September 11, 2019

The dam finally broke in the growth sector, with virtually anything containing a rich price-earnings multiple being taken to the woodshed. This was not a complete surprise, as we have seen the growth-stock leadership whittled down from 70 names on the Watch List to 48 recently.

In part, the selling was a result of the market realizing that fears of an economic slowdown and recession were overblown. You can see that by the rally in the 10-year Treasury yield from a low of 1.43% to Wednesday's 1.73%. As well, outperformance by the homebuilders and retailers, two cyclical segments, reinforced this. A market bidding up cyclical groups like these is clearly not worried about recession.

The Nasdaq itself was largely immune from the liquidation in growth. This due to the large presence of financial issues in the index.

The recent action has allowed the S&P 500 to supplant the Nasdaq as the de facto leading stock index.

As has been discussed in the videos and reports, the growth leadership was centered in software titles. This can be a double-edged sword, as things are rosy on the way up, but tend to fall apart all at once on the way down. It is acceptable to have a portfolio concentrated in just one corner of the market as long as we are cognizant of the risk and can take quick action in case that corner comes undone.

Hopefully, subscribers heeded the caution inherent in these reports and the videos by adjusting for higher risk. As mentioned a number of times, it is important to always have a handle on the reward-to-risk potential of a cycle -- and then adjust one's risk accordingly.

Otherwise, after some post-breakout profit-taking, some of our Focus List ideas of last week act well, including Lam Research (LRCX) and Onespaworld Holdings (OSW). These are not classic growth stocks, which explains their inability to come undone with the growth sector.

As in recent weeks, precious few names set up. The game plan will be to capitalize on any setups provided by index/sector ETFs, all the while being cognizant of what the new cyclical leadership can provide. As I tweeted, it is a misconception that only growth stocks can lead a bull market. Cyclical and defensive sectors also lead from time to time. In '06-'07, the two biggest-winning groups were cyclicals: the fertilizers and shippers.

Going forward, we will continue to be opportunistic. It is important, however, to recognize and accept that the reward-to-risk ratio has changed for the worse. Again, this means adjusting one's risk exposure along with tempering one's expectations. Above all, let's stay patient and let the opportunities come to us without forcing anything.

Among the names, Docusign (DOCU) is perhaps the highest-potential growth title. I began following it after it came public in April 2018. It has the four things that institutions with a growth mandate crave: 1) Big earnings growth estimates, 2) Good relative strength, 3) Excellent liquidity to facilitate the building and liquidation of a position without it adversely affecting the market, and 4) Highly stable earnings growth produced by a steady-eddy line of business.

The stock came up the right side of its consolidation without a pause. It is being monitored for a handle or pullback prior to entry. Earnings expected Dec. 5 (unconfirmed).

Freshpet (FRPT) shows an earnings-per-share progression of -0.15/0.05E/0.57E for ‘18/’19E/’20E while logging sales growth of 27% and 26% in the two recent quarters.

The stock is putting in a 10-week consolidation with some decent accumulation days on the right side of its pattern. It can be taken above the 51.85 pattern high. Earnings expected Nov. 4 (unconfirmed).

Verra Mobility (VRRM) shows a 72% earnings growth estimate for ’20. Revenue has grown at 42% and 12% in the two recent quarters. A 95 RS stock in a 67 RS group with an A- acc/dis rating.

This is a $14 stock that is nearing the top of its four-month cup pattern. It can be monitored for a pullback or handle. A very aggressive operator might take it above the 15.07 pattern high. Earnings expected Nov. 5 (unconfirmed).

Kevin Marder

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The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Marder Investment Advisors Corp., Kevin Marder, or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. Estimate data provided by Thomson Reuters. Expected earnings release dates provided by EarningsWhispers.