WHAT TO DO NOW: Remain defensive. There’s no question the market is historically oversold, so a rebound attempt could get underway at any time. However, you know the drill—we have to see something develop first to believe it. We’re not ruling out a nibble if we do see some real support appear, but right now, with our indicators bearish and many individual stocks still blowing up, we’re holding tons of cash (north of 80%) and just two positions. We have no changes tonight.
Current Market Environment
The market is down again today, though we do see many stocks and some growth funds putting up a fight. As of 1:30 ET, the Dow is down 333 points and the Nasdaq is down 82 points, though growth funds are up in the 1% to 4% range.
Stepping back, there’s not much to really be said about the market that hasn’t been said already: The downtrend is in effect, with not only our trend-following measures negative but many indexes and especially individual growth stocks in free fall. In fact, regardless of what happens with the indexes, that’s probably the most noticeable thing—nearly every evening we’re seeing at least a couple of former or potential leaders blowup after earnings, with Dutch Bros (BROS) today’s most glaring example.
As for the popular “Are we finally near a market low?” question that’s on everyone’s minds, what we can say is we’re seeing more and more historic extremes. Coming into today, for instance, just 10% of Nasdaq stocks were north of their 200-day lines, which has only been surpassed by the 2020 crash and the 2008 financial crisis over the past 20 years. Moreover, during the past five days (including today) we’ve seen an average of around 30% of all Nasdaq stocks hit new 52-week lows each day, which, again, is among the two or three highest seen in decades.
To be fair, the NYSE isn’t as extreme yet (12% above the 50-day line; 23% above the 200-day; ~25% of the exchange hitting new lows over the past five days) —though another two or three bad days would probably do the trick.
Obviously, we’re not into predictions, but it certainly seems like we’re in a give-up-the-ghost phase at this point, with even many commodity-type names (shippers, fertilizers, coal, copper, steel and even some energy) getting tossed overboard. Thus, the conditions are certainly in place for a meaningful low that the market can work off of and ideally build a sustainable low—but we still have to see some actual up action first.
In the meantime, we remain very defensive, with north of 80% in cash, waiting patiently for an upturn. Given that cash hoard, we’re not ruling out a nibble if we see even more downside extremes followed by a turn up, but our main focus remains on the next sustained uptrend—when new leaders have set up and start multi-month runs, that is when the big money can be made. In the meantime, we’re keeping our eyes open but advise remaining mostly on the sideline.
Model Portfolio
Amid the carnage in growth stocks, Arista Networks (ANET) actually doesn’t look horrible, but Monday’s market maelstrom cracked any meaningful support and forced us out of the stock. Like everything else, a bounce is certainly due, and if the stock can really explode off its lows, it’s possible shares could set up and enjoy another run when this mess is over with—while supply chain issues are still around, those are (ironically) likely to ebb if the economy slows, and yet demand for Arista’s wares are unlikely to be affected by any reasonable slowdown. We’ll keep an eye on it, but we sold our stake Monday afternoon and are comfortable holding the cash. SOLD
Devon Energy (DVN) and most energy names have begun to wobble, with Monday’s huge selloff (coming after a big post-earnings advance) a bit of a shot across the bow. Big picture, we do think the overall energy stock advance has room to run—the fundamentals here are hard to argue with, with Devon seeing ~$7 per share of free cash flow this year at $80 oil, and beyond the big dividends ($1.27 per share payout coming up), it sounds like Devon will indirectly boost the amount of cash flow going to shareholder returns by stepping on the shareholder buyback gas (possibly buying back another 2.5%-ish of the firm by year-end, if not more), and of course if energy prices ramp from here all those figures could grow. That said, near-term, we think things are a bit of a coin flip given the stock’s big run, the market’s weakness (sellers could come around for things still hanging near their highs) and the fact that, as mentioned in the first section, we are seeing more and more commodity-related areas come under pressure. If you don’t own any and want to nibble on weakness, we’re not going to argue, but having already taken partial profits a couple of times, we’re content to sit tight with DVN and give the stock room to maneuver. HOLD
ProShares Ultra S&P 500 Fund (SSO) has gone over the falls with everything else. Of course, holding a leveraged long fund in a clear down-trending environment is not what we had planned, but as we’ve been throwing things overboard of late and already had huge amounts of cash, it became a portfolio management question of what to hold that was “less bad” than everything else. And, frankly, given some of the implosions out there (BROS today, CARG last week, even PSTG and PANW just in the past week), we’re really not upset that we held this one as opposed to some others. Still, what counts is what’s to come—while we won’t hold and hope forever, we think the combination of hugely oversold/pessimistic measures out there and SSO’s recent decline means the risk/reward of holding for a while longer is better than just capitulating here. Don’t get us wrong: If we were “only” 50% in cash or something like that, you can bet that we’d trim back—and, frankly, we could sell a portion of what we own if we see a few good up days. But given our current stance, we think holding what we have is the right move. HOLD
Watch List
Celsius (CELH): CELH had a monster run into November 2021 as its new energy drinks (which studies have shown can boost metabolism to an extent) continue to take share in the mass market. Growth remains humongous (sales up 161% in Q1, earnings of eight cents were up from a penny), thanks in part to big increases in distribution. Not surprisingly, the stock was clobbered in recent months, but it’s basically held the 40 area since January and is showing huge-volume support after earnings this week.
Halliburton (HAL): You know the story here—the odds favor HAL’s recent four-week pullback being part of a pause that refreshes rather than a major top, with earnings likely to kite higher for many quarters/years to come.
Halozyme (HALO): HALO’s Q1 report was just fine (sales up 32%, earnings up 27%), and management stuck to its call that royalties would rise 50% this year. As a whole, analysts see the bottom line relatively flat this year as the tax rate goes up, but next year should see earnings up 30%—and, for what it’s worth, the stock’s P/E of 18 certainly means it’s not over-loved.
Lantheus (LNTH): LNTH might be the only growth stock that’s acting normally, with a sharp pullback to the 50-day line that’s so far found support. Our only rub here is that this year’s earnings step-function increase (from $0.49 to $3.03 per share, estimated) might be a one-time thing, with little growth going forward.
Livent Corp. (LTHM): If you believe in the growth of electric vehicles, then you believe that demand for lithium will skyrocket in the years ahead, and Livent is a leader in that field. Sales and earnings are taking off, earnings estimates are huge and the stock did react well to earnings last week, and while it’s given back a chunk of that in recent days, it’s still etching a reasonable consolidation.
Shockwave Medical (SWAV): SWAV nosedived to new lows with the market, but its Q1 quarterly report has brought in huge-volume support (this could end up the heaviest volume week since September 2020), with sales and earnings crushing expectations. The stock needs work but a bottom could be in.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, May 19. 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 5/12/22 | Profit | Rating |
| Arista Networks (ANET) | - | - | - | - | - | Sold |
| Devon Energy (DVN) | 2,414 | 28 | 6/4/21 | 64 | 126% | Hold |
| ProShares Ultra S&P 500 (SSO) | 3,410 | 47 | 5/29/20 | 48 | 2% | Hold |
| CASH | $1,671,017 |