) and ramp up our exposure if the bulls continue their push.
But, while we’re as ready as anyone to jump on some fresh leaders, we’ll stick to the system and go with what’s in front of us—with our indicators negative, we’ll again sit on our hands tonight, but we’ll be on the horn if anything changes in the days ahead.
Model Portfolio
Arista Networks (ANET) continues to do its best to hang in there—and as long as it does, we’re happy to hold on and give the stock a chance. There’s been nothing new from the company since the quarterly report a couple of weeks back, though one thing from the earnings presentation caught our eye: Arista’s market share in 100G ports shipped lifted to 31.4% in Q3 of last year, up four percentage points from just three quarters prior (it’s too early for industry-wide Q4 numbers), and that trend is likely to continue and to broaden to newer 400G offerings given the company’s top-notch product line. (Maybe that’s why one big investment house just upped its target and offered bullish words.) Still, at day’s end, we own the stock and not the company—a drop below the low 110s or so (near last week’s nadir) would likely force us out of some or all of our position, but at this point, we’re OK hanging on. HOLD
Devon Energy (DVN) continues to look fine, hanging near new-high ground, and nothing has changed with the tremendous cash flow story here. That said, we have our antennae up, at least in the short term. Why? Well, when we bought DVN in the first part of last year, oil stocks were generally hated (or viewed as “only” economic reopening plays), and few predicted anything amazing for energy prices. Today, of course, oil is at 13-year highs (up around $110), and energy stocks are basically the strongest group in the market—and DVN is one of the strongest in the sector. Plus, the last real breakout for the stock came in September, so it’s not early in the intermediate-term move, and when it comes to portfolio management, DVN has grown to be a huge position (18% or so of the Model Portfolio). With all of that said, it certainly doesn’t seem like investors are discounting ever-higher oil prices (we’re not valuation-based investors, but the stock is trading just above nine times anticipated cash flow assuming just $75 oil), and we haven’t seen any real abnormal action (on the upside or downside) in DVN or its peers. In total, if we see a change in character, we’ll probably book partial profits, but at this point we’ll continue to go with the evidence—with DVN and the group acting well, we’re hanging on, and we’re OK buying a small amount if we see modest dips (two or three points) from here. BUY
ProShares Ultra S&P 500 Fund (SSO) certainly isn’t in great shape, and we continue to keep a close eye on it—any sign that another major leg down is getting underway could have us selling and moving on. But as opposed to Devon, SSO is a relatively small position for us (5% of the portfolio), due mostly to repeated partial profits since we originally bought it in mid-2020. And as for the here and now, the S&P 500 is holding nearly all of its recent strong bounce since the Russian invasion took place. Having held to this point, and with so much cash on the sideline, we advise sitting tight and seeing if this bounce can morph into something longer lasting. HOLD
Watch List
Bill.com (BILL): BILL was a big winner the prior few years, which is a mark against the stock in our book; we’re favoring fresher names. That said, the story is outstanding, growth is still accelerating, sponsorship is fantastic (lots of top-performing funds own some) and the stock is holding its big earnings gap from early February. The stock still needs work but it’s definitely showing some relative strength.
CarGurus (CARG): CARG always had a nice business, using its popular website to link dealers to consumer leads. But the big story now is CarOffers, a firm purchased in early 2021 that has a platform that’s replacing auctions among dealer-to-dealer car buys and is also allowing thousands of dealers to engage in instant offers (like Carvana and Karmax do). The stock exploded 40%-plus on earnings, and growth should remain rapid for a long time to come.
Datadog (DDOG): DDOG has been falling back some, including during today’s selling in growth stocks. But it remains about 30 points above its January lows, which is a plus, and the growth story (written about in last week’s issue) remains enticing.
Dutch Brothers (BROS): BROS just reported a great Q4 (sales up 56%; EBITDA was positive but flat from a year ago despite opening many more stores), and the outlook for 2022 was also solid, too (sales and EBITDA both up 42%, likely conservative). That said, the stock hasn’t done much, though it is holding long-time support north of 40.
Halliburton (HAL): HAL has actually been chopping around even as oil prices rally, partly due to some uncertainties (because of sanctions and war) involving the firm’s big international business. Even so, shares look fine, and our guess is the first dip toward the 50-day line (now at 29 and rising steadily) should offer support.
Inspire Medical (INSP): INSP has a great story, with its sleep apnea offering likely to take huge share in the years ahead. The stock is trading in the middle of a year-long consolidation.
Palo Alto Networks (PANW): PANW is probably the strongest growth stock in the market, thanks to huge demand for its next-generation cybersecurity offerings. It’s not going to double overnight, but the stock has all the characteristics of a winner.
Trade Desk (TTD): TTD did have a monstrous run in recent years, but it’s also made no net progress since November 2020, and the firm’s programmatic ad buying platform continues to produce massive growth.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, March 10. 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 3/3/22 | Profit | Rating |
| Arista Networks (ANET) | 1,626 | 137 | 12/10/21 | 120 | -12% | Hold |
| Devon Energy (DVN) | 7,240 | 28 | 5/7/21 | 59 | 109% | Buy |
| ProShares Ultra S&P 500 (SSO) | 1,741 | 30 | 5/29/20 | 61 | 103% | Hold |
| CASH | 1,423,520 |