Cabot Growth Investor 1466

November through most of January was relatively smooth, but we’ve seen more cracks over the past month—especially this week, as growth stocks have come under severe pressure. To be fair, our trend following indicators are still positive, so we’re not selling wholesale, but we’re not letting stocks get away from us on the downside, either.

Earlier this week, we cut bait on CrowdStrike, and tonight, we’re letting to of NovoCure, taking small profits in each. Our cash position will now be around 40%, and as always, we’ll remain flexible going forward, prepared to either put money to work (if this is another short-term shakeout) or raise more cash (if a “real” correction unfolds.)

Cabot Growth Investor 1466

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More Cracks Appear
At the start of November we saw a couple of blastoff-type indicators flash green (like the Three Day Thrust rule), and that turned out to be the start of a powerful intermediate-term advance. During the next two-plus months, progress was relative smooth—yes, there was the occasional terrible day or sharp bout of rotation, but the indexes and most leading stocks basically glided higher through most of January.

But we’ve seen a bit of a character change during the past month, especially when it comes to the Nasdaq and many leading growth titles. The late-January decline was a doozy (5.5% in four days) and brought with it some abnormal action among some leaders. The snapback from there was very encouraging for sure, but now the Nasdaq and many stocks have quickly given up that move—including more than a few that have snapped their 50-day lines.

Now, to be clear, much of the broad market is still in decent shape and has avoided this week’s wobbles. Our Cabot Tides are still clearly positive, and broader indexes like the NYSE Composite and S&P 400 MidCap haven’t even touched their 25-day lines during all of the commotion.

Thus, at least among growth stocks, there’s little doubt that more and more names are cracking. To us, the wild action and myriad potholes among individual stocks in the past month have one clear interpretation: The environment is getting choppier and more challenging, with a few weeks of gains often given back in a few days and a good number of extended leaders succumbing to selling pressure. The short-term relative performance line of the Nasdaq vs. the stodgy Dow Industrials tells a similar tale, with the RP line dipping below support for the first time since the early-November kickoff.

Because of all that, we took a step toward the shore on Tuesday and are taking another one today, selling two of our weaker stocks and holding the cash. If this morphs into a real correction, we’ll quickly jump out of another name or two, but should the bulls make another stick save, there are plenty of high-potential names holding up well (many of which we write about in today’s issue).

What To Do Now
For the here and now, though, we’ve pared back, taking a small profit in CrowdStrike (CRWD) and, tonight, doing the same in NovoCure (NVCR), which broke down on earnings. That leaves us with a cash position around 40%.

Model Portfolio Update
After a great rebound following the late-January market dip, growth stocks have hit another major pothole this week, with more than a few stocks breaking key support, though some have rebounded nicely since. With our trend-following market timing indicators still positive, we aren’t interested in selling wholesale, but there have been enough breakdowns that we did ditch one name (CrowdStrike) in Tuesday’s special bulletin, and are letting to go NovoCure tonight, which will leave us with around 40% on the sideline.

From here, the game plan is the same as it usually is—if this is another sharp two- to four-day bout of rotation, we should see strong support soon. But if the selling continues, it raises the odds of a more meaningful dip, at least among growth stocks, and will have us paring back further.

For now, we think we’re in a good position, with nearly one-third of the portfolio in cash, but we’re willing to move in either direction (buy or sell) depending on the evidence going forward.

Current Recommendations

CrowdStrike (CRWD)—CrowdStrike’s fundamental story hasn’t changed one bit, but we decided to pull the plug on Tuesday’s special bulletin for a couple of reasons. First, the stock’s drop from its recent high of 250 all the way below 200 on Tuesday’s low looks abnormal; in fact, even now, shares are no higher than they were in mid-December, which isn’t awful but does hint at some stalling of late. Second, despite holding the stock for a couple of months, our profit cushion was minimal—and after having a 20% profit, our rules prevent us from letting the trade turn into a loss. If you still own CRWD and want to use a stop near Tuesday’s lows (near 198), we wouldn’t argue with that, but the hero-to-zero action (new highs to gapping below its 50-day line in just a few sessions) prompted us to take our small profit (9% on the average of our two buys) off the table. If shares set up properly down the road, maybe we’ll take another swing at CRWD, but right now the buyers look to be losing control. SOLD.

Five Below (FIVE)—FIVE nearly tagged its 50-day line during Tuesday’s dip, but it’s bounced back well and is currently perched near new high ground. The firm has been quiet on the news front since its mid-January presentation at a popular retail conference, but all signs continue to point higher here, with its holiday season/January numbers (same-store sales up 10% in November/December and accelerated nicely in January), its resumption of rapid store growth (17%-plus store growth this year) and a continued best-in-class economics backdrop (recouped new opening costs in about 15 months last year despite the pandemic and reduced operating hours) all very encouraging. We’d also note that management has begun to lift its long-term 2,500 store target goal (vs. about 1,000 at year-end) in a wink-wink, nudge-nudge way, effectively lengthening the firm’s runway of growth. Long story short: We remain optimistic that FIVE can trend nicely higher over time as the rapid, reliable growth story plays out, while any stimulus package out of Washington should help investor perception, too. A dip below the 50-day line would have us returning to a Hold rating, but right here we’re OK starting a position. BUY.

Halozyme (HALO)—Halozyme released Q4 results on Tuesday evening (after the selling maelstrom) and they confirmed that everything is on the up and up—as it said in its January update, Q4 sales (up 127%) and earnings (50 cents a share, up from a loss a year ago) were excellent, driven by two big milestone payments (one from Horizon, one from Janssen) and an 86% hike in royalties. Moreover, the 2021 outlook was strong, not just in terms of financials (44% sales growth, a doubling of royalties and surging earnings this year; $425 million of milestone payments expected over the next three years) but in terms of the underlying business, with 16 Enhanze-related products in clinical trials by year end, including four products likely to be in Phase III trials by then. The stock initially reacted well to the report, but the weak market and a big convertible debt offering ($700 million, priced this morning) has taken back all those gains, though the stock is still north of its 50-day line. The action is wild, but we’re actually going to stay on Buy for the moment and see how the stock handles itself following this post-offering selling. BUY.

NovoCure (NVCR)—NVCR hit a new high just a couple of weeks ago, but earnings this morning were a dud and, combined with the souring market, caused the stock to cascade. The Q4 revenues were fine and in-line with management’s pre-announcement in January. However, earnings fell far short of estimates, and the earnings release made a note that spending would likely pick up steam as the firm pushes its clinical trial programs. That makes sense longer term, but it means earnings estimates should head lower, which obviously isn’t ideal. The stock took a big hit today, dipping below some support it carved out over the past few months in the mid 150s. Given NVCR’s long run and heavy-volume breakdown, we’re going to sell our shares tomorrow, booking a modest profit (cost basis under 142) and hold the cash. SELL.

Pinterest (PINS)—PINS seemed to suffer from some forced selling during Tuesday morning’s downturn, dipping to nearly 70(!) before buyers began snapping up shares; the stock actually closed up on the day and, while it’s dipped again with everything else since, the overall pattern is constructive. Helping the overall cause may have been a very bullish Investor Day from Snap; while the two companies don’t compete directly, both are benefiting from the same trend as online advertisers look for more avenues (rather than just Facebook, Google and the like) to get in front of younger potential customers (like Snap’s user base) or at an earlier stage of the buying process (for Pinterest). Whatever the exact reason, the firm has all the numbers to make big investors drool and a big-picture story that’s hard to match. We’ll stay on Buy, though near-term rockiness is to be expected. BUY.

ProShares Ultra S&P 500 Fund (SSO)—For the second time during the current intermediate-term run, the S&P 500 fell to its 50-day line this week (the prior was in late January), and once again it’s found support, though today’s dip isn’t giving a warm and fuzzy feeling. It’s possible that Monday and Tuesday’s air pocket will have some reverberations, or possibly be the start of the long-awaited market correction. But at our heart we’re trend followers, not trend predictors (especially when it comes to the overall market), and with our Cabot Tides still in good shape, we remain bullish on SSO. BUY.

Roku (ROKU)—The long-awaited pothole for ROKU finally arrived this week, with shares dropping as much as 100 points in two days before finding some support beginning on Tuesday afternoon. Of course, while dramatic, the drop wasn’t crazy given the recent run (shares bounced near their 50-day line; stock is back to where it was in late January, etc.), though we still think it could usher in a rest period. We reported on most of the firm’s Q4 numbers last week, but having gone over the report in more detail, there are a few more tidbits we’d like to highlight: First, 38% of all smart TVs sold in the U.S. last year were Roku models, just to give you an idea of the firm’s dominance. Second, while total revenue was up 58%, the more important platform revenue piece of the pie (which is what brings in the profit; players and such are sold near breakeven) was up a huge 81% in the quarter and 71% for the year. And a lot of that is being driven by advertising—while primetime household TV ratings were down 21%, ad costs were actually up 13%, which is driving more advertisers to Roku (the six largest ad agencies doubled their investment with Roku from the prior year). Combined with the fact that ROKU stock is “only” five months into its run, we think the long-term outlook is bright. Near term, though, we think it’s best to stay on Hold until the stock finds its footing. HOLD.

Twilio (TWLO)—Fundamentally, there’s no doubt that Twilio’s business is in great shape as the Q4 report revealed, and with many of its clients seeing their own operations improve (in cyclical areas, especially travel and leisure), the next year or two should offer continued upside. That said, as we wrote in Tuesday’s bulletin, our antennae are up when it comes to the stock because of its wild up-and-down action in recent weeks after a huge run (which is rarely a great sign), along with three big dilutive offerings and acquisitions since August. (Including last week’s offering, the share count is up about 18% in the past year!) To be fair, there aren’t many big, liquid, dominant outfits projected with this kind of growth profile, and chart-wise, TWLO is still north of its 50-day line, which is becoming a rarity; a good couple of days could do a world of good. We’re not in a rush to bail, especially as we have some other stocks acting funkier, but we went to Hold on Tuesday and are watching the stock carefully. HOLD.

Uber (UBER)—UBER looked set for glory after a beautiful shakeout and recovery a couple of weeks ago, but the stock has come under pressure once again due to a variety of issues—first, the Q4 report was just OK, then the U.K. said ride sharing drivers are employees and now there’s news that a big Chinese ride share firm is entering Europe (likely leading to some price competition). Honestly, at heart, we remain optimistic here: Uber is the leader in a business that should rebound sharply in the months ahead (Rides) and is also the hands-down leader globally in delivery services of all kinds, a market that should grow many-fold in the years to come. However, we also recognize that we’re back to around breakeven on our position (cost basis just under 52) and, like many other names, the up-down action in recent weeks is a yellow flag. As with TWLO, we’re willing to give UBER a bit more room to maneuver, but a drop back into the upper 40s would call into question the uptrend. HOLD.

Watch List

• DraftKings (DKNG 58): DKNG has earnings out on Friday—we like the overall chart pattern and the story, so we’ll be very interested in the reaction.
• Dynatrace (DT 50): As with many recent breakouts, DT has been yanked around by the market, but it’s still intact overall.
• Farfetch (FTCH 64): Like many stocks, FTCH has been all over the map during the past three weeks, but there’s been no real distribution on the weekly chart and the company will report Q4 results tonight.
• Floor & Décor (FND 94): FND will report earnings tonight—and with the stock having effectively rested for the past two months, a positive reaction would be tempting.
• ZoomInfo (ZI 53): ZoomInfo’s Q4 report was terrific and the stock is just shy of new high ground. See more later in this issue.

Other Stocks of Interest

Affiliated Managers (AMG 143)—We’ve written a bit about Bull Market stocks of late (those whose business benefits directly from a stronger market and rising asset values); giant Goldman Sachs was mentioned here two issues ago, and Affiliated Managers is another big boy in the group that should do well. As the name suggests, this company is effectively a collection of boutique, affiliated money management operations that can benefit from the parent company’s sales platforms and relationships with other asset managers; the asset base is big ($716 billion or so) and well diversified across customers (institutional, retail and high net worth) and classes (equities, alternatives, international, etc.). Overall, it’s a great business, with after-tax profit margins in the 30% range, though growth has been mediocre at best, which, combined with a downtrend in the sector, crushed the stock for many years. But management stepped up during that time (it bought back 10% of its shares last year alone!), and now Wall Street is looking ahead to better times—analysts see earnings rising 22% this year and given the size of the Q4 earnings beat ($4.22 per share was 51 cents above estimates), that’s likely conservative. The stock got going with the rest of its sector right after last year’s election and enjoyed a beautiful, persistent uptrend, and then went vertical after the recent quarterly report. Even better, AMG has held firm of late, possibly because of its dirt-cheap valuation (less than nine times this year’s earnings). It’s obviously not revolutionary, but we think AMG is a few months into a sustained advance; pullbacks of a few percent would probably offer a good entry point.

Diamondback Energy (FANG 69)—Energy stocks are never going to get our heart racing, but we’re students of the market, and we believe that it’s very likely that the group’s multi-year bear market ended late last year, which means there should be upside ahead. (It reminds us a lot of when the housing sector finally got going after six years in the outhouse back in 2012/2013.) Of course, the numbers of every energy explorer are a mess after last year’s dip in prices and production, but Diamondback Energy looks like an emerging blue chip of the new uptrend: It’s long had some of the most lucrative acreage in the country, with 347,000 acres in the Midland and Delaware basins in Texas, and the firm has some of the lowest cash breakeven costs in the industry—if oil averages just $40 per barrel, Diamondback expects to crank out nearly $4 per share of free cash flow (after CapEx), while at $50 per barrel, that figure leaps to more than $6 per share! The plan for now is to roughly keep production flat in 2021 (even as spending declines), though you can bet Diamondback won’t hesitate to ramp output if prices really get going. (The cash flow also funds a decent 2.3% dividend.) Meanwhile, the firm has been buying low during this industry downturn—it should close on its acquisition of Guidon this week (bringing 32,500 more acres in the northern Midland) and is expected to complete its buyout of QEP (nearly 50,000 acres in the Midland) by the end of March. Obviously, if oil prices tank, all bets are off, but we think there’s a lot more potential upside surprises than the other way around. As for the stock, it was at 140 back in 2018, and even after its post-crash rebound last year, was still sitting in the mid 20s in November. But the uptrend since then has been steep and persistent, and given that the uptrend is just four months old (after a two-year decline), we think there’s more upside ahead.

Wix.com (WIX 333)—In the growth theme of helping small businesses (and even individuals) do more online, Wix has usually played second fiddle to some more popular names (like Shopify), but business has always been great and now it’s reemerged after resting for the second half of last year. The company has one of the top-rated website creation platforms out there, allowing anyone to customize via various templates, optimize for search engines, add advanced features (online store, accept bookings, professional blogs) and create mobile-only sites. (It even has an AI engine that allows users to get a personalized design simply by answering some questions.) And Wix can also help businesses on the marketing side of things, generating leads through emails and Facebook ads (among other things) while tracking progress through analytics. It’s a simple idea, but Wix’s offering is broad and is gaining share, and the freemium business model (a lot of free features, but you pay for the advanced stuff) is working—Wix breaks even in less than one year on new customer acquisitions, and then collects more and more money as people expand their usage of the company’s offerings (3x return on investment after three years, on average). Growth picked up nicely in Q4, with sales up 38%, and management sees 30%-plus growth in 2021 as all the new customers from last year ramp up. WIX was one of the big pandemic winners, breaking out in May and zooming into July, but it then grinded sideways for six-plus months. Now the stock has come alive again, bolting to new highs on massive volume last week.

New Issues, New Leadership
An extended market upmove provides some challenges—namely in finding fresh leaders that are still early in their move. For the past few weeks, for instance, we’ve had trouble finding high-odds entry points, as most leaders were stretched to the upside while those emerging will often turn out to be laggards.

For example, some recent earnings winners were tempting, especially those that have leapt out of multi-month ranges. But whereas the first stocks to get going in a new market move usually work well, breakouts after a few months of a rally don’t present the same risk/reward ratio; some work well, but as we’ve begun to see this week, plenty end up failing or stalling out.

However, that mainly applies to stocks that are already established. Recent IPOs (public sometime in the past 12 to 18 months), on the other hand, can often dance to their own drummer for a few months no matter what the market is doing. The reason: Big investors need to learn the story, kick the tires and begin building positions, and all of that takes time.

What impresses us today is that we see a bunch of newer issues that did indeed spend a few months in the middle and latter part of 2020 going through the typical post-IPO droop, but are now either setting up or have lifted off from great looking launching pads. Moreover, many of these possess the traits that can produce a sustained move, with solid growth stories and numbers, as opposed to the super-speculative stuff that’s caught some investors’ attention.

Once this pothole/pullback/correction (whatever it turns out to be) finishes up, we’re looking at a few of them as potential buys. Some of our favorites:

ZoomInfo (ZI) has set up a great post-IPO structure in recent months and just reported an outstanding quarter (sales up 53%, earnings up 140%; the firm hiked 2021 guidance too). As we wrote in the last issue, the company looks like a follow-on play in the giant customer relationship management (CRM) field, with a platform that dynamically updates contact information and provides intelligence (ranks potential sales prospects from best to worst, etc.) for clients. It looks a little bit like a bullets supplier in the midst of the CRM war, as its offering is already integrated into most big software systems, so it should do well no matter who does well. And it’s getting into adjacent markets, too. ZI actually advanced after earnings this week despite the deluge of selling in growth stocks; this remains near the top of our watch list.

SelectQuote (SLQT) looks like “just” an insurance company, but it’s much more than that—the firm has been around for three decades and now operates one of the leading online insurance portals around. The secret sauce here is its technology and database of more than one billion data points that leads to better results for consumers and for the 50-plus insurance providers that sell on the portal. Senior health insurance (like Medicare Advantage) is the main draw here, though it provides life and auto insurance as well. And business is going nuts, with sales and earnings more than doubling in Q4 and analysts expecting rapid growth for years to come. The stock has come to life since that report, with big-volume buying pushing SLQT to lifetime highs before the recent pothole.

One Medical (ONEM) (also called 1Life) is a very intriguing play in the health field, but instead of a new device or drug, the company is improving the gigantic primary care field: For a $199 annual membership, people can get faster and easier access to primary care doctors (in-person or virtually), with same- or next-day appointments, 24/7 virtual offerings, on-site lab services and more. It’s a no-brainer, and many firms are offering the plan option (who value a healthier, more productive workforce; employers renew at 90%-plus rates), with a ton of individuals signing up—One Medical had 511,000 paying customers at the end of September (up 29%), and that’s with the company operating in just 13 states. (It’s opening up in four more markets this year.) There will be competition, but the market is gigantic and this firm obviously has a product that people value. The stock broke out of a base in mid-January and has held firm this week—but earnings are due out tonight.

There are other names, too, like Progyny (PGNY), GoodRx (GDRX) and Azek Company (AZEK)—if and when the market settles down, we think many of these new issues can be new leaders sometime in the weeks and months to come.

Cabot Market Timing Indicators
It’s still a bull market, and for much of the market, this week’s volatility hasn’t been a huge deal. But growth stocks are looking iffy, so we’ve moved closer to shore by selling two stocks and are remaining flexible going forward.

Cabot Trend Lines: Bullish
The hectic day-to-day action has had no effect on the market’s major trend. Our Cabot Trend Lines remain clearly bullish, with the S&P 500 (by 11%) and Nasdaq (by 17%) closing well above their respective 35-week moving averages. And those figures haven’t changed much this week, despite the wobbles. Whether or not a correction unfolds, there’s no question the overall bull market remains intact.

Cabot Tides: Bullish
Our Cabot Tides are also clearly positive, though there’s a divergence developing—four of the five indexes (including the S&P 400 MidCap) are currently north of their lower (50-day), but the S&P 500 is getting close and the Nasdaq dipped back below its own 50-day average today. Still, you shouldn’t dissect the indicator much—we’re watching closely, but with most indexes in good shape, the intermediate-term trend is pointed up.

Cabot Real Money Index: Negative
Our Real Money Index, which is a five-week sum of money flows into (or out of) equity funds and ETFs, has pushed back into negative territory, meaning investors have become giddy (a negative from a contrary point of view). The last time the Index was up here (early December), the indexes made no net progress for about a month. We’ll see if this bout of buying leads to some rougher sledding.

Charts courtesy of StockCharts.com

The next Cabot Growth Investor issue will be published on March 11, 2021.

Cabot Wealth Network
Publishing independent investment advice since 1970.

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Chairman & Chief Investment Strategist: Timothy Lutts
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