WHAT TO DO NOW: There’s no question much of the market’s evidence has improved from a top-down perspective, highlighted by green lights from the Four-Day Frenzy and our Cabot Tides. But individual stocks (especially growth stocks) are still tricky, with a good amount of selling/stagnating on strength. In the Model Portfolio, we’ve put a chunk of money to work in a handful of small-ish positions and are happy to give them rope—but we’re also not in a rush to buy more, holding onto our current 45% cash position (or adding to it) until we see some upside among names we own and are watching. Tonight, we’re changing Globalfoundries (GFS) to Hold, as it’s quickly come under pressure.
Current Market Environment
Stocks had their second straight bad day today to close out the quarter. At day’s end, the Dow had sunk 550 points, the Nasdaq dropped 222 points and many growth stocks got hit hard.
From a top-down perspective, the market’s evidence has continued to generally improve, the past two days of pullback notwithstanding—from some resilience after the January lows to positive divergences in the number of new lows to the Four-Day Frenzy green light, things were already looking up coming into this week. And now we have a Cabot Tides buy signal, which we talked about in Tuesday’s special bulletin.
That’s all to the good and we’re not going to discount it—so far, the overall action is about what you’d hope to see. That said, we still see some hurdles for the market to prove that this rally in the real McCoy.
The first, of course, is our Cabot Trend Lines, which remain bearish. We weren’t expecting a quick flip in that indicator given its long-term nature, but it does tell you that many indexes, sectors and stocks still face a lot of overhead.
Speaking of overhead, the second thing that’s missing so far are stocks pushing to new highs—more often than not, things that approach their old highs (or some sort of resistance) are quickly repelled, and the total number of stocks reaching virgin turf remains small.
Again, neither of these are death knells, as rallies often start jaggedly, especially ones that did this much damage to growth stocks. But the disjointed action and still-large number of air pockets are a sign to go slow and make the market prove itself from here. That’s why we added a handful of “small” (5% of the portfolio, which for us are half-sized stakes) positions and are still holding a good-sized 45% cash position.
From here, it’s really a matter of using the market, our stocks and others that we’re following for feedback: If we develop solid profits, we’ll extend our line (likely, at least in part, by averaging up on some of our own holdings), but if we develop further losses or see more air pockets (as we’re already starting to witness), we’ll either hold the cash we have or add to it by selling a recent purchase or two.
On that note, tonight we’re placing Globalfoundries (GFS) on Hold, as the stock has gone from super-strong to suspiciously weak in just a couple of weeks. We’ll hold the half position here and see if it can find support.
Arista Networks (ANET) hasn’t set the world on fire, but it’s done well alongside the market during the past three weeks, lifting above a little resistance in the 134 area before hanging around 140 in recent days. There’s been nothing new from the company for a while, and our thoughts here haven’t changed much, with the overall consolidation since the start of the year looking normal—if the market rally keeps chugging, we think ANET will participate. On the downside, a drop into the low- or mid-120s at this point would be iffy, but right here, we think the path of least resistance is up. BUY
CarGurus (CARG) was added via a special bulletin this week, and it’s sure to be a volatile name as it consolidates the gigantic earnings move from late February. We think the firm’s base business (connecting dealers to potential customers) should recover nicely as the pandemic fades, but it’s the CarOffers subsidiary that really has huge potential, potentially replacing the “old world” of car auctions among dealers, while also giving the small-fry dealers a chance to buy inventory from individuals via the Instant Max Offer product. We’re OK buying a half-sized position here, albeit with a loose loss limit in the mid-30s. BUY A HALF
Devon Energy (DVN) has been fairly calm and collected in recent days despite some wild swings in oil prices, and we think one of the reasons is that the energy market isn’t as volatile as it seems: While the current (front-month) price of oil (which is the one quoted on the news) has been all over the map, prices for contracts due later this year or early next year have been somewhat more stable. Moreover, just looking at the price/cash flow/potential dividend situations, it’s hard to argue investors are discounting triple-digit oil prices for that much longer, so these periodic shake-the-tree movements aren’t freaking out investors. Whatever the reason, the action is encouraging so far, as DVN has held its impressive snapback from two weeks ago, with recent weakness finding support around the 25-day line as volume dries up. We still think Hold is the right rating here given the news-driven action, but the longer the stock can hold up and calm down, the better the chance the advance will continue. If you own some, just sit tight. HOLD
Dutch Bros. (BROS) is always volatile, so we’re OK hanging on here and sticking with a loose loss limit in the upper 40s. That said, like GFS below, there’s no doubt that sellers have clearly shown up as the stock has tested multi-month highs twice in recent weeks—and the drop of the past two days, while acceptable, isn’t pretty. Fundamentally, nothing has changed with the growth story; it’s likely more about the market environment, at least when it comes to potential growth leaders. Given that BROS is still above all its moving averages, we’re going to stay on Buy a Half; if you don’t own any and want to pick up some shares here, we’re OK with it. But if all’s well we’d expect the stock to stabilize in the days ahead north of 50 (ideally right here)—if it does, we still think the stock can do very well, but if not, we may change our rating. BUY A HALF
Globalfoundries (GFS) etched higher lows during the market downturn, and as soon as the pressure came off the market, it zoomed to new highs on very big volume; combined with a rapid, reliable growth story (for at least the next three or so years thanks to its ever-increasing total of long-term contracts), it all pointed to a high-odds play. But it looks like, despite that, GFS has rolled a 7: Despite being very well-traded, shares became out of control soon after tagging new highs, and the last few days have been poor to say the least, with shares sinking below support today in the mid-60s. To be fair, we are seeing some iffy news/stock action in some spaces of the chip sector (AMD and MU haven’t helped of late), but it is what it is. At this point, with a half position and the prior positives, we’ll stick with GFS tonight—but even though it’s a recent purchase, we think it’s prudent to move to Hold and give it just a couple more points of leeway. HOLD
Palo Alto Networks (PANW) was added along with CARG this week. We’ve always been fans of the cybersecurity space, which is in a very long-term growth phase as all things go online and to the cloud. PANW was a bit of a laggard in the group for a couple of years, but it’s gained major traction with a suite of next-generation products that is boosting sales, earnings, cash flow and remaining performance obligations. We’re OK starting a position here, though pullbacks of 15 or 20 points wouldn’t be surprising. As for the stock’s high price, it’s not ideal, but just buy fewer shares; it’s the amount of money you have invested that counts, not the number of shares. BUY A HALF
ProShares Ultra S&P 500 Fund (SSO) looks great, having lifted persistently since the lows, rising above all of its key moving averages. Encouragingly, it’s also acted well since the Four-Day Frenzy green light; the longer it can do that, the better the chance that the possibility of one more sharp retreat in the near term (not unusual after these signals) will be avoided. We averaged up in our small position in SSO last week and believe it can do very well, but as always, we’ll just see how it goes. BUY
Pure Storage (PSTG) had a big move on earnings before the market low and then a nice move after that—and as opposed to many other growth stocks that have tagged new high ground, PSTG has been resting very quietly in recent days. That obviously doesn’t mean the stock can’t pull in, but there certainly doesn’t seem to be a many big investors eager to get out—to the contrary, we think the firm’s move to a more subscription-based storage offering has the perception of these big fish improving. We’re OK taking position here or on dips of a point or two. BUY A HALF
Halliburton (HAL): We’re not sure we want two oil names in the portfolio—when the group turns, the exposure will hurt—but we really do like the overall action in HAL, which just got going at the start of the year and should see years of strong earnings growth ahead. The situation reminds us somewhat of the homebuilders in 2012 as they began long, steady runs after a multi-year bust.
Inspire Medical (INSP): INSP has acted very well since the market low, though (a) it’s still thinly traded (260,000 shares per day, albeit at a high stock price) and (b) has some overhead to chew through like most things.
Lantheus (LNTH): LNTH had a one-day shakeout last week, but it held support near its 25-day line and bounced well.
Nutrien (NTR): NTR has begun to gyrate, with news-driven ups and downs the norm in recent days. Ideally, shares will ease lower during the next week or two and (importantly) settle down somewhat—if so, we’ll likely take a swing at it. Fundamentally, while a cease-fire would be near-term bearish, we doubt the crop/fertilizer price situation will go back to the way it was for a long time, if ever.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, April 7. 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 3/31/22||Profit||Rating|
|Arista Networks (ANET)||1,626||137||12/10/21||139||2%||Buy|
|CarGurus (CARG)||2,451||45||3/30/22||42||-5%||Buy a Half|
|Devon Energy (DVN)||3,620||28||6/4/21||59||110%||Hold|
|Dutch Bros. (BROS)||1,847||58||3/18/22||55||-5%||Buy a Half|
|Palo Alto Networks (PANW)||176||620||3/30/22||623||0%||Buy a Half|
|ProShares Ultra S&P 500 (SSO)||3,410||47||5/29/20||66||39%||Buy|
|Pure Storage (PSTG)||3,043||36||3/25/22||35||-2%||Buy a half|