WHAT TO DO NOW: Growth stocks have turned tail in a big way starting two weeks ago, with most leaders having now cracked intermediate-term support. This is still a bull market overall (our Cabot Tides are technically still positive, though they’re close to the fence), but the action among individual growth stocks has forced us to sell three names during the past two weeks and we’re now holding a cash position north of 50%. We’re placing ProShares Ultra S&P 500 Fund (SSO) on Hold, but have no further sells tonight.
Current Market Environment
The sellers ran wild today, with the Dow losing 346 points, the Nasdaq falling 274 points (2.1%) and the average growth stock we own or watch down nearly 5%.
From late January through late February, we began to see a change in character, with a string of wild up-down-up-down action in leading stocks—coming after a big run, that’s a sign the bears have begun to put up a fight. And now, at least when it comes to growth stocks, we’re seeing the result, with a ton of stocks cracking their intermediate-term uptrends and many coming unglued.
The selling had been mostly a growth stock affair coming into today, though now we’re beginning to see the growth stock weakness spill into the rest of the market—our Cabot Tides are effectively on the fence as some of the broad market indexes begin to come under pressure.
Beyond the indexes and Tides, though, our main thought is this: The combination of a huge, prolonged run in many growth stocks, elevated investor sentiment for many weeks and, now, fierce selling pressure/many breakdowns in leading titles is usually a toxic mix. We’d be thrilled if this time didn’t follow the normal script, but playing with the odds, we’ve been selling stocks and raising cash during the past two weeks, including via our Special Bulletin yesterday (selling Halozyme), leaving us with more than half the portfolio in cash.
Because of that, we’re not in a rush to throw a bunch more stuff overboard, at least right now—in fact, we’re flexible and aren’t ruling out some sort of strong snapback or “re-rotation” back into growth, especially after seeing some puke-type action in many names during the past few days. (Some backing off in interest rates could help.) But there’s no question the onus is firmly on the bulls to step up and show support for growth stocks; if not, we could raise even more cash going forward.
Tonight, our only change is that we are placing ProShares Ultra S&P 500 Fund (SSO) on Hold while we hang onto our 52% cash position. We’ll be on the horn if we have any further moves in the days ahead.
Model Portfolio
Five Below (FIVE) gives us some exposure to the cyclical/re-opening theme, which is where the money has been flowing during the past couple of weeks—and that’s a big reason the stock has been relatively resilient, briefly touching new high ground yesterday before reversing hard. Of course, bigger picture, it’s going to be the firm’s growth story that really drives the stock, and the next update on that should be out in a couple of weeks (mid-March). Analysts see Q4 sales up 22% and earnings of $2.11 per share (up 8% from a year ago), but more important will be the full-year outlook (analysts currently see $4.04 per share, up 91%). With FIVE acting well, we’ll stay on Buy, but expect further shenanigans in the near-term. BUY.
Halozyme (HALO) was sold in yesterday’s Special Bulletin as the stock’s post-earnings action has been iffy to say the least, with no support appearing despite sterling fundamentals. Down the road, HALO is a name we could revisit if it sets up properly—we think the Enhanze-related royalty story will play out for a long time to come. But with the market acting funky and our profit having vanished, we decided to pull the plug and hold the cash. SOLD.
Pinterest (PINS) has hit the taboggan slide with all other growth stocks, falling back into its December/January range this morning. This is one of many situations where, if you have a loss or if you’re holding a giant position (whatever that means to you), using a tight stop or selling some makes some sense. But as we’ve written before we think PINS is still relatively early stage, both stock-wise and business-wise, and has all the metrics (booming sales and earnings and a unique offering) that should keep big investors interested. Obviously, if the stock or market really implodes we could change our view, but having already booked partial profits twice (in total selling about half our original stake), we’re aiming to play PINS out for a larger gain. HOLD.
This is still a bull market, so we believe ProShares Ultra S&P 500 Fund (SSO) will be higher down the road. But the S&P 500 sliced its 50-day line in decisive fashion today. HOLD.
Roku (ROKU) is in a very similar position as PINS—the stock has continued its sharp pullback this week, but we’re aiming to play out a longer-term move because (a) we’ve already sold about half our original shares, (b) the stock should be early-stage and the recent dip doesn’t appear long-term abnormal, and (c) the growth story is rare and just starting to accelerate. Indeed, a move made this week should be a longer-term positive: Roku bought a segment of Neilsen that should allow the firm to better monetize its users and provide better ad tools and measurement than even traditional TV. Given our position, we’re OK holding on to our remaining shares and seeing if they can find support and eventually round out a new launching pad. HOLD.
We’re also practicing patience with Twilio (TWLO), which has come under pressure with everything else. That said, we’re less sanguine here than with some other names, mostly because we don’t view the stock as early in its overall run—the blastoff came last May around 180, and the stock also had a major move in 2018 and 2019, too. Of course, there’s a reason why TWLO has been a big winner (rare story, liquidity and growth prospects), and even after the recent collapse, the stock is “only” 23% off its high, which isn’t gross given the Nasdaq’s performance. We’re OK holding here, but we’ll be watching to see if/when TWLO finds support and how strong (or not) its next bounce is. HOLD.
Uber (UBER) is actually still holding above its lows from last week, partially thanks to a bullish note from peer Lyft, who said its rideshare traffic volume hit its highest level at the end of February since the pandemic hit last March (and it also nudged up Q1 estimates, too). At heart, we think Uber’s big 2021 should keep big investors involved on dips, and if it can get through this rough stretch, there could be plenty of upside in this blue-chip-type name. Still, we’re playing this by the book—a drop back into the upper 40s would likely force our hand and have us cut bait. For now, we’re willing to give UBER a chance to hold up. HOLD.
Watch List
Dynatrace (DT 48): DT has been smacked around but actually looks normal on the weekly chart. The longer it can hold support, the greater the chance it has a solid leg up when the pressure comes off growth stocks.
DraftKings (DKNG 62): DKNG tried to break out and failed, but even so, it’s formed higher lows in recent days while the Nasdaq and most growth stocks have done the opposite. The story remains big and the company keeps inking new deals.
SelectQuote (SLQT 26): We think SLQT has the story and numbers to be a big winner. The chart has been whacked with the market and a recent (non-dilutive) share offering but is still in decent shape.
Shake Shack (SHAK 109): SHAK is still holding near its 50-day line and has a powerful cookie-cutter story that should benefit as the economy reopens.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, March 11. As always, we’ll send a Special Bulletin should we have any changes before then.
