The market and growth stocks have had a couple of wobbles so far in September, and given the heady run from leading stocks in August, some further shakeouts are possible. If the selling pressure intensifies enough to turn our Cabot Tides negative, we’ll trim our sails, but right now, the trends of the major indexes and the vast majority of leading stocks are pointed up, so we remain positive.
Cabot Growth Investor 1402
[premium_html_toc post_id="159163"]
Many Potholes, but Growth Stocks Holding
Every morning (after the kids’ lunches are done of course), I like to open up my laptop and take an unbiased look at the whole market—not just the growth stocks I recommend and follow, but various sector ETFs, sentiment measures and the like. It’s a good way to jumpstart your brain, remembering where things left off the prior day.
And what I’ve seen in recent mornings is a lot of weak action. Emerging market stocks remain a mess, with many leaders (like former holding Alibaba) hitting multi-month lows. Semiconductor stocks, which have been lagging for months, are making a dive lower led by former leaders (Micron looks terrible). Many other areas have taken on water, too, and we’ve seen a noticeable pickup in the number of stocks hitting new lows on both the NYSE and Nasdaq.
But what about growth stocks? So far, so good! Yes, most took hits when the big boys came back from vacation early last week. And, to be fair, we have seen some two- to four-day, big-volume selloffs in some popular stocks like Apple and Google, which could easily lead to some more short-term wobbles. But among the real leaders of the market, we’ve seen very few breakdowns, with the vast majority simply consolidating their heady August gains.
All of this is a long way of saying that it remains a split tape. A lot of stuff is under pressure, some names are continuing to base-build (as they have since early this year) and some, including many stocks we own, remain in favor. These divergent markets are usually tricky with elevated odds of a sharp selloff or vicious rotation.
Thus, it’s a good idea to keep your eyes open and to have a game plan in case we see a tectonic shift under the surface of the market. And we continue to pick our spots and keep some cash on the sideline; even after the dips so far in September, we’re not yet seeing a ton of great entry points due to the big run-ups among many stocks in prior weeks.
But when looking at the primary evidence, it’s all pointed up—not just growth stocks, but the major indexes too, with both our Cabot Trend Lines and Cabot Tides still positive. Thus, while there are short-term potholes to watch out for (September and October are frequently tricky), we remain bullish, with the odds favoring higher prices for leading stocks down the road.
[highlight_box]WHAT TO DO NOW: Remain positive, but step carefully as the current volatility could easily continue. In the Model Portfolio, most of our stocks are acting well, and our only change tonight is placing Okta (OKTA) back on Buy. Our cash position stands at 16%.[/highlight_box]
Model Portfolio Update
So far in September, the market’s weakness hasn’t greatly dented the Model Portfolio. Part of that is because we were lucky enough to score a couple of solid earnings-induced moves last week from FIVE and OKTA, But overall, the damage to leading stocks hasn’t been severe.
That doesn’t mean we’re complacent—many indexes aren’t far from key support and many stocks are hesitating. We still have around 16% in cash in the portfolio, which we’re content to hold for now.
The good news, is that, despite the Nasdaq’s recent hiccup, the bull market is intact. August (and last week) brought some fresh breakouts and the number of stocks hitting new highs has been decent. If the Tides turn negative, we’ll pare back or set a couple of tight mental stops, but we’re still thinking positively, and are keeping our watch list up to date and looking for solid entries.
Current Recommendations
BUY—Autodesk (ADSK 151)—Our timing with ADSK was off, as the stock has pulled back since our recommendation due both to profit taking and the market’s latest pothole. Still, the chart looks fine overall and the business opportunity remains huge. In a recent sit down, management said it sees big potential in the construction sector, where the competition is fragmented but is projected to start consolidating around a single vendor (like Autodesk). They also pointed to a renewed emphasis on longer-term (two-year) deals, which weren’t widely offered during the initial stages of its transition to a subscription model, but going forward, should be a key contributor to the firm’s lofty free cash flow goals (about $6.50 per share in 2021 and $10-plus in 2023). If the stock dives all the way back into its prior base (low 140s), that will be a yellow flag. But right now the main trend is up for the stock and the business. If you don’t own any, we’re OK grabbing shares here.
BUY—DexCom (DXCM 146)—DXCM popped to new highs yesterday, which is obviously a plus, but we’re just as impressed with the stock’s persistent run since earnings, a sign that big investors are in accumulation mode. While the company guided revenues to $925 million for the full year on its conference call last month, the magnitude of its Q2 beat (the prior estimate was just $855 million!) and the newness of the G6 (just launched last quarter) means most investors are thinking estimates are still too low. If you own some, just hang on and give the stock room to breathe. If you’re not yet in, you could nibble here, though the lack of upside volume during the past couple of weeks raises the odds of another shakeout or pullback.
BUY—Five Below (FIVE 131)—FIVE soared to new highs last week after reporting another much better-than-expected quarter last Thursday, with sales (up 23%) and earnings (up 40%) topping even the most optimistic views. That said, possibly more impressive was the company’s sub-metrics—new stores have seen productivity actually increase (payback is now far less than one year, vs. one-year previously); same-store sales rose 2.7%, which was big considering that last year Five Below benefitted from the fidget spinner craze; and management said same-store sales improved month by month during the quarter. Guidance got a nice bump, and analysts are now looking for a 41% earnings jump this year (partially thanks to tax cuts) and 21% next. Bigger picture, FIVE is now nearly a year into its run, which we think can go on a while, especially as successful retailers tend to have longer shelf lives (pun intended) with institutional investors due to their predictability. Shorter-term, though, FIVE’s had a good run both recently and during the past three months, so we’re expecting dips. If you really want in, you could buy a small amount here, though we prefer trying to enter on retreats of a few points.
BUY—Grubhub (GRUB 143)—GRUB has been whisper quiet on the news front since its earnings report, but investor perception remains on the upswing—after a quick dip to its 25-day line last Wednesday, shares perked back up to new highs yesterday before some sloppy action today. Similar to FIVE, Grubhub’s advance is now about a year old (it blasted off last October), which we generally view as the middle innings of a leader’s advance; there’s more of a chance that selling pressures could grow after a fruitful, long run, but we certainly wouldn’t say GRUB is obvious or over-owned. In fact, we remain impressed with how mutual funds are piling in (590 owned shares at the end of June, up from 418 a year ago and 464 at the start of 2018). All told, we’re still bullish here—we just added shares a few weeks back—and the big, earnings-induced breakout in July following a four-month rest bodes well for the intermediate-term. Long story short, we’ll stay on Buy.
BUY—Ligand Pharmaceuticals (LGND 257)—LGND has been slapped around a bit so far this month, including a few high-volume down days, but the stock is still hanging around its 25-day line, so the pressure hasn’t been that severe. The stock is early stage, having just blasted off in May, and more and more big investors are discovering the company’s unique, royalty growth story. What’s most impressive about the business model is how profitable it is—with revenues of $141 million last year, Ligand had just $30 million of cash expenses (R&D plus administrative costs); this year, with revenues expected to surge to $232 million, cash expenses are only expected to rise to $37 million. Back to the stock, a dip to the 50-day line (around 237 and rising) wouldn’t be shocking if the market had another wobble or two, but we’re not trying to time the short-term—with LGND in a nice uptrend, we’ll stay on Buy.
BUY—Neurocrine Biosciences (NBIX 122)—NBIX has been up, down and all around during the past three weeks, but it still looks fine to us—the recent eight-point dip to its 25-day line looks buyable if you’re not already in. As we’ve written before, we like how analysts continue to nudge up their earnings estimates (now at $1.88 per share for next year, up a dime from a week ago) as perception rises for the firm’s Ingrezza treatment and sales of AbbVie’s Orilissa (which was due to launch last month), which Neurocrine will collect sizable royalties on. If the stock fell below its prior low and its 50-day line (both around 112), it would call into question the intermediate-term uptrend. But we continue to think NBIX changed character starting in May, and that its fundamental story will attract plenty of big fish. We’re OK buying some here if you don’t own any.
BUY—Okta (OKTA 74)—Our patience is paying off with OKTA, which has blasted ahead following its quarterly report last week. We dive more into the stock’s overall chart action of the past few months on page 7, so we won’t repeat that here. Instead, let’s look into the numbers: Revenues rose 57% and came in about 10% above estimates, the loss per share of 15 cents was four cents slimmer than expected, and billings rose 53% and were a big 12% above what Wall Street was looking for. Just as important, there was a 55% bump in customers paying at least $100,000 annually, while overall customer growth of nearly 10% from the prior quarter (450 new clients in all) while renewals and upsells remained strong. The bottom line here is that demand for identity and access management solutions is booming, and Okta looks like it has the best software suite to address those needs, which is attracting more and more big clients. Given that the stock’s overall run just began in February, and that OKTA’s breakout last week came from a three-month rest, we have high hopes shares are in the early stages of its overall run. We’re going back to Buy.
HOLD—PayPal (PYPL 92)—PYPL continues to flop around, and we don’t have many new thoughts—longer-term, the odds favor a continuation of its advance, but near-term, the stock is doing more chopping than trending, so we’re fine sticking with a Hold rating. On the business front, the company just launched a free service to give sellers in good standing instant access to their funds, as opposed to many days (or longer) it often takes due to fraud concerns; the top brass thinks it could be a meaningful differentiator to attract more merchants to PayPal’s platform. The firm also just partnered with DraftKings, giving it deals with five of the seven online sportsbooks. A bit more strength or tightness could be enough to get us to restore a Buy rating, but today we think new buying should be focused elsewhere.
BUY—Teladoc (TDOC 77)—TDOC remains in an impressive uptrend, refusing to take much of a breather despite its heady run. One piece of news that slipped under the radar from the firm’s quarterly report was that the Centers for Medicare & Medicaid Services is beginning to embrace telehealth, announcing it will reimburse these services for its Medicare Advantage patients as well as its fee-for-service enrollees, with both approvals coming earlier than expected. Separately, management was clear in the conference call that the company’s pipeline is much larger than a year ago, both thanks to potential deals with larger customers and payers opting to offer more of Teladoc’s services. We’re sure to hear more details at the firm’s Investor Day on September 27. In the meantime, we’ll stay on Buy, though like many growth stocks, don’t be surprised to see further ups and downs in the days to come.
Watch List
Canopy Growth (CGC 51): We’re impressed with Canopy, which remains resilient and strong despite a big run and many doubters. Our experience is that the first multi-week rest after a strong thrust from a new leader usually leads to much higher prices. Watch for it.
Carvana (CVNA 67): CVNA catapulted off its 25-day line to new highs this week. We’re still waiting for a more meaningful rest period given the stock’s run in recent weeks.
Exact Sciences (EXAS 75): EXAS rested for about 10 months, but with Pfizer helping to push its revolutionary Cologuard screening test, the stock is looking ready for a new advance.
Palo Alto Networks (PANW 236): PANW has reacted well to earnings, and the growth story is very much intact. We’re big fans of the stock, though our question is now much it may trade with OKTA, which is in the broad cybersecurity field.
PetIQ (PETQ 42): PetIQ has an intriguing and unique retail story and a near-perfect chart. Our only issue is that it’s thinly traded, though an upcoming offering of closely-held shares could change that. See below for more.
Pure Storage (PSTG 28): Pure’s all-flash storage systems are thought to be a couple of years ahead of the competition, and some smart investors (like Fidelity, which owns more than 10% of the firm) are gobbling up shares.
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.
Axon Enterprise (AAXN 70) — Axon Enterprise, which used to be known as Taser International and sold mostly shock guns to police departments, has kept its focus on police, but has shifted its focus to body and in-car cameras and evidence-management software. (It still sells Tasers, too.) AAXN broke out of a 19-month slack period in February 2018, soaring from 25 to 76 by late July. AAXN started a correction on July 24, then went into free-fall after the company’s August earnings report. The report looked good, but the stock fell sharply, dropping to 56 on big volume. The pullback may have been just a reaction to the long rally, and the stock bounced up again almost immediately. AAXN has climbed back to 73, which is within shouting distance of its July high. We don’t see this as a great entry, but if AAXN consolidates for a few weeks at this level, it could offer a new buy point.
Eli Lilly (LLY 106) — Despite its huge portfolio of marketable drugs for both humans and animals, Eli Lilly, with its $114 billion market cap and single-digit annual revenue growth, isn’t the usual target for Cabot Growth Investor. LLY traded sideways from the middle of 2015 through late July 2018, but got a huge boost in late July when its Q2 earnings report delivered yet another estimate-beating set of numbers. It’s worth noting that big pharmas like Lilly and Pfizer have been earning a lot of attention from investors by featuring steady growth and attractive dividends. (LLY’s dividend yields 2.1% per year.) With a stock that’s soared from 88 to 106 in less than two months, Eli Lilly looks like a conservative, long-term breakout that should do well over time. If that formula appeals to you, consider digging further into the Lilly story.
Glaukos (GKOS 63) — Glaukos is a one-trick pony, but it’s a pretty good trick. The company makes tiny stent devices that treat glaucoma (excessive pressure in the eye) by allowing fluid to drain. The company’s stock is hot right now because Alcon, the only major competitor in the micro-stent business, has withdrawn completely from the market after a five-year study revealed safety concerns. GKOS soared from 45 to 63 on the news and has been holding on tightly at that level. Glaukos had been experiencing six quarters of slowing revenue growth (from 64% in Q4 2016 to 5% in Q2 2018), but the Alcon news changes the landscape completely. The glaucoma surgery devices market is expected to grow from its $353 million 2016 value to $2.1 billion in 2023, and Glaukos is in a great position to grab its fair share of that.
PetIQ (PETQ 42) — There’s a growing trend toward increased health and wellness care for pets, and PetIQ makes high-quality pet-care products that are sold in national retail stores. PetIQ is a leader in bringing foods and medicines that were previously available only through vet clinics into chains like Wal-Mart, Target and Dollar General. PETQ has only been trading since July 2017, but it has already increased its roster of institutionally investors from 116 to 160. And with the market for higher-quality pet care growing rapidly, the company’s expanding string of pet wellness centers (29 now, including 17 opened in the second quarter) is expected to top 1,000 by 2023. PETQ traded under resistance in the high 20s from its IPO until the middle of August, when it blasted off on enormous volume and is now trading above 40. It’s a good story. An upcoming share offering could produce a better entry point.
Handling a Stock Properly is Key to Big Profits
While stock picking is obviously crucial if you’re going to make good money in the market, a big and underrated part of successful stock investing comes from knowing how to properly handle a winning stock. One investor said it best a few years back: How many people have owned a big winner like First Solar, Baidu, Facebook or others at one time or another, but either bought near the end of the move, were shaken out during market weakness or simply didn’t own enough to make a big difference in their accounts?
In our experience, the answer is a lot, which crimps many people’s performance. What good is buying a stock that ends up going on a large move over many months if you get shaken out early on or only own a few shares?
There are many reasons why investors handle stocks improperly, but probably the biggest is that most investors struggle with differentiating between normal and abnormal action—i.e., identifying times when big investors are seriously paring back (or getting out totally) of their positions, versus when a name is resting after a big run.
We’re not here to tell you that we (or anyone) can know for sure what a stock is going to do next. It’s been a fruitful market in general, and for growth stocks in particular, so patience has often been rewarded. But beyond the current environment, we’ve studied what dozens of past big, institutional-quality winners have looked like during their advance, which helps put the odds in our favor.
One important and relatively simple thing to remember is this: During advances, multi-week and even multi-month rest periods are normal, and that those consolidations can even occur when the major indexes are rallying. The problem comes from investors making decisions based on how they feel—when a stock falls or lags for a few weeks, it feels like a trend change, but oftentimes it’s a normal rest before the next leg up.
When you have a tiger by the tail, what you’re really looking for is a change in character in the chart. Take Facebook (FB), for example. For years, the stock basically traded north of its 40-week moving average (nearly the same as the 200-day line), with dips to that area consistently finding support. The one exception was late 2016, but (a) the stock wasn’t far from its price high (just 15% at its nadir), (b) it held its lows after the post-election downmove in growth stocks and (c) we actually did have a stop right under its lows, but FB ended up resuming its advance.
This year, though, FB looks different—the stock decisively plunged below its 40-week line on record volume in the spring, and while it did come back after that, it’s since fallen back down. We’re not saying the stock is set to fall sharply from here, but after a multi-year run, this year’s action tells us FB is no longer a leader.
Conversely, take a look at Okta’s (OKTA) weekly chart. Shares just broke out from a big post-IPO pattern in February of this year and rallied sharply, nearly doubling by mid June. Then came the selling—two of three weeks saw big-volume declines, and the stock pierced its 10-week moving average, which we know had a lot of people jumping out.
We put a stop in place to make sure we didn’t take a huge hit, but the stock held up after that, volume dried up, and even the sharp late-July dip quickly found support. (If you’re a sharp chart watcher, you also noticed that the late-July dip closed the week near the top of its range on a nice pickup in volume—a sign of institutional dip buying.)
After tightening up a bit in the upper 50s, our patience was rewarded last week when OKTA surged out of its base on earnings. And given that the original move started just seven months ago and that the stock just rested for three months, the odds favor higher prices ahead.
As we wrote above, there are no sure things, and it’s inevitable that, down the road, some stocks that we own that look fine will end up breaking down for one reason or another. But being able to differentiate between abnormal action and normal, proper consolidations can go a long way toward helping you hold on to stocks—and holding on for bigger moves is where the real money is made in growth investing.
Cabot Market Timing Indicators
After a nice August, the indexes and some stocks have taken breathers in September, which could easily continue for a bit. But most growth stocks remain in fine shape and the market’s trends are pointed up. Thus, you should remain bullish.
Cabot Trend Lines: Bullish
The relatively minor wave of selling has done nothing to alter the market’s larger, longer-term uptrend. Our Cabot Trend Lines are still solidly positive, with the S&P 500 (by 4.3%) and Nasdaq (by 5.8%) nicely above their respective 35-week moving averages. Until this indicator says differently, it’s best to assume the bull market is intact and should produce higher prices down the road.
Cabot Tides: Bullish
Our Cabot Tides also remain positive, with all five of the indexes we track (including the S&P 400 MidCap, shown here) holding above their lower (50-day), rising moving averages. Granted, a couple of bad days could give a new signal, but you know us—we don’t anticipate, and sometimes it’s just as the Tides get close to flipping that the bulls return. Bottom line, the intermediate-term trend is still pointed up.
Two-Second Indicator: Unhealthy
The Two-Second Indicator had been improving but that changed during the past couple of weeks, as the number of new lows has again spiked due to a variety of names (including many emerging market stocks) hitting 52-week lows. It’s not a death knell, as leading stocks and sectors have been doing well all year despite this indicator’s yellow light, but it would be healthier to see more areas rowing in the same direction.
[premium_html_footer]
Send questions or comments to mike@cabotwealth.com.
Cabot Growth Investor • 176 North Street, Post Office Box 2049, Salem, MA 01970 • www.cabotwealth.com
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 SEPTEMBER 20, 2018
We appreciate your feedback on this issue. Follow the link below to complete our subscriber satisfaction survey: Go to: www.surveymonkey.com/marketlettersurvey
Neither Cabot Wealth Network nor our employees are compensated by the companies we recommend. Sources of information are believed to be reliable, but are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on the information assume all risks. © Cabot Wealth Network. Copying and/or electronic transmission of this report is a violation of U.S. copyright law. For the protection of our subscribers, if copyright laws are violated, the subscription will be terminated. To subscribe or for information on our privacy policy, call 978-745-5532, visit www.cabotwealth.com or write to support@cabotwealth.com.
[/premium_html_footer]