WHAT TO DO NOW: Raise a little cash. Today’s huge selling wave in growth stocks isn’t the end of the world, as the trends of the major indexes and most leading stocks is still up. Thus, it’s vital to take things on a stock-by-stock basis, selling those that are raising red flags and holding (or buying) those that are dipping normally. In the Model Portfolio tonight, we’re selling Autodesk (ADSK) and selling one-third of our PayPal (PYPL)shares, while shifting ServiceNow (NOW) to Hold. Our cash position will be around 17%.
Current Market Environment
The broad market rose but growth stocks were bludgeoned today, with the Dow rising 104 points but the Nasdaq losing 88 points.
From a top-down perspective, the overall bull market is still in good shape, as the intermediate- and longer-term trends (Cabot Tides and Cabot Trend Lines) are pointed up and the vast majority of leading growth stocks are in good shape. The broad market (Two-Second Indicator) has also improved, though we can’t conclude it’s in the greatest of health yet.
However, the big change we’ve seen in recent days—especially today—was a very strong rotation out of growth stocks and (to a lesser extent) into other areas of the market. One big down day isn’t anything to freak out about; in fact, such a move was half-expected. That said, we have seen some stocks show some intermediate-term red flags (climax action after many months of advancing), which, combined with today’s action, is a warning.
On the other hand, many growth stocks look just fine, pulling back normally (albeit sharply) after strong advances.
Overall, then, you should take things on a stock-by-stock basis. In the Model Portfolio, we are raising some cash tonight by cutting our loss in Autodesk (ADSK) and selling some shares in PayPal (PYPL). That said, a few of our stocks are acting fine, and this dip likely provides a decent entry point.
The most important thing to remember right now is that it’s still a bull market. (For perspective, even after today’s decline, the Nasdaq as a whole is still about 1% above its 25-day moving average.) Yes, some stocks look toppy and a general pullback is always a possibility, but going with the evidence, it’s not the time to sell wholesale. Instead, it’s best to take a few chips off the table and then watch how things go from here.
Tonight’s sales will give us around 17% in cash, which we’ll hang onto for now, though we have our eyes on a couple of good-looking growth stocks should this end up being a short shakeout.
Model Portfolio
Autodesk (ADSK 109) reported a decent but messy quarter last night, with new subscriber additions a bit softer than expected, and cash flow came in below estimates. The major story is still intact—management reiterated its expectation for $6 of free cash flow per share in 2020—but the stock was clobbered from the get-go today, gapping down in a big way. There is some support around these levels, but the stock hasn’t made any progress since May and we obviously have a loss. We’ll cut it short here by selling ADSK. SELL.
Alibaba (BABA 180) has been acting a bit funky for the past many weeks, and today it gave up the ghost, dipping back below its 50-day line on big volume. Could today be yet another shakeout before the stock rallies further? It’s possible, but today’s action comes after three months of just-OK performance. If you have a loss or little profit, you should tread carefully, possibly using a stop in the low 170s. In our situation, though, we’ve already sold half our shares (in late September) and have a good profit on the rest. Moreover, we still think BABA is one of the top liquid leading growth stocks in the market and it should eventually see further upside in this bull market. Thus, if you’re in a similar position to us, we advise holding and gritting your teeth. HOLD.
Exact Sciences (EXAS 58) has hit a wall near 60, but overall the action has been fine. The stock wasn’t down much today, partially due to some positive comments from one analyst who hiked his price target after management meetings pointed toward big opportunities for Cologuard and the possibility of profitability a lot sooner than expected. None of this means EXAS can’t pull back further, of course, especially after its recent run. But given the action, we’ll stay on Buy, and will use a mental stop in the low 50s as a place to exit if the sellers come out of the woodwork. BUY.
Five Below (FIVE 61) perked up to new highs today, which is obviously a good thing. That said, the real test will come on earnings, which are due out on Thursday (November 30) evening. Obviously, a bad reaction is possible, but as usual, we’ll holding through the report and see what comes—we like the fact that the stock is still early stage, as it just got going from a multi-year consolidation a few weeks ago. We’ll leave our Buy rating intact, but keep any new positions small ahead of the report. BUY.
Facebook (FB 175) was walloped today, and similar to BABA, we’re a bit concerned given the stock’s lack of outperformance in recent months. If the stock fails to bounce, we could take some additional partial profits in our position (which is around 8% of the Model Portfolio), but at this point, there should be good support in the 170 to 175 area. Thus, we’ll stay on Hold. HOLD.
Grubhub (GRUB 66) was yanked lower today, but to us, this looks like a normal dip. The stock had catapulted from 52 in late October to nearly 70 last week before this retreat, and the 25-day line is still down below 63.5. Bottom line: Hang on if you own some, and if you don’t, you could pick up shares here or on dips of another point or two. BUY.
PayPal (PYPL 73) has had a nearly uninterrupted run since breaking out in April, and recently, moved out of trend on the upside, which is a sign of exuberance. (Think of an uptrending channel on the chart over many months, and then a stock moving out above the top of that channel.) Combined with today’s drop, the overall action raises the odds that PYPL has started (or will soon start) a consolidation. Long-term, the stock probably has further to run, but after such a long advance, we think it’s prudent to take partial profits and let the rest ride. Thus, tonight, we’ll sell one-third of our shares and hold the rest. SELL ONE-THIRD, HOLD THE REST.
So far, the selling in growth stocks hasn’t dented the rest of the market—ProShares Ultra S&P 500 Fund (SSO 105), for instance, hit new highs this morning and is still in a firm uptrend. With the 25-day line down near 102 and the 50-day line around 100, SSO is a bit extended to the upside. Thus, if you want in, aim for dips of a point or two. BUY.
ServiceNow (NOW 121) has stalled out during the last month and got hit today, which is enough for us to go to Hold. We still like the story, and the overall chart isn’t a disaster, but we are going to keep a tight stop in place. If NOW holds above support in the upper 110s, we’ll likely sit tight, but a skid below there will have us moving on. HOLD.
As we’ve written before, we believe Shopify (SHOP 104) probably needs more time to wear out the fast-money traders and move shares to stronger hands, so today’s sharp downdraft wasn’t a total surprise. Longer-term, we still want to give our small position a chance to hold up because the fundamentals are so enticing—the company announced that its more than 500,000 merchants in 175 countries sold more than $1 billion of merchandise during the Black Friday/Cyber Monday weekend, with a peak of $1 million per minute, up from $555,000 a year ago. We advise continuing to follow the plan—hang on with a stop in the upper 80s. HOLD.
Universal Display (OLED 180) based out for nearly five months from June through October, then exploded from 130 to 193 in just four weeks. Thus, while the recent downmove has been sharp, it looks normal to us; OLED even closed well off its lows today. Throw in the gigantic fundamental potential, and we’re staying on Buy—you can nibble on dips if you’re not yet in. BUY.
Watch List
Cabot Oil & Gas (COG 29) or ProPetro (PUMP 18): We continue to poke around the oil patch, thinking the group could be turning the corner. Old friend COG is one of the best looking charts in the group (with big earnings and production growth estimates), while PUMP is a strong new issue that offers fracking services in the Permian Basin.
Planet Fitness (PLNT 32): PLNT continues to look fine, though it’s not near a great entry point at this time.
Splunk (SPLK 79): SPLK has taken a hit during the past couple of days, but it’s still holding the vast majority of its huge earnings gap from two weeks ago.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Wednesday, and, as always, we’ll send a Special Bulletin should we have any changes before then.
