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

Cabot Growth Investor 1457

The overall evidence continues to lean bullish, but growth stocks are on a wild ride, first selling off in August/early September, then rallying for a few weeks before backing off again in recent days. We remain optimistic, but are still taking things on a stock-by-stock basis, pulling the plug on laggards while aiming to put money to work in potential new leaders. This week, we let go of Wingstop on Monday, leaving us with around one-quarter of the portfolio in cash.

In tonight’s issue, we write more about our thoughts on the market and our stocks, talk about one recent sell we wish we had back and dive into two secondary indicators we’re watching closely to tell us when the market (and growth stocks) will decisively break out.

Cabot Growth Investor 1457

[premium_html_toc post_id="218297"]

Riding the Bucking Bronco
Investing in general, and growth stock investing in particular, tends to be very streaky—while many would love for a steady, low-stress increase in their portfolios, that’s not how the world usually works. Instead you get periods of time when the money gushes in, followed by stretches where there’s a lot more chop than trend.

This latter phase is what one investor used to call “riding the bucking bronco,” where, as a trend follower, you tend to ride the ups and downs for many weeks (sometimes months). The goal is mostly to grind it out, stay in gear with what’s going on and be on the right side when the next sustained, big-money move takes place.

Thankfully, despite the many challenges of 2020, we’re still doing well, easily outpacing the major indexes. But the past couple of months have certainly had that bucking bronco feel, at least for growth stocks— the sellers were active in August and early September, then the buyers pushed many names back toward (or out to) new highs for three or four weeks, but now we’ve had a rough week and a half, as many high-flying names have pulled back sharply.

That’s not to say the steady improvement in the evidence we wrote about in the last issue has been erased. Our Cabot Tides are still holding onto their buy signal, for instance, and few leaders (with the exception of Fastly (FSLY) last week) have cracked while many secondary indicators are still generally flashing green lights. (We write about our Two-Second Indicator and Aggression Index later in this issue.)

Thus, we’re still leaning bullish, and we think we have some potential bigger winners in the Model Portfolio if they can survive earnings season. But we’re also taking things on a stock-by-stock basis, willing to cut bait if a name breaks down while being discerning on the buy side.

Of course, there are plenty of reasons we’re seeing some hesitation of late. Earnings season is just revving up, so some profit taking in extended titles makes sense ahead of Q3 reports. And the election is set to arrive in a week and a half, and after the 2016 experience, there’s likely a lot of hedging and pre-positioning occurring ahead of the outcome.

What To Do Now
Near-term, then, you should watch where you step, but big picture, we continue to see just about every signpost pointing higher, so you also want to lean bullish and give your strong, profitable stocks some wiggle room. Since the last issue, we’ve added a half position in Penn National (PENN) and sold our stake in Wingstop (WING), which leaves us with around 26% in cash.

Model Portfolio Update
As we wrote on page 1, we’ve been riding the bucking bronco of late, first pruning some weak performers during August and early September, then rotating into some stronger names as growth stocks perked up, and, this week, as growth stocks have sagged, letting go of laggard Wingstop and pushing our cash level back to about a quarter of the portfolio.

Indeed, the past week has been rough, though it depends on what names you’re looking at, with some high-flyers getting cut down while others hold their recent gains. We’re not overreacting to every good (or bad) day or two, but it’s clear that there are a bunch of crosscurrents out there as big investors position themselves into earnings and the election, so our antennae are up.

All in all, we think our overall stance is appropriate, but we continue to put more emphasis on the action of individual stocks. We’re not opposed to moving in either direction (buy or sell) depending on the action—this pullback could offer up some nice opportunities if the buyers step in and support leading stocks—but tonight, we’re standing pat.

Current Recommendations

StockNo. of SharesPortfolio WeightingsPrice BoughtDate BoughtPrice on 10/22/20ProfitRating
Datadog (DDOG)1,6679%11010/9/2099-10%Buy
Dexcom (DXCM)2906%21611/15/1939583%Hold
Five Below (FIVE)12779%1389/18/20134-2%Buy
Penn Gaming (PENN)1,3305%70.410/16/2063-10%Buy a Half
Pinterest (PINS)444410%409/18/205127%Buy
ProShares Ultra S&P 500 (SSO)1,7417%605/29/207830%Buy
Roku (ROKU)5486%1708/28/2022331%Buy a Half
Seagen(SGEN)95410%1869/18/202018%Buy
Twilio (TWLO)5539%1745/8/2029570%Buy
Wingstop (WING)Sold
CASH$488,97027%

Datadog (DDOG)—DDOG got off to a good start for us, but the weakness in most growth stocks during the past week has pulled it down sharply in recent days. Of course, it’s always possible the latest breakout will fail, but to this point the selling volume has been reasonable, especially compared to the record-setting volume seen as shares took off a few weeks back. Plus, the stock is still above support in the mid/upper 90s—like most names, the evidence favors the next major move being up. Obviously, if growth stocks or the market as a whole really give up the ghost, all bets are off, and the upcoming earnings report (due November 10) will be key. But until proven otherwise, we’re going with the idea that DDOG should find support as it pulls in, especially given the company’s sterling growth profile. If you own some, grit your teeth, and if you’re not yet in, we think picking up a small position here marks a solid risk/reward situation. BUY.

DDOG-102120 for Cabot Growth Investor 1457

Dexcom (DXCM)—Dexcom’s quarterly report is due out next Wednesday, with analysts looking for revenues to rise 20% and earnings of 64 cents per share, which is actually down a penny from a year ago. Given that the firm regularly trashes expectations, it’s likely Wall Street wants to see bigger numbers, but whatever the case the reaction to the report will go a long way toward determining whether the past few months was a “normal” rest period or whether DXCM has lost its luster. As for the recent action, the stock has sagged with most growth titles, but remains stuck in the same wide trading range that it’s been in for a while. If you want to trim ahead of the report, feel free, but with the major trend still up, we’ll follow the usual plan, which means holding through the report and seeing what comes. HOLD.

DXCM-102120 for Cabot Growth Investor 1457

Five Below (FIVE)—It’s been all quiet on the news front for Five Below since its earnings report in early September, but the stock continues to act just fine. Bigger picture, we have high hopes the stock has turned the corner after a two-year rest, and also, in terms of the here and now, the company has its hands in both the growth (cookie-cutter story) and economic recovery (as the world returns to normal, so should traffic at its stores) cookie jars, which should keep it somewhat (not totally) insulted if there’s a big bout of rotation in the market going forward. Of course, the election could be a big event (potentially affecting perception of the China tariff policy going forward), but we’re more focused on the bigger picture. With the stock having pulled back to its 25-day line, we’re fine grabbing shares if you haven’t yet. BUY.

FIVE-102120 for Cabot Growth Investor 1457

Penn National Gaming (PENN)—Our timing with Penn National was unfortunate, as we entered our half position last Friday and the stock immediately hit the skids as money flowed out of recently hot stocks and areas. (All casino stocks were hit on fears of a longer-than-expected time for a full recovery.) As always, if the stock really craps out (pun intended), we’ll take our hits and move on, but we remain optimistic PENN can make a powerful move down the road—to us, it appears to be the leader in the new iGaming and online sports betting theme that should drive rapid growth for years to come. Another possible plus is the election, but we’re not talking about the presidential race: Maryland, South Dakota, Louisiana and Nebraska all have various sports betting initiatives on the ballot (Maryland is more sweeping than others, it appears.) The stock has been yanked back down toward its 50-day line (now around 63) on tame volume; we wouldn’t rule out a shake below that line, especially with earnings coming soon (next Thursday, October 29), but we’re willing to give PENN a loose leash (nearly 20% from our cost) because of its volatility and our small-ish position. Long story short, we’ll honor our loss limit if it comes into play, but right here, we remain optimistic. BUY A HALF.

PENN-102120 for Cabot Growth Investor 1457

Pinterest (PINS)—Pinterest will report earnings next Wednesday (October 28), which will be key—analysts are looking for sales growth of 35% and earnings of a couple of cents per share. But investors are already getting indications the wind is at Pinterest’s back: Snap’s (SNAP) bullish quarterly report has most thinking that online advertising demand has recovered much faster than expected, and for Pinterest in particular, some analysts believe user growth has remained strong (it was up 39% in Q2) and the long-term monetization opportunity (it gets far less revenue per user, especially internationally, than other go-to online/e-commerce sites) will drive years of rapid growth. PINS itself looks great, having popped to all-time highs on Wednesday after the SNAP report. We’ll stay on Buy, but given the upcoming report and the fact that the stock is extended, we’d be keeping any new buys small and looking for dips. BUY.

PINS-102120 for Cabot Growth Investor 1457

ProShares Ultra S&P 500 Fund (SSO)—The S&P 500 has made no net progress for about two months now, and depending on how earnings and the election go, that streak could easily extend farther. But none of that is abnormal—you can’t expect a straight-up advance like we saw off the March lows—and as opposed to many growth stocks, the S&P’s (and, hence, SSO’s) pullback during the last week and a half has been calm, cool and collected, which is encouraging. If the Cabot Tides flip back to negative (or neutral) in the days ahead, we could go back to a Hold rating, but having already taken partial profits, our main goal here is to play out the rest of the bull move with this leveraged long fund—given the historic panic earlier this year and the blastoff indicators that flashed in May and June, the overall uptrend should have much farther to run. Right now, we’re OK picking up shares if you’re not yet in. BUY.

SSO-102120 for Cabot Growth Investor 1457

Roku (ROKU)—Many growth stocks ramped higher like ROKU did in late September and early October, but relatively few have held up as well as it has, still hovering well above its 25-day line (now at 206 and rising) as it catches its breath. One analyst’s due diligence pointed to Snap (which has already reported a great Q3) and Roku being the biggest beneficiaries of ad spending shifting online, which is obviously a plus. All will be revealed in the quarterly report (November 5), and the stock’s reaction to that will obviously be key, but we’re also keeping our eyes on the big picture—ROKU etched a year-long consolidation (September to September) and only recently has let loose on the upside. Moreover, the stock has been under accumulation for months (look at all the above-average volume weeks during the past few months, a sign of institutional accumulation), which usually portends good things. We still own “only” a half-sized position here—we’d like to average up, and aren’t ruling it out, but with shares still a bit stretched to the upside and with earnings coming in two weeks, we’ll just hold onto what we have. If you aren’t yet in, though, we’re fine picking up a small position here. BUY A HALF.

ROKU-102120 for Cabot Growth Investor 1457

Seagen (SGEN)—Seagen (name changed from Seattle Genetics a couple of weeks ago, though the symbol remains the same) has pulled in a few points on very light volume over the past week and a half but remains perched above its 25-day line (195 and rising) and is still north its prior highs (near 185). Like most stocks, the company has earnings to get through in the near-term (due out October 29)—the official estimates are a bit hard to pin down due to some one-time milestones likely to be included, but investors will be watching for continued sales progress on its top three drugs and any insight as to what to expect in 2021 (especially with Merck now on board). SGEN has a history of running up and then going sideways for a while, so a longer rest isn’t out of the question, but we continue to think higher prices are in the offing. BUY.

SGEN-102120 for Cabot Growth Investor 1457

Twilio (TWLO)—TWLO has been hit hard in recent days, falling from around 340 to 290 (ballpark) on no news, likely due to the rotation out of growth stocks. That’s never fun, but stepping back, we don’t see anything unusual here—volume has picked up somewhat but is far less than the buying seen earlier this month, and even with the sharp decline, the stock (like others mentioned above) is holding north of its 25-day line and its prior highs (both in the 280 area). Near-term, the environment will surely push/pull the stock, there’s little doubt that the recently upped long-term view (30%-plus annual organic growth for years to come) and the acquisition of Segment (a leading new-age customer data platform) provide a couple of catalysts to keep big investors buying on dips; we’ll be looking to see if management provides any more tidbits about these (especially Segment) on its conference all next Monday (October 26). All told, we’ll stay on Buy as most of the evidence is still positive, but the reaction to earnings will be important. BUY.

TWLO-102120 for Cabot Growth Investor 1457

Wingstop (WING)—We gave WING every chance to hold up, but as growth stocks came under pressure this week, this name faltered; we sold it Monday afternoon on a special bulletin, and it’s continued to slide since. Longer-term, Wingstop has a consistent growth story, so we wouldn’t rule out revisiting it down the road, but there’s no question there are many stronger, higher-potential situations out there today. We got out around breakeven. SOLD.

WING-102120 for Cabot Growth Investor 1457

Watch List

  • Beyond Meat (BYND 172): BYND has pulled back with most growth stocks in recent days. A bit of calm action could have us taking a swing at it, albeit a small position given its volatility. Earnings are likely out in early November.
  • Bill.com (BILL 110): We’ve always loved this story, and now, after months of choppy action, it looks to have changed character. Earnings are out on November 5.
  • Cloudflare (NET 56): NET has come alive of late, and while it’s hiccuped with everything else in recent days, it’s in position to help lead any sustained advance from here. See more later in this issue.
  • CrowdStrike (CRWD 134): CRWD has been pulling back on reasonable volume since being rejected near 150 resistance a few days ago. Still looks normal, especially after nine weeks up in a row before this.
  • Square (SQ 176): SQ has chopped around for a couple of weeks but continues to hold the vast majority of its recent gains. Earnings are due out November 5.
  • Uber (UBER 37): UBER has a nice long-term setup and could be a combination growth (Uber Eats) and recovery (rides) play should the market favor more of the latter going forward. See more below.

Other Stocks of Interest
The stocks below may not be followed on a regular basis. They’re intended to present you with ideas for additional investment beyond the Model Portfolio. For our current ratings on these stocks, see Updates on Other Stocks of Interest or email mike@cabotwealth.com.

GrowGeneration (GRWG 21)—We haven’t stepped foot into the marijuana sector during the past couple of years, but a few are beginning to perk up and grow up (i.e., become more liquid), and one of the more interesting ones is GrowGeneration, which has a classic bullets/army story—whereas many firms are battling with each other to sell more and more weed, GrowGeneration benefits no matter who wins that war. It operates the largest chain of hydroponic garden centers in the U.S. (28 locations in 10 states), selling specialized lighting, additives, nutrients, soil and more for cannabis growers big and small. Encouragingly, 60% of sales are consumables, leading to an expanding stream of recurring revenue from current customers, while the firm is building a line of private label products (under the Sunleaves brand) to deliver lower prices and gain leverage on third-party sellers. Growth has been fantastic as more states at least partially legalize weed and as the industry expands—sales rose 123% in Q2, while same-store sales boomed an incredible 49% and earnings leapt into the black. And because GrowGeneration is a retail play (all of its products are completely legal, avoiding regulatory risk), there’s a cookie-cutter aspect to this as well; the firm had 16 stores at the end of 2018, 25 at the end of last year, currently has 28 and has a goal of boosting that to 50 by the end of next year (part of that expansion should be through M&A). Analysts see the top line rising nearly 50% next year, but that could prove very conservative depending on the environment. As for the stock, it went vertical in August before dipping sharply, but it’s nudged its way up since then. It’s lower priced and volatile, but the next big move is likely up. Earnings are likely out in mid-November.

GRWG-102120

Uber (UBER 37)—In the last issue we wrote about how most IPOs (after initial multi-week pops) usually sag soon after and build larger consolidations before embarking on a sustained run. That could be the setup in Uber, which has revolutionized a lot of urban society through its ride sharing system. The hesitation here was always that, despite rapid growth, Uber continually lost a lot of money, and that was doubly true once the pandemic hit, as the ride sharing business fell off a cliff due to virus fears and far less mobility (still down around 50% from pre-pandemic levels, though it’s slowly recovering). However, the virus also provided opportunity—the company’s CEO says that food delivery (Uber Eats) is now the primary business. Indeed, in Q2, delivery bookings actually lifted at triple-digit rates (up 122%) while trips were up 101% and the number of users rose 71%. Longer-term, the top brass thinks the firm can crank out 30% cash flow margins in this business, especially as there’s likely a permanent step function higher in the number of people who prefer delivery. The rest of this year isn’t likely to be great for the company (sales slipping versus a year ago, accompanied by losses), but big investors could start looking ahead soon—the combination of some possible vaccines and a return to normalcy should have the formerly strong ride sharing business back on track, and there’s no reason to think Eats won’t continue to do well. Indeed, analysts see revenues up nearly 40% next year, and the top brass believes the company as a whole can approach breakeven on a cash flow basis. The stock was a famous IPO loser last year, but it’s now built a year-long launching pad and is beginning to show some tightening action in recent weeks. A powerful burst above 40 in the weeks ahead (possibly after earnings on November 5) would be intriguing.

UBER-102120

Wayfair (W 266)—Wayfair, the online furnishings leader, has always been one of those companies that is super controversial in the eyes of investors—while the underlying business is real and has grown nicely over time, the bears continually pounded management for big losses and negative cash flow. Frankly, the shorts may have had a point (bleeding red ink on north of $9 billion of revenue isn’t a great look), but this is a long-term growth area: U.S. online sales of home goods and furnishings are expected to quadruple during the next decade, and the pandemic and ensuing move of everything online has made Wayfair’s huge investments in recent years (expanding internationally, better logistics and distribution, more marketing, etc.) look like a stroke of genius. Sales had been growing at a healthy 20% to 35% pace, but that rate accelerated wildly in Q2 (up 84%) as active customers surged (up 46%), and the rush of buying was so intense that Wayfair cranked out a huge profit (earnings of $2.88 per share; free cash flow north of $1 billion!) in the quarter. The question is whether that kind of growth is set to continue—many remain skeptical (analysts see revenues up just 14% in 2021), but given that Wayfair obliterated expectations (earnings tripled estimates last quarter) and the stunning action of the stock after its depressed March low hints that there may be something bigger going on here. W remains highly shorted (15.4 million shares short compared to average daily volume of 2.4 million), so it’s always possible the stock disintegrates, but it’s also possible that the latest nine-week rest will mark a solid setup ahead of the Q3 report, which is due out November 3. A strong breakout could be worth playing.

W-102120

Two of Our Favorite Secondary Indicators
When it comes to how heavily invested we are in the Model Portfolio, that decision almost always comes down to what we call the primary evidence—the trends of the major indexes (our Cabot Trend Lines and Cabot Tides) and the action of leading growth stocks (admittedly more subjective). In fact, one of the big secrets to investing is to avoid making huge mistakes, and if you stay in gear with the trends and the action of the leaders, you’re guaranteed never to miss out on a major upmove or to stay bullish during a prolonged drop—and that fact alone puts you ahead of 80% of investors.

That said, we also follow a handful of secondary indicators, as they can often provide clues to the market’s health and/or give you an idea of the risk-reward scenario that’s out there. One of those is the Real Money Index, which can give us short-term clues when investors are too giddy or fearful.

But we’re watching two others right now for hints on whether the market’s correction (10.5% on the S&P 500, 13% on the Nasdaq) has really come to an end. The first is our old trusty Two-Second Indicator, which is simply the daily reading of the number of stocks hitting new lows on the NYSE. The indicator has its limitations (it can get infected by a lot of bond funds and preferred stocks at times, or when one sector is going down the tubes), but it almost always does a good job of picking up on any broad selling pressures out there.

two second indicator

And today, the good news is there isn’t any—after a brief spike during the market dip in late September, the number of new lows has been below 40 every day, and below 30 for all of October, even when we’ve had a bad day or two or three. It’s a good sign, and the longer these readings remain tame, the greater the chance that the market will see new highs before long.

We’re also looking closely at Cabot’s Aggression Index, which is the ratio of the growth-oriented Nasdaq Composite versus the defensive-laden consumer staples sector. It answers the important question, “How aggressive are big investors being with their investments?” We mostly use it as a big-picture indicator—as long as the ratio is above the lower of its 10-week and 40-week moving averages, and that average is advancing, it tells you growth stocks are in favor. That’s been the case since the end of April, which is encouraging.

aggression index

However, right now what we really want to see is if, after a three-month sideways phase, the Aggression Index can kick into gear on the upside—decisive new highs in this measure would be a great sign that the next leg up for the market (and growth stocks) is underway … and could have us stepping on the gas when it comes to new buying. Both of these are worth watching the days and weeks ahead.

When to Go Back to the Well
If it’s a bull market, it’s inevitable that some stocks you sell along the way, even ones you take solid profits in, will come back to life in the weeks or months ahead. As growth stocks bounced back some in September/early October, we’ve seen that occur, which begs the question, when should you go back to the well and re-buy a stock you got out of?

The key in these situations is to avoid bias in either direction—don’t avoid the stock out of shame, and don’t rush back into it simply because the stock was “good” to you in the past. Instead, just put it up against all the other names you don’t own, and if the mix of story (rapid and reliable growth), numbers (sales and earnings, etc.) and chart (powerful action and a decent entry point) is top-notch, feel free to take another swing at it.

Right now, the only stock we sold during the past couple of months that we are envious of is Cloudflare (NET). The story, of course, remains the same, with a global network (more than 200 cities) built from the ground up for the cloud and digital age, offering thousands of companies (including 16% of the Fortune 500) the reliability and security that their websites and operations need. And growth has been both rapid (50%-ish top line) and reliable, with little reason to expect a major slowdown. With a total market likely north of $30 billion, Cloudflare should have years of growth ahead.

NET_102120

And the stock has been very impressive of late—the initial rebound from its September stumble wasn’t overly impressive, but then NET went ballistic two weeks ago, exploding to new highs on by far its heaviest volume day ever. The possible catalyst was the company’s launch of Cloudflare One, a network-as-a-service offering that should offer even better performance and security for clients. Whatever the reason, the incredible move to new highs, and its resilience since then (even as peer Fastly (FSLY) blew up), is a good sign. NET is back on our watch list. WATCH.

Cabot Market Timing Indicators
The overall market is still mostly positive, with the trends up and most leading stocks holding support. That said, we’ve seen some noticeable growth stock slippage during the past week and a half, and with earnings and the election coming, we’re stepping carefully while giving our strong, profitable names room to breathe.

Cabot Trend Lines: Bullish
It’s been an up-and-down few weeks, and this hesitation could easily continue a while longer. But to this point the odds strongly favor the next major move being up: Our Cabot Trend Lines remain perched clearly in bullish territory, with the S&P 500 (by 12.8%) and Nasdaq (by a huge 19.4%) holding well above their respective 35-week moving averages. Translation: The larger, longer-term trend continues to point up, telling us the overall bull market is very much intact.

Cabot Trend Lines

Cabot Tides: Bullish
Our Cabot Tides are holding onto their recent buy signal despite some retrenchment from the major indexes. Here you see the daily chart of the S&P 500, which has backed off after approaching its old (September) highs, but it remains north of its moving averages. Should things back off from here, the Tides could be effectively neutral (sideways action since early September), but just going with what’s in front of us, the intermediate-term trend continues to point up.

S&P500

Cabot Real Money Index: Neutral
Our Real Money Index remains very quiet, with money steadily pouring out of equity funds and ETFs, but few dramatic moves (into or out of the market). Thus, the indicator remains effectively neutral as we wait to see if investors provide a high-odds contrary signal (buy or sell) in the weeks ahead.

Real Money Index

Charts courtesy of StockCharts.com


The next Cabot Growth Investor issue will be published on November 5, 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.