As we steamroll toward the holidays, the market remains in great shape, and bigger picture, we continue to expect good things in 2020. Near-term, we are finally seeing a few signs of complacency, so some rocky trading is likely at some point; being choosy on the buy side makes sense. But we’re thinking bigger, aiming to hold our strong leaders with the goal of developing some bigger winners.
In tonight’s issue, we’re adding one half-sized position to the Model Portfolio; that will leave us with 19% in cash, which we’re looking to put to work as opportunities arise. We also review three initial lessons learned from this year, highlight some intriguing names that are setting up well and give you our latest thoughts on all our holdings.
Cabot Growth Investor 1435
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The Bull Market Rolls into 2020
First and foremost, this being our last official issue of the year, I want to wish you and yours a very Merry Christmas and Happy Holidays. We’ll have a brief, eggnog-laden update next week, along with any bulletins as needed.
As for the market, nothing has changed our view that the bull market has plenty of upside left in the months ahead. And the reason for that isn’t hope or optimism (though we do have plenty of the latter), but because when you look at the rubber-meets-the-road evidence, the vast majority of it remains positive as we head into the New Year.Specifically, the longer- and intermediate-term trends are up, the rally is broadening out (small- and mid-cap indexes are joining the party; the number of new highs is expanding nicely) and numerous big-picture studies with excellent track records (like the MACD discussion in the last issue) tell us the market should be solidly higher over the next year.
That said, it’s only fair to point out that we’re finally seeing meaningful signs that investors have gotten the bullish message—which, from a contrary point of view, may usher in a bit of rocky trading. While more meaningful sentiment measures (like money flows) remain subdued, shorter-term indicators (put-call ratios, surveys) are showing complacency. And that makes sense, given that many of the worries out there (China trade, Fed behind the curve, etc.) seem to have dissipated.
Throw in the fact that the major indexes are nearly 12 weeks removed from their recent low and extended above their moving averages, and some market-wide indigestion (something lasting longer than a few hours, which is all we’ve seen of late) wouldn’t surprise anyone. Thus, it’s best to be a bit choosy on the buy side.
That said, the big money isn’t made by timing the market’s shorter-term swings (which is nearly impossible anyway)—no, the big money is made by owning a fresh leading stock early in a new market advance and riding it for months (or years if all goes well) as big investors pile in. That’s our main goal, and we think we own a handful of the true leaders of this advance, and will be looking to add more as opportunities arise.
What to Do Now
Remain bullish. In the Model Portfolio, we sold MasTec early last week as the stock couldn’t get out of its own way. Tonight, we’re going to start a half-sized position in Sea Ltd. (SE), which leaves us with 17% in cash.
Model Portfolio Update
As we head into the year’s home stretch, the market remains in great shape, and we have reasonably high hopes for 2020—we’re not anticipating 1999 all over again, but numerous pieces of evidence tell us the path of least resistance is up for the intermediate- to longer-term.
As for individual growth stocks, most are still in uptrends, but it’s been a mixed bag during the past three weeks or so, with some pushing higher and others retreating, often sharply. Those dips are never fun, but except for MasTec (which we ditched early last week), there’s been no abnormal action, and this week we’ve seen some nice snapback action.
Near-term, we do think a few grenades are possible, especially as much of the worrisome news has disappeared (the market is perverse that way), but we’re putting a little cash to work by adding a half position in Sea Ltd (SE), which we think has big potential.
Current Recommendations
Dexcom (DXCM 216)—One thing to always keep in mind is that a stock’s first pullback after an initial breakout and upside move isn’t usually calm, cool and collected (if we were only so lucky), but instead, is short, sharp and vicious. That was the case with Dexcom last week, as the stock plunged from 230 to 200 (round numbers) on no specific news (though the fact that a vital app went down for a couple of days didn’t help), but this week the buyers have returned. One catalyst for the rebound was news that giant Eli Lilly is integrating Dexcom’s continuous glucose monitoring systems into its personalized diabetes management system, which is still in development. Encouragingly, not only has the stock rallied nicely, but volume has been solid, too, which lessens the chance that this is a dead cat bounce. Of course, that view could be wrong, and a drop all the way into the low/mid 190s would be iffy. But while a modest round of selling going forward wouldn’t shock us, we continue to think DXCM is a liquid leader that recently began sustained upmove. We briefly went to Hold in our update last week, but we’re restoring our Buy rating in tonight’s issue. BUY
DocuSign (DOCU 73)—DOCU suffered a bit of post-earnings shakiness, but that kept with the character of the stock, which has been making solid (but choppy) upside progress since its September blastoff. And now shares are perched just shy of virgin turf, so the trend is clearly up. We continue to have high hopes because the company appears to be in the early stages of a very long growth wave—e-signatures (and digital contract management in general) are still in the relatively early stages of being adopted, and given that they save clients tons of time and money, it shouldn’t be nearly as sensitive to the economy and CapEx decisions as other products. In fact, the recent quarterly report brought some signs that adoption is accelerating (17% same-customer growth rate, up from 13% the prior quarter, and a huge 25,000 new customers in total garnered during the quarter). Back to the stock, further choppiness is possible (the 50-day line is down around 69), but we’re holding on tight to our shares, and think new buyers can start a position here or on dips of a couple of points. BUY
Inphi (IPHI 74)—Similar to Dexcom, IPHI suffered a tedious pullback (12% or so) recently, but now it appears that the correction is over, thanks in part to a some strong analyst commentary this week. According to the analyst, the company is poised for a few years of 25% to 30% growth as its many product lines should see excellent, growing demand from (mostly) large clients; in data centers alone, Amazon, Google, Alibaba and Facebook should all be placing big orders in 2020. Back to the stock, it’s a bit thin and squirrelly, which leads to plenty of jagged movements, but the underlying trend of the chart (which appears to be relatively early in its overall move) and business look great. A break into the mid 60s would be a concern, but at this point we see the next major move as likely up. BUY
MasTec (MTZ 64)—MasTec had numerous factors going for it when we bought in, including a solid story (leverage to the buildout of 5G and energy infrastructure), growth numbers and chart (new highs), not to mention confirming strength in many cyclical sectors. But the odd financing deal with the firm’s owners changed investor perception, causing us to sell out last week. In retrospect, we wish we had sold a bit higher, but we’ve seen many of these situations find support a week or two later. This time, MTZ didn’t, so we cut our loss and moved on. SOLD
ProShares Ultra S&P 500 Fund (SSO 149)—Up, up, up … except for a sharp two-day shakeout in early December, it’s been a smooth ride higher for the S&P 500 (and hence SSO, which moves twice the S&P on a daily basis) since early October. We’re not shorter-term players, but as we wrote on the first page, another dip or consolidation is increasingly likely given that some complacency has crept into the market, though such a wobble may wait after the year is over given seasonal tendencies. That’s no reason to sell out, though new buyers should probably consider starting small up here or looking for minor weakness (dip of two or three points). While it’s been a heady run during the past two-plus months, the vast majority of intermediate- and longer-term evidence (including the fact that the S&P 500 emerged from a 20-month period of no progress in October!) tells us SSO should see higher prices. BUY
Qorvo (QRVO 117)—QRVO has enjoyed a great run of late, racing higher by 17 points from its shakeout low a couple of weeks ago, buoyed by numerous upgrades as analysts steadily come around to the view that the 5G smartphone boom is (a) going to get underway in the near future and (b) is likely to be larger than initially thought. Earnings estimates continue to inch higher (now $6.62 per share for next year, up 16% from the current year), but we have a hunch those will prove to be conservative; indeed, some analysts are thinking $7 or $7.50 is more likely. Whatever the exact numbers, the takeaway is that Qorvo is near the start of what should be a big period of growth, and while chip stocks can come and go quickly, the stock’s explosive November breakout from a multi-year zone bodes well. We’ll stay on Buy, though given the recent pop, we suggest keeping new positions small or looking for modest dips. BUY
Sea Ltd. (SE 39)—We wrote up Sea in last week’s issue (Other Stocks of Interest), so we won’t repeat the whole story here, but suffice it to say that we think the company has a chance to be one of the next big e-commerce (through its Shopee platform) and online entertainment success stories in Asia. In fact, outside of China, it’s already the largest platform in the region, and while growth in the entertainment side of the business is likely to slow down a bit (not likely to have a new hit game next year after its monster seller Free Fire this year), e-commerce should continue to explode (revenues up 267% in Q3!) as it expands its presence and rolls out improved monetization tools. The bottom line is still in the red, but top-line growth has been out of this world and analysts see that continuing next year (sales up 36%), and given the size of recent beats (management upped forecasts by 10% after Q3 results alone), those guesstimates are likely conservative. As for the stock, its February breakout from a big 16-month post-IPO base led to a great five-month run, and now it’s toying with fresh breakout after etching a four-month launching pad. To be fair, SE isn’t completely free and clear on the upside yet, but we’re going to take a half-sized (5% of the portfolio) position here, use a loss limit in the 33.5 to 34 range to keep risk in check, and will look to average up on signs of decisive strength going forward. BUY A HALF
Teladoc (TDOC 83)—TDOC is the third of our stocks to have suffered a tedious retreat during the past couple of weeks, but like the others, it didn’t crack key support (held the 50-day line as well as the top of its prior base) and is now on the rebound. The company has been quiet on the news front since an early-December conference appearance, though perception is growing that 2020 could be a breakout year for telemedicine, especially when it comes to boosting utilization of the firm’s existing member base; 37% of the firm’s members came to Teladoc just this year, leaving lots of upside engagement potential as outreach/marketing efforts take hold. The stock isn’t definitively out of the woods, and a drop into the low 70s wouldn’t be good to see, but we’re encouraged that (except for one day) selling volume on the way down was light and that buyers are stepping up. We’re fine grabbing shares around here if you don’t own any. BUY
Vertex Pharmaceuticals (VRTX 218)—Whereas most of our positions have been volatile (up, down or both) this month, VRTX has been calmly and grudgingly pulling back toward its moving averages (it’s tagged its 25-day line; the 50-day line is above 204 and rising). Some sort of brief, sharper dip is certainly possible, but to this point, the action is about as clean as can be. There are never any sure things in the stock market, but Vertex’s top-notch story, growth profile for (at least) the next couple of years (earnings expected to basically double from 2019 to 2021) and powerful stock action all portend higher prices ahead. We’re considering averaging up with a few more shares, but given that we already have a good-sized stake (11% of the portfolio) we won’t push the envelope right now. If you’re not yet in, though, we think the current rest period offers a good chance to start a position. BUY
Watch List
- Axon Enterprise (AAXN 70): AAXN is holding most of its post-earnings move, which is good, though we’d still like to see another round of accumulation to show the buyers are truly in control.
- Carvana (CVNA 96): CVNA remains as volatile as ever, with 3% to 5% daily moves the norm. But shares are trading at new highs and the story is as big as ever.
- Luckin Coffee (LK 32): LK is a hot Chinese stock with a big story, mind-boggling growth and a strong chart. See more below.
- Tesla (TSLA 404): TSLA has reaccelerated higher, tagging all-time highs. For all the news and rumors that are out there, it looks like the stock has entered a bullish Reality phase based on real profits and execution.
Other Stocks of Interest
Luckin Coffee (LK 32)—Luckin Coffee has a big, easy-to-understand idea that could go very far if management makes the right moves. The company has all the makings of the Starbucks of China (it should have more locations than the coffee giant in China in the near future), but its business model is totally different—Luckin gets most of its orders online and customers generally pick up and take out their coffee, tea, nuts, juices and the like (45% of items are non-coffee) at a specified time. That keeps costs low, which Luckin generally passes on to the customer (30%-plus cheaper than Starbucks). The company’s growth in the store count (3,680 at the end up September, up 24% from the prior quarter), items sold (up 60% from the prior quarter!) and revenues (up 517% from a year ago in Q3; analysts see 2020 revenues up 170%) are almost hard to believe, though such growth translates into a ton of spending on expansion and marketing, leading to a bottom line that’s deep in the red. But sub-metrics like store-level operating margins have turned solidly positive and expenses are rapidly shrinking as a percent of revenue. Beyond the numbers, though, is the aforementioned big idea—given its head start, brand name and technology know-how (getting and filling so many orders online every day isn’t easy), Luckin will almost surely become much, much bigger in the years ahead. The stock just came public in May and thrashed around for the first few months of its life, but broke out on two straight weeks of huge volume in November, took a breather and is now trying to extend its gains. LK is extremely volatile, but we think a shakeout (or a bit longer of a rest) could offer up a solid entry point.
Floor & Décor (FND 50)—We usually have a few names that we keep a very distant eye on—the long-term stories and growth numbers are compelling, so it’s usually a matter of waiting patiently for investor perception to improve. Floor & Décor is one of those names—the firm is a specialty retailer of hard surface flooring (tile, wood, natural stone, laminate and decorative accessories), with around 60% of business coming from pros and the rest from do-it-yourselfers. There are obviously other places you can buy these products, but Floor & Décor offers a one-stop shopping experience, with a far better in-store selection compared to competitors due to its big box locations (75,000 square feet on average). Because of that, the firm is grabbing lots of market share (sales up 20% in Q3, while industry-wide hard flooring sales were up just 1.3%), which in turn is encouraging the firm to open stores at a rapid pace; it had 113 warehouses at the end of September, and this will be the seventh straight year the store count has risen at least 20%! (Moreover, this year’s openings were the best sales-wise of any cohort to date.) Despite lackluster housing and construction sectors, the company’s sales and earnings have grown every quarter, and now it appears the wind is at the company’s back—in November, housing starts were up 14% from a year ago, while building permits (a leading indicator) hit 12-year highs (up 11% from a year ago). Analysts see earnings up 22% in 2020 (possibly conservative), and FND is rounding out a nice launching pad, which is part of a long 20-month consolidation. We’re intrigued.
Spotify (SPOT 150)—Streaming music has plenty of competition from the likes of Amazon, Apple and others, and that’s one reason that Spotify, which came public back in April 2018, is still hovering below its IPO price. But despite the competition, this is a gigantic worldwide market, and Spotify continues to lead the way—interestingly, management said that, in comparison to Apple Music, it’s gaining about twice as many subscribers per month, while engagement is twice as high and churn is half as much. And the numbers give some weight to those claims—in Q3, the firm had a whopping 248 million monthly active users (up 30% from a year ago), 113 million of which (up 31%) are premium subscribers. (The others get ads and don’t have access to as many features.) That drove both subscription revenue (up 29%) and ad-based revenue (up 20%) nicely higher, with the firm cranking out a solid profit as well. Podcasts seem to be a big growth area (39% gain in hours streaming from the prior quarter), which are leading to solid upsell opportunities. Stepping back, though, we think the driver is that investor perception is steadily improving, as every quarter that Spotify produces solid growth dampens fears that competition will eat into business. As for the stock, SPOT looked awful in September, but earnings caused a huge gap up and the stock has consolidated nicely since. It still needs some strength to be in a real uptrend, but this is the type of liquid, consumer-facing stock that big investors could pile into if things go right.
Lessons Learned
Every year around the holidays when things slow down a bit, we like to start the process of looking back at our trades from the year. We don’t do it bask in the glow from our winners—instead, we look for any useful tidbits that can be gleaned from winners or losers. After all, nobody has all the answers in the market.
Thus, while we haven’t completed our reviews yet, we like to write a piece in our last issue of the year (that’s this one!), looking at two or three lessons learned from the year—lessons that should help our bottom line next year and down the road.
#1: Later-Stage Situations are Lower Probability
We might as well start with a couple of stinkers—Ciena (CIEN) early in the year, and RingCentral (RNG) just a couple of months ago. While neither seems to have anything to do with the other and they came during different times of the year, both were bought well into their runs. CIEN was less obvious, but notice how the stock actually broke out four months ahead of our recommendation; it was intermediate-term extended at the time, which was likely on reason it ran out of steam. As for RNG, shares had been kiting higher for well over a year years, but we (mistakenly) gave more credence to the huge volume clue after the Avaya deal.
Of course, there’s no precise definition of what is or isn’t late stage; some things that look like they’ve run “too far” can continue higher for a while, while others fall apart. But in a bull market, your odds are much better going with fresher names, usually a stock that’s recently gotten going from a multi-month (or multi-year) consolidation, as there’s less potential profit taking by big investors. Thankfully, there are many stocks that fit that description these days—including the market itself!
#2: Blastoff Indicators are Valuable!
Blastoff indicators—those rare signs of power from the market that usually kick-off major advances—don’t flash often, but when they do, it’s usually during a time of huge market stress, which makes them incredibly valuable, effectively giving you the answers to the test before everyone else.
That’s what happened at the start of this year. Just 10 trading days off of last year’s market low, the 2-to-1 Blastoff Indicator turned green; since 1960, it had flashed just 10 other times, with an average maximum gain of 25% in the S&P 500 a year later. Well, it’s been nearly a full year, and the S&P has risen as much as … 24%!
A few weeks after that, the 90% Blastoff Indicator went positive in late February. Historically, a year after such a signal, the S&P rallies as much as 20%. So far, we’re up 15%, so it was another great signal.
Of course, these signals aren’t something that’s going to be integrated into a day-in, day-out market timing system. But that’s part of the attraction—few investors follow them, and when they do flash, few investors believe them. But their track record is nearly perfect! Granted, they don’t tend to come in consecutive years, so 2020 isn’t likely to see another barrage of them. But they’re definitely something to keep in your arsenal.
#3: Earnings Moves are Important—but Keep Some Perspective
In the market, the obvious usually becomes less valuable, and we’ve seen that play out a bit with earnings gaps in recent years. It’s still true that big earnings gaps (up or down) tend to be important for the intermediate-term—stocks tend to follow-through after such gaps in the weeks ahead, contrary to what most investors believe.
However, during the past few years, earnings gaps have become very popular and well followed; many investors look for them every day! Again, they still have predictive value, especially the huge earnings gaps up early on in a new bull trend. But on the downside, a bad day following earnings has become less reliable as an indicator of doom.
This year, in fact, we had a ton of adverse earnings reactions—Twilio (TWLO), for example, got dented 7% in February, and then got clocked by 6% after its report in early May. But neither really saw the stock break down in a major way, so we held on until the move finally ended in August.
Okta (OKTA) was another example—shares got whacked right after its report in March and, despite finding some support, ended up making no progress for few weeks after that despite a strong market. But that was no reason to sell, and OKTA ended up enjoying a heady advance before finally cracking.
We’re sure there will be other lessons to learn from 2019 as we dig further into our buys and sells, but these are three that stand out as we start our homework.
Cabot Market Timing Indicators
Some complacency has crept into the market, but when looking at the primary evidence, the message remains clear: It’s a bull market, and while short-term pullbacks are possible, the odds continue to favor higher prices down the road.
Cabot Trend Lines: Bullish
Our Cabot Trend Lines were negative for the first few weeks of the year, but since late February, they’ve been stubbornly positive, which has allowed us to keep a bullish mindset ever since. And as we head into 2020, the longer-term trend remains firmly up, with the S&P 500 (by 6.6%) and Nasdaq (by 7.7%) hover well above their respective 35-week moving averages. Translation: We still expect nicely higher prices when looking months down the road.
Cabot Tides: Bullish
Our Cabot Tides also remain positive, with all five indexes we track (including the Nasdaq, the daily chart of which is shown here) handily above their lower (50-day) moving averages. Near-term, the outlook is a bit murkier for the market, but the Trend Lines and Tides are telling us the path of least resistance remains up.
Cabot Real Money Index: Neutral
Our Real Money Index is still stuck in neutral territory, as inflows and outflows have been generally offsetting each other during the past many weeks. As a heads up, money flows can get a bit funky around year-end for non-sentiment reasons (rebalancing, etc.), but the overall take (little investor enthusiasm despite higher stock prices) remains intact.
Charts courtesy of StockCharts.com
The next Cabot Growth Investor issue will be published on January 2, 2020.
Cabot Wealth Network
Publishing independent investment advice since 1970.
CEO & Chief Investment Strategist: Timothy Lutts
President & Publisher: Ed Coburn
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