WHAT TO DO NOW: Pare back. The iffy action we saw among growth stocks in September has turned into a severe selloff so far in October. While our Cabot Tides are still neutral, the action among leading stocks is enough for us to raise some cash. On two Special Bulletins yesterday, we sold all of our PayPal (PYPL) and one-third each in Ligand (LGND) and Teladoc (TDOC), raising our cash position to around 29%. From here, we’re open to anything, but the onus is on the bulls to step up. We have no further changes tonight.
Current Market Environment
The major indexes finished generally higher today, while growth stocks found a little support. At day’s end, the Dow rising 55 points and the Nasdaq bouncing 26 points.
Growth stocks came into September riding high, though short-term sentiment was elevated and some stocks were out of trend on the upside. Thus, a near-term pullback was likely, and indeed, we saw that in early September.
But the action since the initial selloff is raising yellow flags. Growth stocks bounced back but then were distributed again in late September, and after a modest bounce near month-end, leaders have been crushed this week, with many diving below support on big volume.
Said another way, the evidence has been slowly worsening for the past five weeks when it comes to growth stocks, with repeated bouts of heavy-volume selling and, now, more stocks showing abnormal intermediate-term action. Our Cabot Tides are still on the fence, but the action among individual stocks demands some action, and we’ve taken some this week.
On two Special Bulletins yesterday, we pared back by selling all of our shares in PayPal (PYPL) and selling one-third in both Ligand Pharmaceuticals (LGND) and Teladoc (TDOC); combined; the moves will leave us with around 29% in cash.
Looking ahead, we have two thoughts. First, we remain very bullish when it comes to the longer-term outlook—there’s a lot of evidence and data that suggests the overall bull market has plenty of room to run. (So don’t stick your head in the sand.)
In the short- to intermediate-term, though, it’s important to keep an open mind. It’s fair to say the onus is on the bulls to show up and support growth stocks; if they don’t, we’re willing to raise more cash. But if the buyers do reappear, there are a lot of stocks that are (a) still relatively resilient and (b) are now five weeks into consolidations—i.e., there’s still lots of leadership that could start another leg up if things go right. So be sure not to get overly negative here.
Tonight, we’re standing pat after our moves yesterday. The Model Portfolio still has eight positions, but our cash position is up to around 29%.
Model Portfolio
Autodesk (ADSK 155) hasn’t been “hot” in recent months, so it also hasn’t been dented much during the past few days; in fact, the stock is holding up just fine, hovering within its post-earnings consolidation range. The story hasn’t changed, of course, and this is a bigger-cap outfit with a relatively foreseeable future that should keep big investors interested. We’re staying on Buy. BUY.
DexCom (DXCM 126) has taken a hit, partly from the market, but also because of news that competitor Abbott Labs got European approval for a new version of its continuous glucose monitor. Still, from all we can read from various analysts, while the move is a positive for Abbott, it certainly doesn’t mean its device (called the Libre 2) is up to snuff compared to Dexcom’s G6. Overall, we’ve seen plenty of stocks get whacked on competitive threats only to resume their advance soon after (Grubhub did this a few times back when everyone was worried about Amazon or other competitors). Thus, we want to give the stock a chance to find support and see how it bounces—if institutions continue to bail, we’ll use a mental stop in the 118 to 120 area, but for now, we advise holding on and seeing how things shake out. HOLD.
Any stock that’s had a good run has taken a hit, and Five Below (FIVE 121) is no exception. Still, we think the action is both reasonable and unsurprising—remember that FIVE originally broke out nearly a year ago and has had a moonshot since reporting earnings in June. (The huge break in retail stocks yesterday didn’t help the cause.) FIVE’s near-term path will obviously come down to the market, so we’re not ruling out a dip to, say, the 50-day line (now near 115 and rising). But we’re sticking with our Buy rating, thinking this month-long dip will eventually lead to higher prices. BUY.
Grubhub (GRUB 135) actually isn’t doing that badly, as it continues to put up a fight near its 50-day line. If you have a loss (or a giant position), a relative tight stop in the upper 120s makes sense, but if you have a good-sized profit, we’d remain patient here—GRUB could easily fall further if the market remains in rough shape, but it remains well above the top of its prior consolidations (115-117 area) and, of course, the fundamentals remain pristine—the firm continues to ink deals, with the latest being with Blue Apron, which is testing selling its meal kits through Grubhub in New York City. It’s not the biggest deal in the world but is another sign GRUB is the deliverer of choice for most meal providers. HOLD.
Ligand Pharmaceuticals (LGND 259) finally got whacked today, though it found support near its 50-day line intraday. We sold one-third of our shares on last night’s Special Bulletin, not because LGND had flashed any major red flags, but because of portfolio management reasons—it was a relatively large holding in the portfolio, we had a decent profit, and the sour growth stock environment had us desiring more cash. Now, with a little profit off the table, we can give our remaining shares room to run. So far, LGND’s dip has been normal (this is the first 50-day line test since the breakout in May), and even if a base-building effort develops we’d expect it to eventually resolve to the upside. Long story short, if you own some with a decent profit, consider booking a little here, but hang on to most of your shares. HOLD.
Neurocrine Biosciences (NBIX 119) is probably the next stock on the chopping block if growth stocks continue to croak. Indeed, this morning, shares looked doomed, easily slicing their 50-day line, but they found support as the day wore on. Fundamentally, one analyst said all systems remain go for the company after meeting with management; there are some data releases that could move the stock going forward, but odds favor Neurocrine’s sales and pipeline coming through in fine shape. If the stock closes below the 112 area, we’ll likely take a small loss and move on, but above there, we’re willing to give shares a chance—so far, they’re holding up relatively well and the earnings potential in the quarters ahead is huge. HOLD.
Okta (OKTA 68) is one of the few growth stocks that hasn’t hit a new monthly low this week (it dipped to 65 two weeks ago, vs. 67 this morning). Obviously, that’s very short-term stuff, but it is a small sign of resilience as the stock consolidates following its big earnings gap early last month. The 50-day line is down near 62 and rising, so like everything else, further retrenchment is possible, but we like the relatively tight action in the face of what’s going on in the market, which is likely a good sign most weak hands were worn out during the prior three-month rest. BUY.
We cut bait with PayPal (PYPL 87) on Tuesday morning’s Special Bulletin, taking our solid profit and holding the cash. We have nothing against the company, and it’s always possible that if the stock resets in the weeks or months ahead, we could revisit it. But at this point, shares have seen almost no above-average volume buying in months, compared to repeated bouts of big-volume selling, and the upside power in the stock has been lacking despite a good run in the market since May. All told, we think there will be better stocks to own once growth stocks get back in gear. SOLD.
Teladoc (TDOC 80) was the second stock we took partial profits in last night, selling one-third of our holding today. As with LGND, the selling wasn’t because of any major degradation in the chart or the story; it was about taking some chips off the table and giving our remaining shares more room to maneuver. The firm’s Investor Day last week was very bullish and painted an overall picture of years of rapid growth as virtual care becomes more common. We still think this is a very big story that can be a “big stock,” i.e., one where hundreds more mutual, pension and hedge funds take positions. If you have a good profit, you can take partial profits while holding the rest. HOLD.
Watch List
Canopy Growth (CGC 49): CGC has entered its fourth week of consolidating after a huge run. We continue to think the opportunity is giant, but want the stock to settle down a bit more before pulling the trigger.
Exact Sciences (EXAS 77): We’re very impressed with the action of EXAS, which is holding just fine in recent weeks, probably because the weak hands were already worn out earlier this year. The tie-up with Pfizer looks like a game changer for the company.
PetIQ (PETQ 36): PETQ’s secondary offering is out of the way, which (along with the weak growth stock environment) has caused the stock to quickly sink to its 10-week line. Usually the first pullback to the 10-week line is buyable—we’re not buying here given the environment, but it’s worth watching to see how shares act in the days ahead.
Roku (ROKU 73): ROKU isn’t near a great entry point, but its relative strength and sterling fundamental potential makes it worth watching.
WPX Energy (WPX 21): We’ve been keeping a distant eye on energy stocks all year, and now we’re seeing some stocks lift from great-looking launching pads. WPX is one of our favorites, though there are others in the group we also like such as Continental Development (CDEV 23) and Transocean (RIG 14). If the rotation out of growth stocks continues, we think WPX and energy names can benefit.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Tuesday, and, as always, we’ll send a Special Bulletin should we have any changes before then.
