All these great names sold off. What gives?
I know I have been calling for a sell-off as we get to old highs and even break to new ones. It is a tricky game to, on the one hand, root for the market reaching new highs, and on the other, see a fall off soon after. Hey, I'm human, who doesn't want to see stocks stretching for new highs? It is like breaking the 3-minute mile.
All that said, we try to keep emotion out of the process of how we allocate to and de-allocate from equities. Looking at the charts might uncover what is going on with these great names. These are our high growth, high-beta names, so there are always times that these types of names can sell-off sharply by profit-taking without cause. What has caught everyone's attention is that so many fast-growing names are selling off at the same time and without a specific reason or rhyme.
The Trade Desk (TTD)
TTD is a great and highly profitable company, with a loyal and growing customer base. We can see from the chart that it has strongly broken its upward trend (rising green line). The break has been sharp and fairly rapid. At $210-ish, we are at the beginning of support, but it is clear that there is more support at around $200. So TTD may have more room to fall. I would still buy in tiny increments if there was some cash available. I know we are building cash for the sell-off, so sell something to make room for more TTD. It is that good a name...
CRWD beat both on revenue and earnings with sales up 94% Y/Y and lifted guidance.
Q2 subscription revenue was up 98% Y/Y to $97.6M. ARR grew 104% to $423.8M and promptly lost nearly 8% after the recent report and has kept falling. CRWD is now down 35%; Yahoo Finance has pointed to less aggressive guidance going forward.
Nearly every fast-growing name in tech looks to tamp down expectations after earnings reports. You have even heard me say that "Sandbagging" is a phenomenon, that causes me to caution traders to lighten up positions or hedge going into earnings. In this case, management lifted guidance, but it was deemed not enough. That doesn't ring true to me.
CRWD is now 35% below its all-time high. Maybe it never reaches that high again, but at some point and soon, CRWD will fall to a level where we could get some alpha. IPO lock-up is in December, so some watchful waiting on the name with an entry point at around $60 might be warranted. With CRWD trading higher at $68, it seems to be bottoming already. CRWD started rolling over before TTD, so I am not seeing a discernible pattern yet. Since TTD is profitable and growing, perhaps this is a late arrival to this sell-off and we are already getting close to the end. Let's explore more and see.
ESTC is a tool or an infrastructure technology component for cloud and "apps". It had a fantastic earnings report and that is the spike you see on the chart. It looks like ESTC has bounced off $80 and is now moving up. It might be too early to tell, but it seems to be back to an uptrend.
I like ESTC, I think that like Twilio (TWLO) and MongoDB (MDB), cloud, services and apps depend on these infrastructure subsystems. It provides a specialized type of search for big data or unorganized, non-formatted type data. You are not going to repeal the buildout of the next generation of services that needs this technology.
Right now I don't feel like I should be recommending names since I am asking you to trim profits, but I am tempted. If you have trimmed enough, or are hedging, you may want to add or start a small position today. Sell other stuff to make room maybe.
TWLO is down 24%, though it is up $3 right now. TWLO is very much like ESTC, except it provides communication subsystems for apps and web. It is the "go-to" for that type of essential building block.
Twilio dutifully beat on earnings and revenue and raised guidance, but apparently, not enough for Mr. Market and promptly sold off as you can see above. The chart above does not inspire confidence; a double top and the subsequent sharp retreat means market participants are showing conviction that that high price level is not where TWLO should be. It has bounced nicely today, and that is counter to the current market direction so that is good. Even though it is nascent, the fact that TWLO is up tells me that we may be towards the end of this rotation away from high growth names... Maybe.
Okta Inc. (OKTA)
OKTA is in the same camp as ESTC and TWLO. It is characterized as a security subsystem, but OKTA is more than that. For the consumer, it manages their identity with a service provider and makes it convenient to have safe interactions. For the service provider, it makes it easier to customize experiences for the user. For the enterprise, managing IDs clearly has tremendous importance for corporate security. OKTA is also an infrastructure enabler to developers of services in the cloud, apps, and web. I have not picked these names because they have fallen very hard, and recently. Last I checked, OKTA was also up (now it's down a few pennies).
The stock did fantastically for earnings and received a very nice upgrade from Jefferies from $120 to $160. Now it has fallen to $108-ish today. In this case, I have two charts for OKTA. The first is a 5-day chart that shows a precipitous decline, and the second, an uptrend just forming.
This is all to the good. Pulling out a bit, we see a double top, prior to the fall. Again, similarities to previous names. I wonder again if there was a point that many market participants made a u-turn on the values of these names, yet it seems that we might be finding some nascent support at this time. Just looking at where OKTA is right now, we see good support in this $100-95 level, and that OKTA bounced from $100. My caution is the next level is clearly about $80; if this trend of selling these cloud tech enablers gets stronger, this $100 level may not hold. All that said, I like OKTA's prospects.
WDAY is different from the last 3 and has more similarity to TTD in that it is an enterprise application that lives in the cloud. It is similar to Salesforce (CRM) in that it provides services. That said, it has also fallen precipitously... check it out above. Again, I didn't choose WDAY because it is up today. In any case, let's move from the 6-month chart to the 1 month and see where we are at...
It is clear that WDAY bounced from the mid-$160s, but there is some pretty strong overhead congestion from just under $175 to $179-ish. In this crazy situation, and with so much overhead room for alpha, I would wait until WDAY is decisively above $180 before we get momentum to the upside back.
Moving away from the pure tech names, I want to point out that the Med-Tech names are also feeling the wrath of investors who seem to have discovered their value gene all of a sudden...
DexCom, Inc. (DXCM): Just about 12 days ago DXCM was at all-time highs at $178 and now is more than 20% below that level. DXCM is a fantastic medical device maker for diabetics. It has nothing to do with the internet or cloud.
Also, Tandem Diabetes (TNDM) fell to $58, down 22% today before it bounced. I am not going to bore you with charts that basically look the same as TWLO and ESTC, etc. What are all these charts telling me? I may be outsmarting myself, but this is what may be going on:
- The senior money managers are fully back in charge and, not being fools, are taking profits in the stocks that have moved the most to prepare for the sell-off
- This assumes two things: 1) they are skeptical that the current run to new highs is a fake-out; and 2) I am not the only one who is sounding the alarm to prepare for a retreat once we get to those highs.
- Guess what? I may be outsmarting myself, or perhaps these senior managers are, in that this run to new highs may have longer legs than I imagined. I know that sounds crazy, but think about it. The stock market always manages to make fools out of the largest number of participants. I think that is going to happen here with the "smart money".
- Just so you don't think I've totally lost it, look at the VIX, it's below 16! There is no real fear in the market. This is a more gradual and considered move.
- This is not the first time that you have had sector rotation from high-tech names to value and dividend-paying names, and then going right back to high growers. Again, this feels like the "old hands" are pulling in the horns. They are showing the youngins how it's done. How often does that attitude come up short when it is SO indiscriminate. What does Med-Tech have to do with software infrastructure names for e-retail (for example)? No, I think these geezers are in for some "comeuppance". With all due respect to all geezers, since I think I qualify.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.