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Growth Investor
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Cabot Growth Investor 1475

It’s not 1999 out there, and the environment remains tricky and narrow. But there’s also improvement being seen among growth stocks, with more and more stocks showing persistency and power. We’re still going slow, but we added two new half positions last week; we’d like to increase our exposure soon, but tonight will sit tight.

In tonight’s issue, we talk in depth about some of the improved evidence we’re seeing, write about all of our stocks and highlight a few tempting titles (including a new cloud software name that’s on our watch list—see Other Stocks of Interest).

Cabot Growth Investor 1475

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Still Tricky, Still Challenging—but Also Still Improving
Through the first half of the year, 2021 has been about as tricky as we can remember, at least for growth stock investors. Rotation and news-driven moves have been the norm, with many leading (or formerly leading) growth titles cascading 30% to 40% in the spring while boring old cyclical stocks kited higher. Even after growth stocks found a bid in late May, the action was tough, with mostly fleeting moves. If you’re focused on growth, you pretty much had to be flipping in and out of names every couple of weeks to make money—which is very hard to do.

As we enter July, the tricky, challenging environment is still mostly with us, with many stocks getting caught in the surf depending on what’s in favor each day or week. That rotation means many names in a variety of sectors are having trouble really getting going. One telling statistic: On the NYSE and Nasdaq, nearly half (about 46%) of all stocks across the entire market are still below their 50-day lines, even as the S&P 500 and Nasdaq hit new highs!

And yet, despite the incessant wobbles, we continue to see improvement in other areas, the most important of which is something we write about in detail later in tonight’s issue: Among the market’s leading growth stocks, we’re finally starting to witness persistency and power among more than a few liquid, institutional-quality names.

For example, stocks that for most of this year could only go up for a few days before getting whacked have now risen consistently for a few weeks; pullbacks will come, maybe soon, but the fact that the advance has gone this long is a bullish change in character. And instead of low-volume rallies, like we saw a few times from February through May, we’re seeing many names move up on big volume—often for many days in row. These volume clusters are a sure sign big investors are taking an interest. Throw in some secondary evidence (Aggression Index looking better; new lows are encouragingly tame) and it’s clear the evidence is improving.

When you put it all together, the chop, rotation and narrow breadth has us going slow … but we’re always following the evidence, so we’re slowly stepping into fresh leaders (either newer names, or stocks getting going after months in the doghouse) as opportunities arise.

What To Do Now
Slowly extend your line. Last week, we added half-sized positions in Cloudflare (NET) and DocuSign (DOCU), which leaves us with 47% cash. We’re aiming to put more to work soon, especially if growth stocks rest for a few days, but tonight our only change is restoring the Buy rating on Floor & Décor (FND).

Model Portfolio Update
Step by step, growth stocks have picked up steam during the past month or so, and while it’s far from 1999 out there, we’re beginning to see more and more stocks show power and persistency on the upside, which bodes well. Last week, we dipped our toes into the water with two new half-sized buys; we’d like to add more exposure, but we’re standing pat for now.

To be clear, our confidence level right now is rising, but we don’t view this as some sort of “blastoff” environment where everyone needs to dive into the pool head-first—many stocks are still banging their heads at key resistance areas, rotational action is still prevalent and, market-wide, our Cabot Tides is more mixed than positive. Thus, with some yellow flags out there (and with earnings season revving up in a couple of weeks), we still favor moving gradually.

But none of that is meant to dump on the rally. There’s no question the evidence is improving, and the fact that this action comes after a tough three-plus months for the Nasdaq (with many names having rested for six-plus months) is usually a good sign.

Current Recommendations

StockNo. of SharesPortfolio WeightingsPrice BoughtDate BoughtPrice on 7/1/21ProfitRating
Cloudflare (NET)9635%1046/25/211040%Buy a Half
Devon Energy (DVN)724011%285/7/21307%Buy
DocuSign (DOCU)3635%2776/25/212780%Buy a Half
Five Below (FIVE)8528%1389/18/2019643%Hold
Floor & Décor (FND)1,0045%1074/9/21106-1%Buy
Progyny (PGNY)1,5775%645/28/2160-5%Buy a Half
ProShares Ultra S&P 500 (SSO)1,74110%605/29/20121101%Buy
Roblox (RBLX)1,0525%965/28/2186-10%Hold
CASH$948,32847%

Cloudflare (NET)—Cloudflare’s self-description tells you why the stock should be a blue-chip for the cloud age: Its offerings allow clients to protect and speed up their applications without adding hardware, installing any software or changing a single line of code. Simply by running everything through Cloudflare’s cloud-based global network, firms improve performance and security, and the network itself gets “smarter” as it collects and adjusts to new data. In effect, instead of buying products from the old networking guard like Cisco, Juniper and the like, companies can sign up with Cloudflare and have a solution for the cloud age. More recently, the company is expanding partnerships so clients can get more of any data from the network—the firm has integrated with Microsoft’s Azure, Splunk and others to easily send security logs (firewall events and network errors in general) from Cloudflare to one of these platforms for analysis. Big picture, “only” 17% of the Fortune 1,000 are paying customers, a figure we think can easily double or triple in the years ahead. As for the stock, it’s shown extremely persistent upside in recent weeks, more or less advancing in a straight line to new highs, a sure sign that the buyers are active. We added a half-sized position last week, and we’ll stick with that for now—but we’d like to average up soon, preferably after a little rest or shakeout. We’ll see how it goes, but right here we think you can buy a half position (for us, that’s 5% of the Model Portfolio) if you’re not yet in. BUY A HALF

NET-063021

Devon Energy (DVN)—As growth stocks have come back to life, money has flowed out of cyclical stocks—so it goes in the rotational environment that is 2021. Still, as opposed to many industrials, financials and transport titles, energy stocks have thus far retreated normally, so we still think the group in general (and DVN in particular) will see higher prices ahead. Indeed, despite some fears about slowing growth, Fed rate hikes, the Delta variant of the virus and more, oil prices are still holding north of $70, while natural gas prices have actually surged (partly due to the crazy heat in many parts of the country—it was 99 in Boston this week!). While we don’t like to do too deep of a dive into numbers projections, the fact that the company paid a 34 cent per-share dividend based on Q1 cash flow (paid out yesterday) should translate into more than that for Q2, as prices have clearly been higher during the past three months. Of course, we’re never complacent, especially with energy stocks, which can turn tail in a hurry, but we continue to think DVN will see higher prices ahead. If you don’t own any, we’re OK taking a swing at it here. BUY

DVN-063021

DocuSign (DOCU)—DocuSign was our second addition last week, and it’s also continuing to act well, with little ability to pull back much even as it’s moved to new highs. As we wrote in the last issue (under Other Stocks of Interest), this was one of the bigger pandemic winners, but while many thought growth would slow as the world turned right side up, just the opposite is happening—growth is still accelerating even as it’s only captured a few percent of its potential market. And that potential market is gigantic: In essence, all the other “clouds” at a company (sales, marketing, HR, Operations, etc.) require agreements, which means demand for DocuSign’s Agreement offering (form generation, remote notary services, update and monitoring contracts, as well as e-signatures) will boom. Back to the stock, we’re not ruling out a pullback or shakeout after the recent move, but given that the recent power came after 10 months in the wilderness, the odds favor any dips that come will find support. BUY A HALF

DOCU-063021

Five Below (FIVE)—FIVE was tedious for a few months, but despite all the crosscurrents, the stock never got hit too badly (15% top-to-bottom correction) and is now looking peppier—after pushing back to resistance near 200, the stock has backed off a bit but remains within a few points of new high ground. With many of the names benefiting from the economic reopening, there’s some fear that 2022 won’t show much growth, but that shouldn’t be a problem here; analysts see sales and earnings up 18% next year, and those are almost always a bit shy of what reality turns out to be. In other words, Five Below’s 20%-plus annual growth plan (driven by the rapid expansion of its store base) should be in place even after this year’s huge earnings rebound (up 125% from a year ago and up 59% from 2019!). Stock-wise, we’re not necessarily waiting for a breakout, but it’s a fact that the recent upmove came on very quiet volume and there’s a bunch of resistance in this area. If you want to pick up a few shares, go ahead, but officially we’ll stay on Hold until we see a bit more decisiveness from FIVE. HOLD

FIVE-063021

Floor & Décor (FND)—Ideally, the same situation that’s playing out with Five Below is happening with FND—the stock’s action in May and for most of June was discouraging, but shares have turned on a dime, recouping more than half their correction in just seven trading days! Plus, the rise was accompanied by a string of good-volume days—that doesn’t mean it’s up and away from here, but odds look pretty good that the stock has bottomed and, short-term dips aside, it should work its way higher. Looking at the store count, Floor & Décor expected to open 27 new warehouse stores this year, and through June, it’s on track for that (looks to be 13 opened so far), which would be a big 20% gain from the 133 that were open at the end of last year. Sure, there’s always a chance that FND’s rally could roll over, but the combination of the bullish fundamentals and renewed, high-volume strength portends good things. We’ll restore our Buy rating. BUY

FND-063021

Progyny (PGNY)—PGNY remains in a correction of sorts, pulling back about seven points but holding its 50-day line (now just above 58)—in the current environment, usually it’s these types of names (that have dipped to support over two or three weeks) that find buyers, so we’re optimistic that will be the case here. Bigger picture, we certainly want to give our half-sized position a chance: In a May presentation, the company believes it has penetrated less than 4% of its target market and notes that two-thirds of their clients left their health carrier to work with Progyny, and given that the firm’s solution works so much better than standard fertility plans (leading to drastically lower treatment, drug and maternity care costs for employers, not to mention higher productivity), there’s no reason the user base can’t expand many-fold in the years ahead. A break of the 50-day line could have us moving to Hold, with a dip into the lower/mid-50s a red flag. But right here, the pullback looks normal so we’re fine grabbing shares. BUY A HALF

PGNY-063021

ProShares Ultra S&P 500 Fund (SSO)—We’ve talked about the many stones you could throw at the market’s rally during the past few months, to no avail, and here’s another one—as the S&P 500 has made new highs in recent days, less than half of stocks in the index have been above their respective 50-day lines, a sign of very narrow breadth that, historically, leads to some rough sledding. Will this imperfection be the one that finally ends the rally? Maybe! But we’re not here to predict, we’re here to interpret, and while many indexes are heading sideways, the fact that the S&P 500 (and SSO) and Nasdaq have recently hit new highs is clearly a good thing. A drop under 114 would likely having us changing our tune at least a little bit, but we advise continuing to follow the plan—hold on if you own some, and if you don’t, you can start a position, preferably after a little weakness. BUY

SSO-063021

Roblox (RBLX)—RBLX has bounced nicely in recent days, lifting off its 50-day line (now near 82.5), which is obviously good to see. It’s a close call, but we’re going to stay on Hold for a bit longer to see if this bounce sticks—we’re not doubting it, per se, but the fact that the stock gave up its entire breakout before rebounding isn’t the best sign, and the rally has “only” recouped about half of the decline. Any hint that May’s business slowdown was a one-off would likely do wonders, but we’ll have to see if/when the firm will release the next update. All in all, we’re happy to give it some wiggle room, but we’re keeping our Hold rating in place. HOLD

RBLX-063021

Watch List

  • 10x Genomics (TXG 190): TXG remains a bucking bronco with sharp ups and downs, but shares did flirt with new highs this week before pulling in. Still, we like this story a lot and some upside power or even some quiet action for a bit could have us pulling the trigger.
  • Asana (ASAN 61): Asana has all the makings of a new leader as growth stocks rev up, with a better mousetrap in the work management software space. See more below.
  • CrowdStrike (CRWD 251): There’s no question CrowdStrike looks great and has big potential—we’re still considering adding a position in and around here. Our one hesitation is that there is a bit of overlap with Cloudflare, which has some security offerings, but it’s not enough to dissuade us in a big way.
  • Dynatrace (DT 60): Dynatrace has an easy-to-understand story that should take it far, and after a year-long consolidation, appears to finally be getting free.
  • Snap (SNAP 68): Now four months into a big (but reasonable) consolidation, Snap is beginning to show some spunk. Fundamentally, the firm inked a licensing deal with Universal Music, allowing users to add music to their content. The big draw here is management’s outlook for 50%-plus revenue growth for many years to come.

Other Stocks of Interest
Asana (ASAN 61)—Asana is a newer name in the cloud software group that has “fresh leader” written all over it. The company has a better mousetrap in the work management software space, the need for which has increased given how many people are now working remotely all or most of the time. Asana’s offers not just an online task system of record, but clients can also track and monitor those tasks (as well as bigger-picture objectives and missions) across teams and company-wide projects. Asana is thriving as companies are looking to organize and track day-to-day work and projects (while competitors like Smartsheet are more for those looking for a spreadsheet replacement). Business-wise, it’s also a plus that Asana’s solution can be used across an organization—many larger clients are quickly expanding their usage of the platform to all nooks and crannies of their operation. The proof is in the numbers: Asana’s revenue growth is both strong and accelerating (up 55%, 57% and 61% the past three quarters), customers are leaping onboard (client base increased 7.5% sequentially in Q1), and the firm is making huge inroads among big users, with its larger clients increasing their spending by more than 40% on average each year! The bottom line is in the red as the top brass hikes investments, which makes sense given that Asana has just a couple percent of the target market. Fundamentally, then, this company seems to have something special, and the stock’s action is jaw-dropping—ASAN built its first-ever launching pad from February through May, and the breakout and follow through since has come on monstrous volume. Short term, it’s extended, and some sort of shakeout is likely. But given the story and newness of the stock, we’re looking at this move as an initial kickoff. ASAN is on our watch list; some cooling off should provide a chance to get in.

ASAN-063021

Figs (FIGS 46)—Figs is a retail story, but instead of focusing on fashion or athletic apparel, it focuses on … scrubs, the at-work apparel that most healthcare professionals wear on a daily basis. It’s estimated that this is a $12 billion market in the U.S. alone (north of $70 billion globally), and it’s essential and recession proof, and yet there hasn’t been much innovation in the basic wares for years. But Figs has a better product: Using its proprietary FIONx fabric technology, it offers nurses, doctors and the like stretchable, anti-odor, anti-wrinkle, moisture-wicking apparel (13 different brands) with easily accessible zippered pockets. Simply put, the clothes are more comfortable, functional and durable, and Figs’ e-commerce sales focus (avoiding the maze of distribution channels usually used in the industry) has been a plus. The firm has also broadened out to adjacent apparel (lab coats, compression socks, face shields, etc.), and is set to enter more lifestyle-wear offerings for the same client base, further increasing its potential market. Figs’ products have caught on, resulting in ridiculous growth—sales and earnings are leaping ahead at triple-digit rates (sales up 172%, earnings up 133% in Q1), yet it has just a small fraction of the overall market in the U.S. ($350 million full-year, run-rate revenue). In theory there could be some competition, but Figs has developed a brand name in the industry (1.5 million active buyers; 65%-ish of revenue is from repeat customers), which should count for a lot. There’s not much to examine with the stock. (public in late May), but FIGS is off to a great start and is borderline liquid already, which is a plus. It’s sure to be very volatile, but a pullback or some quiet trading would be tempting.

FIGS-063021

Five9 (FIVN 185)—Five9 is a firm that’s been around for a while, but it continues to have a great growth profile. The company is one of the leaders in cloud contact center software, which allows clients to offer better customer service, improved monitoring, better call routing, multichannel responses (text, chat, phone, etc.) and reduced costs. (Artificial intelligence is a big driver, too, making the reps more productive.) Despite the advantages, well over half of contact centers still use legacy systems, so the opportunity is giant, and Five9 is capturing more than its fair share as its platform is regarded by those in the know as one of, if not the, best out there. The pandemic goosed what were already strong growth trends, and they show no sign of dissipating—revenue growth (up 45% in Q1) is still accelerating and crushing expectations, while earnings (up 35%) are kiting higher as well. But just as attractive are the sub-metrics: Recurring revenue makes up 92% of the total here (great visibility), Five9 just set a new logo and installed base booking record in Q1, same-customer revenue growth (up 21% in Q1) is itself accelerating and it’s closed some giant deals of late (two in Q1 will combine to produce $20 million of annualized revenue, or nearly 4% of the firm’s current tally!), a sure sign that big outfits are (a) eager to move away from legacy systems and to cloud contact centers and that (b) Five9 is one of the more attractive players. FIVN has had a big run over the years and enjoyed a great advance during the pandemic, but it’s now spent all of 2021 effectively resting in the 150 to 200 area. Shares have recently started to perk up, and a bit more strength would tell us the next advance is likely underway.

FIVN-063021

Finally Seeing Some Persistency and Power
In the market, up is good and down is bad, but there’s obviously a lot more to it than that—at the end of the day, we obviously want our stocks to head higher, but when it comes to evaluating the health of a rally or an individual stock, you want to see evidence that big investors are active. The reason: When big investors are starting or building positions, it tends to last many weeks, months or (ideally) years as the growth story plays out, increasing your chance of landing a real winner.

There are two great ways of spotting whether those elephants are in there accumulating positions. The first is persistency, which simply means that a stock or sector is rising most days and, often, many weeks in a row. It’s the situation where a stock rises in a “straight line,” which means, on the chart, you can basically draw a line right through all the bars of the uptrend. Such persistent buying means the Fidelitys and T. Rowe Prices of the world are in there most days picking up shares.

The other way is more obvious: Big volume buying, especially when you see many days in a row of it. Such “volume clusters,” as we call them, are a clear sign the buying isn’t your Aunt Sue or Uncle Jerry, but instead the huge mutual, pension and hedge funds.

Ever since the mid-February top (and, frankly, even before that speculative frenzy) it was hard to find persistent and powerful action among leading, liquid growth stocks. Yes, there were a few examples in recent months, but most of the rallies came on light volume or really just lasted a few trading sessions (often on big gaps up overnight). That’s better than the alternative but the proof was lacking that growth stocks had really turned up.

Now, though, we’re seeing it—and we’re spotting it in more and more and names. Nvidia (NVDA) was one of the first, leaping out of a nine-month dead period and going bananas on the upside. The advance barely hiccupped for a few weeks (persistent) and check out the volume cluster in late May and early June.

NVDA-063021

Of course, one swallow doesn’t make a summer, so it was hard to trust NVDA at the time. But now it’s appearing in many places. Look at Shopify (SHOP), which has been one of the market’s bigger winners in recent years—it went nowhere from last July into May of this year, but then began to perk up and check out the volume cluster as it attacks its prior highs.

SHOP-063021

Old friend Roku (ROKU) has benefited from some potential buyout rumors, and frankly, it still has a lot of overhead to chew through. But check out the volume cluster in recent days as the stock has finally gotten off its knees.

ROKU-063021

Dynatrace (DT) is a name we’d like to own at some point, and after a year-long consolidation where the only power came on February’s earnings gap, the stock has changed character and shown a persistent advance since mid-May. And then there are our two new additions last week—Cloudflare (NET) and DocuSign (DOCU)—that have come to life as well.

DT-063021

Obviously, there are still potholes out there, including the fact that we’re still witnessing a bunch of stocks get right up to resistance … and then peter out again and again. But the fact that some liquid leading names show power and persistency is another feather in growth stocks’ cap.

New Lows, Aggression Index Both Confirming Sellers Losing Control
During the past couple of months we’ve written about our Aggression Index as well as the new low tallies on the NYSE and Nasdaq—both are among our favorite secondary-type measures of the market environment. And, happily, despite continued crosscurrents in the market, both are showing signs that the sellers have left the building, at least for now.

First, look at the new lows on the NYSE, which is our old Two-Second Indicator. Despite cyclical stock strength, you can see the number of new lows flared up every few weeks. But now the readings have been below the key 40 figure for about a month and a half, with recent readings coming in at single-digit levels.

New Lows

Then there’s Cabot’s Aggression Index, which we wrote about a month ago—at the time, the Index was testing the key 40-week line (a meaningful dip below that signifies a potential longer-term shift out of growth titles), but happily, it’s spiked higher of late, recouping about 60% of its springtime decline. Obviously, things can change at any time, but just going with the evidence, the action of both are good to see.

Agression Index

Cabot Market Timing Indicators
The market as a whole continues to be tricky and challenging, but growth-oriented areas (including key indexes and individual stocks) continue to improve their standing. It’s still best to pick your spots and stocks carefully, but we’re OK gradually putting money back to work.

Cabot Trend Lines: Bullish
Our Cabot Trend Lines have been telling us the bull market is alive and well all throughout the tricky, challenging spring action—and last week, both the S&P 500 and Nasdaq tagged new high ground! Each index closed last week about 9% (give or take) above its respective 35-week moving average, so there’s still plenty of wiggle room before the longer-term trend comes under fire.

Cabot Trend Lines

Cabot Tides: Bullish
Our Cabot Tides are still technically positive, but as has been the case for much of this year, it’s a very mixed bag—small- and mid-cap indexes are neutral, but big-cap measures (including the S&P 500, daily chart shown here) recently hit new highs! There are obviously still many crosscurrents out there, which does increase risk, but the fact remains the intermediate- and longer-term trends are still pointed up.

S&P500 Tides

Cabot Real Money Index: Neutral
Our Real Money Index, which measures the five-week sum of money flows into/out of equity funds and ETFs, hit a frenzied (multi-year) peak in February as growth stocks topped. Since then, it’s backed off consistently (save last week), though we’d like to see a dip lower (as we did during September/October of last year, which preceded a big advance). Overall, we like the progress, but the Index officially remains neutral.

Real Money Index

Charts courtesy of StockCharts.com


The next Cabot Growth Investor issue will be published on July 15, 2021.

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President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
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