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

Cabot Growth Investor 1476

Growth stocks had been improving some, but the sellers never quite disappeared, and now they’re back with a vengeance—many growth-oriented measures are down 6% to 10% this month alone, and even the broad market is going along for the ride.

Thankfully, we never got heavily invested given the indecisiveness, and now we’re throwing up some safety nets—we sold one stock yesterday (giving us more than half in cash) and put two others on hold.

Despite the selling, we’re not throwing in the towel—we see a ton of decent setups still, so if earnings season goes well, there could be some liftoffs. But for now we’re remaining cautious until things change for the better.

Cabot Growth Investor 1476

[premium_html_toc post_id="233871"]

Can’t Shake the Sellers
Because most of us are long-only players (focusing our time looking at what to buy, not short), we usually think of things from the perspective of buyers. There’s nothing wrong with that, per se—a lot of my commentary and analysis is focused on whether or not we’re seeing big, institutional buyers show up. Especially at key levels, such evidence is vital; when a stock is trying to break free of a multi-month range, for instance, the volume surrounding the liftoff is one of your best indicators of whether the move will hold.

However, one thing I learned when I first joined Cabot 22 years ago is that a lot of uptrends (in the overall market or individual stocks) get going not because of huge buying, but because the bears are sold out. Indeed, some of our oldest market timing indicators (like the Two-Second Indicator) attempt to measure the amount of selling pressure on the broad market. Selling will often wax and wane, but the key is whether they stay in hibernation, allowing the buyers to flex their muscle.

Today, we’re not seeing that—after a few weeks of improvement (albeit with tricky and challenging action), the sellers have come out of the woodwork so far in July. It started with growth stocks, which have had a rough go of it since the last issue; measures like the Russell 2000 Growth Index and glamour funds like Ark Innovation are down 6% to 11% so far in July! But the selling has also spread to the broad market (our Cabot Tides are back on the fence), with just a handful of mega-cap growth names propping up the big-cap indexes; less than 40% of all stocks are even above their 50-day lines!

If you own pretty much anything, then, you’ve likely seen some slippage of late. In the Model Portfolio, we never got heavily invested due to the endless indecisive action, but we ditched one stock yesterday and have placed two others on Hold.

Looking ahead, though, we’re not throwing in the towel. In fact, we have one thing to report that’s quite encouraging: Despite the sour start to July, the overall action of the past few months has resulted in more setups among growth stocks than we’ve seen since the fall of last year. If earnings season goes well, we think there could be a ton of stocks that emerge from sound launching pads and provide great buying opportunities.

What To Do Now
However, right now, we have to go with what’s in front of us, which includes many failed breakouts and stocks that have trouble holding their gains—and that means a continued cautious stance is appropriate. In the Model Portfolio, we cut bait with Roblox (RBLX) on a special bulletin yesterday, and we’re placing both Devon Energy (DVN) and Progyny (PGNY) on Hold. Our cash position is around 52%.

Model Portfolio Update
In the Model Portfolio, we’ve basically been following a less-is-more mentality, with not much movement during the past few weeks because of the tricky, challenging action in most growth stocks. We’ve been content to generally ride the bucking bronco up and down, and given our large cash position, we’re still mostly of that mindset.

But now that selling pressures are picking up again, we’re also not going to simply hold and hope; on yesterday’s special bulletin, we sold our half-sized stake in Roblox and have placed Progyny and Devon Energy on Hold.

From here, we’re not eager to hold a lot more cash unless things really unravel, so it’s possible we could add a good-looking name or two if we’re forced out of some of our current names and if growth stocks find support. Plus, as we wrote above, there are still a lot of setups among growth stocks if earnings season goes well; we’re not throwing in the towel at all. But, as we’ve been advising for a while, it’s best to wait and actually see some stocks take off before doing much buying—until then, it’s a meat grinder environment at best.

Current Recommendations

StockNo. of SharesPortfolio WeightingsPrice BoughtDate BoughtPrice on 7/15/21ProfitRating
Cloudflare (NET)9635%1046/25/21103-2%Buy a Half
Devon Energy (DVN)724010%285/7/2127-5%Hold
DocuSign (DOCU)3635%2776/25/212770%Buy a Half
Five Below (FIVE)8528%1389/18/2018635%Hold
Floor & Décor (FND)1,0045%1074/9/211060%Buy
Progyny (PGNY)1,5774%645/28/2155-14%Hold
ProShares Ultra S&P 500 (SSO)1,74111%605/29/20123105%Buy
CASH$1,030,36952%

Cloudflare (NET)—If growth stocks can eventually let loose on the upside, Cloudflare looks like one of the leaders—big picture, the stock “only” got going after the pandemic, and the five-month rest to start the year looks like a normal refresh phase, and the persistent uptrend in recent weeks after all of that bodes well. Of course, the big upcoming event will be earnings, which will be released August 5; analysts see revenues rising 46% from a year ago with a loss of three cents per share, though it’s a good bet those will prove conservative—one brokerage house’s surveys showed huge demand for security software (part of what Cloudflare offers) in Q2 of this year compared to a year ago, which should help. Plus, the overall picture couldn’t be brighter, with Cloudflare having garnered a fraction of its potential customer base. As always, we’ll take what comes—if NET really gets hammered by the market or earnings, we’ll cut bait, but with the vast majority of evidence still positive here, we’re optimistic that the next big move is up. Hold on if you own some, and if not, you can start a position here or on dips of another couple of points. BUY A HALF

NET-071421

Devon Energy (DVN)—Despite higher oil and natural gas prices during the past six weeks, energy stocks have been pulling back in a choppy manner (the sector is down nearly 10% since early June), and DVN has gone along for that ride—it dipped below its 50-day line last week and, after a brief bounce, has fallen right back to its lows again. Overall, the action isn’t abnormal, either with DVN or the group as a whole; we’re willing to give our stake some more wiggle room, as commodity stocks will often test you multiple times before kicking into gear. As for catalysts, any hint or forecasts about Devon’s Q2 and rest-of-year dividend payouts (one analyst predicted back in June that the firm’s total dividends could be $1.50 per share this year and $2.10 in 2022) could help. (The Q2 dividend announcement will likely be released with earnings on August 3.) Right now, though, given the weakness in the stock and the broad market, we’ll switch to a Hold rating and look for buying support to appear. HOLD

DVN-071421

DocuSign (DOCU)—We could pretty much just copy and paste Cloudflare’s writeup here—if growth stocks kick into gear (meaning more breakouts and sustained runs), DOCU’s powerful action from its lows and its rapid, reliable growth story should keep big investors interested. Speaking of the story, a presentation from DocuSign’s CFO revealed a couple of tidbits: With revenue running at a $1.8 billion annual run rate, the firm is the largest player in its markets, yet while there’s sure to be some competition in this overall $50 billion market, the biggest opportunity is simply moving people into the 21st century—in the CFO’s words, “there’s just so much greenfield opportunity of folks who are still doing either manual processes or using pen and paper and are switching to automation.” As for the stock, it’s finally giving up some ground, but volume’s been light and the overall advance remains intact. We’re OK picking up shares here or on further dips if you don’t own any. BUY A HALF

DOCU-071421

Five Below (FIVE)—FIVE is a good example of what’s been going on in the broad market, even among decent stocks—shares popped on earnings in early June for one day, before backing off for the next two weeks. Then came a four-day surge toward its highs … followed by the latest three-week retreat into the middle of its range. It’s tedious as can be, though that said, given that the stock hasn’t done anything wrong, there’s nothing to do but grit our teeth and continue to practice patience. At this point, a drop below 175 or so would call into question the major uptrend (below the 40-week line and the prior low), and thus would likely have us taking the rest of our profit off the table. But at heart we still believe all these weeks of wobbles will resolve to the upside given the firm’s story, outlook and lack of big-volume selling in recent weeks. If you own FIVE, hang on. HOLD

FIVE-071421

Floor & Décor (FND)—FND has hit some resistance of late that’s caused it to back off a bit, but we actually see a lot of encouraging signs here—the fact that shares have only dipped grudgingly and on light volume despite the recent run (and weakness in the broad market) plays into the thought that the stock’s correction is over. There’s been nothing new from the company, though fears over the new Delta strain of the virus have been used as an excuse to hit many retail stocks (including FIVE above), but if anything, Floor & Décor’s business should be resilient as housing and construction is likely to boom even if there’s another smaller virus wave ahead. We’ll stay on Buy. BUY

FND-071421

Progyny (PGNY)—PGNY was one of the first stocks out of the gate after the market’s May low, but like many names, that strength hasn’t persisted, and this week shares dove below their 50-day line on average volume. As we’ve written many times, we doubt there’s anything wrong with the fundamental story here, which isn’t dependent on the economy or affected by the virus and should play out for a long time to come. Throw in the fact that stocks have been bouncing after pullbacks and we’re willing to give PGNY a bit more rope—but not too much. We switched our rating to Hold on yesterday’s special bullish and will use a mental stop on our half-sized stake a couple of points below here. HOLD

PGNY-071421

ProShares Ultra S&P 500 Fund (SSO)—As we alluded to on page 1, the narrowness of the market is getting extreme, with most stocks in intermediate-term consolidations (below 50-day lines) and, on some days, more new lows than new highs. Indeed, small- and mid-cap indexes have been flats-ville for months now, and our Cabot Tides are on the fence. (Interestingly, down the road, we think those broader indexes could be setting up a high-odds entry; see later in the issue for more on that.) Despite all of that, though, the S&P 500 remains in a solid uptrend, testing new high ground this week, and that keeps SSO in fine shape. As has been the case for many weeks, our antennae are up in case the extended run hits a major pothole, but right now SSO looks good. We’ll stay on Buy, but new buyers should aim for pullbacks of a couple of points. BUY

SSO-071421

Roblox (RBLX)—RBLX had been steadying itself for three weeks, even showing some tight weekly closes, and there was actually some good news this week (Roblox’s service launched in China in partnership with giant Tencent). But none of that has stopped from the sellers coming around for the stock again—shares decisively sliced their 50-day line this week, though volume was just so-so. Sure, there’s always the chance that the quarterly report (likely out in three weeks or so) turns this around, but we’ve given our half-sized stake enough of a chance to correct and hold up; we advised selling and holding the cash on yesterday’s special bulletin. SOLD

RBLX-071421

Watch List

  • Asana (ASAN 67): We really like ASAN—it’s a newer name that appears to be one of the fresh leaders in the cloud software space. Any shakeout or consolidation would be very tempting. Earnings aren’t likely out until September.
  • Bill.com (BILL 180): We stalked BILL for many months, and what’s interesting is that its weekly price/volume action has been nearly pristine during that time. The story is great, and the stock is set up nicely here. Earnings are likely out in early August.
  • CrowdStrike (CRWD 249): CRWD continues to look like a clear leader to us, with a pristine fundamental story, growth that’s hard to beat, and even this latest dip has come on light volume after some huge accumulation in June.
  • Dynatrace (DT 58): DT has finally hit a little resistance but remains fine overall, holding near its 25-day line. The one beef here is the lackluster earnings estimates (possibly because of a higher tax rate this year). Earnings are due July 28.
  • Roku (ROKU 406): ROKU had a wicked downturn in the spring (44% from top to bottom), partly due to worries over its move into original content. But, so far, that move has proven fruitful, with users tuning in and the firm reportedly doubling its upfront ad commitments over 2020. Shares still have some work to do but are pulling back normally within its overall consolidation. Earnings are likely out in early August.

Other Stocks of Interest
Chipotle Mexican Grill (CMG 1582)—Chipotle needs no introduction, and usually, we avoid those types of stocks—when something is so well known (1,770 funds own shares) there’s not often amazing upside. But sometimes, with “old” stocks, there’s something new in the business that causes a sea change in the numbers, and that’s what’s happening here with Chipotle’s digital operations. This isn’t just a story about slightly higher margins or some minor benefits of a new e-commerce site, this is about a massive improvement in the company’s financial model: The company was set up as an in-store dining operation, and for years they thought they could hit $2.5 million of revenue per location over time, but now that digital orders are booming (up 134% in Q1!) and make up half of all revenues, there’s huge potential upside to that figure, possibly to $3.5 million per store or more over time. Along with that, the digital/takeout boom is boosting new store returns (cash-on-cash returns about 10% higher than without), especially in Chipotles that have a new drive through pickup lane for those that ordered digitally. Plus, of course, there’s still a strong cookie-cutter aspect to the story—the firm has around 2,800 locations now, is opening 200-ish new stores this year and sees the potential for 6,000 or more down the road. Of course, there’s a lot of other, in-the-weeds stuff that’s helping (menu innovations, price hikes to cover higher wages to attract more employees), but the end result of it all is that the firm’s bottom line is going through the roof; this year, earnings are expected to come in around 75% higher than 2019’s tally (last year took a step back due to the pandemic), with another 32% gain in 2022. And given these new trends, there’s no reason solid growth can’t continue for years to come. None of that means CMG is going to double during the next month, but it’s one of many larger-cap growth names that spent a long time doing nothing (no net progress from late August 2020 to mid-June 2021) and is now showing strong accumulation. The next big event will be earnings, due out next Tuesday (July 20).

CMG-071421

Natera (NTRA 112)—Fundamentally, one of the themes we’re highest on going forward is the genetic revolution—to us, the ability to use a blood sample to test for abnormalities has always seemed sci-fi-ish, but that’s increasingly the reality today. Natera is positioned as a leader in the field thanks to its proprietary bioinformatics software and artificial intelligence technology platform. The company’s claim to fame is Panorama, which is the most accurate (and most validated via massive amounts of uses) non-invasive prenatal test out there, able to ID genetic abnormalities caused by extra or missing chromosomes in the baby’s DNA. (The test is able to differentiate between Mom’s and the babies’ DNA, and also has the highest accuracy in determining the sex of the baby.) Panorama has big market share already, but much of that is in higher-risk pregnancies; the upside in “average” risk pregnancies (3.4 million in the U.S. alone each year) is giant. But prenatal is just the start—with other tests including Signatera (can detect circulating tumor DNA for residual disease and recurrence monitoring; possible 2.4 million test opportunity annually) and Prospera (assesses the risk of kidney transplant rejection; the transplant testing market as a whole could be a $2 billion opportunity), the company has incredible upside. As management has made moves, revenue growth has kited higher at north of 30% annually (product revenue up 36% in Q1) as the number of tests performed (348,200 in Q1, up 48%) has lifted. Granted, the bottom line is deep in the red as the company invests in trials and new tests, and expectations are high ($10.5 billion market cap vs. $600 million run-rate in revenues), but the upside here is that Natera will become blue chip of the genetic testing era. As for the stock, it’s built a big and somewhat sloppy consolidation since February and has been slapped around with everything else this week, but is still positioned in the vicinity of its highs. Let’s see if NTRA can show some upside power, preferably after a bit more of a rest. Earnings are likely out in early August.

NTRA-071421

Oak Street Health (OSH 56)—With earnings season about to rev up, one thing we like to do is look for stocks that might not be showing a ton of strength right now but are relatively well positioned to start a new advance—if earnings are well received, of course. One name that fits the bill is Oak Street Health, which is upending the primary care model in the healthcare industry: The firm operates a total of 86 centers across the U.S. (up from 54 a year ago) that offer primary care services to about 109,000 Medicare-eligible patients. The advantages are obvious, as primary health providers are overwhelmed and often offer less-than-stellar service, leading to patient frustration and poorer health results. Oak Street, on the other hand, gives patients more personalized service that leads to better outcomes (its patients are admitted to hospitals half as often compared to the average senior) and customer experiences, which has led to a booming business. Management thinks its potential market is north of 25 million patients, so capturing just a few percent of that would mean years of growth for Oak Street. As with anything involving Medicare (and Medicare Advantage), the details can be a bit involved (the firm gets its revenue by entering “full risk” contracts with Advantage plans, getting a cut of the monthly payment), which is a risk. But at day’s end Oak Street’s idea makes sense and it’s essentially a cookie-cutter healthcare provider (it’s aiming for about 120 centers by year end, with hundreds more down the road) serving an industry that’s desperate for improvement. The bottom line here is in the red as expansion costs eat into revenues, but the top line was up 47% in Q1 and is expected to rise north of 50% both this year and next. The stock, as mentioned above, isn’t hot—OSH has essentially tread water since mid-December, but its swings up and down have become more muted, even in spite of a share offering. Could OSH break down? Sure. But if it can hold near its 40-week line, it’s possible a great Q2 report could kickstart a new advance. Earnings are likely out in early August.

OSH-071421

Small- and Mid-Cap Leveraged Long Funds are Worth Watching
We’re always focused first and foremost on finding new leading stocks, but market timing is obviously a big part of what we do, and that’s why we’ve owned a stake in a leveraged long index fund from time to time. We’ll never have half the Model Portfolio in ETFs, but when the right set of circumstances comes along, owning the right ETF can provide solid (and relatively smooth) returns.

One of our favorite times to jump in is when we see some of our time-tested blastoff indicators flash green. To recap, these blastoff indicators speak up when they spot overwhelming strength in the market—basically when the situation becomes “hyper-overbought.” Most investors think such an environment is bearish (things have come “too far too fast”) but history tells us just the opposite, that these periods actually lead to huge returns over time with little drawdown.

That’s exactly why we took a position in ProShares Ultra S&P 500 Fund (SSO) just over a year ago. In late May, both our 90% and 2-to-1 Blastoff Indicators flashed as the market accelerated higher after the March crash. The news was awful and to many the market looked too high, but we dove in and SSO did well for a few months.

SSO-071421

What’s interesting (and somewhat lucky) was that another blastoff measure turned positive just after last year’s election—the Three Day Thrust (three straight days of at least 1.5% gains in the S&P 500) rule kicked in, which itself has a sterling track record. All told, SSO has more than doubled from our original purchase last May, which is pretty darn good when you’re talking about an index fund.

(As a heads up, when we do play leveraged long funds, we restrict ourselves to (a) a major index, not a sector, (b) no more than double leverage, moving twice the index on a daily basis, and (c) something that’s well traded, so we all have the ability to get in or out if need be. If you want to be more aggressive and play triple-leveraged sector funds, that’s fine, but it’s not for us—we’re trying to play out intermediate- to longer-term moves, not trade in and out, so we want something with a bit more stability.)

Back to today, we don’t have anything that high-odds right this second; the broad market has been weakening of late as the sellers come out of the woodwork. But what’s interesting is that many of those broad market indexes—particularly small caps and mid-caps—are setting up beautifully in the big picture.

IWM-071421

Take a look at the iShares Russell 2000 Fund (IWM), which is the most popular small-cap index out there. Shown here is a three-year chart of the fund, and you can see that from mid-2018 through October of last year, the small-cap sector of the market built a huge base. Then came the November blastoff (mentioned above) that kicked off a giant run in the broad market—IWM broke out and ran up beautifully into February. And now that fund has gone straight sideways for more than five months. It’s a similar story with the SPDR S&P Midcap 400 Fund (MDY); if anything, mid-caps have been a touch stronger than small caps in recent weeks.

MDY-071421

When you step back, both broad market areas are etching their first consolidation after multi-year breakouts, which in and of itself usually leads to good things. And the fact that the “corrections” thus far have been very tame given the post-November advance also bodes well. When looking for leveraged long funds, there’s nothing too appealing for the S&P 400; most funds trade thinly. But for small caps, we’re keeping an eye on the ProShares Ultra Russell 2000 Fund (UWM), which is the same as SSO but tracks the Russell 2000 instead of the S&P 500.

Of course, you know us—we’re not going to anticipate anything, as for all we know small caps will pull back further in the weeks or months ahead. But the longer-term setup is there; something like UWM is a good idea to keep on the back burner, and will likely be a solid play when the broad market embarks on its next upmove.

Still Lots of Indecisiveness
We’ve been searching for a way to describe the on-again, off-again rotational nature of the market of late—the main reason we continue to advise going slow—and we think indecisiveness says it all. Despite what you see in the big-cap indexes and among a few leaders, most names (even among growth stocks) have been showing lots of indecisiveness, especially at key levels, and now of course we’re seeing selling pressures pick up.

Snap (SNAP), which boasts a great story and accelerating growth, is a perfect example. The stock was a leader into the February top, and built a deep consolidation in the spring along with most growth stocks. Then it began to repair the damage in May, pushing above some resistance in June and rallying to 70 last week—before it dropped eight points in two days! SNAP isn’t broken and is still worth watching into earnings (out July 22), but the point is unless you bought it in the first few days off its low, you’re not making any progress.

SNAP-071421

Obviously, there are other stocks acting better (as we wrote about in the last issue), but there are a ton of names that have shown similar action. The key as earnings season gets going is to see if potential leaders can replace the indecisive action with a strong uptrend. Until then, we’re content to keep things relatively light.

Cabot Market Timing Indicators
The overall bull market remains intact, but the rough action so far in July has put our Cabot Tides on the fence and dented most growth stocks (and, really, anything outside of mega-cap names). Earnings season could save the day, but we’re remaining cautious until the selling pressure eases.

Cabot Trend Lines: Bullish
Our Cabot Trend Lines remain in fine shape, as they focus on the resilient big-cap indexes and their longer-term, 35-week moving averages—at last week’s close, both the S&P 500 and Nasdaq traded about 10% above their respective moving averages, a clear sign the overall bull trend remains intact.

Cabot Trend Lines

Cabot Tides: On the Fence
Our Cabot Tides are back on the fence—while the big-cap indexes are in good shape so far, the broader indexes (including the S&P 600 SmallCap, shown here) are either at or below their 50-day lines, and more telling, have effectively treaded water for two to five months. Whether this leads to a broader selloff or another bout of rotation is anyone’s guess, but right now the overall market’s intermediate-term trend is neutral.

S&P 600

Cabot Real Money Index: Neutral
As the market has generally chopped around, money flows have done the same—our Real Money Index remains in neutral territory, as little net money has moved into or out of equity funds during the past five weeks. The cooling off from February’s frenzy is good, though a meaningful dip lower from here could provide a better contrary signal.

Real Money Index

Charts courtesy of StockCharts.com


The next Cabot Growth Investor issue will be published on July 29, 2021.

Cabot Wealth Network
Publishing independent investment advice since 1970.

President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
Cabot Heritage Corporation, doing business as Cabot Wealth Network
176 North Street, PO Box 2049, Salem, MA 01970 USA
800-326-8826 | support@cabotwealth.com | CabotWealth.com

Copyright © 2021. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our 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. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory 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: are made in regular issues, updates, or alerts by email and on the private subscriber website.

Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.