What To Do Now: Remain defensive. We’re actually growing optimistic that last week’s lows will hold for the near term, which should help some stocks begin the repair process. But beyond that, the evidence remains very negative, so we’re holding plenty of cash and remaining patient. We’re not ruling out a little nibble if something sets up, but tonight, we have no changes, with a cash position near 70%.
Current Market Environment
Stocks are deep in the red today following some high-profile earnings duds—as of 1 pm ET, the Dow is down 334 points, and the Nasdaq is off 387 points.
When it comes to the market, we’re splitting our thinking into the near term (next couple of weeks, maybe a bit longer) and everything beyond that.
In the near term, we’re optimistic that last Monday (and, really, the entire week, which brought more than few oversold extremes) represents the workable low we’ve been looking for—“workable” meaning something the market and most stocks can work off of, effectively ending the crash stage and starting the “repair” stage, where the best stocks and sectors can act like tennis balls (bouncing strongly, ideally on earnings) and being to repair the damage on their charts.
True, we’ve seen some high-profile duds on earnings of late, including PayPal (PYPL) and Meta/Facebook (FB) this week among mega-caps and Dynatrace (DT) among glamours. But even today’s drop really didn’t take back much of the latest rally attempt; given the intense prior selling and bounce since then, our guess is this rally phase has further to run.
That said, when looking beyond the next couple of weeks, it’s hard to really conclude anything very bullish from the recent action. Our Cabot Tides remain clearly negative, and last week, our long-term Cabot Trend Lines turned negative for the first time in over a year and a half. Probably more important to us right now, the “Growth Tides” that we wrote about in the last issue are still bearish as well.
To be clear, none of this is surprising at this point—we’re glad to see the market rebound, but there haven’t been any rare blastoff indicators that have flashed and, after the whopping decline we just saw, it’s likely to take some time to repair the damage. Ideally, we see some further rally, then a retest of sorts in a few weeks, which brings with it outright panic—after which, we’ll probably have some more legitimate setups and a better shot at a sustained upmove.
Still, that’s just one scenario. It’s always possible we fall a lot farther, or maybe this rally slowly gathers steam and morphs into the real McCoy. As always, we’re just taking it as it comes, and right now that means remaining in a defensive posture.
Tonight, we’re going to stand pat, but if this rally does progress (we’ll see), we’re still not ruling out some moves—a small buy or two and/or some re-jiggering of the portfolio in general. But right now, we’re content to stand back with our large cash position and see how things play out, while updating our watch list as things set up.
Model Portfolio
Arista Networks (ANET) has bounced with most things in the past few days, and it’s still a few points above last week’s low even after today’s market-induced dip. Of course, the bounce hasn’t been as sharp as some other names, but that’s not unusual—usually the hardest hit stuff is what bounces the most initially before the sellers return. Right now, ANET certainly isn’t in great shape, but it’s “only” 18% off its highs and all fundamental signs point to good things: While Meta’s (FB) stock plunge was the headline news today, management said its CapEx plans ($29 to $34 billion, up from $19 billion in 2021) were unchanged from its earlier guidance, driven by “investments in data centers, servers, network infrastructure and office facilities”—that should be very good news for Arista. We’re not complacent, but with nearly 70% in cash, we think it’s best to hang on. Earnings are due February 14. HOLD
Devon Energy (DVN) has chopped around a bit in recent days despite very resilient oil prices (in the $87 range) and skyrocketing natural gas prices (near $5 even after today’s sharp drop). As always, those prices are going to move around a lot, and if the market has another leg down, it’s possible economic worries could drag oil prices lower. But anything around up here is going to be a gusher for the industry in general and Devon in particular. The quarterly report is due February 15, as is the Q4 dividend announcement; while we offer no predictions, the fact that oil and natural gas were higher in Q4 vs. Q3 bodes well for a beefy payout. Just as important, though, will be any updated cash flow outlook for 2022, along with any adjustments to its payout and/or share buyback schedule. Back to the stock, potholes are always possible, but DVN looks great, and we still think the huge-volume buying after the dip two weeks ago should lead to higher prices. We’ll stay on Buy, though aim for dips of a couple of points. BUY
Our Cabot Trend Lines are bearish, so we’re not letting ProShares Ultra S&P 500 Fund (SSO) out of our sights—owning a leveraged long fund in what could be a continuing bear phase isn’t our top idea. That said, we’re not leaving our brain at the door either, as the S&P 500 is one of the stronger major indexes (SSO got within one point of its 50-day line yesterday) and, as we wrote above, we think the odds favor last week’s lows holding for a bit. If we’re wrong on that, we’ll obviously trim or cut bait here, but given our large cash hoard, we’ll continue to hold on and see how this bounce progresses. HOLD
Watch List
Blackstone (BX): You wouldn’t expect a Bull Market stock like BX to be doing well, but the stock rebounded beautifully, partially thanks to a very bullish Q4 report. Dependable, fee-related earnings are soaring here (up 144% in Q4 and up 71% for all of 2021).
Dutch Brothers (BROS): BROS actually enjoyed a nice volume clue on Tuesday as it rounds out a post-IPO base. Volatility remains extreme here, but shares are showing some relative strength and the cookie-cutter story is excellent.
Halliburton (HAL): We still like producers like DVN, but oil service stocks have only recently gotten going from months of rest, and business should accelerate this year. Q4 earnings doubled and should increase another 63% in 2022 (likely conservative).
Inspire Medical (INSP): It’s a bit thin for now, but Inspire has a better mousetrap when it comes to sleep apnea, leading to rapidly growing sales, more funds taking a position (510 at year’s end) and a stock that’s holding “only” 22% from its highs.
Planet Fitness (PLNT): Sure, it’s not a wild growth story, but we think PLNT’s underlying growth story is intact, and the stock could have a huge turnaround year in 2022.
Snowflake (SNOW): We’re keeping SNOW on the watch list a bit longer, but we do want to see more push on the upside should this rally persist—so far there hasn’t been a big bounce.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, February 10. As always, we’ll send a Special Bulletin should we have any changes before then.
| Stock | No. of Shares | Price Bought | Date Bought | Price on 2/3/22 | Profit | Rating |
| Arista Networks (ANET) | 1,626 | 137 | 12/10/21 | 123 | -10% | Hold |
| Devon Energy (DVN) | 7,240 | 28 | 5/7/21 | 52 | 86% | Buy |
| ProShares Ultra S&P 500 (SSO) | 1,741 | 30 | 5/29/20 | 66 | 118% | Hold |
| CASH | 1,423,520 |