Suffice to say the last two weeks have been very tough. On the one hand, yes, of course some sort of correction or pullback has been expected given the huge progress the market – and growth stocks, small caps and IPOs in particular – have made over the last 12 months. But expecting something to come eventually and actually experiencing it are two entirely different things.
To be clear, broadly speaking the market is doing OK and the big-picture trend is still up. The S&P 500 and S&P 600 are just 5% off all-time highs, while the Nasdaq is off 11%. There is just a lot of action under the surface.
There is an eerie aspect to the current correction since it was precisely this time in 2020 when stocks began to fall apart. Of course, that was due to the beginning of the pandemic and associated lockdowns and now we are finally starting to emerge from the tunnel (we think). The situations are totally different in all sorts of ways. But the feeling investors have of “losing control” when stocks are appearing to melt down is likely still raw for many.
One of the practical differences of expecting versus experiencing is that when the markets start to correct, crazy things happen. Just like fundamentals can go out the window during a fierce rally they can evaporate during a correction. Some of this is driven by loads of investors hitting the sell button trying to protect gains and avoid losses. Some is driven by institutions moving money around, forced liquidations and other factors.
Point is, it can be difficult to make sense of things during a correction because often things don’t make sense in the very short-term. Corrections are a process, not a point in time, and they are messy.
On to a couple points on what’s happening now.
The most discussed catalysts driving the growth stock correction are rising interest rates, fears of inflation and ballooning national debt. There is a good deal of valuation reset mixed in, as well as rational profit taking. I suspect the rise of retail trading is also contributing to the volatility. We also have some fear of the unknown – we haven’t been through a pandemic recovery of this sort before and don’t know exactly how trends will evolve. Bottom line is there is uncertainty, which the market does not love.
Big picture, some inflation and higher-than-zero interest rates are good. History and the Fed are crystal clear on that. But the speed of increases, and the broader context of what’s happening in the market and economy are important.
On the topic of market performance during rising interest rates, the below data from Bank Of America Global Research is insightful.
The punchline is the data shows that stocks tend to do well during periods of rising interest rates. Notably, during the last six cycles of rising rates, dating back to 1995, the S&P 500 has gone up. Most of the time it has gone up a lot.
Now, what the Fed does with interest rate policy doesn’t always jive perfectly with what is happening with rates in the real world. Just reference the current state of affairs; 10-year Treasuries have jumped since January and are up from 0.7% six months ago to 1.56% today, yet the Fed hasn’t moved.
Eventually it will, and history shows that rising rates don’t signal the end of a bull market. While I’m far from being an economist my sense from observing and digesting research is that during this recovery, if yields continue to climb, the Fed will react. Maybe it will be another Operation Twist, maybe it will be something else.
Bottom line, I don’t think the Fed will stand by if the velocity of rising rates puts an economic recovery in jeopardy due to chaotic market events. One last point – it may also be that some tamping down of enthusiasm in the stock market is better in the long run than the alternative. Food for thought.
Enough big-picture stuff. On to our stocks.
We are continuing to make incremental moves with the goals of maintaining exposure to the stocks we believe will help lead the market in the coming quarters, while also limiting losses and taking steps to have cash available to put to work when it seems appropriate.
Here are a few notes on each of our stocks.
APi Group (APG). So far this stock is holding up well. Maintaining at buy. BUY
Altair Engineering (ALTR). Also OK (not great). BUY
Castle Biosciences (CSTL). Stock in no man’s land but not broken and near support at 64. BUY
Certara (CERT). First report as a public company came yesterday and surpassed expectations modestly. Overall, the report was about as expected. Revenue was up 20% with software revenue up 4% to $17.5 million and services up 28% to $47.1 million. Initial 2021 guidance is for revenue of $272 million to $285 million, ahead of estimates. Guidance is likely conservative. The stock is selling off this morning as the market tries to find firm ground. First take is the stock reaction is overdone. Moving to hold. HOLD
Freshpet (FRPT). Stock below 50-day line but not broken. Support a few points lower near 132. BUY
JFrog (FROG). Stock looks awful and now trading near IPO price. Should be support here. Moving to hold. HOLD
Kornit Digital (KRNT). Stock gave up its post-earnings gains and near 50-day line now. Acting “relatively” strong. BUY
Lyft (LYFT). Trending up. One of our healthiest looking stocks. BUY
Nuance (NUAN). Searching for support near 42 (stock fractionally below that level this morning). On the fence here as I think Nuance has the story and fundamentals to be a leader when this correction washes out, but I don’t like this break. Moving to sell. SELL.
Pinterest (PINS). Searching for support that should take hold in the 62 to 64 range. Believe PINS can lead out of this correction but as with NUAN a break of support would hurt. For now, still a buy. BUY
Poshmark (POSH). A recent IPO that we have a half-sized position in and which is trending toward its IPO price of 42. Averaging in is still the move here though in current market there’s little rush. Will keep at buy a little longer. BUY
SolarEdge (SEDG). Broke below what should have been support near 266 yesterday. We have a gain of over 140% and a full position. Let’s be defensive and sell a quarter. SELL A QUARTER, HOLD REST
Varonis (VRNS). Should be a security leader but in no man’s land between 200- and 50-day moving average lines. We should get a bump soon, if not will take full or partial gains. Move to hold. HOLD
10x Genomics (TXG). Was strong then got whacked yesterday. Should be near support. HOLD
Bill.com (BILL). Good company that has potential to lead coming out of this. A 27% correction (i.e. now) is roughly in line with previous ones. HOLD
Chewy (CHWY). In no man’s land between 200- and 50-day moving average line. Should be a long-term winner but may take some time. Current pullback of 33% is big, but not the biggest (-36% was last March). We hold a half after taking partial gains, and are now taking more. SELL QUARTER, HOLD REST
Cloudflare (NET). In no man’s land between 200- and 50-day moving average line. Like others should be a long-term winner but needs to firm up soon. Let’s sell another quarter and hold the other half. SELL QUARTER, HOLD HALF
CrowdStrike (CRWD). Same story here. CRWD broke support yesterday and is now in no man’s land. Let’s sell another quarter and hold the other half. SELL QUARTER, HOLD HALF
Datadog (DDOG). Took more gains yesterday. Stock should find support soon near 79. If not, we will likely let the rest go. HOLD
Farfetch (FTCH). Took partial gains this week. Stock right at support near 53.5. If it breaks much below here we’ll exit fully. HOLD
Fisker (FSR). Wildly volatile stock that’s going to continue to move a lot regardless of market conditions. Still a very compelling way to invest in the future of EVs. HOLD
Five9 (FIVN). Should be a leader coming out of this though the stock has recently broken support. HOLD
Purple (PRPL). Stock sold off hard yesterday and is bouncing some today. Trading near bottom of consolidation phase from this past fall. HOLD
Shift4 Payments (FOUR). Reported good quarters this week and management issued favorable initial 2021 guidance. Stock is one of our strongest. Looking to move to buy once market stabilizes. HOLD
Sprout Social (SPT). Another software stock that should be fine long-term but has broken 50-day line and is seeking support. HOLD
Virgin Galactic (SPCE). Another story stock that’s wildly volatile. The market hasn’t been kind since management pushed back the test flight. Still, the long-term prospects are compelling. Looking for support to move back to buy. HOLD
Upwork (UPWK). Broke below 50-day line yesterday. Good story but can’t ignore stock’s action. We have a gain of just over 100%. Take partial profits by selling a quarter. SELL QUARTER, HOLD REST