Cabot Growth Investor 1470

We continue to see more and more setups among growth stocks, but overall, the market remains in a spin cycle, with few stocks letting loose on the upside and incessant rotation among stocks and sectors. With the recent rally running into trouble, we cut bait with DraftKings (DKNG) earlier this week, but are willing to give the rest of our names some rope as we head into earnings season. Get all our latest thoughts on our stocks and our latest watch list in tonight’s issue.

Cabot Growth Investor 1470

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Seeing More Setups, but Still in the Spin Cycle
Two-plus months ago, speculation was running rampant and most growth stocks had made giant moves over the prior six to nine months. So when the sellers finally stepped up and cracked the intermediate-term uptrend in many growth stocks and the Nasdaq itself, our main thought was that time would be needed to wear/scare out the weak hands and re-set these stocks’ longer-term advances.

And while there’s been a lot of ups and downs since then, that thought has pretty much played out as expected—which should be a good thing. We’re seeing a lot of growth stocks eight to 13 weeks into fresh launching pads, and most have earnings coming up over the next two or three weeks. If we see a good number of bullish reactions, there’s no reason we can’t sink our teeth into some fresh leaders (or in established leaders resuming their uptrends). Now’s a good time to have your shopping list handy.

However, here’s the difficult part: Seeing stocks with good stories and growth numbers set up properly is a necessary first step, but you still need to wait for the bulls show up before you leap off the diving board back into the pool. The past three weeks were a great example of that, as many stocks perked up for a while, but at day’s end, few showed decisive strength and the sellers pulled most things back down in recent days.

From a glass-half-empty point of view, there’s a chance that the recent rally was a final gasp before a broader selloff—the S&P 500 moved out of trend on the upside after a five-month run (something that often precedes a rough patch), and the Nasdaq has so far been stymied by its prior highs. Throw in some iffy secondary factors (new lows have begun to rise again) and it wouldn’t be shocking to see a “real” correction.

But we’re not preaching that right now. Instead, the environment looks more of a spin cycle than anything else—yes, there are a handful of growth names that look awful and and a few that have nosed out to new highs, but the vast majority stuck in the middle, simply being tossed around within wide trading ranges as they come in and out of favor every couple of weeks, leading to a lot more frustration than profit.

Thus, for now, we remain in something of a “hurry up and wait” situation—with no real money being made out there, we’re sticking with a cautious stance and are willing to cut bait with anything that cracks, though we’re also keeping our watch list fresh and are ready to start a new buying spree if big investors do the same.

What To Do Now
Remain cautious but stay alert. In the Model Portfolio, we cut our loss in DraftKings (DKNG) earlier this week, raising our cash position back to 48%. But we’re also comfortable giving our remaining names room to maneuver as we see what earnings season brings.

Model Portfolio Update
Growth stocks began to perk up two to three weeks ago, which prompted us to put a little cash to work in the last issue, but most of the early risers ran into a brick wall near their prior highs and since then we’re seeing the selling pressure pick up again. In response, we’ve turtled a bit, cutting DraftKings out and keeping a close eye on a few of our names.

That said, we’re not so much bearish as just thinking we’re back in the soup—yes, there’s a chance this latest rally was a big suck-in that will lead to a big decline (the S&P 500’s latest move looks somewhat blowoff-ish in the intermediate-term), but most growth stocks are back within their wide ranges while rotation remains intense.

In total, there’s no good reason to be heavily invested—we continue to think less is more in this environment; our cash position stands near 50%—though we’re still taking things on a stock-by-stock basis and will be on the horn if we have any further moves in the days ahead.

Current Recommendations

DraftKings (DKNG)—DKNG was showing some early relative strength during this correction, but that’s fallen by the wayside of late despite good news surrounding sports betting approvals in states like New York and Arizona. We don’t think the long-term run is over, and if the stock sets up again down the road we could revisit it. But at this point, shares haven’t been able to get out of their own way since topping five weeks ago and they tripped our maximum loss limit earlier this week. Given that we had a half-sized position, the damage wasn’t huge, and if you happened to enter at a lower price, we’re not opposed to giving DKNG a bit more rope. But we cut bait in a special bulletin Monday and are holding the cash. SOLD.

Five Below (FIVE)—FIVE was one of a handful of growth stocks that appeared ready to get going during the latest market rally, but like nearly all of its peers, its breakout attempt was swatted away, again failing in the 200-205 area and testing its 50-day line this week. Similar to most growth stocks, though, this doesn’t appear to be a major breakdown; at this point the stock is still in the upper reaches of its multi-month range (170 to 205, ballpark). Nothing has changed with our overall thinking that this is an early-stage situation (both fundamentally and chart-wise), so we’re sticking with a Buy rating—but in case we’re wrong and the stock (or the entire market) hits the skids, a move into the upper 160s would be a red flag. For now, though, we’re holding on, and think you can nibble if you’re not yet in. BUY.

Floor & Décor (FND)—Frankly, FND is one of a dozen or so stocks that looks like it wants to really get going if the market allows it to—shares broke out on good volume (a rarity these days) last week before being jerked around a bit with the market, though shares are still holding near new highs. Fundamentally, everything should be going gangbusters at the company; one brokerage firm’s indicator for home renovation activity just surged to new highs, which has a good history of tracking with same-store sales growth at outfits like Floor & Décor. A drop into the mid-90s would represent a failed breakout that, along with our loss at that level, would likely have us getting out. But right here, we like it—we think FND will be a winner, but it’s a matter of surviving the correction/chop in the near term. Hold on if you own some, and if not, we’re OK buying a half-sized stake here or on dips of a couple of points. BUY A HALF.

Pinterest (PINS)—Pinterest has been a disappointment—two weeks ago, it was actually testing all-time highs, but a combination of growth stocks coming under renewed pressure and some cautious words from a small analyst outfit (they said Q1 started strong but decelerated toward the end of March) caused a bunch of selling starting last Friday, driving the stock back into the lower half of its overall consolidation. To be sure, the action is a negative; worst-case, this could be a double top, and the business acceleration that came with the pandemic could be fading, changing the long-term perception of the stock. That’s a possibility to be aware of, but we think the odds are against it—interestingly, another analyst swatted away fears of slowing growth last week while another recently had positive words about the stock. The truth will be revealed next Tuesday (April 27) when the quarterly report is released: Wall Street sees revenues up 74% and earnings of eight cents per share, but the key will be the rest-of-year outlook. It’s also worth noting that Snap (SNAP) reports tonight and that could push/pull PINS to some extent. Respecting the weakness, we’ll go back to Hold, but the real key will be what happens after earnings next week. HOLD.

ProShares Ultra S&P 500 Fund (SSO)—If you look at some secondary evidence, there’s reason to worry when it comes to the S&P 500—the index itself has moved out of trend on the upside after five-plus months of up action, the number of new lows has picked up a bit (our old Two-Second Indicator) and sentiment remains elevated by many measures. But that’s why we mostly follow the primary evidence, which for the market consists of the intermediate- and longer-term trends—you could have said a lot of those same worrisome things two or three months ago, and yet the uptrend has continued, with the S&P 500 (and, thus, SSO) continuing to crank ahead. We’re just going to keep playing this by the book—as long as the buyers are in control, we’re content to hang on and ride the uptrend. We’ll stay on Buy, though for new shares, we prefer to get in on dips of a few points. BUY.

SelectQuote (SLQT)—Yes, SLQT has come down a couple of points during the past week as growth stocks have turned weak, and sure, if the sellers stay at it (maybe into the 26 to 27 area), we may choose to cut our loss. But frankly, we’re still as optimistic about the stock as we were a couple of weeks ago—chart-wise, the stock has now found support near its 50-day line three times during this growth stock downturn, all at higher levels, and the story should lend itself to rapid, reliable growth for many years to come as it grabs market share in the direct-to-consumer Medicare insurance area. As a recent IPO, wobbles are to be expected, but we think SelectQuote can do very well if and when the market can find its footing. We’re holding on to our stake, and if you don’t own any, we’re OK buying a half-sized position here. BUY A HALF.

Twilio (TWLO)—TWLO remains mostly neutral here—the bounce from its lows recaptured 58% of its total decline, and encouragingly, the dip in recent days hasn’t been bad at all even as some growth stocks have come unglued. Still, this stock is a bit of a split decision: Just looking at the chart, TWLO wouldn’t be something we’re overly interested in here, with a lot of big-volume selling and few signs of real accumulation since its peak. However, fundamentally, there aren’t many big, liquid firms with a dominant position in the heart of the digital revolution that have expectations of 30%-plus revenue growth for years to come. As with many stocks these days, earnings (due out May 5) will probably tell the intermediate-term tale; analysts see revenues up 46% and a loss of 10 cents per share, though any upgrade to the earnings outlook (analysts still see a loss for 2021 as a whole) could be more important than the Q1 numbers. If you’ve taken a couple of rounds of partial profits like us, we continue to advise sitting tight and seeing what comes. HOLD.

Uber (UBER)—It appears UBER may be leaving us at the altar once again, with the stock’s big-volume rally on bullish March statistics (the Rides business saw its biggest month of bookings ever, while the Delivery business continues to grow at 150%-plus rates) leading to yet another sharp dip back into the middle of its consolidation. Maybe we’re wrong and this last pop was the final suck-in before a major failure—if so, we’ll likely cut bait somewhere in the 49 range—but we’re going to stay on Buy because of our view that the next major move is up, which is backed up by the fact that UBER has continued to etch higher lows during its tedious ups and downs. Earnings are due out May 5, and management’s updated outlook for growth (especially as comps become tougher for the Delivery business in Q2 and Q3) will be key. Right now, we advise hanging on, and if you want to start a position here, you can. BUY.

Watch List

• 10x Genomics (TXG 191): TXG made it all the way back to its old highs before backing off, but still looks ready to get going from its six-month rest period. Fundamentally, 10x has the look and feel of the next Illumina. Earnings are out May 5.
• Bill.com (BILL 153): BILL still needs some work but we’re intrigued by its near-perfect price/volume action. See more later in this issue.
• Diamondback Energy (FANG 75): FANG and other oils (like Cimarex Energy (XEC), written about later in this issue) are now seven weeks into normal-looking corrections. Frankly, a shakeout from here wouldn’t shock us, but bigger picture, we think the next major move is up. FANG’s earnings are due May 3; XEC’s are out May 5.
• Halozyme (HALO 49): We got out of HALO around breakeven after it tanked in March, but it steadied itself for a few weeks and has begun to push higher. The story, which revolves around its Enhanze technology, remains pristine. Earnings are out May 10.
• Shockwave Medical (SWAV 158): Shockwave is a small company that’s almost surely going to get a lot bigger in the years ahead as it revolutionizes atherosclerosis procedures. The stock moved out to new highs this week. See more later in this issue.
• Wayfair (W 308): W has backed off on super-quiet volume, but we think it could be playing possum before making a run to new highs. Earnings are due May 5.

Other Stocks of Interest
Cimarex Energy (XEC 61)—Many energy stocks are now seven weeks into consolidations, and while this rest could last longer (remember, these names more than doubled from November through early March), some of the weak hands have surely been kicked out. We’re still watching Diamondback (FANG), but another name we like in the group is Cimarex Energy, a well-situated explorer that’s mostly focused in the Delaware Basin in Texas (though it’s also got a rig going in Oklahoma) and, like its peers, isn’t (yet) being tempted into rapidly expanding production despite the rebound in oil prices. Instead, costs have been cut (cash costs down 16% last year) with output likely to increase at a slow, steady pace (low single digits) while Cimarex throws off mountains of cash flow—even at $35 oil and $2.50 natural gas, the company will be cash flow positive after CapEx and paying a solid dividend (1.8% annual yield), while at $55 oil and $3 natural gas (somewhat similar to today’s price environment), Cimarex will crank out around $750 million of free cash flow, which equates to nearly $7.50 per share or 12.5% of the current stock price! Despite having no debt maturities until 2024, much of that cash will go toward debt reduction, but we think the bigger story here is a re-valuation of the sector: For now anyways, gone are the days of spending to the hilt to expand output and valuing things based on oil still in the ground—replaced by solid balance sheets and burgeoning cash flow even in so-so price environments like the present. (If oil prices really pick up for any meaningful amount of time there’s no telling how big cash flow can get.) XEC is hanging around its 10-week line after a month and half of consolidation—as mentioned above, a longer/deeper correction wouldn’t shock us after the multi-month advance, but we doubt XEC’s (or the sector’s) overall run is close to over. Earnings are due May 6.

Horizon Therapeutics (HZNP 94)—If you’re looking for a biotech that’s got real products out there and a pipeline that’s chock-full of high-potential candidates, Horizon Therapeutics is worth a look. The company’s focus is on medicines that target rare autoimmune and inflammatory diseases, and it already has two powerhouses on its hands. The first, dubbed Tepezza, is the big growth driver: It’s the first and only FDA approved treatment for Thyroid Eye Disease, reducing eye bulging and double vision; despite launching just last year, it brought in a whopping $820 million of revenue, making it one of the most successful rare disease drug launches ever. (Supply of the drug has dried up a bit as Horizon’s contract manufacturer has been forced to crank out COVID vaccines, but most expect that to be solved in the next couple of months.) Then there’s Krystexxa, the only medicine for uncontrolled gout, which grew 19% last year and brought in $406 million. And looking ahead there are tons of names in the pipeline (partly thanks to the acquisition of Viela, which brought four candidates that are in nine development programs), including seven programs for Tepezza and Krystexxa (label expansions) and two Phase III trials for a drug called Uplizna that targets a rare neuromuscular disorder and a disease that leads to organ swelling. Right now, most of the focus is on the first two blockbuster drugs—Horizon believes they have a combined peak sales potential of $4.5 billion annually ($3.5 billion of which is Tepezza), nearly four times what they brought in a year ago. The top brass sees company revenue up 25% this year with cash flow up 16%, and there’s no reason both metrics can’t rise significantly in the years ahead. The stock staged a multi-year breakout last spring and had a huge run through early October; now HZNP has etched a base-on-base launching pad during the past six months. Earnings are due out May 5 and a bullish reaction could prove buyable.

Shockwave Medical (SWAV 158)—One of the things that’s been lacking in the market during the past couple of months is buying conviction—whereas selling pressures have eased at times, the buyers haven’t really shown up, with lots of low-volume upmoves that quickly get erased. Shockwave Medical, however, is an exception, and there’s good reason for it: The company has a new standard of care for treating atherosclerosis (plaque buildup in the arteries), especially when it comes with hardened calcium. Traditional treatment methods haven’t been very effective and carry risks, but Shockwave uses a catheter to deliver localized sonic pressure waves that crack the calcium without damaging the surrounding tissue. The product has been easy to learn, and the results (both effectiveness and safety profiles) are excellent, so the uptake has been rapid in peripheral arteries and there’s upside ahead in coronary arteries (FDA approved a system for that on February 12), while Shockwave has a system for breaking up calcium in valves in clinical trials. Right now, the firm is a small fry, with just $70 million or so in annual sales, but growth has been rapid (up 73% and 59% the past two quarters), and management said Q1 revenue will come in well above expectations (up 107%) from a year ago, with analysts seeing more of where that came from (triple-digit sales growth for all of 2021, too). The stock had a big run last year and early this year but topped in late January and had a tough correction for the next couple of months. But the Q1 pre-announcement caused a surge of buying (biggest weekly volume since last September) in late March—and, even more impressively, SWAV has pushed to new highs this week. It certainly smells like a new leader, and the full quarterly report is due out May 10.

Price-Volume Relationship Can Offer Clues to Accumulation
Oftentimes, getting into the weeds when it comes to stock research will do more harm than good; as one author put it, too much noise can transform your intuition to “into wishing” when looking for potential buys. Sticking with key criteria—a strong story, barriers to competition, rapid sales and earnings growth and an up-trending chart—is 80%-plus of the battle.

That said, there are other clues that can increase your odds of finding a potential big winner, and a lot are easy to point out—for instance, a long string of up weeks early in an advance (similar to FedEx (FDX), written about last issue) is almost always a positive clue, while triple-digit sales growth is something many huge winners have possessed.

However, one subjective thing we tend to look at is the weekly price-volume action over many months; if a stock repeatedly rises on good volume and falls on light volume, it’s a feather in the cap of the bulls.

This was one reason why we got into Roku (ROKU) last year. Notice how, from April through September, even though the stock was still in the midst of what turned out to be a year-long consolidation, shares flashed a ton of huge buying clues—we counted six massive-volume up weeks (one was more churn than buying) and no meaningful big-volume selling. It was a sign that big investors were building positions (and absorbing supply), which opened it up to a big run when it kicked into gear.

For that reason, today we’re keeping an eye on Bill.com (BILL), a name we’ve been watching on and off for a year. As you can see on the chart, the stock has been near-impossible to hang onto, with big rallies followed by multi-week 20% to 35% drawdowns. But if you look at the price-volume action in recent months there’s a lot to like—since early November, we count eight above-average volume up weeks and just two down, and both of those showed some supporting action after a prior pullback. The story here (bringing the back office of small businesses into the digital age) is a theme that’s driven other winners (like Shopify and Square), and a ton of top-performing growth funds have taken positions in recent quarters.

BILL’s recent action hasn’t been top notch—it’s still in the lower reaches of its consolidation—but if earnings in early May change that, it could be ready for a sustained run. WATCH.

The Big Money is in the Big Swing
When I first started at Cabot, the market was almost always pretty uniform—obviously, some sectors here or there (gold, energy) could dance to their own drummer based on certain factors, but it was the exception rather than the rule for different parts of the market to diverge. If the overall market was headed higher, chances are growth stocks were doing the same, and vice versa. In fact, divergences over many weeks or months usually showed up only near meaningful market high points.

However, in the past 10 to 15 years, that’s changed—we routinely see bouts of rotation, with one sector or theme coming into favor for a while, only to see a reversal of that a few weeks later. That’s the situation we’ve been in for the past couple of months: Take a look at the newly popular Ark Innovation Fund (ARKK), which plays in most of the pure rapid-growth names we do, which is still stuck below its 50-day line despite the fact that the Dow has been cranking ahead. It’s a similar story with the Innovator IBD 50 Fund (FFTY; not shown), which has been chopping around wildly and is still sitting in the middle of its multi-month range.

So what about cyclical stocks? As we’ve written many times, they can be worth playing; in fact, we’re intrigued by some (like oil) these days given that they just had a horrid few years. But there are a couple of things to be aware of before you start plowing into a bunch of financials and oils. First, because most of their businesses are subject to outside forces (interest rates, currencies, commodity prices), they can be very hard to hang onto, with uptrends disappearing in a matter of days.

And for the here and now, these cyclical areas haven’t had a “real” correction in five-plus months, so there’s certainly the potential for an air pocket or two. Again, that doesn’t mean we’ll never pull the trigger on a non-growth name (we’re still following a couple of energy and Bull Market-type stocks), but it’s not a high-odds proposition, at least right this second.

Bigger picture, the point of this exercise is to remind you that, as the famed Jesse Livermore once said, the big money is in the big swing—getting in early in a new, sustained advance for a young-ish growth stock and riding it for months (or years). That time will come again, and maybe sooner than many think depending on how earnings season goes. But until then, it’s best to keep it light and let everyone else fight it out on a daily basis while we wait for the next leaders to launch.

Cabot Market Timing Indicators
There’s been some good weeks and bad weeks, but the general gist of the market has remained the same—the broad market is in good shape and the trends are up, but rotation has been incessant and growth stocks remain hit or miss. We see some good setups but are waiting for the bulls to truly take control before plowing in.

Cabot Trend Lines: Bullish
Our Cabot Trend Lines continue to look just fine, with the S&P 500 (by nearly 14%) and Nasdaq (by nearly 13%) standing well above their respective 35-week moving averages, which keeps the longer-term trend pointed firmly up. Of course, the day-to-day action has been tedious and rotational, but there’s no question the overall bull market is firmly intact.

Cabot Tides: Bullish
The Cabot Tides are also looking good, with all five indexes (including the S&P 400 MidCap, shown here) moving higher above their lower (50-day) moving average. Yes, the advance is ripe (now more than five months old) and some indexes (like the S&P 500) look a bit blowoff-ish in the near term, but that could have been said a couple of other times during this upmove, too. Until proven otherwise, the market’s major trends continue to point up.

Cabot Real Money Index: Negative
Investors have backed off just a bit during the past couple of weeks, with inflows into equity funds and ETFs slowing. That’s pulled our Real Money Index lower, though it still remains elevated. It would be a much higher-odds setup if we get a couple of weeks of selling from the man-on-the-street, but we’ll have to see if that comes.

Charts courtesy of StockCharts.com

The next Cabot Growth Investor issue will be published on May 6, 2021.

Cabot Wealth Network
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