Issues
Current Market OutlookAfter a prosperous last 12 months, 2021 got off to a sour start today, though that wasn’t totally surprising—early-January is known for crosscurrents and profit taking (especially after good years) as big investors un-hedge and reposition their portfolios. That doesn’t mean today’s weakness should be excused, but what counts most is what happens from here: Another couple of rounds of sharp selling in the leaders and major indexes (possibly coinciding with some intermediate-term breakdowns) would tell us the bears are making a stand, while a quick show of support in many key stocks will be a good sign. We’re keeping our eyes peeled, but so far, the trends of the market and the vast majority of stocks remains up, so we remain mostly bullish, though are continuing to pick our spots.
The first Top Ten list of the year is a mixed bag in terms of stocks and sectors. Our Top Pick is Bill.com (BILL), which is finding support after a normal, early-stage retreat.
| Stock Name | Price | ||
|---|---|---|---|
| AGCO Corporation (AGCO) | 102 | ||
| Arvinas, Inc. (ARVN) | 84 | ||
| Bill.com Holdings (BILL) | 138 | ||
| BridgeBio Pharma (BBIO) | 64 | ||
| CrowdStrike (CRWD) | 201 | ||
| Inari Medical (NARI) | 85 | ||
| Kohl’s (KSS) | 39 | ||
| Lam Research (LRCX) | 478 | ||
| Lemonade (LMND) | 113 | ||
| MongoDB (MDB) | 350 |
It’s been a great year for growth stocks, and we’re glad to have easily outperformed the major indexes, adding to our longer-term track record. Whatever the exact numbers, we hope you enjoyed a prosperous 2020, and have a great and healthy New Year.
That said, we’re always looking ahead. Big picture, we remain bullish, but growth stocks have hit a bit of a pothole this week, which wasn’t totally unexpected. We’re not reacting to the action yet, though we’re also comfortable holding our 19% cash position and see what comes as the calendar flips.
That said, we’re always looking ahead. Big picture, we remain bullish, but growth stocks have hit a bit of a pothole this week, which wasn’t totally unexpected. We’re not reacting to the action yet, though we’re also comfortable holding our 19% cash position and see what comes as the calendar flips.
As we near the end of 2020, I’m thankful that 2020 was so very good to the leading marijuana stocks, and that we managed, overall, to ride the trend quite profitably.
As I write, the uptrend is intact and we remain fully invested, but as the calendar turns to 2021, there’s a chance that the trend (and the trend of the broad market as well) might turn down.
Thus I’m on alert.
But I learned long ago not to argue with the trend of the market, so until the trend changes, I recommend staying heavily invested.
Full details in the issue.
As I write, the uptrend is intact and we remain fully invested, but as the calendar turns to 2021, there’s a chance that the trend (and the trend of the broad market as well) might turn down.
Thus I’m on alert.
But I learned long ago not to argue with the trend of the market, so until the trend changes, I recommend staying heavily invested.
Full details in the issue.
This is one of the two weeks a year where Cabot Top Ten Trader is not published, which means there won’t be a new Profit Booster covered call trade this week. That being said, I did want to note that our four open positions (AA, UBER, ADNT, CDE) are all in good shape.
The New Year promises to be a great one for dividend stocks. After underperforming the market in 2020, the stars are aligning to make 2021 the year of the dividend.
The distribution of the coronavirus vaccine promises to bring this pandemic to an end and unleash a full and robust recovery in 2021. Energy stocks that had been neglected in the market recovery have caught fire in anticipation of a full recovery in 2021.
A huge and overdue rally in the sector has paused temporarily ahead of a very promising year, giving us an opportunity to get into one of the very best stocks in the sector at a still cheap price.
Global energy giant Chevron (CVX) currently offers the rare combination of great value and momentum, as well as a fat yield. The stock has already moved higher, the rally has a long way to go.
The distribution of the coronavirus vaccine promises to bring this pandemic to an end and unleash a full and robust recovery in 2021. Energy stocks that had been neglected in the market recovery have caught fire in anticipation of a full recovery in 2021.
A huge and overdue rally in the sector has paused temporarily ahead of a very promising year, giving us an opportunity to get into one of the very best stocks in the sector at a still cheap price.
Global energy giant Chevron (CVX) currently offers the rare combination of great value and momentum, as well as a fat yield. The stock has already moved higher, the rally has a long way to go.
This month we review how the capital markets performed in 2020 and provide our outlook for 2021. We look at the broad equity market and trends below the surface, including growth/value, large/small and sector returns. We also briefly discuss the global equity and commodity markets as well as the U.S. fixed income markets. Our outlook starts with a review of how our 2020 outlook turned out, then dives into what we see for 2021 for the S&P 500, touches upon the rising influence of the two “Easts” and our wariness about speculation, and concludes with some timeless perspective about investing.
The issue also reviews the high yield bond market. We follow the high yield bond market as it provides a different perspective on equity markets. Importantly, there is considerable overlap among high yield bond investors, turnaround investors and private equity investors who may acquire undervalued companies.
Each January, we highlight our “Top Five” stocks for the coming year, based on a combination of favorable risk/return and timeliness. For 2021, our Top Five includes Conduent (CNDT), Meredith Publishing (MDP), Newell Brands (NWL), Signet Jewelers (SIG) and Wells Fargo (WFC).
Our feature recommendation is Ironwood Pharmaceuticals (IRWD). The market views Ironwood as a failed pharmaceutical company but its low share valuation, steady/rising profits and the presence of an effective activist investor make the stock a stand-out value, in our view.
The letter also includes a summary of our recent sales of GameStop (GME) and Freeport-McMoran (FCX), our price target increases for Trinity Industries (TRN), Adient (ADNT), DuPont (DD) and General Motors (GM) as well as the full roster of our current recommendations.
Please feel free to send me your questions and comments. This newsletter is written for you. A great way to get more out of your letter is to let me know what you are looking for.
I’m best reachable at Bruce@CabotWealth.com. I’ll do my best to respond as quickly as possible.
The issue also reviews the high yield bond market. We follow the high yield bond market as it provides a different perspective on equity markets. Importantly, there is considerable overlap among high yield bond investors, turnaround investors and private equity investors who may acquire undervalued companies.
Each January, we highlight our “Top Five” stocks for the coming year, based on a combination of favorable risk/return and timeliness. For 2021, our Top Five includes Conduent (CNDT), Meredith Publishing (MDP), Newell Brands (NWL), Signet Jewelers (SIG) and Wells Fargo (WFC).
Our feature recommendation is Ironwood Pharmaceuticals (IRWD). The market views Ironwood as a failed pharmaceutical company but its low share valuation, steady/rising profits and the presence of an effective activist investor make the stock a stand-out value, in our view.
The letter also includes a summary of our recent sales of GameStop (GME) and Freeport-McMoran (FCX), our price target increases for Trinity Industries (TRN), Adient (ADNT), DuPont (DD) and General Motors (GM) as well as the full roster of our current recommendations.
Please feel free to send me your questions and comments. This newsletter is written for you. A great way to get more out of your letter is to let me know what you are looking for.
I’m best reachable at Bruce@CabotWealth.com. I’ll do my best to respond as quickly as possible.
Last Friday was the expiration of our December covered call positions, and I’m happy to report it was yet another great month. Here were our final profits and yields:
Current Market OutlookNews of travel restrictions due to a new strain of the virus over in Europe hit the major indexes early today, but when it comes to our analysis, the reason for the initial selloff is secondary—the setup for an air pocket has been around for a couple of weeks as sentiment was elevated and most stocks and indexes were extended to the upside. Thus, today’s hiccups weren’t totally unexpected, but the damage was limited; at day’s end, the major indexes held up well and remain in intermediate-term uptrends, as do most stocks. Near term, further reverberations are likely, so we still think it best to pick your spots and stocks carefully, but with the major evidence still positive, we are too.
This week’s list has a nice mix of stocks benefiting from different trends (growth, reopening, cyclical, etc.). Our Top Pick is Elastic (ESTC), which has finally, decisively gotten going from a long 20-month IPO base.
| Stock Name | Price | ||
|---|---|---|---|
| Alcoa (AA) | 22.12 | ||
| Cardlytics (CDLX) | 146.04 | ||
| Coeur Mining (CDE) | 9.88 | ||
| Elastic (ESTC) | 155.91 | ||
| Floor & Décor (FND) | 99.10 | ||
| Kodiak Sciences (KOD) | 149.51 | ||
| PayPal (PYPL) | 237.79 | ||
| Redfin (RDFN) | 78.54 | ||
| Smartsheet (SMAR) | 72.00 | ||
| WESCO International (WCC) | 75.16 |
Updates
This past week there was a 13% gain in one of our newer recommendations and I’m recommending the sale of another.
It’s quite common that a year’s top-performing stocks and industries can fade after the new year arrives as investors shift money into industries that have been long-ignored. “Buy low” doesn’t just refer to stock market corrections and random stocks that have fallen precipitous amounts. “Buy low” can also refer to unrecognized industry-wide opportunities.
As we march toward the end of Q4 and the beginning of 2018, most investors are, rightly, turning their attention to what’s likely to happen in the year ahead. Returns this year have been nothing short of outstanding. While we’ve had bouts of volatility, especially in individual stocks, there’s been astounding breadth of strength across almost all sectors.
Remain mostly bullish, but continue to play things on a stock-by-stock basis. The overall market remains in fine shape, and we’re pleased to see many growth stocks find buyers in recent days (though many still appear to need more time to rest after big runs this year). In the Model Portfolio, we’re buying a 10% position in a leading Bull Market stock that’s pulled back a bit after a decisive breakout. That will leave our cash position near 18%.
The major indexes have moved pretty much straight up since our last update, and many of the troubling divergences we’d been watching have disappeared. Financials and industrial stocks remain strong, while tech stocks have managed to get back on the horse.
The Office of the U.S. Trade Representative and the Department of Commerce have taken a decidedly different approach to U.S. participation in international trade since November 2016. I realize that international trade can be somewhat of a dry topic, but since these decisions are affecting the bottom line in U.S. industry, stock market opportunities are unfolding before us.
Global markets were all mixed up this week as old world-type stocks moved higher and new world stocks—mostly tech—sold off. Things have normalized a little over the past two sessions however as investors appear to have come to their senses and realized that, while tech might have moved too far too fast, many high-flying technology stocks are doing so well because they’ve been growing at high rates, quarter after quarter, and they look like they’ll continue to do so.
The iShares EM Fund (EEM) has dipped decisively below its 25- and 50-day moving averages, which pushes the Cabot Emerging Markets Timer into negative territory. We have one change tonight, moving one stock from Buy to Hold.
One stock is now rated Sell, and three stocks are rated Sell a Portion.
It remains to be seen whether the market’s rotation from tech into older economy names is a temporary tax-bill-related phenomenon or a longer-term cycle. But historically, a day like last Wednesday, when the Nasdaq closes more than 1% lower and the Dow closes at least 0.4% higher, is followed by at least a month of Dow outperformance.
The economy continues to show robust recovery led by a robust housing market. New single-family house sales unexpectedly rose 6.2% to a seasonally adjusted annual rate of 685,000 this October. We are near-term bullish on our home improvement- and construction-related recommendations.
Raise a little cash. Today’s huge selling wave in growth stocks isn’t the end of the world, as the trends of the major indexes and most leading stocks is still up. Thus, it’s vital to take things on a stock-by-stock basis, selling those that are raising red flags and holding (or buying) those that are dipping normally.
Alerts
This Top Pick has posted some great gains so far this year.
One stock reports third quarter earnings beat and another moves from Hold to Strong Buy.
Many of our stocks seem stuck in the mud—not bad, but not blasting off like some of the market’s leading stocks. Also, looking at the Marijuana Index, we see that it’s now come back down to where it was in mid-January.
Results of the annual Dodd-Frank Act stress test (DFAST) and the Comprehensive Capital Analysis and Review (CCAR) are due on June 21 and June 27, respectively, after the markets close.
The market finished modestly higher yesterday after the Fed decided to hold interest rates steady but hinted at cuts down the road. At day’s end, the Dow was up 38 points while the Nasdaq finished higher by 33 points.
It’s time for a seasonal ETF trade with this agriculture fund.
Adobe Systems (ADBE) reports strong second-quarter results.
We’re buying one software company’s stock today and selling another’s.
We’re buying one software company’s stock today and selling another’s
The shares of this commercial payment company were just upgraded by Goldman Sachs to ‘Buy’.
The market is indicated to open slightly higher this morning as stocks continue to work to officially come out of their correction. Our Cabot Trend Lines remains positive and the Real Money Index tells us many weak hands have already bailed out, both good signs. But we’re waiting on the Cabot Tides to give a green light before doing any major new buying from here.
This database platform company is expected to grow by 33% next year.
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 Top Ten 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 Top Ten features.