WHAT TO DO NOW: Remain mostly bullish but continue to pick your spots and be prepared for plenty of shenanigans. The environment continues to improve steadily in our view, though (a) the Nasdaq is extended to the upside and (b) the chop factor remains in place, with names generally pulling back after a good week or two. In the Model Portfolio, most of our names act fine, but Five Below (FIVE) is now a problem—we’re holding on tonight, but keeping it on a tight leash and will have further updates as need be. Our cash position will remain near 25%.
Current Market Environment
Stocks are higher as we write this but, after a strong recent run, the gains are fading and individual stocks are mixed. As of 3 pm, the Dow is up 70 points but the Nasdaq is up just 2 points.
It’s nothing dramatic or all at once, but we continue to see steady improvement in the market. From a top-down perspective, the Nasdaq is actually extended to the upside (pullbacks are possible), but growth-oriented indexes and funds are finally showing a little oomph on the upside. More important to us, an increasing number of individual growth titles are acting well, with some upside follow-through emerging; indeed, the number of new highs on the Nasdaq seems to finally be turning up after months of sloughing off.
Still, that’s not to say it’s 1999 out there. In fact, the chop factor remains very real—if a stock you own has had a good couple of weeks, it’s a good bet that the name is in for some selling, and possibly a sharp shakeout. That said, to this point, few of those sharp selling waves have actually cracked many leading stocks, so the action qualifies more as tedious than bearish.
Overall, we’re on the same path as before—gradually becoming more encouraged (and putting money to work) as more stocks act well, but it’s still tough to stay on offense, with one or two stocks springing leaks every couple of weeks. In the Model Portfolio, our only change tonight is moving Five Below (FIVE) back to Hold and placing it on a relatively tight leash, while keeping an eye on a couple of other names that are chopping around.
Model Portfolio
Asana (ASAN) reported a fine quarter last night, with sales growth accelerating again (up 72%) and easily topping estimates, but possibly more impressive was talk on the conference call that the firm’s planning software, which had historically been adopted by one department here or there, is now seeing more widespread usage—one Fortune 50 company, for instance, now has 25,000 employees using Asana! Indeed, the firm’s same-customer revenue growth rate for those paying it at least $5,000 per year grew 25% in the quarter, while for the larger clients (those spending at least $50,000 per year), it soared 45%. (Overall, the growth rate was 18%.) The stock, in typical fashion, was volatile early on, but finished strongly higher on the day. With earnings out of the way, we’d like to average up (fill out our stake by purchasing another half-sized position), but we’re not going to chase it here given the overall environment and the fact that the Nasdaq is short-term extended to the upside. We’ll stay on Buy a Half, but aim for dips. BUY A HALF
Cloudflare (NET) actually spent most of the past month meandering sideways, though it found some good-volume buying yesterday after testing its 25-day line. Some sort of deeper correction is always possible if the Nasdaq pulls in, but so far NET acts like a real institutional-quality leader thanks to its position as a top-notch content delivery network and cybersecurity provider. BUY
Devon Energy (DVN) had a sharp shakeout yesterday after OPEC delivered some less-than-stellar news, though it popped right back today. (Interestingly, Jacob Mintz of Cabot Options Trader has seen a good amount of call buying in the stock in recent days.) On one hand, we’re optimistic yesterday may have been a final shakeout (coming after last week’s big rally) to pave the way toward higher prices. But we can’t ignore the constant industry-driven moves that are still there—we’re comfortable hanging on, and a little calm action could have us going back to Buy. But for now we think Hold remains the correct rating as the stock gyrates. HOLD
DocuSign (DOCU) hasn’t done much of anything since early July, dragged down in part by some sour stock performance from other former pandemic winners (Peloton, Zoom, etc.). Obviously, we think DocuSign is in a different class—that’s why it blasted off three months ago—but to be fair, the big test will be tonight, when the firm reports earnings—analysts see sales up 42% with earnings of 40 cents per share, but more important will be the outlook and any commentary on business trends. Big picture, this is DOCU’s first consolidation since getting going in June and selling volume has been very light; it “should” be OK but we’ll let earnings tell the tale. We’ll stay on Buy but will have updates if needed. BUY
Dynatrace (DT) has enjoyed a nice bounce off its 50-day line during the past week, easily pushing to new highs. There’s been no news from the company, but we see its platform producing rapid and reliable growth for a long time to come as the multi-year transition to the cloud and apps continues, and we consider the stock early-stage given that it emerged from a year-long consolidation in June. We’ll stay on Buy, though it’s probably better to aim for dips of a couple of points. BUY
Five Below (FIVE) was looking as pretty as could be two weeks ago, but a sour earnings report from Dollar General (which talked about rising shipping costs) caused the initial wave of selling, and Five Below’s own report last night confirmed that margins will likely be crimped during the next couple of quarters—while the numbers looked fine overall (sales up 52%, earnings up 128%), the sellers hit the stock hard again today because of the cost issue.
Fundamentally, we don’t think much has really changed—the major cookie-cutter story is certainly intact, and even on the cost side, management said gross margins could be cut by “tens of basis points” (meaning, say, 0.5%) which is hardly a disaster. Meanwhile, the Q3 guide implied 20% same-store sales growth from 2019 (a better comparison due to last year’s store closures), which was far larger than expectations, so the core business looks healthy. All that said, the fact that the stock has shown so much weakness of late is definitely abnormal—FIVE is actually back near its long-term 200-day line (near 188)! Put it all together and we’re going to hold on tonight, but if this is just a temporary dump, we’d expect FIVE to bounce in the very near future (next couple of days) as there “should” be a good amount of support around here. If not, we’ll move on. Hold for now. HOLD
Floor & Décor (FND) has done a great job of regaining ground of late following the sharp post-earnings pullback to its 50-day line last week. Like many stocks that are up and down, there hasn’t been any real news to drive it, so further volatility is certainly possible. But big picture, we still see the stock as trying to emerge from a seven-month period of no progress, which should lead to good things. Same advice as most of our other stocks: We’re on Buy but new buyers should aim for dips of a couple of points. BUY
ProShares Ultra S&P 500 Fund (SSO) remains in a firm uptrend, though both the S&P 500 and Nasdaq do look a bit extended to the upside, so after the holiday we’re half-expecting some weakness to set in. Still, the story here is unchanged—while there are some yellow flags out there, SSO is still trending higher, so we’ll follow along. BUY
Watch List
Dexcom (DXCM 540): DXCM has popped to new highs this week, though we’re still thinking some modest weakness is possible—and if it comes, buyable.
DraftKings (DKNG 61): Shares need more work but are starting to change character and round out a new launching pad. The story remains as big as ever.
Lightspeed Commerce (LSPD 118): We wrote up LSPD in last week’s issue, and it’s been going vertical in recent days. The next pullback of a week or two should mark a good entry point.
Wingstop (WING 176): WING hasn’t been powering ahead, but that’s part of the attraction, with a nice, calmer setup after a few weeks of wild action. If FIVE has to be kicked out, we could look to replace it with another cookie-cutter story like this one.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, September 9. As always, we’ll send a Special Bulletin should we have any changes before then.
