What To Do Now: Remain bullish, but keep your eyes open. At this point, the dip in the market and most growth stocks is normal, coming after a huge run and breaking hardly any leaders. That said, further near-term weakness wouldn’t be surprising, and you should monitor your weakest stocks in case the selling intensifies. In the Model Portfolio, we placed Dyantrace (DT) and Floor & Décor (FND) on Hold in yesterday’s special bulletin but have no further changes tonight. Our cash position is around 18%.
Current Market Environment
As of 11:30 am, the market is mixed while growth stocks are bouncing modestly. The Dow is down 63 points, while the Nasdaq is up 114 points.
Looking at the bigger picture, nothing has changed with our overall thoughts: The evidence tells us it’s a bull market and that the intermediate-term uptrend remains intact. Part of that is due to our market timing indicators—despite the sharp dip of late, all of the major indexes remained in fine shape, keeping our Cabot Tides (and Cabot Trend Lines) solidly bullish.
Moreover, we have to say that it’s been a long time since we’ve seen so many breakouts from multi-month ranges. Indeed, while the major indexes suffered “only” a one-month correction (early September to early October), we know that many stocks (growth and otherwise) spent three to nine months (depending on the sector) consolidating since the spring of this year—and before and during earnings season, a ton of them have blasted off, with few major reversals so far.
With that said, we’re also not leaving our brains at the door, as the short term is showing a couple of yellow flags. In recent updates, we’ve written about how investor sentiment, which had gotten ground down during the tedious chop and September market correction, has come spiking back. Some of that is based on sentiment indicators (our own Real Money Index is at its most jubilant level since late April) and some is based on market measures (November 5 saw 445 new highs on the Nasdaq, the highest level since March).
To be clear, we don’t consider either one of those as major negatives, but they confirm what most already know: Stocks have had a good run and a lot of people are excited, and that often (not always) leads to some potholes and tricky trading.
We’ll take it as it comes—so far, most leaders look fine, and sharp two- or three-day pullbacks aren’t unusual in bull markets. That said, we’re keeping our eyes open, and on yesterday’s special bulletin, we placed two stocks (DT and FND) on Hold, mostly because they had stalled out a bit before and are testing 50-day lines.
On the buy side, if the market/leading stocks rebound from here, we’re not opposed to continuing our buying spree. But tonight, with around 18% in cash, we’ll sit tight and see how things shake out in the days ahead. We have no further changes tonight.
Model Portfolio
Ambarella (AMBA) had a big, straight-up run, which left it vulnerable to some sort of shakeout—and the combination of the market’s decline and news that the firm’s CFO is taking a health-related leave of absence led to a whopping big decline on Wednesday. Similar to the market, such a shot across the bow usually has some reverberations, so we do think the odds favor some more selling (or at least choppiness) in the near term. But overall, the decline looks normal given the prior move; for context, the 25-day line is still down around 179. If we had a huge position, maybe we’d consider trimming some shares, but we don’t, owning “only” a half-sized stake (and we still have a modest profit, too). Looking out a bit, earnings are due on November 30, which will probably tell the intermediate-term tale, but all in all, we don’t think anything has changed here—Ambarella’s computer vision chips should see huge demand going ahead, which should kick earnings much higher. If you own some, hold on, and if not, we’re OK taking a swing at a small position around here. BUY A HALF
Asana (ASAN) also took a big hit yesterday, though it came after a couple of good days, so the selling brought the stock back into its three-week range. Admittedly, shares have lost a bit of steam, and after such a massive run in recent months, we’re not complacent here, especially with earnings (due December 2) coming up in less than a month—a break of the 50-day line (now at 116.5 and rising), which hasn’t been penetrated since May, could have us taking partial profits. But at this point, ASAN is still north of its 25-day line, so we’re not going to anticipate anything. We’ll stay on Buy, though we have our eyes open to see if the selling persists. BUY
Cloudflare (NET) reported yet another great quarter last week, with steady-as-she-goes revenue growth (up 51%) and, surprisingly, a profit of a penny, reaching their goal of breakeven a year ahead of schedule. (To be fair, management said it’s likely to reinvest profits back into the business to launch new products, so expect breakeven-ish results for a long time to come.) The sub-metrics were also pristine: Cloudflare is now up to more than 132,000 paying customers (up 31%), including 1,260 of which pay them at least $100k a year (up 71%); same-customer revenue growth came in at a very healthy 24%; and, interestingly, about half of its new, large customers are entirely new to the company, indicating bigger and better deals. NET’s had some wild action since that report, but overall, shares are still perched around the 200 level and remain in fine shape. As for handling the position, we’re still pondering taking partial profits, but as we wrote last week, we’re also not usually in a rush to sell our strongest stock. If you own some, hang on; if not, we’re OK starting small, preferably on dips of a few points. BUY
CrowdStrike (CRWD) remains wild and wooly, rebounding to new highs during the day yesterday before being yanked down by the market. Helping with the stock’s general tone was news that Robinhood was hacked last week (seven million users affected; ransom payment was demanded), while another study said some defense-related firms were hacked in recent months. We’re open to anything, and a drop into the 250s would be a yellow (maybe a red) flag, but until proven otherwise, we think CrowdStrike remains a new-age leader in the space and has years of rapid growth ahead of it. We’ll stay on Buy. BUY
Some energy stocks have bobbed and weaved a bit lately, partly due to the market and partly due to the drop in natural gas prices. But Devon Energy (DVN) remains in fine shape, bolstered by its cash flow outlook released with last week’s quarterly report (~$6 per share of free cash flow next year at $70 oil and $4 natural gas); in fact, among its peers, it looks like the strongest horse out there. Now, with the 50-day line under 37 and with the near-term market outlook cloudy, we’re not ruling out a “real” pullback. (As an aside, we wouldn’t be shocked if the recent inflation numbers bring some “tough talk” from politicians, which could dent energy prices a bit.) Still, those are just guesses—right now, DVN looks great, and any selling has come on low volume and been swatted aside by the bulls. We’ll stay on Buy, and a bit more controlled weakness could even have us averaging up a bit. BUY
Dexcom (DXCM) has acted just fine during the past few sessions, meandering on light volume near its highs. As with everything else, a dip of a few percent isn’t out of the question if the market has another selling wave, but all indications are that buyers remain in control as they anticipate a big earnings bump going forward as the G6 gains ground and the G7 hits the market. BUY A HALF
Dynatrace (DT) has a great, long-lasting growth story in our opinion, but it’s at a key juncture here. Shares were whacked after the Q3 report, though quickly snapped back and tested their old highs in the days ahead—and, to be clear, that’s a good thing, as a strong snapback goes a long way toward telling us that the earnings move was a shakeout. But now DT is giving up ground again, retesting its 50-day line … and all of this comes after a persistent rally since May. Just looking at the evidence, we still believe the next big move is up, but there’s no question some big investors have been trimming. We switched to a Hold rating yesterday and will use a mental stop in the 66 to 68 range (just above our cost)—above there, we’re willing to let DT bounce around all it wants, but a break of that area would tell us a deeper, more prolonged retreat is possible. HOLD
For the second straight quarter, Floor & Décor (FND) has sold off after earnings, with renewed cost inflation and supply chain worries pulling the stock back to its 50-day line (near 128). Big picture, there’s little doubt that the company is going to get much larger over time, but the Q3 report raised more questions when it comes to the next couple of quarters; earnings estimates have dropped a bit for this year and next as Wall Street expects part of the solid sales growth to be eaten up by higher costs. As we did earlier this year, we’re OK giving FND more rope to allow the long-term uptrend to reassert itself, but we’ll set a mental stop in the upper 110s and take what comes. HOLD
ProShares Ultra S&P 500 Fund (SSO) ran from a low of 118 during the worst of the early-October selling to a high near 144 this week before pulling in a few points. As we wrote in the intro, the risk of a few more hiccups has risen given the moonshot October advance and fluffy sentiment. But overall, there’s no doubt the trend is up and we think any pullbacks from here are very likely to give way to higher prices. BUY
Watch List
Affirm Holdings (AFRM): AFRM took a huge two-day hit but is bouncing well today after a great quarterly report (which included a further, tighter tie-up with Amazon). We’re looking for it to settle down before entering.
Airbnb (ABNB): It still has some overhead to chew through, but ABNB reacted well to earnings and looks like a potential liquid leader to us if the business environment remains positive.
Coinbase (COIN): COIN shook out after Q3 results came in beneath estimates, but the damage to the stock wasn’t bad, and there’s little doubt Q4 and beyond looks bright as crypto trading is back on the upswing.
Snowflake (SNOW): SNOW is marching ahead on low volume—it’s sort of in no man’s land on the chart, though the growth story is compelling so we’re content to keep watching.
Wingstop (WING): WING had a massive-volume shakeout and support after earnings and is now 8% off its highs. Like many retailers, there are some cost/inflation worries, but after 15 months of ups and downs, the shakeout may have cleared out the remaining weak hands. We’ll see.
ZoomInfo (ZI): ZI has all of the characteristics of a big winner and has shown positive action since earnings. If growth stocks stabilize and this stock can show some buying, we could enter.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, November 18. 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 11/11/21 | Profit | Rating |
| Ambarella (AMBA) | 655 | 166 | 10/14/21 | 192 | 15% | Buy a Half |
| Asana (ASAN) | 1,874 | 89 | 7/22/21 | 131 | 48% | Buy |
| Cloudflare (NET) | 1,790 | 113 | 6/25/21 | 200 | 77% | Buy |
| CrowdStrike (CRWD) | 804 | 286 | 10/22/21 | 285 | 0% | Buy |
| Devon Energy (DVN) | 7,240 | 28 | 5/7/21 | 43 | 53% | Buy |
| Dexcom (DXCM) | 186 | 635 | 11/12/21 | 631 | -1% | Buy a Half |
| Dynatrace (DT) | 3,114 | 65 | 8/6/21 | 74 | 14% | Hold |
| Floor & Décor (FND) | 1,845 | 111 | 4/9/21 | 128 | 15% | Hold |
| ProShares Ultra S&P 500 (SSO) | 871 | 60 | 5/29/20 | 140 | 133% | Buy |
| CASH | 423,792 |