Current Market Environment
The market took another hit this morning, but like yesterday, the major indexes have found support as the day has progressed—just after 3 pm EST, the Dow was down 70 points while the Nasdaq was off 66 points.
Part of the reason for the recent selling is supposedly due to inflation fears and higher interest rates—indeed, the 10-year note reached north of 1.30%, which is low historically, but up 30 basis points (0.3%) since late January and 50 basis points (0.5%) from the start of December.
Still, while most will look for reasons why the market did this or that, the real reason for the recent selling is probably simpler—stocks have had a big run, sentiment is joyous (money flows have picked up in a big way during the past two weeks as the market has surged higher) and many leading stocks and indexes are well above any support. As always, the what is more important than the why.
Looking at the evidence, nothing has really changed from a top-down point of view—even at today’s lows, none of the five indexes we track for our Cabot Tides came close to their 25-day lines (never mind their more important 50-day moving averages). We’re also pleased to see the number of new lows hold at very low levels (10-ish on the NYSE, under 20 on the Nasdaq) despite the recent ups and downs, which is a sign there’s still great uniformity among the broad market.
Leading stocks are mostly in the same boat—yes, some are seeing a bit of leakage, but except for the occasional earnings-induced plunge, we haven’t seen any breakdowns of consequence.
In the near term, we continue to think going slow on the buy side remains the right call; if you’re a swing trader, by all means have at it, as many stocks are moving up and down quickly. But for our style (position traders, meaning intermediate to long term), the combination of the market’s extended run (now 16 weeks from the post-election kickoff), elevated sentiment and lack of great entry points means we’re OK holding a bunch of strong stocks, but are also sticking with our 20% cash position.
However, we don’t want to give the impression we’re in a “no buying” mood—in fact, a little cooling off in growth stocks from here would probably see some recent earnings winners offer high-odds entries, while some others that are set to report earnings in a few days are looking tempting (see our watch list). We’ll be on the horn if we have any changes (possibly before next week’s issue), but we’ll again stand pat today, though we will restore our Buy rating on Five Below (FIVE).
Model Portfolio
CrowdStrike (CRWD) hit some resistance near 250 and has wobbled with the market during the past couple of days. But overall, it (and, encouragingly, most of its cybersecurity peers) remains in fine shape. As with most stocks, further near-term dips are possible, but the main trend here is up, and the outlook for the firm’s Falcon platform is fantastic; just today the firm announced a small-ish acquisition ($400 million) that will boost Falcon’s detection and response capabilities through better data ingestion. BUY.
Five Below (FIVE) continues to thumb its nose at us, rallying right back to its January highs after our partial sale (and move to Hold) a couple of weeks ago. (Not that we’re complaining; we still own a good-sized chunk, so we hope the stock goes to the moon.) The company has been quiet on the news front since its early-January holiday update (Q4 earnings are likely out in mid-March), though there are no signs that the turnaround isn’t in full effect; in fact, it’s likely the quickening pace of vaccinations (5% of the country has now been fully vaccinated with two doses) is increasing perception that malls and what-not will be increasingly full as the year goes on. The question is our rating, as FIVE still has some yellow flags … but then again, the stock is sitting near new highs. Putting more emphasis on price, we’ll restore our Buy rating, though we’d prefer starting new positions on dips of a few points. BUY.
Halozyme (HALO) continues to look fine, though it’s lost some momentum in recent weeks, with not much progress since mid-January. That’s obviously not a death knell, but as we look ahead to earnings (due February 23), it’s possible a bad break could undo the stock’s breakout from last November. Still, while it’s good to be prepared for whatever comes, we remain very optimistic with HALO—the rapid and reliable growth story, along with increasing sponsorship and an early-stage chart, all point to higher prices ahead. We’re sticking with our Buy rating, but as always, with earnings coming soon, keep any new positions on the small side. BUY.
NovoCure (NVCR) also will report earnings next week (February 25), and similar to HALO, it’s in a situation where it hasn’t done anything wrong (still north of its 50-day line after this morning’s test; new highs as recently as last week) but has lost some momentum (not much progress since the start of the year). Looking ahead, a decisive drop under 150 (which has offered support three times since early December) would be a red flag, but you know us—we don’t anticipate, but follow the evidence. Right now, the trend is up, NovoCure’s story is unique and the numbers (and projected numbers) are top-notch. We’ll stay on Buy, but as with HALO, keep new buys small this close to the report. BUY.
Pinterest (PINS) continues to look great, though it’s getting tossed around a bit with the market of late. Day-to-day action aside, though, the stock has the look and feel of a new-ish leader whose growth story should have legs as online advertisers look for places to exploit beyond just Facebook and Google; the fact that Microsoft was interested in buying Pinterest recently only adds to the positive investor perception. If you own some, sit tight, and if you don’t, we’re OK starting small here or (preferably) on some further weakness. BUY.
Some sort of market correction or dead period wouldn’t shock us at this point given the secondary indicators (sentiment, time elapsed from the November breakout) that are out there, but to this point, the major indexes have had a hard time pulling back for more than two to four days before the buyers step in. That’s been great for our stake in the ProShares Ultra S&P 500 Fund (SSO), which moves twice the S&P 500 (percentage-wise) on a daily basis—SSO reached a new high near 100 on Monday before pulling back a smidge. Bigger picture, we continue to think the November kick-off is likely to lead to bigger things; that move took the S&P 500 out of a big consolidation (and the broad market out of a multi-year rest period), which should bode well in the months ahead. A decisive drop below the 50-day line (now near 93 and rising), which would likely coincide with the Cabot Tides turning negative, would have us going to Hold and possibly trimming some shares, but at this point, we’re staying on Buy, with dips toward the 25-day line (now near 96) likely to bring in support. BUY.
Roku (ROKU) took a good-sized hit on yesterday’s selloff, though the chart looks fine—shares are still holding above their 25-day line (under 432) and volume on the dip was actually well below average. The real key will come after tonight’s Q4 results: Wall Street expects revenue to have grown 50% with a loss of five cents per share, though a lot of sub-metrics (new accounts, revenue per user, etc.) and any inklings about how advertising dollars are switching to connected TV platforms will also be key. Given that we’ve already trimmed our position twice, we’re willing to give ROKU plenty of rope should the stock see some post-report selling, but we’ll just see how it goes. Right here, we’ll simply stay on Hold. HOLD.
Twilio (TWLO) released yet another great quarterly report last night, with revenue growth accelerating again (to 62%), and while earnings were flat, the four cents per share topped estimates by a whopping 12 cents. Probably more impressive were some of the sub-metrics (mind-boggling same-customer revenue growth of 39%), some of management’s words (it looks like the firm’s Flex cloud customer service offering and its recent acquisition of Segment are both going gangbusters) and the Q1 guidance (revenue outlook of $531 million compared to $487 million consensus). Shares were higher all day today despite the market’s pothole, and while we wouldn’t say this was some sort of breakaway gap (like we saw last May when we initially bought TWLO), it’s certainly an encouraging sign. Twilio continues to have emerging blue chip written all over it, with its various communications and customer engagement offerings becoming must-have’s. We’ll stay on Buy, though some near-term weakness wouldn’t shock us. BUY.
Uber (UBER) has pulled in a few points since its quarterly report last week, which makes sense; the Q4 report wasn’t great and the market has hiccupped since then. But we still think the story (big recovery in Rides this year, with huge secular growth in the Delivery segment) is intact, and the stock looks fine to us—the low 60s might be a near-term ceiling, but we think this dip looks buyable if you’re not yet in. (We’d note that Cabot Options Trader’s Jacob Mintz has picked up on some big call buying in UBER this week; we don’t trade on that but it backs up the view some big investors view this as a buyable dip.) BUY.
Watch List
Dynatrace (DT 53): DT has pulled back a few days after a huge post-earnings move; it’s even withstood a poor earnings reaction from peer Datadog (DDOG). The only rub here is that earnings estimates for the coming year are mundane.
DraftKings (DKNG 59): DKNG is now setting up nicely after a big base-on-base chart formation. Frankly, it’s temping to start a position half-sized here and roll the dice on earnings, figuring the risk to the portfolio (1%, even if we lost 20%) is modest. But we’ll hold off for the moment.
Farfetch (FTCH 69): FTCH has nosed to new price highs, though the RP line has yet to confirm and earnings are out February 25. We’re still watching it closely.
Floor & Décor (FND 98): FND is beginning to set up nicely, though it has earnings out on February 25. Assuming the reaction isn’t crazy (up or down) we could take a swing at it.
ZoomInfo (ZI 56): ZI has been chopping around near its post-IPO highs ahead of earnings (February 22). As we wrote last week, we think this is a fresh, new growth story that could have legs.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, February 25. As always, we’ll send a Special Bulletin should we have any changes before then.
