Please ensure Javascript is enabled for purposes of website accessibility
Growth Investor
Helping Investors Build Wealth Since 1970

Cabot Growth Investor 1442

We’re beginning to see some short-term signs of spring in the market, first via some resiliency in the broad market, and now from buyers actually stepping up to the plate. We think there’s a decent chance the market has found a workable low, and we’re encouraged to see a decent number of growth stocks bounce back. All of that is good to see, but the primary evidence -- the trends of the market and most stocks --are still pointed down. We’re not ruling out a nibble or two if the buyers keep at it, but it’s best to remain defensive until we see more than a modest bounce.

In tonight’s issue we talk about one group that has seen some very big-volume buying of late, a sign big investors were eager to jump in on weakness. And we also review our remaining positions and a few other top-notch names we think could put on big runs once the market enters a new uptrend.

Cabot Growth Investor 1442

[premium_html_toc post_id="201191"]

Some Short-Term Signs of Spring
We can’t remember a time when the news flow came as fast and furious as it has in recent weeks, from state-wide shutdowns to big market swings to stimulus packages to Federal Reserve actions. That’s why it’s good to have a system, which allows you to avoid obsessing over everything that’s going on in the world and focus on a few key things that put the odds in your favor.

Right now, those things tell us a defensive stance remains appropriate; our Cabot Tides (the sell signal back on February 24 was a good one) and Cabot Trend Lines are both negative, and the vast majority of stocks are in downtrends. You can slice it any way you want, but when the evidence is looking like it is now, it’s best to focus mostly on capital preservation while waiting patiently for the next bull phase to take hold. That’s what we’re doing in our Model Portfolio, which is holding a touch more than 70% in cash.

However, as the title of today’s issue suggests, there is some good news. For the first time since the crash began five weeks ago, we’re starting to see encouraging signs, the most important coming from the broad market. Back on March 12, which was a dreadful day, a whopping 4,400 stocks hit new lows on the NYSE and Nasdaq combined, but that was the peak reading—even as the indexes slid in the days that followed, fewer stocks participated on the downside. In fact, this Monday, when everything sank to lower lows, “only” 1,600 or so stocks did the same.

Such a positive divergence is often the first sign that selling pressures are easing, and when combined with other factors—a bunch of growth stocks showing big-volume support (including many on earnings), lots of up/down action after a big decline (a sign the bulls are finally joining the fight), tons of bears in sentiment surveys—we think there’s a decent chance the market has hit a workable low.

To be clear, that’s not a reason to party; we’ve received a ton of buying questions lately as people aim to pick up “bargains.” If you’re defensive, we’re not against nibbling (we could do the same if some stocks bust loose on the upside), but realize that (a) there’s nothing that says this decline can’t reassert itself, and (b) even if we have hit a solid low, the odds favor a bottoming process over time.
What To Do Now
Thus, you should keep most of your powder dry until the trends turn up and (most importantly) fresh leaders begin their advances. We could put a little cash to work if this bounce gains steam, but right now we’re remaining patient. In the Model Portfolio, our only change of late was a small trimming of our Teladoc (TDOC) position yesterday, leaving us with around 72% in cash.

Model Portfolio Update
It’s been as crazy and stressful a month as we can remember (both in the market and in real life), and we’re happy to have the Model Portfolio come through it in good shape by avoiding any huge duds and riding some outliers on the upside (we write more about that later in this issue). But, as always, our focus is on what comes next.

On that topic, we’re optimistic that stocks have hit a workable low due to a handful of factors. The question, though, is what to do about it—with over 70% in cash after shaving off some more TDOC shares, we’re not opposed to a nibble on one or two things, as any countertrend rally may last a while given the severity of the recent crash. The good news is that we have a growing list of intriguing names, including some that have soared back on huge volume (tennis balls); if the market shows more upside power and a few of these stocks do the same, we could put a little money to work.

However, any buying would be relatively small right now. With the market clearly in a downtrend and a bottom-building process most likely needed, our main goal remains unchanged: We’re focused on preserving capital and confidence for the next sustained uptrend, which is when the big money will be made.

Last point before getting to our stocks: As we touched on earlier, we’ve gotten a ton of questions recently about buying, usually centered on beaten-down areas (airlines, cruise lines, energy, etc.) or “cheap” blue chips that have fallen apart. If you’re highly defensive, our general take is that there’s nothing wrong with rolling the dice in a small way. But just realize that the reason many things seem low is that they’ve fallen so far, so fast—not because of any time-tested value methodology. Said another way, many things that seem cheap can still go lower given that their trends are down, and even if they don’t, a bunch of chopping around and news-driven moves are likely to be the norm for a while.

Don’t get us wrong—we are hopeful that the market has found a workable low, and the best stocks may have already hit bottom. Thus, if we do see a good-sized countertrend rally, a nibble or two within the context of being generally defensive is fine and could help your results somewhat. But when it comes to any large buying, we advise sticking with the system that’s gotten us here, waiting patiently for our indicators and leading stocks to give the green light.

Current Recommendations

StockNo. of SharesPortfolio WeightingsPrice BoughtDate BoughtPrice on 3/26/20ProfitRating
Dexcom (DXCM)3867%21611/15/1925016%Hold
DocuSign (DOCU)1,3108%659/13/198428%Hold
Teladoc (TDOC)6318%7811/01/19160105%Hold
Vertex Pharmaceuticals (VRTX)4147%19911/8/1922412%Hold
CASH$945,93370%

Dexcom (DXCM 250)—In the current pandemic, no industry is completely immune, as even safe businesses are facing huge uncertainties. Obviously, then, big investors are looking for growth-y outfits that (a) should see sales hang tough through the virus situation and (b) should see a quick re-acceleration in business once the world returns to normal. Dexcom seems to meet both of those requirements—on the first topic, the firm has stated that it’s seen no disruptions in its supply chain due to the virus and is still taking/shipping orders. And longer-term, there’s zero change in the overall outlook; diabetes isn’t going to go away (unfortunately), and the firm’s continuous glucose monitors will remain in demand as patients continue to shift away from self-done daily injections. The sellers came around for the stock a couple of weeks ago (which prompted us to take partial profits—we own two-thirds of our original stake), but despite some ugly action, DXCM held its 200-day line (95%-plus of stocks did not) and has bounced nicely since then (all the way back to its 50-day line). Like everything else, it’s not out of the woods, and a drop below its recent low would be worrisome. But right here, the short- and long-term evidence remains encouraging, so we advise hanging on. HOLD.

dxcm32520

DocuSign (DOCU 84)—It’s a sure thing that business spending is going to tank in the months ahead as corporate survival is emphasized, but it’s unlikely any will be dumping products and services that actually save them time and money. In fact, there could even be a bump in demand as clients look to slash costs. All of that should play into DocuSign’s hands, with demand staying firm for its core eSignature offering, as well as its newer agreement platform; 94% of revenue is subscription-based, while the average contract (adjusted for size) is 18 months long, so it’s hard to see many voluntarily abandoning ship. Plus, management’s bullish outlook on its conference call just two weeks ago (looking for sales growth of 30% this year, and 32% in the current quarter) confirmed that the pipeline is still chock-full of new opportunities. Of course, when it comes to the stock, the valuation is huge, but there aren’t many companies out there that analysts see growing earnings north of 60% both this year and next in this environment. As we touched on last week, the eSignature offering still has plenty of growth potential, but just as exciting is the firm’s expansion into all areas of the agreement process, which it should be able to upsell to its 589,000 clients. DOCU has remained resilient, bouncing off its 200-day line and, this week, coming within shouting distance of new highs. We’re holding on tightly to our shares. HOLD.

docu32520

ProShares Ultra S&P 500 Fund (SSO 92)—We bailed out of our remaining SSO position not long after the last issue and the fund is in the same area now as it was back then. Looking ahead, it’s likely we’ll revisit this (or another leveraged long index fund) down the road—whenever a sustained uptrend gets underway, it should go on for a while and prove very lucrative, and SSO would be a straightforward way to ride it. Still, while we won’t rule anything out in this unprecedented environment, the fact that the crash has lasted only five weeks means more time is likely needed for all the forced selling (funds that have blown up due to the huge moves in oil, bonds, stocks, etc.) and portfolio repositioning to be done. Thus, we’re in no rush to jump back in (at least in a major way) and are holding the cash from our sale. SOLD.

sso32520

Teladoc (TDOC 160)—Telemedicine was on a steady growth track anyways, but there’s little doubt that the pandemic is accelerating engagement in the near-term (more people reaching out to doctors online rather than seeing them in person) and likely long-term (more demand over time as those introduced to it will likely continue to use it going forward for minor/medium ailments). Indeed, Teladoc itself said two weeks ago that volumes were going through the roof, with U.S. visit volume up 50% in a week! That sent TDOC soaring through Monday, so much so that it flashed some intermediate-term climax signals. (One example: It was more than 100% above its 200-day line.) And after that, the stock suffered a couple of enormous-volume declines, which is a warning sign after a big advance. Plus, it’s possible that, should the market bounce continue, money could come out of “virus” stocks and move into some other areas. Now, to be clear, the damage here is far from crushing—shares are still north of their 25-day line, and given that shares just got going from a 15-month launching pad at the start of the year, it’s likely that TDOC remains early in its overall run. Put it all together and we still want to ride some shares for what we think can be a larger big-picture move; as virtual care hits the mainstream, Teladoc looks like an emerging blue chip. But there’s no question some intermediate-term yellow flags have popped up, so we decided to trim a few more shares in yesterday’s special bulletin, selling one-quarter of what we had left (we had already taken some chips off the table twice before), leaving us with around 40% of our original shares. SOLD 25%, HOLDING THE REST.

v

Vertex Pharmaceuticals (VRTX 224)—VRTX has been tossed around with everything else during the past month, but its correction was relatively mild (only 20% vs. 35% for the S&P 500) and it held its 200-day line, too. And why shouldn’t it? Demand for its cystic fibrosis (CF) treatments, including its new Trikafta triple-combination offering, shouldn’t be impacted much by the virus, and Vertex itself has already said its supply chain is in good shape and (as of a couple of weeks ago) that it was standing by its buoyant 2020 financial guidance. A decisive break below its recent lows would be a red flag, and possibly a sign that demand is slackening for its products in the near term (fewer people going to the doctor to get new treatments?). But there’s little doubt that, over the next couple of years, Vertex’s earnings are set to boom as Trikafta (which expanded the company’s addressable market to 90% of CF patients) sales ramp up; analysts see Vertex earning around $10 a share in 2021. We took partial profits a while back and are happy to sit tight with the rest of our shares—we think the stock can be a steady performer once the market puts this down period behind it. HOLD.

vrtx32520

Watch List

  • Coupa Software (COUP 143): Many cloud software names had “wipeout” action last week before finding monstrous-volume support, often after earnings. Coupa is our favorite, though we’re watching others like SMAR, TEAM and VEEV. See more on the group later in this issue.
  • Chewy (CHWY 34): Chewy combines reliability (pet products, which increase no matter the economic environment) with a great long-term growth story. See more below. Earnings are due out in early April.
  • Cloudflare (NET 22): We continue to really like the action and potential of NET—it could become the go-to network provider for the cloud age, offering strong and reliable growth. The stock has rebounded beautifully and isn’t far from new high ground.
  • Inphi (IPHI 76): By all accounts, Inphi’s business remains very strong as big cloud and network operators actually see more demand due to the virus shut-in. Shares are snapping back this week.
  • Zoom Video (ZM 141): ZM remains one of the strongest stocks in the market, and there’s little doubt the company should see accelerating metrics even after the virus threat passes. We’re looking for a rest period or shakeout before entering.

Other Stocks of Interest
Chewy (CHWY 34)—In an environment full of uncertainties, Chewy provides a breath of fresh air, with a simple, straightforward growth story that should take it far. The company is basically aiming to be the Amazon of pet supplies, with all of the food, treats, crates, cages, grooming and health products that Fido and Pumpkin need. Of course, there are other players that sell these goods online, but Chewy has an advantage due to its sole focus on this huge ($70 billion!), fragmented market—the firm offers more than 45,000 individual products, and has emphasized private brands (private offerings up 80% over the past year, including many higher-margin hard goods) and its pharmacy business (prescription food and meds), which is its fastest-growing category. Combined with an excellent fulfillment network (nationwide delivery available in two days, with many in just one day; the CEO is a former Amazon fulfillment head), top-notch customer service, a big recurring revenue stream (70% of sales are auto-ship!) and the general industry move to online purchases and Chewy’s future is bright. The firm has been building out its infrastructure, which has kept the bottom line in the red, but sales have been growing rapidly and are expected to rise nearly 30% in the year ahead. Long-term, there’s likely not much in the way of Chewy becoming much, much larger and eventually turning a big profit. The stock had been in the midst of a big post-IPO base for nine months, but after getting yanked down by the market, CHWY found huge-volume support and leapt back above all its moving averages. The next quarterly report is due out April 2. We think the stock has great potential.

chwy32520

Advanced Micro Devices (AMD 47)—Advanced Micro Devices has been around for ages, and for much of that, it was almost always playing second fiddle to Intel or other chip giants. But the past couple of years has changed that, as new products in growth-y areas like computing and graphics (along with some missteps by Intel) have turned it into a leader. The details of the products can give you an ice cream headache, but it’s enough to know that the firm is making hay in the PC, data center and graphics/gaming end markets, taking share from Intel and even Nvidia due to some of the best products out there—and signs point to it keeping or building on that lead. Of course, the virus has thrown a wrench into many plans of late, but as of March 5, the company was still bullish—at its Investor Day, it actually upped its long-term guidance and said it didn’t expect much of an impact from the virus. The outlook has likely worsened a touch, of course, but major disruptions aren’t anticipated, as demand for the firm’s chips should remain strong during and after the virus shut-in. (Analysts still see sales up 28% this year and earnings booming 77%.) AMD has gotten hit along with everything else since the top, but we see real signs of resilience—first, the stock has held its 200-day line (unlike 95% of stocks), and second, each of the past four weeks has seen the stock close mid-range or higher on big volume, which often indicates support. If AMD can round out a launching pad, it could be ready to go once the market gets out of its own way.

amd32520

Veeva Systems (VEEV 147)—One thing you often see during bear phases and market dislocations is a prior leader that still has a good story and numbers will dive prior lows from the past few months—such action usually scares out the last of the remaining weak hands and “resets” the stock’s advance. Veeva may be following that script—the company has cranked out steady sales and earnings growth for years thanks to the life science industry’s best suite of cloud software products, including clinical data management, clinical operations, regulatory, safety, quality control and more. And its Vault content management product has proven a huge hit both in life sciences and other industries. As it’s launched more individual products, the firm’s target market has expanded (now north of $10 billion) and customers have gobbled them up (same-customer growth rate of 21% last year). Sales, earnings and cash flow growth have been strong and consistent in the mid-20% range for a while, and the potential remains huge, with management seeing that type of growth continuing for the next few years. All of that pushed VEEV significantly higher over the past few years, but it stalled out in the middle of 2019 and, as the market crashed, dove to its lowest level in about a year. However, it then found huge-volume support each of the past couple of weeks. VEEV still needs lots of work (overhead resistance to chew through), but the story is as good as ever and the recent wipeout could clear the decks for the market’s next bull phase. It’s worth keeping an eye on.

veev32520

Over Time, It’s Your Outliers that Count
There will be a lot of investing (and other) lessons learned from the past four weeks, and we think one of the biggest is something we’ve been writing for a long time: Over time, investing is really a game of outliers. Said another way, despite any irritating minor mistakes you make (and we all make them), the vast majority of your performance, good or bad, stems from your big winners and your big losers.

Said another way, our experience is that most of your trades—the small losers, the small and modest winners, etc.—tend to cancel each other out. That might not literally be the case, but most investors don’t look back at a one- or two-year period and say, “Wow, I really did well because of a bunch of 7% gainers!” No, those small plusses are mostly offset by the losers that every investor will have. Instead, it’s the outlier trades that really do your portfolio’s work.

Such a fact might be a bit scary—after all, how often do you really hit a home run? But the good news is two-fold. First, the point is you don’t have to hit many home runs; just a couple of big winners, properly handled, can make all the difference.

And the second encouraging fact is that a lot of this equation is completely under your control! If you dedicate yourself to cutting losses short, practicing sound portfolio management (don’t let a decent winner turn into a loss, etc.) and following the market’s trend (getting defensive when the trend turns down), you’ll automatically shield your wealth against downside outliers. Add in some rules to let winners run (allowing you to get some big winners) and you’ll be ahead of 80% of investors.

When we think back on the last three-plus years, we made plenty of mistakes and had our share of bad luck—selling Shopify (SHOP) and some others too early was costly; not getting heavily invested quick enough a couple of times hurt; and last year alone, we got knocked on the head numerous times on earnings. I’m sure there were dozens of other negatives.

But by catching a few solid winners over that time frame (Teladoc (TDOC) has helped us stay in the black so far this year), and by avoiding massive losses, we’ve held our own—since the start of 2017 the S&P 500 (including dividends) is up less than 7% annually, while our Model Portfolio is up more than 17% per year. Going back to the start of 2007 (when I took over, more than 13 years ago) the portfolio has outdone the market by nearly 3% annually during a period that included a lot of tough years for growth stocks.

To be sure, you’re only as good as your latest trade, so we’re always looking forward, not back. But if any lesson is learned from this unprecedented time, it’s that having a methodology that protects against big losses and allows for some big winners is key for making (and keeping) solid profits.
Use Volume Clues to Build Your Shopping List
When the market is in shambles like it has been, it makes it easier to find stocks holding up, and resilience is always worth paying attention to. But we also like to look for stocks that may have initially gotten whacked and looked toast but then quickly stormed back on huge volume—a sign big investors gobbled up shares on weakness.

Interestingly, one area we’ve seen recently that fits that description is was one of last year’s early leaders—cloud software and “new-age” cybersecurity titles. Take a look at Coupa (COUP), which has probably our favorite story in the sector: Shares came completely unglued two weeks ago, diving to multi-month lows, but the stock closed that week solidly on huge volume. And then COUP exploded higher on even bigger volume last week thanks to a great earnings report! Similar patterns are seen in names like Okta (OKTA), Zscaler (ZS) and Smartsheet (SMAR).

Officially, we have Coupa back on our watch list, but given the fact that most of these stocks have cooled off for many months (not just the past few weeks) and the sizable buying volume, we’ll be keeping an eye on a few of them. If they can hold and even build on the recent signs of support, some could take pole position in market’s next set of leading stocks.

coup32620
smar32620

Cabot Market Timing Indicators
The historic coronavirus crash has been no fun, but thankfully our proven system of following the trend (Tides negative February 24) and action of leading stocks had us building up cash to avoid the worst of the damage. Near-term, there are some green shoots appearing, but it’s likely to take some time before a sustained uptrend gets going.

Cabot Trend Lines: Bearish
Our Cabot Trend Lines have turned clearly negative, with both the S&P 500 (by an incredible 24%) and Nasdaq (by 19%) closing below their respective 35-week moving averages last week. Of course, we were taking action well before the sell signal, and this week’s bounce has shrunk those distances a bit. But the red light is another reason to remain defensive and focus mostly on preserving capital.

v

Cabot Tides: Bearish
It’s been just over a month since our Cabot Tides turned bearish, and unfortunately that turned out to be a great signal, with the major indexes (including the Nasdaq, shown here) heading down the chute since then. Remember, for a new intermediate-term uptrend, we need to see most indexes (a) rise above their lower (25-day) moving average and (b) for that moving average to itself advance. That’s likely to take some time, so until further notice, the intermediate-term trend is down.

CabotTides32620

Cabot Real Money Index: Positive
The Real Money Index is a secondary measure, but there’s no question investors are quickly hitting the eject button—the five-week sum of money withdrawn from equity funds and ETFs has hit a 15-month low, with three of the past four weeks seeing big redemptions. It’s a good sign there’s plenty of money on the sideline that should drive a solid advance once the trend turns back up.

RMI32620

Charts courtesy of StockCharts.com


The next Cabot Growth Investor issue will be published on April 9, 2020.

Cabot Wealth Network
Publishing independent investment advice since 1970.

CEO & Chief Investment Strategist: Timothy Lutts
President & Publisher: Ed Coburn
176 North Street, PO Box 2049, Salem, MA 01970 USA
800-326-8826 | support@cabotwealth.com | CabotWealth.com

Copyright © 2020. All rights reserved. Copying or electronic transmission of this information is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. No Conflicts: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to its publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: All recommendations are made in regular issues or email alerts or updates and posted on the private subscriber web page. Performance: The performance of this portfolio is determined using the midpoint of the high and low on the day following the recommendation. Cabot’s policy is to sell any stock that shows a loss of 20% in a bull market or 15% in a bear market from the original purchase price, calculated using the current closing price. Subscribers should apply loss limits based on their own personal purchase prices.

Save

Save

Save

Save

Save