Issues
2017 was a great year for investing in stocks. In this issue, I briefly review my recommendations and market performance in the past year. I also introduce a new stock in the retail space, move one stock to Hold and another stock to Sell.
The year began with five straight days of advances for emerging market stocks, which was pleasant. And the little rap on the knuckles from the market on Tuesday and Wednesday brought us back to reality without doing much damage. So the bottom line is that our stock universe is still in an uptrend and the prospects for 2018 looks just fine.
Our contributors are stock-picking experts, utilizing their various investment styles to offer investors a wide range of strategies through up and down markets. And their track records are impressive. While the market’s double-digit gains of 2017 were fantastic, our contributors did even better.
Now, we move ahead to 2018, and this issue is packed full of exciting opportunities among very diversified sectors and investing styles.
Now, we move ahead to 2018, and this issue is packed full of exciting opportunities among very diversified sectors and investing styles.
Today’s recommendation is a familiar name, not because I’ve recommended the stock before (I haven’t) but because the company’s creations are enjoyed by millions of Americans and a major new acquisition will only increase the company’s reach.
Current Market OutlookIt’s been a great start to the year, with most areas and indexes shooting ahead on solid volume in recent days. We’re still seeing some wild moves (up and down), which is par for the course for early January and you can expect volatility among individual names to remain elevated in the near-term. Our focus is always on the intermediate- to longer-term, so while there remain some near-term yellow flags (with many stocks extended to the upside and with sentiment bubbly, you should pick your spots on the buy side), the positive price and volume action keeps us bullish.
This week’s list is about evenly split between growth stocks and industrial/commodity stocks, which tells you how broad the advance has been. Our Top Pick is Commercial Metals (CMC), a mid-sized steel-related outfit that just catapulted out of a huge base on earnings. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Alcoa (AA) | 0.00 | ||
| Autohome (ATHM) | 98.65 | ||
| Commercial Metals (CMC) | 0.00 | ||
| Dycom Industries (DY) | 0.00 | ||
| Lear Corp. (LEA) | 0.00 | ||
| Lennar (LEN) | 61.85 | ||
| Netflix, Inc. (NFLX) | 423.92 | ||
| Splunk (SPLK) | 207.67 | ||
| Steel Dynamics (STLD) | 0.00 | ||
| Twitter (TWTR) | 40.37 |
This month’s candidate is another software stock—but not a high flyer. Rather, this company is still scooting just below the radar, and trades at a big discount to most of its peers. When you value it based on growth, it’s downright cheap—but valuation isn’t why we’re buying it.
The Model Portfolio is more than 90% invested and off to a good start this year. In tonight’s issue, we write about our newest addition and the excellent relative strength it’s shown in recent months; we think it’s a liquid leader of the new energy rally. We also write about some recent IPOs, other stocks we’re watching and, of course, dive into all of our recommended names.
Current Market OutlookThe calendar has flipped, but the market environment remains bullish, with the major trends of most indexes and leading stocks continuing to point up. Today saw some rotation back into a few of last year’s leading growth stocks, but we wouldn’t jump to conclusions quite yet—January is known for lots of volatility as big investors reposition their portfolios and, in a couple of weeks, as earnings season gets underway. You should keep your feet on the ground and honor your stops, but you shouldn’t get carried away with daily moves over the next few days; ideally, try to buy strong stocks on normal dips. For overall stance, you should remain bullish.
This week’s list has a nice mix of great stories and charts, ranging from a speculative biotech to a couple of strong energy stocks. Our Top Pick, though, is one of the largest copper miners in the world—Freeport McMoRan (FCX) appears to have blasted off and entered a sustained uptrend after forming a very long launching pad. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Adamas Pharmaceutical (ADMS) | 0.00 | ||
| American Woodmark (AMWD) | 0.00 | ||
| Burlington Stores (BURL) | 193.95 | ||
| Diamondback Energy (FANG) | 0.00 | ||
| Freeport-McMoRan Inc. (FCX) | 13.78 | ||
| Floor & Décor (FND) | 68.03 | ||
| Ollie’s Bargain Outlet (OLLI) | 103.94 | ||
| Penn National Gaming (PENN) | 45.38 | ||
| ProPetro (PUMP) | 23.30 | ||
| Warrior Met Coal (HCC) | 0.00 |
The bull market remains alive and well, with most stocks and sectors in good shape, so we\'re generally letting our winners run and staying heavily invested. That said, January is often a tricky month, so with the potential for potholes and volatility, tonight\'s Cabot Stock of the Week is a mega-cap growth stock that, by some measures, is undervalued.
There are many changes in today’s issue: we’re adding four new stocks and selling seven stocks.
Updates
While flashier, more star-studded teams like Lionel Messi’s Argentina, Kylian Mbappe’s France and Erling Haaland’s Norway garnered most of the headlines at the just-completed World Cup, Spain was the best team. There was nothing flashy about Spain: no mega-stars, not a ton of goals, no relentless attack. Instead, they dominated the tournament with precision passing, immaculate ball control and near-impenetrable (just one goal allowed all tournament!) defense.
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.
Alerts
Toll Brothers (TOL) reported earnings blowout and the stock is rising; maintain Buy. BorgWarner (BWA) stock is rising; rating change to Hold. Also, brief notes on Applied Materials (AMAT), Archer Daniels Midland (ADM), Big Lots (BIG) and Tesoro (TSO).
Brokerage firm Jefferies also likes our first idea—a media company, saying it’s a great buy, based on valuation and international growth prospects. Our second recommendation is a sale of a pharmacy stock.
While the overall market is still in decent shape, there’s no question that growth stocks are being crushed across the board. We’re selling two stocks that have broken down on big volume. That will leave us with nearly 50% in cash.
Sell GM. General Motor’s EPS is now expected to grow less than 1% in 2017, so an expectation of additional capital gains is unrealistic in the foreseeable future. Plus updates on BorgWarner (BWA) and Quanta Services (PWR).
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.