The market\'s rally in recent days has turned our Cabot Tides positive, joining our Cabot Trend Lines and Two-Second Indicator. Because of that, we did some buying in a Special Bulletin last evening, but added half-sized positions because both companies are set to report earnings next week.
Cabot Growth Investor 1366
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Uptrend Likely Resuming
The day after our April 12 issue was published, the market appeared ready to give up the ghost. The barrage of bad news had taken its toll on investors, and selling intensified as fears surrounding that weekend’s North Korea test ramped up. All the major indexes we track cracked their 50-day lines, with some close to tagging four-month lows!
But that dip appears to have been the final shakeout in a seven-week consolidation. Stocks (especially growth stocks) bounced back nicely last week, and this week brought a buying stampede, with the Nasdaq catapulting above the 6,000 level (for the first time ever) and other indexes quickly spiking back to their March peaks.
That action has flipped our Cabot Tides back into the bullish camp, where it joins the Cabot Trend Lines and Two-Second Indicator. And because of that, we bought two new positions in the Model Portfolio on a Special Bulletin last evening. (Though we bought in smaller-than-normal amounts; see the top of page 2 for more on that.)
We won’t assume the market will just kite higher from here; some resistance is likely to appear at those March highs in the short-term, and earnings season usually causes the market to whip around a bit, not to mention its effect on individual stocks.
But looking at the evidence, we have to conclude that this setup looks pretty classic. After a big post-election advance, the market’s seven-week breather was extremely tame; the Nasdaq gave up less than one-fifth of its November-February advance, while the S&P 500 gave up less than one-quarter of its own winter run-up. Yet, as certain areas took hits, we saw the sentiment pendulum swing pretty sharply toward pessimism, as the number of bulls among individual investors fell to a six-month low last week and money gushed into bonds.
Now, after a few good days, the number of stocks hitting new highs have spiked (see page 7) and growth stocks have come alive. Things can always change, but going with what we see, the bull market appears to be resuming, which tells us to put some of our cash back to work.
[highlight_box]WHAT TO DO NOW: In the Model Portfolio, we’re pleased to see most of our recommendations acting well. Last night, we bought half-sized positions in Tesla (TSLA) and Universal Display (OLED), and we’re placing Netflix (NFLX) back on Buy after a powerful shakeout-and-recovery. We’ll now have 19% cash.[/highlight_box]
Model Portfolio Update
The market has come alive in recent days, highlighted by Monday’s big rally following the French presidential election. That’s pushed our Cabot Tides back into a positive stance, joining the Cabot Trend Lines and Two-Second Indicator.
The tricky part right here is that most of the stocks we’ve been watching closely and would like to buy are reporting earnings soon—within the next five or six trading days. Thus, we’re hesitant to plop down a bunch of money in new buys just ahead of earnings, but we also want to follow our plan to do some buying now that the market is coming out of its funk.
So we’ve split the difference. We bought two half-sized positions, one in Universal Display (OLED) and one in Tesla (TSLA). If they react poorly to earnings, we can always cut bait, but if they get through unscathed, we’ll look to buy the other half of the positions in short order.
Current Recommendations
BUY—Alibaba (BABA 115)—BABA has lifted a few points during the past couple of weeks, tagging its highest level since its 2014 post-IPO peak. Of course, the big event will be the upcoming earnings report; there’s no set date yet, but we expect it within a couple of weeks. Fundamentally, the company’s closely-linked payment outfit (Ant Financial) is continuing to expand, agreeing to purchase MoneyGram and moving into more countries as it attempts to build a global financial network. (Alibaba has a big profit sharing agreement with Ant, so as Ant grows, so does Alibaba’s bottom line.) Back to the stock, it’s a bit extended to the upside in the short-term, but we like its recent upside volume. You could buy some around here, though you should keep any new positions small ahead of earnings.
BUY—Facebook (FB 147)—FB pulled back to its 10-week line earlier this month, but buyers used that as a chance to pile in, driving shares to new highs in recent days. Earnings will be released on May 4; the reaction will obviously be key, though we’re optimistic the stock is relatively early in its current run after it made no progress from February through December of last year. The company’s F8 development conference last week offered a bit of news on the direction of Oculus (Facebook’s virtual reality business) and Messenger, which now has 1.2 billion monthly users. And this week, it announced that Instagram now has 700 million active users (up 100 million from just four months ago!) and that Instagram Stories has hit 200 million daily users, surpassing Snapchat. We’ll stay on Buy, but new buying should be kept relatively small this close to earnings.
BUY—Netflix (NFLX 150)—NFLX is one of many examples in today’s issue of the value of sticking with your plan. The stock took a good-sized hit after earnings last week, due mostly to concern over higher spending levels during the next quarter or two. But shares never tripped our mental stop in the 136-137 area, and yesterday they exploded back to new highs! The catalyst was an announcement of a licensing deal with iQiyi, a Chinese online video platform, which should provide a backdoor for Netflix to enter the potentially gigantic Chinese market in the months ahead. The combination of the earnings shakeout, the quick, big-volume snapback and the fact that the overall market has come back to life looks bullish to us. Short-term wiggles are possible, but NFLX’s uptrend looks to be resuming. We’ll go back to Buy.
BUY—ProShares Ultra S&P 500 Fund (SSO 87)—SSO also tickled our mental stop a couple of times two weeks ago when fears surrounding the North Korea situation drove the market lower. Now, of course, the buyers are back, with SSO testing its early-March highs. We’d like to see the S&P 500 and other major indexes move to new highs along with the Nasdaq as added confirmation that the bulls are back in control, but there’s no question the action is encouraging, and we continue to think the market can surprise on the upside in the months ahead. If you don’t own any, you can buy some here.
HOLD—Shopify (SHOP 74)—Shopify will report first-quarter results on May 2; analysts are looking for revenues of $121 million (up 67% from a year ago) and a loss of nine cents per share, but equally important will be metrics for recurring revenue, client growth (which rose 50,000 in the fourth quarter alone, to 375,000) and gross merchandise volume sold through its platform. The stock has continued to act great, zooming to a new high last week (partly on buyout rumors) before pulling back a bit today. Longer-term, we think SHOP likely just kicked off a major advance in January, but we’ll stay on Hold for now with next week’s quarterly report looming.
BUY A HALF—Tesla (TSLA 310)—Tesla needs no introduction, as the firm’s Model S (sedan) and Model X (SUV) electric vehicles are selling like mad. That, actually, is one of the main facts we feel is vastly misunderstood by most investors—that Tesla is rapidly increasing production and, hence sales. In the first quarter, for instance, Tesla delivered more than 25,000 vehicles, up 69% from a year ago (13,450 were Model S, 11,550 were Model X). And the company is aiming to continue ramping output in a big way, especially as the lower-cost Model 3 begins volume production in September. As for the stock, it recently broke to new all-time highs after 30 months of correcting and consolidating, beginning what we think could be a very profitable “Reality” phase as the company transitions to profitability next year. The only hitch is that earnings are due on May 3; because of that, we took a half-sized position (dollar-wise) in last night’s Special Bulletin. If TSLA holds its own (or rallies) after earnings, we’ll look to fill out our position.
BUY A HALF—Universal Display (OLED 89)—Universal Display is our second addition tonight, and as with TSLA, we took a half position because the company will report earnings on May 4. The story here is simple and potentially gigantic: After years of promise, the future appears to be now for organic light emitting diodes, which are beginning to be used in many smartphones (including the upcoming iPhone 8), TVs and tablets because of their better performance, vivid colors, lower cost and flexible form factor. That should play right into the hands of Universal Display, whose revenues are about evenly split between material sales and royalties/licenses (due to its 2,500-plus issued patents). The firm is conservatively managed (hardly any debt on the balance sheet), and 2017 looks to be the coming out party, with analysts expecting earnings up 40% this year (and another 57% next). The risk here is that OLED is a down-the-food-chain (and somewhat thinly-traded) stock—if its customers cut back spending, shares could get hit hard. But if things go as planned, the upside is huge, so we picked up a half position and will see what earnings brings.
BUY—Veeva Systems (VEEV 53)—Veeva just announced its Vault EDC software package, which combines a few different capabilities (electronic data capture, analysis and sharing, plus clinical trial management and planning) into one unified suite. Overall, the software eliminates all transcribing needs and reduces the time spent on data verification. The stock didn’t react much to the news, but it remains in fine shape, bouncing off its 25-day line and nosing to new highs last week. Earnings were reported in early March, so the next report isn’t due out until June. You can buy shares around here if you’re not in yet.
HOLD—XPO Logistics (XPO 50)—XPO is another stock that nearly knocked us out two weeks ago when it closed right at our mental stop (at 45), but it’s come back to life with the market, pushing above 50 on a few days in a row of excellent volume. Few investors will ever get excited about a trucking and logistics company, but we believe XPO has great potential, as CEO Bradley Jacobs has previously turned mundane companies into star performers via the acquisition-and-efficiency route. We’re not opposed to buying a small position here given the action, but officially, we’ll stay on Hold given that earnings are out on May 4.
Watch List
Arista Networks (ANET 139): ANET has refused to retreat much in recent weeks, so we’ll continue to wait for an entry point and the company’s next earnings report, which is due May 4.
Chipotle Mexican Grill (CMG 481): As we write on page 6, many retail stocks are beginning to show life, and CMG looks like a solid turnaround situation after last night’s quarterly report.
Square (SQ 18): SQ has nosed out to new highs on good volume ahead of earnings on May 3.
Vertex Pharmaceuticals (VRTX 116): We think VRTX could be a leader of this leg of the bull run, but it will depend on the reaction to earnings, which are due out tomorrow evening, April 27.
Other Stocks of Interest
The stocks below may not be followed in Cabot Growth Investor on a regular basis. They’re intended to present you with ideas for additional investment beyond the Model Portfolio. For our current ratings on these stocks, see Updates on Other Stocks of Interest on the subscriber website or email mike@cabotwealth.com.
Abiomed (ABMD 130) — Abiomed is a company built on one product line, the Impella heart support pumps that allow minimally invasive treatment for patients who need temporary help. Impellas are used during and after heart surgeries, for patients who have been turned down for surgery, following heart attacks and in other situations. The company just surpassed 50,000 patients who have been treated with Impella pumps and this success has produced great revenue growth—up 43% in 2016—and earnings projections (39% in 2017 and 51% in 2018). ABMD had a bad day on April 17 after a Medicare payment issue came up, but the recovery was quick and energetic. With expansion in Japan underway, the future looks bright. The company will be reporting its fiscal fourth-quarter results on May 4, and analysts are predicting earnings of 35 cents per share and revenue of $123 million.
Bioverativ (BIVV 58) — Bioverativ is a company focused on the treatment of hemophilia and other rare blood disorders that was spun off from Biogen in January. The company has two commercial hemophilia treatments, Eloctate and Alprolix, which make it a profitable enterprise with a steady outlook for growth. Analysts see revenues up 18% this year and 12% next, while earnings should lift at slightly quicker rates. The company’s six candidate drug programs are still in discovery or preclinical development, but investors like the predictability of the company’s future. And there’s a wildcard factor, which is the possibility that the company, with its $6.2 billion market cap and focused product line, might be a takeover target for one of the pharmaceutical whales. BIVV came public at 40 on January 12 and took just a few weeks to get moving higher. It’s now trading near 58, and looks like a “steady Eddie” sort of investment.
Momo Inc. (MOMO 37) — Momo Inc. runs a Chinese social media site that boasts a unique set of location-based capabilities, like being able to tell users when they are near another user with a compatible profile. This ability to get subscribers together earned the company a reputation as a hookup site and the nickname “the Tinder of China,” but Momo is outgrowing that by offering live video, games and a big selection of unique emoticons. Revenue growth has been phenomenal, up 199% in 2015 and 313% in 2016, and the firm has averaged triple-digit earnings growth over the past eight quarters. The stock stumbled in 2016 after the Chinese government nixed its takeover by Alibaba, but has been on a roll since December 20, soaring from 17 then to 38 before a shakeout today. It’s volatile, but the potential is enormous. If it works, it could really work.
Are Retailers Ready to Run?
The broad retail sector is one of our favorite areas to examine when we hunt for winning stocks. Whether it’s a retailer, a restaurant chain or a consumer goods company that sells its wares at one of these stores, these companies often have both great growth potential (as they penetrate a mass market) and some surety surrounding their future prospects, as unique retail concepts and products tend to be hard to replicate. That combination can produce sustained, long-term uptrends.
However, the retail sector has been a major laggard during the past year, especially during the post-election period—the SPDR Retail Fund’s (XRT) relative performance line recently hit a six-year low! In terms of the recent underperformance, poor industry results, some high-profile bankruptcies or near bankruptcies and fears of an import tax have all kept the group in the mud.
But as some of those fears have eased, we’re seeing some potential turnaround situations and new leadership take shape. If earnings season goes well, we could see these retail stocks take a leadership role in the next market upmove.
Chipotle Mexican Grill (CMG) is one we’re very intrigued by, as the stock was a huge leader through 2015 until the company’s E. coli and other supply-related health issues caused same-store sales to crash (down 20% last year!) and earnings to implode more than 90%. But the core of the firm’s story remains unchanged, and now that management has fixed the supply issue and some time has passed, it appears business is turning back up—the top brass sees same-store sales rising in the high single digits this year, while analysts see earnings soaring to north of $8 per share. Importantly, the store expansion plan remains on track, with about a 9% increase in the store count planned this year. Chipotle just reported great earnings last night (sales up 28%, earnings of $1.60 per share), which led to a nice pop higher. The next pullback looks buyable.
Five Below (FIVE), which we owned for a time last year, fell from 53 to 35 during the middle of last year before tightening up for a few months—extending what is really part of a huge three-year base. In terms of the growth story, it’s one of our favorites. The company has a unique retail concept (dollar stores targeted at teens and pre-teens) that produces outstanding store returns (payback in about a year), which allows for rapid expansion (store count was up 19.5% last year, with a similar expansion likely this year). Sales and earnings have been cranking ahead at 20% to 25% and should continue to do so for at least another few years. If retail stocks come back in favor, FIVE remains one of our favorite ideas.
While it’s a bit thinly traded and not a turnaround story, Ollie’s Bargain Outlet (OLLI) has an enticing story, with a unique retail concept with barriers to entry (closeout merchandise), preventing Amazon or Walmart from directly competing. The company’s merchant teams are a big differentiator; their connections provide the variety of bargain merchandise its customers love. And closeout availability is way up as so many brick-and-mortar outfits close their doors. With 234 stores today, Ollie’s is aiming to boost its count by 10% to 15% annually for another decade or so, which should keep sales and earnings rising by 15% to 20% annually. The stock just lifted to new price and RP peaks.
There are many others we’re watching as well, including Yum China (YUMC), the Chinese arm of giant Yum! Brands that just lifted from a nice-looking IPO base, and Ulta Beauty (ULTA), which is hovering near its highs after a long period of little progress. The key will be earnings season; if a few of these stocks get going, they’re likely to lead the sector higher and offer up some good entry points. Keep a lookout.
Buyers Begin to Set Up
When it comes to interpreting the broad market’s health, there’s nothing better than our Two-Second Indicator—the fact that the number of stocks hitting new lows on the NYSE (and Nasdaq for that matter) remained tame recently was a big reason we never got overly defensive in recent weeks.
But we also keep an eye on the number of stocks hitting new highs, especially on the Nasdaq, which is a good sign of the buying pressure on growth-oriented stocks.
You can see in this chart that there were smaller and smaller amounts of stocks hitting new highs in March and most of April, even when the Nasdaq itself was near its peak. And recently, the 10-day average of new highs was less than 60, a fairly washed out reading for a bull market. Now, though, the buyers have returned, with new highs spiking on Monday to their highest totals since the market’s March 1 peak. It’s an encouraging confirmation of the Tides’ new buy signal this week.
Cabot Market Timing Indicators
It’s been seven weeks since the market began its recent consolidation, during which time we’ve seen more than a few potholes among key stocks and sectors. But recently, the evidence has improved, first for the broad market, and now with the intermediate-term trend turning back up. It’s a sign to put some money back to work.
Cabot Trend Lines: Bullish
The Cabot Trend Lines are generally bullish for about 80% to 90% of major market moves (with the signals coming a few weeks after bottoms and major tops). And that’s been the case during the current bull move—the indicator turned positive in early April 2016 (two months after the low) and has been bullish ever since, with the S&P 500 (by 4.5%) and Nasdaq (by 7.3%) closing firmly above their respective 35-week lines last week. The long-term trend remains up!
Cabot Tides: Bullish
The Cabot Tides have returned to bullish territory, as all five of the indexes we track (including the Nasdaq, shown here, which is the strongest of the bunch) are back above their 50-day lines. We’d still like to see the rest of the indexes join the Nasdaq in new high ground, but right now, the Tides tell us that the intermediate-term trend has turned back up.
Two-Second Indicator: Healthy
It’s now been a full month (21 trading days) since our Two-Second Indicator last recorded more than 40 new lows, a clear sign that the sellers haven’t been overly active despite the sluggishness from the indexes. (Though not part of this indicator, it’s good to see new highs expand as well; see page 7.) The evidence tells us the broad market remains in good shape.
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All Cabot Growth Investor’s buy and sell recommendations are made in issues or updates and posted on the Cabot subscribers’ website. Sell recommendations may also be sent to subscribers as special bulletins via email and the recorded telephone hotline. To calculate the performance of the portfolio, Cabot “buys” and “sells” at the midpoint of the high and low prices of the stock on the day following the recommendation. Cabot’s policy is to sell any stock that shows a loss of 20% in a bull market (15% in a bear market) from our original buy price, calculated using the current closing (not intra-day) price. Subscribers should apply loss limits based on their own personal purchase prices.
Charts show both the stock’s recent trading history and its relative performance (RP) line, which shows you how the stock is performing relative to the S&P 500, a broad-based index. In the ideal case, the stock and its RP line advance in unison. Both tools are key in determining whether to hold or sell.
THE NEXT CABOT GROWTH INVESTOR WILL BE PUBLISHED MAY 10, 2017
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