Cabot Growth Investor 1468

The market found a little support today, but there’s little doubt that growth stocks remain in a correction and the overall market is coming under pressure. We don’t have a strong opinion on the near-term path, but right now, no real money is being made, so we think less is generally more when it comes to stocks--we’re being patient until this correction finishes up.

That said, there should be some great opportunities on the long side once this correction finishes up, and we spend a lot of space in this issue talking about some indicators we’re watching closely as well as a bunch of names we’re keeping our eye on for potential leaders of the next upmove.

Cabot Growth Investor 1468

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Less is More
In the real world, persistence is almost always associated with good things. If you’re a salesperson, you don’t give up when a few accounts turn you down; you keep selling until one customer bites. If your team is developing a new product, they keep burning the midnight oil until they fix any and all potential issues. If you’re an athlete, you don’t let a few missed shots dissuade you from taking the game-winner at the buzzer.

But the market is not real life. Instead, it’s a contrary animal, which is a big reason so many struggle with it. Today, many things can be said about the environment, but very few of them are good. And that means the current situation for the market (and especially for growth stocks) is one where it’s better not to try too hard; doing very little right now is probably the best thing you can do for your portfolio.

That’s not to say that we’re expecting some sort of implosion. In fact, we really don’t have a strong opinion in the near term—maybe the Nasdaq simply chops around for a while, maybe the indexes will retest their early-March lows or maybe the past couple of days is the start of another “real” leg lower that serves to get the fear level up.

However, regardless of what comes next, our main thought is simply that, unless you’re a short-term trader (if you are, have at it), there’s no money being made in this environment. We compare it to a meat grinder, where the more you trade, the more the market takes from you, either because of outright breakdowns or endless sloppy action. Hence the title of this week’s issue: Less is more, as we focus on staying mostly on the sideline while everyone else fights it out on a daily basis.

However, despite our cautiousness today, we’re excited about what comes next—as sentiment gradually dampens, keep in mind that the vast majority of big-picture evidence tells us this is likely a correction within a bull market, not the start of some prolonged bear phase. When the sellers finish up their work, there will be a batch of leaders to jump on—including some fresher names that big investors have only started to accumulate.

That’s the prize that will be there at the end of this selling storm. The trick is to get from here to there with as much capital (and confidence) as possible.

What To Do Now
Remain cautious. In the Model Portfolio, we’ve been about half in cash for the past couple of weeks, but today we’re going to boost that a bit more by selling our weakest stock: On a special bulletin this morning, we sold our remaining position in Roku (ROKU), which not only is hitting new correction lows but the fundamental story may be changing, too. That will leave us with around 56% on the sideline. Details below.

Model Portfolio Update
Since the last issue we’ve seen some ups, some downs and lots of rotation in and out of sectors, but overall, our main view hasn’t changed much: There’s not any real money being made out there unless you’re a nimble swing trader (we, of course, are position traders, which means intermediate to longer term), with individual stocks and sectors doing a lot of chopping (at best) or declining (at worst).

Really, this action isn’t unusual after a big uptrend ends and, ideally, should serve to dampen sentiment and set up some solid launching pads down the road. For now, though, staying mostly on the sideline is key, especially for growth stocks, letting others fight it out while we wait for the buyers to retake control.

In the Portfolio, we’ve stood pat since our half position buy of DKNG two weeks ago, but the renewed weakness in the Nasdaq and growth stocks prompted us to cut bait with Roku (ROKU), which is our weakest stock. We’re not completely against nibbling on a new potential leader or two given our huge cash position, but we need to see the market find support first.

Current Recommendations

DraftKings (DKNG)—DKNG has pulled in some after nosing to new highs last week (not a surprise, as selling near new-high ground is typical in sour environments), but we think the stock still looks fine, holding north of its 50-day line despite the market and a good-sized convertible note (dilutive) offering last week. Near term, March Madness (NCAA basketball) is likely to goose sports betting totals where it’s legal (one industry outfit sees $1 to $1.5 billion in legal wagering on the overall event), and longer term, analysts continue to up their projections for certain states once they’re legalized (one said New York could eventually be a $3 billion revenue opportunity with DraftKings the lead dog; the company already has a deal in place with an existing casino to enter the market when legalization occurs). It’s possible the stock continues to fade if the correction persists, but we think DKNG has all the makings of a new leader in a gigantic new industry for the next uptrend. A dip into the mid 50s could trip our loss limit, but right here, we’re OK picking up a few shares if you’re not yet in. BUY A HALF.

Five Below (FIVE)—FIVE reported a terrific Q4 late last week (the 13.8% gain in same-store sales was the firm’s best result in a Q4 ever!), and the outlook for Q1 was much better than expectations, too. But more important to us is that the fundamental picture is brighter than ever—not only is the store growth plan back on track (175 new stores this year, 34 of which are have already opened), but the forced (by the pandemic) investments in its digital operations (website, delivery, curbside pickup) and the launch of the company’s Five Beyond theme (prices up to $10—in 140 stores at year-end, a figure that should double this year) lengthens the runway of growth. (It also doesn’t hurt that in January management effectively said its prior store target of 2,500, from 1,000 in December, is likely conservative.) Of course, in this market environment, good news means little, and FIVE has hacked around since the report as it battles with round number resistance near 200. Thus, we’re not complacent, but we think the stock wants to head higher once this correction finishes up. We’ll stay on Buy, but keep new positions on the small side. BUY.

Pinterest (PINS)—PINS was beginning to show a little bit of relative strength, calming down and holding up fairly well during the Nasdaq’s latest dip, though today wasn’t as encouraging. Even so, barring a massive market meltdown, we still see this stock as likely to have another fruitful leg up over time. The reasons: Fundamentally, the main story of Pinterest gaining an increasing share of online ad dollars is playing out as expected (a small analyst shop yesterday said its channel checks are pointing to that), and technically, it’s hard not to ignore the fact that the stock has suffered just four above-average volume down weeks since its breakout last September—and two of those closed near the highs of the week, which is usually a sign of support. As with everything else, there’s nothing that says the stock can’t bite the dust, but we like to play the odds, and PINS’ top-notch growth story, pristine numbers (analysts see earnings up 100% this year and nearly 50% more in 2022—both of which are likely conservative) and acceptable correction thus far have us sitting tight. HOLD.

ProShares Ultra S&P 500 Fund (SSO)—We continue to play our SSO position by the book—as trend followers (not trend predictors), the S&P 500 remains in n uptrend (above its 50-day line), so we’re happy to hold on and ride it, and if you don’t own any, starting a position here is fine by us. Of course, our Cabot Tides are now on the fence, so a decisive crack of support could have us shaving off a few shares to lighten the position. But the plan is still to play SSO out for what we think will be a larger upmove—the vast majority of longer-term evidence remains positive, and the second full year of technical bull markets (which began this week) almost always sees solid double-digit returns. Our eyes are peeled, but right here we’ll stay on Buy. BUY.

Roku (ROKU)—A stock’s action during a correction also provides valuable feedback as to whether those big investors are adding to their position—or cutting it. So far, ROKU’s action has been the worst in our portfolio, with the stock dipping to a new correction low yesterday, with further weakness today. And, as we touched on in last week’s update, one reason for the lack of support (or follow-on selling) could be because the firm’s story is changing—whereas the big attraction here was Roku’s neutral, popular, high-margin platform for streaming services (more streaming services going live actually helped its business), the firm is for some reason making a move into having its own streaming offerings; it’s not so much about competition but about Roku likely having to shovel investment dollars into that area going forward. At this point, the move is small and the shift of ad dollars from standard TV to streaming avenues is the big draw, but it’s looking like perception is changing, with Wall Street seeing more investment (and lower margins) coming in the quarters ahead. We’re open to revisiting ROKU down the road if the stock sets up properly, but we decided to pull the plug on our remaining shares (we had already sold nearly 60% of our initial stake) on a special bulletin this morning and think there will be better opportunities during the next uptrend. SOLD.

Twilio (TWLO)—TWLO is right there alongside ROKU in terms of underwhelming performance, with shares taking aim at their recent lows this week. In contrast to what we wrote about PINS earlier (very little distribution in recent months), Twilio actually saw three straight weeks of heavy-volume selling right off the top (partly due to a big share offering, but it still counts)—that’s not a death knell but the stock should find support soon if all’s well. Fundamentally, there’s been no real change to the story; in fact, it’s likely improving, as Twilio recently bought out India’s largest communications platform (it processed 42 billion text messages last year), which adds another leg to the firm’s international growth story. We’re willing to give Twilio some room to maneuver because we’ve taken partial profits twice and are already sitting on a large cash position in the portfolio, but our antennae are certainly up. HOLD.

Uber (UBER)—UBER remains very tedious, falling a few points after again being rejected by the 60 area, partially due to its exposure to Europe and the poor vaccine rollout (and new shutdowns) going on in various cities over there. Even so, the stock is still basically range bound, and that range is sitting on top of the massive November blastoff. And, at least in North America, business is cranking ahead beautifully, with bookings rising strongly for the Rides business (March was shaping up well as of the last update) and Delivery continuing its hot (generally triple-digit) growth track. A drop into the upper 40s would be very iffy, but right here we advise patience as the stock meanders its way through this consolidation. HOLD.

Watch List

• Diamondback Energy (FANG 74): Price-wise, FANG’s dip toward its 10-week line of late is normal, though we’re looking for a bit more time to pass (only three weeks down after five months up) to set up a lower-risk entry.
• Floor & Décor (FND 95): FND has chopped around lately but net-net the stock is 10 weeks into a fresh launching pad, and its cookie-cutter story remains up there with the best.
• SelectQuote (SLQT 28): SLQT has remained north of its 50-day line through the correction thus far as it sits near the top of a nine-month post-IPO base. Analysts see earnings up 83% this year and 48% next, with big margins, too.
• Shake Shack (SHAK 115): SHAK’s been tedious like most names, but the stock’s range (105 to 130, ballpark) remains intact and normal thus far. Its store count should expand 45% in total this year and next.
• Wayfair (W 329): W actually notched new closing highs late last week before backing off. The volatility is big but we like the multi-month setup and story.
• ZoomInfo (ZI 54): After a tough post-earnings shakeout when the market was imploding, ZI has snapped back in very encouraging fashion. We love the story and numbers here.

Other Stocks of Interest

AirBnB (ABNB)—Let’s say you’re interested in the economic reopening theme, but you don’t want to plow into an industrial or commodity stock that’s already been running for the past five months. One idea is to look at AirBNB, a well-known (but newly public) company that should get a boost from the world turning right side up, but it also enjoys a long-term growth tailwind due to its business model and dominant position (around four million “hosts” on its platform). Of course, the numbers were a horror show last year, but even during the pandemic AirBnB saw some encouraging trends—revenues were down “only” 22% in Q4, which was practically heroic in the travel industry, and that quarter actually saw North American net bookings flat with the year before while EBITDA was basically breakeven. Throw in a bunch of cost cuts (capital spending should be up a bit from last year but still way down from 2019) during the downtimes and some early signs of a rebound (Q1 bookings were up from last year’s as of late February) and there’s no reason the company can’t thrive as vaccine distribution continues and people roar out of their confinement. Analysts see sales growth north of 30% both this year and next, EBITDA to break even this year, and longer-term, Wall Street thinks the firm can earn 18% cash flow margins by 2024. Shares had a good first few weeks after coming public, and have now backed off and consolidated for the past six weeks. IPOs are always tricky, but occasionally a big, liquid name with huge expected growth can do well if the environment is right. We’re looking to see if ABNB can flash some strong accumulation if/when growth stocks kick into gear.

Align Technology (ALGN)—Now that a little time has passed, we’re seeing more stocks that are six-plus weeks into fresh consolidations; that doesn’t mean more time isn’t needed (it probably is), but there are some early-stage structures that could provide a lower-risk entry point down the road. One of those is Align Technology, maker of the Invisalign clear aligners (braces), which have been consistently grabbing market share both here and overseas due to their better looks (no more metal mouth) and top-notch outcomes (thanks to its technology that scans the mouth and produces different sets of braces over the treatment period) for both kids and adults. (My sister-in-law had a couple teeth straightened out with them a year ago, with great results.) Indeed, about 70% of shipments are for adults, but a mom-focused marketing campaign has kicked growth among the teen and pre-teen market into high gear. Growth hit a pothole early in the pandemic (the bottom line dipped about 12% last year), but things are reaccelerating nicely now—sales have risen 21% and 28% during the past two quarters, with earnings up 50% or so, with expansion seen across all end users (teens and adults) and geographies (Q4 shipments up 34% in the U.S., 41% internationally). And analysts see a lot more of where that came from, with earnings expected to explode 74% this year and another 25% next. As for the stock, it etched a long, tedious, two-year base from late 2018 through October of last year, but the Q3 report caused a long-term breakout that proved fruitful. Now ALGN is seven weeks into a new, early-stage consolidation with most growth stocks; it still has work to do, but any big-volume move back into the upper 500s could be an opportunity to start a position.

Progyny (PGNY)—We wrote about Progyny a couple of months ago (and mentioned it again when writing about some recent IPOs two issues ago), though we thought it was cooked for a while after a bad break on earnings in late February. But it’s bounced back impressively as the company sports a great, unique growth story that should play out for a long time to come: Progyny offers health plans that are built from the ground up to help couples conceive (an increasing issue as people start families later in life), avoiding many of the pitfalls out there today (outdated plan designs, lack of coverage, limited access to specialists resulting in higher-risk pregnancies). Instead, the firm’s plans are fertility-centric with a network of 800-plus fertility experts, personalized support services, all-inclusive treatment bundles to choose from and pharmacy offerings. At day’s end, Progyny’s offering is a win-win for everyone involved—individuals see greater pregnancy rates for IVF treatment, a 23% rise in birth rates and an 80% lower multiples rate (twins, triplets, etc.), while employers get more productive, less stressed-out employees. So it’s not a surprise the offerings are catching on quick, with 135 corporate clients inked as of year-end (2.3 million covered lives, up 50% from a year ago), including 40% that never had any fertility benefit prior to Progyny (!), with retention rates nearing 100%. Sales and earnings growth have been very strong, and with management saying the firm is in its strongest ever competitive position, analysts are bullish—sales are expected to grow 55% this year and 40%-plus in 2022, with earnings growing at an even faster clip. The potential downsides here are customer concentration (two clients make up 35% of its total revenue, though that figure is dropping quickly) and, stock-wise, liquidity is an issue; PGNY trades less than $40 million per day, which is usually no-go territory for us. But if the top brass makes the right moves, this is the kind of easy-to-understand story that screams rapid, reliable growth. It’s worth keeping an eye on.

The Time Element
In our view, one of the most underrated aspects of successful investing is what Jesse Livermore referred to as the time element—moves in the market (up, down or consolidations) take time, partially due to psychology (it takes time for sentiment to change) and partially because of mechanics (it takes weeks for mutual, pension and hedge funds to reposition their portfolios).

That’s a big reason why, for many growth stocks, less is more at the moment. Tesla (TSLA), for instance, broke out near 175 after the pandemic and obviously mushroomed above 900 before finally cracking with the market lately. It’s now nine weeks into this correction and consolidation. Could it get going from here? Sure, anything’s possible, but after a big run and decisive break, odds favor stocks like TSLA (and many others) needing more time to wear out the weak hands before resuming their advances. (And some, of course, might not resume their advance at all.)

Conversely, while it’s early, we’re beginning to spot many growth-y names that topped out ahead of the Nasdaq, giving them more time to shape up. If/when the market gets going, they could be ready to rip.

DraftKings (DKNG), our most recent addition, is a good example. The stock’s peak came back in September and spent many months slowly recuperating; yes, this week has been rough, but the stock nosed to new highs recently and is still in pole position to lead a coming advance.

Another example is ZoomInfo (ZI), a stock that’s actually still in the midst of a huge post-IPO base from June of last year—while shares got hit after earnings when the market was tanking, this week’s big-volume spike puts the stock within a few points of all-time highs. This is a new stock that’s liquid and has the sales, earnings and story that could propel it much higher. It’s on our watch list.

Then there’s a name like LGI Homes (LGIH), a mid-sized homebuilder (10^th largest in the U.S.) with an excellent track record of growth thanks to its focus on first-time buyers and in many of the fastest growing areas of the country (southeast, Florida, etc.). And the pandemic has boosted business in a huge way—Q4 results saw sales (up 48%) and earnings (up 106%) blow away expectations while its backlog was up a ridiculous 167% from a year ago. And momentum has remained strong, with home closings up 36% so far this year vs. 2020.

LGIH effectively peaked last August (though it did hit a minor new high in October), marking no net progress for seven months. But now it’s moving, notching new price peaks (though the RP line is still lagging a bit) on a beautiful volume cluster of late—and some others in the homebuilding group have perked up to.

Whether these names push higher from here will be all about the market environment, but so far, we’re seeing more peppy action among growth stocks that have already rested for a few months, while those that just topped in February still look tired.

Watch Cabot’s Aggression Index and Two-Second Indicator
As always, the price/volume action of the major indexes (especially the Nasdaq in this case) and leading growth stocks will give us the most direct signal as to when the buyers are re-taking control, but we’re paying close attention to two secondary indicators for clues to when the market’s character could change.

The first is our Aggression Index, which simply is a relative performance (RP) line of the growth-heavy Nasdaq Composite vs. the defensive consumer staples fund (symbol XLP). On a longer-term basis, the Index has been bullish since mid-April of last year, with the line trending above its lower (40-week) moving average since then.

Near term, though, the decisive crack of the 10-week moving average three weeks ago coincided with the market’s correction—a decisive rebound above that line would be a good sign that big investors are again putting money back into growth stocks and out of defensive names. Conversely, a break of the recent lows (or the 40-week line) would be a major red flag.

Then there’s the number of stocks hitting new 52-week lows, which we used to call our Two-Second Indicator. While the number of new lows doesn’t correlate as closely with growth stocks as it used to, the figures can still provide a hint as to whether the selling pressures are intensifying, leveling off or disappearing all together.

Recently, while the number of new lows on the Nasdaq did rise quickly during the worst of the recent 10% drop (exploding to 313 on the bottom day), they quickly dried up to reasonable levels—though now they’re picking up again as the Nasdaq has wobbled. From here, we’ll be watching for one of two things: First, if the Nasdaq pushes ahead, will the number of new lows decline in a big way (and stay down), or, second, if the Nasdaq heads back to its lows this month, will we see a positive divergence (new lows less than the 313 we saw on the first dip)?

Neither indicator is perfect, of course, but we think they could give off an early heads-up as to when this market correction is nearing an end. So far, though, nothing doing.

Cabot Market Timing Indicators
We still see this as an overall bull market that will carry higher down the road, but right now, less is more—the resilient broad market is beginning to come under pressure and growth stocks remain under pressure. We advise caution while we patiently wait for the buyers to return.

Cabot Trend Lines: Bullish
Our Cabot Trend Lines remain firmly bullish as the major indexes have flopped around during the past couple of weeks. As of last Friday’s close, both the S&P 500 and Nasdaq closed nearly 9% above their respective 35-week moving averages, giving them more leeway to correct and consolidate without interrupting the larger, longer-term uptrend.

Cabot Tides: On the Fence
The Cabot Tides are now on the fence, as the selling has started to spread from “just” the Nasdaq to the other major indexes. The S&P 600 SmallCap (shown here), which has been leading the post-election rally, is a good example, with the index giving up ground and sitting near its 50-day line. We’ve already taken our cues from the action of individual stocks, but the next few days should be telling for the overall market’s intermediate-term trend.

Cabot Real Money Index: Negative
Our Real Money Index is a secondary measure, so it doesn’t preclude the market from getting up and going when it wants to. But there’s no question we’re not seeing a classic setup at this point—despite sloppy-to-down action, investors continue to pour money into equity funds, with the five-week sum of inflows at its highest level in at least a couple of years. That type of enthusiasm doesn’t usually come near market low points, but we’ll see how it goes.

Charts courtesy of StockCharts.com

The next Cabot Growth Investor issue will be published on April 8, 2021.

Cabot Wealth Network
Publishing independent investment advice since 1970.

President & CEO: Ed Coburn
Chairman & Chief Investment Strategist: Timothy Lutts
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