When the market picture gets confusing, as it often does, it pays to have some reliable indicators to depend on—rather than the guy on the evening news. So today, after a couple of weeks of market correction that have done serious damage to some leading stocks and led many pundits to ask whether we’ve seen the market top, we turn to our indicators and ask whether the bull market is truly over, and here’s what they say.
Cabot Growth Investor 1418
Growth Stocks Perking Up
Back in our younger days when we were first learning the market’s inner workings, we viewed the stock market as relatively uniform, even on a short-term basis. Obviously, there were times when divergences popped up (usually near market tops), but if the S&P was up 0.5% one day, chances are two-thirds of all stocks were up. And if the major indexes rose for an entire month, chances are most stocks did the same.
But, especially during the past 15 years, that hasn’t been the case—whether it’s because of a greater number of specialized sectors (REITs, pipelines, etc.) or simply more rotation on a weekly and monthly basis, you’ll frequently have entire sectors sit around for a few weeks even as the major indexes kite higher. And then, if the bull continues, those sectors will come to life while the previously hot areas take a breather.
That’s what we’ve seen in recent weeks—after an everyone-back-in-the-pool blastoff in January and most of February, many growth stocks took most of March and early April off as money chased more cyclical sectors. But after three mini-selling waves in growth stocks since late March, including one late last week, we’re now seeing signs that buyers are “re-rotating” back into growth stocks, with a few moving to new highs and many others setting up.
Beyond the action of growth stocks, the general market looks good, with the trends continuing to point up—though, short term, it could be a bit too good, with little to worry about (Fed, trade, economy) and with this week’s new closing high in the S&P 500 bringing with it some big font headlines. Even so, it’s clearly a bull market.
The thing we’re watching closest right now is earnings season, which is ramping up in a big way for many market leaders. Simply put, if earnings go smoothly, we think there will be a lot of entry points (and follow-on buy points) among growth stocks, likely including some new leadership that emerges. If earnings disappoint, it’s possible the past few weeks were the start of a distribution phase.
[highlight_box]WHAT TO DO NOW: Right now, the evidence is mostly bullish, so we are too. We’re close to putting a chunk of our 17% cash position to work as we’re spying two or three stocks closely for entry points, but tonight, we’ll stand pat—but will let you know in the days ahead if we make any moves.[/highlight_box]
Model Portfolio Update
It’s still a bull market, so we remain heavily invested, but our main focus right now is (as usual) on growth stocks, especially those in the broad technology field—most have suffered three brief selling waves since late March, and the question is whether those waves are the front edge of a larger distribution phase coming up … or whether, given that most leaders have held up during this choppy phase, the selling was set to peter out.
The answer will come during earnings season (CMG reported this week, with a few more coming over the next couple of weeks), but we’re pretty encouraged by what we’ve seen this week—not only did most names we own or follow find support last Friday, but many have shot ahead in recent days even with earnings reports staring them in the face.
We didn’t make any changes since the last issue, and we’re going to continue to stand pat tonight, not due to any market worries, but more to see what happens as earnings season rolls on, both on the sell side.
BUY A HALF—Carvana (CVNA 66)—CVNA has had some fluctuations during the aforementioned three waves of growth stock selling (late March, early April and last week), but we’re pleased to see the stock etch higher lows (55, 58, then 61) during that time. According to one report, Carvana was actually the eighth-largest used car “dealership” in the country last year, and it should gain another few notches this year due to its rapid expansion—after opening in four more Colorado cities, the company is now selling in at least 122 markets, up from 85 at year-end 2018. Another nugget from the latest press release: Carvana’s inventory is now north of 15,000 vehicles. Big picture, we see no reason the company can’t grow manyfold from here, but near term, the key will be the reaction to the upcoming earnings report (due May 8)—a positive reaction would probably have us filling out our position. As it stands now, though, we’re OK picking up a half-sized position here or preferably on dips of a couple of points.
BUY—Chipotle Mexican Grill (CMG 678)—Chipotle reported a great first quarter last night, with sales growth accelerating to 14%, while earnings of $3.40 per share leapt 60% and easily topped expectations. Same-store sales gained 9.9%, the fifth straight quarter of accelerating growth in that metric; digital sales boomed 101% and made up nearly 16% of all revenue; and the firm is continuing to emphasize the digital part of the business (both pickup and delivery) with mobile order pickup shelves (cutting down on wait times) in many restaurants. However, there were reports that the company got a subpoena for some potential illnesses contracted from its restaurants. It’s probably not a meaningful news item (nothing like the wave of illnesses years ago), but it likely exacerbated the stock’s drop today, which took the stock down to its 50-day moving average on big volume before it bounced. We’ll keep it on buy.
BUY—Five Below (FIVE 146)—While technology stocks have had their wobbles, many retail leaders have shown strength, with FIVE being one of them—after its post-earnings shakeout, the stock lifted 12 out of 15 trading sessions, moving out to new price and relative performance (RP) peaks after a seven-month base-building effort. Beyond the chart, FIVE’s excellent store growth is well known, but one thing that doesn’t get as much attention is growth at the stores already open—the company has notched positive same-store sales growth in 19 of the past 20 quarters and every full year since 2011, thanks in part to management reinvesting heavily in product assortment (4,000 typical products in each store). We’ll stay on Buy, though given its recent run, new buyers might consider keeping positions on the small side here or look for short-term weakness.
BUY—Okta (OKTA 102)—The textbooks will tell you that base breakouts lead to sustained runs, and that’s often true, but it’s not as clean as many are led to believe. OKTA, for instance, initially broke out above 88 earlier this month, but was yanked back the next day. Then it surged as high as 97 before quickly dipping to 89 three days later! (Consider it a good lesson in not getting too close to your stocks and keeping stops a reasonable distance away.) Now, though, the buyers have shown up, with shares zooming to new highs above the century mark this week on good volume. The company won’t report earnings until early June, but we’ll be watching to see if results move the stock around from some of its peers in the next few weeks. Overall, we like the stock’s action and see the story having a very long runway of growth. We’ll stay on Buy, but as always, try to get in on normal weakness.
BUY—Planet Fitness (PLNT 75)—PLNT is set to report earnings next Thursday (May 2) after the market’s close; analysts are looking for both sales and earnings to rise 26%, though same-store sales and cash flow (EBITDA) will be closely watched. Given the stock’s nearly straight-up move over the past two months, short-term risk is probably elevated heading into earnings, but with a profit cushion, we’re willing to give this stock some room to maneuver. Our rating remains Buy, though we’d keep new positions small this close to the quarterly release.
BUY—ProShares Ultra S&P 500 Fund (SSO 125)—We have been and always will be mostly focused on finding, buying and riding dynamic new growth stocks, but so far this year, we’re probably most proud that we were able to step back quickly on the bull train in early January when most investors were hiding in the storm cellar. And we did it not by guessing or hoping, but because of our time-tested system—the 2-to-1 Blastoff Indicator got us to put money to work, our Cabot Tides had us buying more soon after, and the 90% Blastoff signal in February prompted us to buy even more SSO! Interestingly, the average maximum gain in the S&P 500 within three months of all 90% signals has been 9%; so far, the index is up around 5.5%, so there could be more near-term upside in store. If you want to take a little profit up here, that’s fine, but we’re sitting tight with our shares, and think new buyers can either start small here or (preferably) on dips into the low 120s.
BUY—Twilio (TWLO 132)—Twilio has bounced back nicely after the selloff of late last week, holding its 50-day line for the second time in two weeks. We still have some worries concerning the stock’s recent action—TWLO has enjoyed just one up day on above-average volume since February 20!—but at the end of the day, the intermediate-term will likely be determined by the reaction to earnings, which are due out next Tuesday (April 30). (Analysts see sales up 73% and a profit of a penny per share, though we’ll also be interested in the firm’s updated same-customer growth metric, which came in at 47% in Q4.) It’s always possible that the big run from the stock over the past year means a prolonged rest is needed, but as always, we’ll just go with what’s in front of us—Twilio’s story, numbers and chart all look good here, so we’ll stay on Buy, albeit with an eye toward next week’s report.
HOLD—Workday (WDAY 199)—Because of the repeated growth stock wobbles, there are a decent number of stocks that (a) had solid, persistent advances in January and February and (b) have now etched relatively flat ranges during the past few weeks. WDAY is one of those, having fluctuated between 175 and 200 since the start of March. Should the stock crack its recent low, we’ll probably bail on some or all of our position, but frankly, most of the evidence suggests the next big move is up, including the stock’s powerful rebound off the market low (120 to 200!) and many data points that suggest demand for newer cloud software solutions in general (ServiceNow reported a fine quarter last night) and using Workday in particular (reports of many wins at huge companies like Geico) is strong. If you don’t own any and want to nibble here, we’re fine with that, but officially we’ll stay on Hold until either a break down into the upper 170s (likely a sell) or a breakout north of 200 (a buy).
DocuSign (DOCU 57): We write more about DOCU below, but suffice it to say we continue to like the story and think it can have a sustained run—now it’s a matter of waiting for the stock to flash a Go signal.
Invitae (NVTA 23): NVTA pulled back sharply last week, but it’s held its 50-day line (the first dip to that support area since breaking out in February). We’re tempted to buy a half position, though the upcoming earnings report (due out May 8) is a risk.
Qualcomm (QCOM 85): We’re not normally into mega-cap stocks, but QCOM has taken flight after its game-changing settlement with Apple—it could be another institutional way to play the upcoming 5G boom. See more on below.
Shopify (SHOP 219): SHOP is definitely a leader again, with its best-in-class e-commerce platform attracting more and more bigger clients. The stock’s recent powerful lift off its 10-week line has been impressive, though the trick (as with many stocks) is that earnings are due out soon (April 30).
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 email@example.com.
DocuSign (DOCU 57)—DocuSign is revolutionizing how thousands of companies agree on things, getting rid of paper-based contracts (which are still used in the majority of cases) and instead using e-signatures for everything from sales orders to invoices to offer letters to legal forms and much, much more; the firm’s platform is becoming a must-have for medium and large enterprises, saving them huge amounts of time and money. (In 2017, 83% of transactions on the platform were completed in less than 24 hours, with 50% done in less than 15 minutes!) Now available in the cloud, this platform addresses a $25 billion market, and DocuSign is making steady progress capturing more than its fair share, and Q4 continued that trend, with revenues up 34% (the eighth straight quarter of between 30% and 37% revenue growth), earnings of six cents per share and another boost in its customer base (477,000 total, up 28% from a year ago, with faster growth in large enterprise clients) and solid growth in its same-customer business (up 12%). Long story short, when looking at the fundamentals, DOCU sports the rapid, reliable growth and big future potential that should keep big investors building positions. As for the stock, it’s effectively formed a giant post-IPO base, with the latest post-earnings action representing a tighter, six-week consolidation after its big late-year dip and persistent early-2019 recovery. A decisive show of strength from here could have us adding DOCU to the Model Portfolio; as of now, it remains on our watch list.
Ollie’s Bargain Outlet (OLLI 95)—We already own three retail-related names in the Model Portfolio (CMG, FIVE, PLNT), so we’re probably not going to add a fourth. But we continue to see many other enticing retail names with great stories, and Ollie’s Bargain Outlet is one of them. The company’s motto is “Good Stuff Cheap” and that explains most of the story—the firm operates 303 closeout stores mostly in the eastern U.S., offering customers crazy-cheap merchandise (20% to 50% below mass market retailers) in a variety of areas (housewares, food, bed and bath, books and stationary, floor coverings, electronics, toys and more), with customers enjoying a “treasure hunt” feel when shopping there. The firm’s merchant team is benefitting from Ollie’s growing size, deepening relationships and, ironically, the wave of brick-and-mortar retail closures, all of which boosts Ollie’s selection. Business-wise, this is a great cookie-cutter story: Ollie’s store economics (about a two-year payback on its initial investment) are excellent, fueling a steady expansion in the store count (up 13% in the past year, up another 14% this year) that should last for many years (950 long-term store target, more than triple today’s figures). Throw in excellent execution that’s led to slow, steady same-store sales growth (up 4% last year, though that may slow to 2% this year) and Ollie’s looks like it can grow 15% to 20% for many years to come. As for the stock, it had a huge run from 2016-2018 before a deep correction with the market last year. It’s back near its highs, and honestly, a few more weeks of base building wouldn’t be the worst thing. If you’re looking for another retail name, OLLI is one to watch.
Qualcomm (QCOM 85)—Qualcomm is a great company, but years of ups and downs in the industry and a protracted legal battle with Apple have led to generally shrinking sales and earnings for many years and a stock that’s been range-bound. But that’s the past—today, perception has changed for the better, thanks mostly to its game-changing deal with Apple last week. In a six-year deal, Apple is set to pay Qualcomm a huge one-time fee plus royalties on all iPhones (one analyst sees $8 to $9 worth per phone) and there’s also a multi-year chipset agreement. Management sees an incremental $2 per share from this deal alone, and nearly as important, it solidifies the value of Qualcomm’s intellectual property; indeed after the Apple deal, Intel actually threw in the towel on the 5G smartphone market! There aren’t many specific numbers yet, but early indications are that QCOM’s earnings next fiscal year (fiscal year starts this October) should grow 40%-plus, with more growth likely as 5G takes off. The stock has gone ballistic in recent days, soaring massively last week and tacking on some further gains this week on overwhelming volume. Of course, QCOM is a mega-cap stock and it isn’t likely to ever be a super-hot growth stock. But we learned long ago never to underestimate huge, liquid stocks that go bananas on huge volume after some growth-y news, and QCOM qualifies. If you’re interested, we’re OK starting a position around here or on dips.
Patience is Key for Hot IPOs
For many years after the Great Recession, the IPO spigot was pretty barren—oftentimes few names came public, and most of those that did were either income-oriented (REITs, pipelines) or super speculative (development stage biotech). However, that’s begun to change during the past two of three years, with a lot of vibrant young growth outfits coming public, often with dynamic revenue growth and sometimes a bottom line that’s just reaching into the black.
And the trend toward exciting growth names going public seems to be accelerating; two weeks ago, Lyft (LYFT), one of the two pioneers of the ride-hailing movement, came public, and its peer Uber is likely to do the same during in the near future. Plus, last week, we saw Pinterest (PINS), the popular visual discovery engine (using the company’s words) come public, as well as Zoom Video (ZM), a high-potential videoconferencing startup.
All of these firms are growing at light speed—Lyft’s revenues were up 90%-plus in each of the past two quarters; Pinterest’s top line leapt 58% in Q4 and earnings were positive; and Zoom’s sales are growing at triple-digit rates. And the stocks are trading a ton of volume early on. In other words, all three are names we’re interested in.
But how do you know when is a good time to buy recently hot IPOs? It turns out all you have to do is practice a little patience. Yes, a few IPOs go straight up for months after coming public, but those are the rare exceptions. By contrast, the vast majority of IPOs build short- to intermediate-term launching pads that offer decent entry points.
Yeti (YETI) was a good example—after coming public in October the stock had a brief spike as high as 21, but then spent the next 11 weeks building an IPO base, which it broke out from in early February. The hitch with this one for us was trading volume; back then, YETI was only trading around $20 million per day, which is generally too low for our purposes.
But you get the idea: Many IPOs that go on to have big runs don’t run right out of the gate, but instead etch little launching pads, which give you a clue that big investors are building positions. (Conversely, post-IPO duds like Facebook or Snap never do this.) They’re not officially on our watch list, but we’ll be watching LYFT, PINS, ZM and other well-traded new issues to see if they set up and join the market’s leadership ranks in the weeks ahead.
Hold ‘Em or Fold ‘Em?
Earnings season is ramping up, and with it comes a very common question: “I own XYZ stock and have a decent profit—should I hold through earnings?” It’s definitely fair to ask, but the answer really has more to do with how you run your portfolio than predicting what comes on earnings.
Let’s face it: If any of us could consistently predict a stock’s reaction to earnings, we’d be on our yacht right now. Instead, it’s more about how you want to handle your position. For our part, we generally hold through earnings for a couple of reasons: First, over time, we figure we’ll hit more than we miss since we focus on strong stocks in uptrending markets. Second, a growth methodology is based on developing a few bigger winners—and if you jump out ahead of every earnings report, it’s going to be very hard to get big gains.
What about the pain of getting gutted by a couple of horrid earnings reactions? Well, if you want to avoid some of that potential pain, there’s nothing wrong with taking some partial profits (maybe one-third of your shares) ahead of the first report and then riding the rest. However, what we advise against is jumping out of your entire position; cutting profits short can work in the short-term but often bites you longer-term.
Let’s look at an example. Here’s CyberArk Software (CYBR), which is one of the leading glamor cybersecurity stocks in the market. (Okta (OKTA) is another.) On the weekly chart, you can see that CYBR broke out in late January (one of the first growth titles to do so) and has had a great run since, riding its 25-day line higher as it tests the 125 level. To us, CYBR is clearly a leader, so if we owned it, we’d hold on and see what comes. But if you bought it lower and have a decent profit and are nervous about losing a big chunk of your gains, you can consider selling a portion and then letting the rest of your dice roll.
The bottom line is that there’s no magic crystal ball for earnings season—if you cut back on risk, you’ll also cut back on potential reward. The real keys are to (a) avoid cutting potential big winners short, (b) have a plan for how you want to handle earnings and (c) execute that plan across all your stocks. If you do those things and own some real leaders, odds are you’ll come through earnings season in great shape.
Cabot Market Timing Indicators
Growth stocks have been on-again, off-again in recent weeks, and earnings season is always tricky. But, big picture, the trends remain up for most indexes and stocks, and we’re even seeing the broad market kick into gear. Bottom line: We remain mostly bullish.
Cabot Trend Lines: Bullish
Our Cabot Trend Lines are still solidly on the bullish side of the fence, as the big-cap indexes continue to perform well. At last week’s close, the S&P 500 (by 5.5%) and Nasdaq (by 7.4%) both closed well above their respective 35-week moving averages, keeping the longer-term trend positive. That doesn’t preclude a near-term retreat, but it does tell us that any correction (if one comes) is likely to give way to higher prices down the road.
Cabot Tides: Bullish
Our Cabot Tides remain bullish, with all five indexes we track (including the Nasdaq Composite, the daily chart of which is shown here) holding above their lower (50-day) moving averages. Encouragingly, we’ve even seen a little life from small-cap indexes, which are approaching their late-February highs. Right now, the intermediate- and longer-term trends are pointed up.
Cabot Real Money Index: Neutral
Money has finally begun to come back into the market, with a total of $9.8 billion flowing into equity funds and ETFs during the past two weeks, the largest two-week sum since last May. Even so, our Real Money Index remains firmly neutral—on a five-week basis, money flows are still actually negative. The next couple of readings will be interesting, but there’s no short-term edge right now.
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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 MAY 9, 2019
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