Thoughts on the Market. Sell FTCH. TXG and FIVN Move To Buy
Yesterday’s big rally in the Nasdaq was enough to reignite bullish spirits but it was not a clear signal that it is time back up the truck on growth stocks just yet. While I side with those who say the pullback has opened up opportunities for fresh buying in many beaten down names, I think the chances of a snapback rally in many of the highest multiple growth stocks, then a follow through to new highs within a few weeks, is unlikely.
More likely is a period of churn as investors continue to play musical chairs with their dollars and seek to diversify into more value/cyclical plays. It’s a good time to be somewhat conservative, look for the fat pitches and be selective with new buying. Patience will pay. It’s also a good time to consider lightening up on positions that seem to have lost their mojo.
A few thoughts …
On yields: There are plenty of analysts who think the 10-year can go higher, to a range of 2% to 2.5%, in the 2021 to early 2022 time frame. While that scenario seems like it could be bad for growth stocks given what we’ve experienced in the last three weeks, context matters.
Yes, rising rates can hurt these types of stocks in the short-term but over a rising rate cycle growth stocks have tended to do very well. The reason is that, generally speaking, rising rates signal a healthy economy.
I pulled weekly index returns during periods of rising rates dating back to 1995. That table is below. As you can see it has not paid to bet against growth stocks during these periods of rising rates.
Caveats?
The periods above are measured in years, not weeks. The market does not like it when yields blast higher.
If yields continue to shoot up quickly and overshoot the “right” target too soon, it’s hard to see a scenario in which growth stocks will do well during that phase. I’m not calling for this scenario to play out, but it should be on your radar as a possibility—especially if the Fed sits pat and lets it happen without any intervention.
We should get incremental clarity on 10-Year yields today. This afternoon the Treasury Department should release results of a $38 billion 10-Year Note auction.
Ultimately, a harsher decline in growth stocks would likely create even more attractive buying opportunities as it should be relatively short lived. But it would also be painful to hold current positions through it. Buying into such a decline would likely feel wrong at the time, especially if you are heavily invested going into it.
To be in a position to be more hunter than hunted, it would be wise to have some cash available. We have sold a number of full and partial positions in recent weeks to achieve this. The only downside to holding cash now is if the market shoots higher you may miss out on some gains. You have to decide for yourself what the right balance of cash is right now based on your individual circumstances.
More positive thoughts ...
Software, Internet and digital transformation stocks, to which we have significant exposure, are now a lot less expensive on valuation than they were a month ago. Management teams are largely positive on their company’s prospects in 2021 and while there are some that benefited from the pandemic, there are also plenty for which a return to “normal” is a net positive. I do not think the long-term uptrend for these stocks is anywhere close to over.
A possible short-term bullish consideration is the $1.9 trillion economic stimulus bill that’s likely to pass in the House. While the recipients of checks will be narrower than with the $2.3 trillion CARES act (the checks will be larger), it’s notable that when those checks were sent out many recipients plowed cash into the stock market. That is likely to happen again to some degree and could give a boost to certain stocks.
What could they buy? Would purchases be skewed more toward growth, or value? It’s anybody’s guess, but my suspicion is that people would buy into names with products and services they are familiar with.
Here is a handy image, courtesy of Quartz, of who will benefit the most from Joe Biden’s American Rescue Plan. It will be very interesting to see how this all plays out.
On to a couple stock specific notes.
Sell Farfetch Limited (FTCH). As discussed previously, Farfetch reported a perfectly good Q4 and issued 2021 guidance that was likely conservative, especially in the back half of the year when things with Alibaba Tmall should begin to ramp up. The potential challenge then will be very tough comparison numbers over 2020, unless Tmall is a larger contributor than management’s initial guidance implies. While Farfetch is arguably the most attractive marketplace name in luxury online these buyers aren’t the focus of the upcoming stimulus checks (granted Farfetch is a global player, but still) and there could be some pushback to online buying as economies open up and people say, “To heck with online shopping, I’m going into a store!”Over the long term I do think FTCH will perform well and money will come back into the stock; however, in the near term I question if there is enough interest to move the stock much higher. FTCH wasn’t a big mover in yesterday’s broad market rally. On balance, I’m on the fence here but given all the factors I’m fine with taking a double-digit gain (roughly 25%) on our remaining half position and putting FTCH back on the watch list until we see more constructive signals. SELL REMAINING HALF
10X Genomics Moves to Buy. TXG is 24% off its high but found support at 138. While things could change quickly that relative performance, coupled with a better-than-expected Q4 report, is enough for me to move TXG back to buy. BUY
Five9 (FIVN). Five9 had a great Q4 and management struck a more bullish tone than normal with respect to 2021. The stock has held up relatively well lately. Historically, pullbacks have been shallower than other software names. That’s all good enough for me. Back to buy. BUY
Finally, since we’ve had a lot of action lately I’ve posted our current portfolio, as well as recent sales, below.
