Issues
Current Market OutlookTurkey’s currency crisis is the latest of what seems like a never-ending string of worries this year (volatility implosions, trade wars, rate hikes, etc.) that have hit the market to some extent. That said, we’re relatively encouraged by what we’ve seen during the past couple of weeks, with the major indexes holding and bouncing off important support, some new leadership emerging on earnings and other leading names forming solid bases. It’s still a tricky, narrow and choppy environment, which is a good reason to pick your spots, honor your stops and hold some cash. But we’re nudging our Market Monitor up another notch, as we see a healthy number of good-looking leading stocks and the market’s major trends remain up.
For the second week in a row, we have a growth-oriented list, a positive sign after the late-July selloff. Our Top Pick is Roku (ROKU), a very volatile name with a very big story. Keep it small, try to buy on dips and expect plenty of wiggles.
| Stock Name | Price | ||
|---|---|---|---|
| Alteryx (AYX) | 132.78 | ||
| Carvana (CVNA) | 82.90 | ||
| CF Industries (CF) | 45.23 | ||
| CyberArk (CYBR) | 111.74 | ||
| Match (MTCH) | 0.00 | ||
| Michael Kors Holdings Limited (KORS) | 73.22 | ||
| Roku, Inc. (ROKU) | 150.46 | ||
| Seattle Genetics (SGEN) | 150.85 | ||
| Teladoc, Inc. (TDOC) | 127.95 | ||
| Wingstop (WING) | 121.52 |
While emerging market stocks (especially Chinese stocks) remain under pressure, we’re starting to see some signs that things may be turning around. Our stocks have been knocked around a bit by earnings season, but we’ve also had some good winners. And we continue to build a watch list of companies with excellent stories and intriguing charts that we will be ready to buy when the general tone of the market improves. Read on for my view on what’s happening right now and why it’s a good time for optimism.
The Dow Jones Industrial Average continues its upward trend, gaining about 900 points since our last issue, helped by another great quarter of corporate earnings. With 81% of the companies in the S&P 500 index reporting, 80% beat earnings estimates and 74% surpassed sales forecasts. Those are the highest numbers since FactSet began reporting in Q3 2008.
The market remains challenging, in that we really don’t know if growth stocks are cooked, or China is in trouble or housing has peaked—but uncertainty has always been part of the game. If you want certainty, buy a bond.
In doing this month’s research, I was struck by the preponderance of excellent investment opportunities within the banking industry – so many that I could fairly easily create a mutual fund entirely devoted to bank stocks!
Current Market OutlookLeading stocks stabilized somewhat during the second half of last week, but we’re still seeing plenty of potholes (mostly on earnings reports) and a bunch of rotation out of fast-growing names and into more cyclical, defensive areas. That’s not to say all growth stocks look terrible—we’re still seeing a good number of positive earnings gaps, including a few in today’s issue—but there remain a bunch of crosscurrents on a day-to-day basis, making it difficult to latch onto top performers. As for the overall market, it’s in solid shape, with the intermediate-term trend tilted up. All in all, we don’t advise hiding in the closet, but it’s important to hold some cash and honor your stops, and on the buy side, to pick your entry points and focus on names that have shown recent, powerful buying.
This week’s Top Ten has a diverse mix of stocks, and happily, it includes a good number of stocks with solid growth stories. Our Top Pick is Paycom Software (PAYC), which staged a fantastic earnings gap (and follow-through) last week.
| Stock Name | Price | ||
|---|---|---|---|
| BJs Wholesale (BJ) | 36.69 | ||
| CarGurus (CARG) | 41.58 | ||
| Chart Industries (GTLS) | 72.05 | ||
| Greenbrier (GBX) | 57.73 | ||
| Illumina Inc. (ILMN) | 289.74 | ||
| Ingevity Corp. (NGVT) | 99.98 | ||
| Neurocrine Biosciences (NBIX) | 123.40 | ||
| Paycom Software (PAYC) | 0.00 | ||
| SodaStream (SODA) | 142.91 | ||
| Zendesk (ZEN) | 82.19 |
With the market on edge we’re going with a slightly larger company than normal with this month’s Cabot Small-Cap Confidential selection. But we’re not being overly conservative. Shares of this software stock have been climbing steadily after a breakout move in May. The reasons? Growth is reaccelerating, profit margins are climbing, and the proportion of recurring revenue is going up.
The overall bull market remains in good shape, but the big event of the past two weeks has been the sharp selloff seen in many leading growth stocks that featured a bunch of abnormal selling. Could this dip be another shorter-term shakeout? Sure, and we’re certainly not sticking our heads in the sand. But the selling has been enough for us to trim our sails, raise some cash and see if the buyers can show some support.
Updates
The market rolls sideways amidst a slew of conflicting forces.
The S&P 500 has bounced around and is at the same level it was in the middle of May. The primary culprit is technology. That sector has been in a funk. The S&P 500 is hard-pressed to generate any lasting traction while this massive sector, accounting for over 40% of the index, flounders.
The S&P 500 has bounced around and is at the same level it was in the middle of May. The primary culprit is technology. That sector has been in a funk. The S&P 500 is hard-pressed to generate any lasting traction while this massive sector, accounting for over 40% of the index, flounders.
The market has gone sideways since May. It seems to be deciding what to do.
It’s encouraging that the resumption of hostilities with Iran has not sent the market lower. It’s also positive that oil prices aren’t rising back to the $100 level earlier in the war, although prices have risen. It’s also another earnings season and analysts expect a big one.
It’s encouraging that the resumption of hostilities with Iran has not sent the market lower. It’s also positive that oil prices aren’t rising back to the $100 level earlier in the war, although prices have risen. It’s also another earnings season and analysts expect a big one.
With war being one of the most dominant themes of the last four years, it stands to reason that investors should position their portfolios to account for this conspicuous (and unwelcome) trend.
And lest one be tempted to think that the warfare theme will diminish anytime soon, last week’s article by NPR deflates that illusion: It revealed that global military conflicts are at their highest level since WWII.
And lest one be tempted to think that the warfare theme will diminish anytime soon, last week’s article by NPR deflates that illusion: It revealed that global military conflicts are at their highest level since WWII.
Price targets are standard practice on Wall Street. But sometimes, they can act as an artificial ceiling.
For example, say Truist sets a price target on an up-and-coming growth stock that’s 25% higher than its current share price. For a growth stock, a 25% return isn’t much. But then again, the stock could be a total flop, which is the natural boom-or-bust tradeoff growth investors must endure in trading off increased risk for massive upside. So, a price target on a growth stock seems almost like an unnecessary cap on a stock that has the potential to go through the roof.
For example, say Truist sets a price target on an up-and-coming growth stock that’s 25% higher than its current share price. For a growth stock, a 25% return isn’t much. But then again, the stock could be a total flop, which is the natural boom-or-bust tradeoff growth investors must endure in trading off increased risk for massive upside. So, a price target on a growth stock seems almost like an unnecessary cap on a stock that has the potential to go through the roof.
WHAT TO DO NOW: Continue to trim your sails. In the Model Portfolio, we’ve been getting closer and closer to shore as growth funds and indexes are under pressure and AI stocks cascade lower. Tonight we’re going to further trim Marvell (MRVL) given its ugly action, selling a third of what we have left. That will leave the portfolio with a big 58% cash position. We could put some of that to work if growth names find support, but we want to see key growth measures firm up before buying.
After a brief pause last week, small caps are once again leading the pack.
Through Wednesday’s close, the S&P 600 Small Cap Index is up roughly 21% year to date, compared to gains of about 15% for the S&P 400 MidCap Index, 17% for the Nasdaq and 11% for the S&P 500.
Through Wednesday’s close, the S&P 600 Small Cap Index is up roughly 21% year to date, compared to gains of about 15% for the S&P 400 MidCap Index, 17% for the Nasdaq and 11% for the S&P 500.
Its earnings season again! That’s a good thing. Earnings just might save the day in an otherwise confusing and uncertain market.
The market is causing whiplash. The Iran peace deal changed things. Stocks held back by high oil prices, and the resulting higher inflation and interest rates, reignited as oil prices came back down after the peace deal. But hostilities with Iran have resumed.
The market is causing whiplash. The Iran peace deal changed things. Stocks held back by high oil prices, and the resulting higher inflation and interest rates, reignited as oil prices came back down after the peace deal. But hostilities with Iran have resumed.
The peace deal may be on hold again. But stocks are hanging in there so far.
The ceasefire with Iran is over and hostilities have resumed. That sounds like a bigger bummer than it’s been in the market so far. Falling oil prices enabled previously beleaguered stocks to soar higher again as the prognosis for inflation and interest rates simultaneously improved. But that rally is over if oil prices spike higher again.
The ceasefire with Iran is over and hostilities have resumed. That sounds like a bigger bummer than it’s been in the market so far. Falling oil prices enabled previously beleaguered stocks to soar higher again as the prognosis for inflation and interest rates simultaneously improved. But that rally is over if oil prices spike higher again.
It’s no surprise that summer often brings lower market volatility levels as Wall Street heads to the Hamptons and participation rates diminish.
Indeed, what we’re seeing right now has all the classic symptoms of a low-participation environment, with investor sentiment being remarkably muted. This can be seen across a number of sentiment indicators for several different markets, most of which are flashing decisively “neutral” signals.
Indeed, what we’re seeing right now has all the classic symptoms of a low-participation environment, with investor sentiment being remarkably muted. This can be seen across a number of sentiment indicators for several different markets, most of which are flashing decisively “neutral” signals.
The divide between value and growth stocks is widening, as the Nasdaq is now more than 5% off its highs after peaking in early June while the Vanguard Value Index ETF (VTV) is hovering near its late-June apex and is up 3% in the last month.
That can flip in an instant, of course, as we saw in April and May. But the bottom line is that value stocks have risen 15% year to date, compared to an 11% gain in the Nasdaq and a 9.5% boost in the S&P 500.
That can flip in an instant, of course, as we saw in April and May. But the bottom line is that value stocks have risen 15% year to date, compared to an 11% gain in the Nasdaq and a 9.5% boost in the S&P 500.
After a very strong run from the March lows, the market appears to be going through an uncomfortable but healthy rotation. Many of the biggest winners from the AI and semiconductor trade have come under pressure, while value stocks, equal-weight indexes and other areas that had lagged earlier in the year have held up much better.
Markets are facing more inflation as the Iran mess gets messier. Concerns over high AI capital spending are a cloud over a resilient market. On the bright side for our portfolio, however, International Business Machines (IBM) shares were up 7.4% this week following last week’s 8.9% gain. Sea Limited (SE) shares leapt 9.6% this week and are up about 20% over the past month. MercadoLibre (MELI) shares are up 11.6% over the last two weeks.
Alerts
This company, helmed by legendary investor Warren Buffett, is a conglomerate that owns and invests in dozens of other businesses.
One of our stocks reported results on Thursday and investors didn’t care for the results.
Here are earnings updates on three of our stocks, including a rating change, plus minor updates on three others.
A recent Reuters survey of 24 brokerage companies showed strong support for the shares of this medical products company, with 79% of analysts giving it a ‘Buy’ rating, and 21% rated the shares a ‘hold.’
This global business beat analysts’ estimates by three cents last quarter.
This home improvement retailer beat Wall Street’s estimates by $0.07 last quarter, posting EPS of $0.86 per share.
Tivo (TIVO) reported non-GAAP $0.40 EPS vs. the consensus estimate of $0.27. News agencies reported all of the following incorrect EPS numbers: (0.29), $0.22, $0.29, $0.30 and $0.45. Here’s the full story.
Fourteen analysts have increased their 2017 earnings forecasts for this energy company.
ADP reported strong first-quarter EPS but slightly weaker-than-expected revenue yesterday, and the stock has declined over 5%.
Updates on four of our stocks—all rated Strong Buy.
Although this equipment maker posted a loss of $0.14 per share for its first quarter, the company’s results did beat Wall Streets’ forecasts of a $0.16 per share loss.
Here are updates on four or our stocks that reported earnings, please updates on two other stocks that have shown strong price action.
Portfolios
Strategy
A few Cabot Options Trader subscribers have asked me about ways to protect gains in their portfolios, so I thought I would write to everyone with a couple of strategies using options to hedge your portfolio.
A subscriber recently asked me if I keep a journal of my trades. Many traders keep journals so they can look back at their trades and evaluate what they did right and what they did wrong.
Want to know how the big institutional investors use options? Here is an example of how one trader spent $132 million on three technology stocks.
Options trading has its own vernacular. To know how to do it, you need to know what every options term means. Here are some of the basics.
Our Cabot Momentum Trader’s market timing system consists of two parts—one based on the action of three select, growth-oriented market indexes, and the other based on the action of the fast-moving stocks Cabot Momentum Trader features.