First and foremost, all of us at Cabot wish you a great long holiday weekend; our offices will be closed tomorrow but we’ll be back at it again on Monday.
As for the market, the story remains largely the same--there are some blemishes, but most of the evidence is positive, so we’re sticking with a heavily invested stance, albeit with some moves based on the action of individual stocks. Earlier this week, we trimmed a bit, leaving us with around 14% in cash.
In tonight’s issue, we write about one new liquid leader we’d love to own at the right price, along with all our latest thoughts on our stocks and the market.
Cabot Growth Investor 1449
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Still the Same Story
Most times, the market environment is in a constant state of change, so when we report to you our latest thoughts on this page, there’s plenty to discuss—rotation among sectors, major moves in the indexes, earnings season or some big-picture event that has flipped (or has the potential to flip) the market’s entire script.
But that hasn’t really been the case during the past two months. Most of that time has been defined by (a) very strong action among leading growth titles, which we’ve been able to take advantage of (the Model Portfolio continues to handily outperform the general market), (b) positive but not powerful action from the broad market, with many broad indexes doing just OK, and (c) the occasional bout of rotation out of growth and into cyclical areas that lasts anywhere from a couple of days to a couple of weeks.
And today, the story remains basically the same, with no real changes among our indicators (the Tides did come close to the edge earlier this week but has bounced since), leading stocks (a few wobbles but basically zero breaks of key support) and much of the secondary evidence (new lows and our Aggression Index).
Of course, there are always small changes going on. One that we’re watching is the latest volatility in the market—after a sizable, prolonged run, we’re seeing much more up-down-up-down action, which is usually a sign the sellers are finally putting up a fight. And as the Nasdaq leapt above its highs from last week, the number of stocks doing the same has fallen off some.
Those and other factors are definitely worth watching, but as we wrote in the last issue, there will always be stuff to worry about (or, in a downtrend, things to be hopeful about). Today, there remains much more positive evidence than negative, so we continue to advise a heavily invested stance.
Importantly, though, just because the evidence remains mostly unchanged doesn’t mean you should be complacent or standing still—instead, you should adjust as needed based on the action of your individual stocks. In the Model Portfolio, for instance, we did some trimming earlier this week based on the charts of two of our holdings, building up a bit more cash that we hope to redeploy in some stronger names at solid entry points going ahead.
What To Do Now
Overall, then, we remain flexible and are keeping our eyes open for danger signs, but with the evidence mostly positive, we remain mostly bullish. On a special Monday bulletin, we sold one-third of our remaining shares of DocuSign (DOCU) and all of our shares of Chewy (CHWY) from the Model Portfolio, which leaves us with 14% in cash.
Model Portfolio Update
Growth stocks have been up, down and all around during the past couple of weeks, but the main trends remains up and few (if any) have suffered abnormal action. Thus, we’ve been content to mostly sit tight … though that doesn’t mean we can’t make a couple of moves here and there, which we did earlier this week.
Based mostly on stock-specific action, we decided to take another round of partial profits in DOCU and let go of our half-sized position in CHWY for a tiny profit. We now have around 14% in cash, which we could put to work either in one of our current names (we’re still looking to fill out our position in CHGG) or a fresh, new leader that presents an attractive entry point.
Current Recommendations
Stock | No. of Shares | Portfolio Weightings | Price Bought | Date Bought | Price on 7/02/20 | Profit | Rating |
Chegg (CHGG) | 1,216 | 5% | 65 | 5/22/20 | 71 | 9% | Buy a Half |
Chewy (CHWY) | — | — | — | — | — | — | Sold |
Cloudflare (NET) | 5,424 | 11% | 26 | 4/20/20 | 37 | 41% | Buy |
Dexcom (DXCM) | 290 | 7% | 216 | 11/15/19 | 411 | 91% | Hold |
DocuSign (DOCU) | 655 | 7% | 65 | 9/13/19 | 195 | 200% | Hold |
Okta (OKTA) | 947 | 11% | 150 | 4/20/20 | 211 | 40% | Buy |
ProShares Ultra S&P 500 (SSO) | 1,306 | 9% | 120 | 5/29/20 | 129 | 8% | Buy |
Teladoc (TDOC) | 631 | 7% | 78 | 11/01/19 | 210 | 168% | Buy |
Twilio (TWLO) | 830 | 11% | 174 | 5/8/20 | 235 | 35% | Buy |
Vertex Pharmaceuticals (VRTX) | 414 | 7% | 199 | 11/8/19 | 292 | 47% | Hold |
Wingstop (WING) | 1,313 | — | 128 | 6/19/20 | 144 | 13% | Buy |
CASH | $245,613 | 14% |
Chegg (CHGG 71)—Our initial foray into CHGG in late May was near a high ebb in the stock, so even after the big rebound in the shares we’re only up a three bucks or so. That’s not ideal, nor is the stock’s crazy volatility (it moves around nearly 5% per day from high to low, on average), but if you take a step back, the evidence still says that CHGG can be a winner: Shares have effectively consolidated for seven weeks after their huge earnings gap, and fundamentally, there are many reasons to expect the COVID-related surge in business to have legs, with remote/online learning and tutoring hitting the mainstream both in the U.S. and around the world—management says that cutting back on shared accounts (it’s a big opportunity as kids in similar classes often share accounts) and uptake of the firm’s recently released bundle product (Chegg Study Pack) should be a big tailwind over the next year or two. Back to the stock, a drop back into the mid/high 50s would be iffy, but conversely, a push higher from here could have us filling out our position. Right now, we’ll stick with a Buy a Half rating. BUY A HALF.
Chewy (CHWY)—All of the positive things we wrote about CHWY in recent weeks still hold true, but we’re in this game to make money, and at the end of the day, Chewy (which was one of our first buys when the Tides turned positive more than two months ago) was up just a smidge from our buy point back then, even as most leading stocks have had big moves. We still think there’s a chance shares can shape up, and if all goes well, maybe we could get back in down the road. But we decided to cut bait on Monday’s special bulletin for a tiny profit. SOLD.
Cloudflare (NET 37)—If you dig into the details of Cloudflare’s products and business, you’ll likely get the proverbial ice cream headache, but the big idea here is easier to grasp—as everything moves to the cloud, companies of all shapes and sizes are going to need new-age networks (like Cloudflare’s) that will enhance performance and security of their various applications. That should produce rapid and reliable growth for many years, which has kept the buyers in control. Following the huge ramp two weeks ago, NET has consolidated nicely as the 25-day line (now at 32.6 and rising) strives to catch up. We’re OK buying some here or on dips of a point or two. BUY.
Dexcom (DXCM 411)—DXCM is now seven weeks into a new consolidation, and near-term, we don’t have a strong opinion on what comes next—shares have respected their 50-day line and are just a few percent from all-time highs (good), but there hasn’t been much upside power of late (bad). Thus, we can see the next couple of weeks going either way. But bigger picture, we think higher prices are ahead as the company’s G6 (and, likely next year, G7) continuous glucose monitoring systems both take market share and ride the overall industry’s growth. If you really want in, buying a half-sized position here with a reasonable stop could be fine, but officially we’ll stay on Hold until we see decisive signs that big investors are aggressively adding shares. HOLD.
DocuSign (DOCU 195)—We like DocuSign’s story as much as anyone, which is one reason we jumped on the original breakout back in September of last year. (Note: This stock flashed Double Skyscrapers at its breakout, similar to Spotify (SPOT) recently; see more on that later in this issue.) However, the stock is not the company, and as we’ve written in recent weeks, DOCU has gotten extended both in the short-term (miles above moving averages) and intermediate-term (tripled from its original breakout 10 months ago). Of course, we almost always prefer to sell the last of our shares defensively (on the way down after a top), but given the big run and our decent-sized position, we decided to again ring the register earlier this week (for the second time in a few weeks), selling one-third of our remaining position. In a sense, we hope the partial sale is a big mistake (meaning our remaining shares continue to kite higher), but should the sellers finally come around, we’re planning to give shares plenty of room to correct and consolidate if need be. HOLD.
Okta (OKTA 211)—As the work-at-home movement (or work-more-from-home movement) seems here to stay, Okta’s identity protection solutions are becoming a must-have for more and more consumer-facing and internal business apps. Interestingly, the firm joined forces with some other new-age cybersecurity players (including CrowdStrike and ProofPoint) to offer an integrated solution for the new environment. One analyst actually downgraded the stock based on valuation earlier this week, but the stock is taking its cues from elsewhere—OKTA leapt to new highs yesterday on solid volume. As with most every leading stock, this one could stage a near-term retreat at any time, but there’s no question the trend is up. BUY.
ProShares Ultra S&P 500 Fund (SSO 129)—It’s now been just over a month since the first blastoff indicator (the 90% signal) flashed green, and the S&P 500 is up a bit since then, with a couple of sharp pullbacks along the way. As we wrote when we initially bought SSO, it’s always possible that 2020 is a “rule breaker” year, where historical probabilities don’t work as well. We’re always playing out different scenarios, and a drop below 115-ish (the June lows) would have us going to Hold, while a move into the mid-100s (a 12% to 14% loss) would likely have us cutting the loss. Still, with all of that said, none of the recent action looks abnormal to us at all—by definition, these blastoff indicators identify “hyper-overbought” environments, which often lead to short-term wobbles, though contrarily, also lead to higher prices down the road. Throw in our still-bullish trend-following timing indicators and we think SSO’s path of least resistance remains up. You can grab some here if you’re not yet in. BUY.
Teladoc (TDOC 210)—Teladoc isn’t an unknown story at this point, as the pandemic has created a lot of buzz around virtual health. But we still think there’s plenty of upside as the sector (and Teladoc’s leading, comprehensive solution) penetrates the mass market. While the virus-related bump to business will slow at some point, management has recently offered encouraging words, stating that retention rates continue to exceed 90% and that large employers are now generally looking for a broad set of services in telehealth plans, which, given that Teladoc is four to five times larger than its closest competitor, is a direct benefit to the company. As expected, TDOC did pull in a bit near the end of June, but it’s perked back to new highs this week. A drop back below 180 would be a yellow flag, but right here, we continue to think the stocks April-June consolidation is giving way to the next leg up. BUY.
Twilio (TWLO 235)—TWLO has been generally quiet on the news front, but that hasn’t stopped the stock, which remains in a firm uptrend; to this point, pullbacks have been limited to either a couple of sharp, shakeout-type down days or a couple weeks of sideways action. That doesn’t mean the stock won’t eventually fall more sharply, but barring a market meltdown, odds favor the first retreat to its 10-week line (now at 193 and rising quickly) finding support. Nothing has changed with our overall view: Twilio smells like a liquid leader of this market advance, so we’ll stay on Buy, though as always, dips of a few points should provide better entries. BUY.
Vertex Pharmaceuticals (VRTX 292)—We go back and forth on VRTX. On one hand, there’s not much to complain about, as shares remain in a two-steps-forward, one-step-back type of advance, with solid support showing up every time the stock sells off for a week or two; that’s just the kind of action we expected in a bull run in such a big, liquid name with a steady growth story. On the other hand, there’s not a ton of juice here—VRTX’s relative performance line (not shown in the chart) peaked in mid-May and is no higher today than in early April. Overall, though, it’s usually best not to overthink things: At day’s end, the stock is still in an uptrend and has a reliable growth story. A big bout of weakness and/or a market selloff could always have us taking our profit, but at this point we believe holding and giving the stock a chance to keep rising is the best option. HOLD.
Wingstop (WING 144)—WING is off to a decent start for us, pushing higher after a five-week rest (including a successful test of its 50-day line). Of course, we never buy just because of the chart—the firm’s long-term cookie-cutter story is as good as it gets (it aims to be a top 10 global restaurant brand over time!), and near-term, its ability to sell both in store and digitally means it should do well no matter how the economic reopening goes around the U.S. Interestingly, the firm just opened its first “ghost kitchen,” a takeout-only location in Dallas that is less than one-quarter as big as a normal dine-in location. We’re fine picking up shares here or (preferably) on dips of few points. BUY.
Watch List
- Datadog (DDOG 90): Similar to many leaders, DDOG has enjoyed an excellent run, but is stretched to the upside. Long-term, there’s huge potential for its application performance management and infrastructure solutions, but short-term, a better entry point should emerge.
- Inphi (IPHI 117): IPHI bounced off its 50-day line nicely this week; we still think it may need more time to wear out some weak hands, but it remains the best play on the need for faster data center speeds.
- Peloton (PTON 59): PTON broke out from its base nine weeks ago and has enjoyed a nice run since. There’s obviously a stay-at-home aspect to the story, but we think it’s much bigger than that, with the firm leading the connected fitness movement.
- Spotify (SPOT 273): SPOT has erupted from a huge post-IPO base, with a mass market story and some major catalysts. See more later in this issue.
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.
Blackstone (BX 55)—We’re always going to have our eyes peeled for new, dynamic growth situations, but given the bifurcated environment, we’re also looking for names outside of traditional growth areas that could come to life if the broad market kicks into gear. One idea is old friend Blackstone, a stock we rode for a bit last year (sold for a tiny profit) and that has set up a big launching pad in recent months. The company is one of the biggest and best Bull Market stocks out there, with a total of $538 billion of assets under management invested in real estate, private equity, hedge fund solutions and credit/insurance products. Cash generation has been solid for a while (fee-related earnings, which are more stable than one-time realizations, rose 25% in Q1, thanks in part to fee-earning assets rising 20%), which has led to growing dividends ($1.97 per share during the past year, yield of 3.5% - and Blackstone is a C-Corp. now so dividends are qualified). While virus-related economic disruptions hit asset prices (analysts see earnings down some in Q2 and Q3), Blackstone is really a play on the economic recovery, especially as the Federal Reserve floors the accelerator—if the global economy comes back and key areas like real estate strengthen, there’s little doubt the company’s distributable income will continue to surge in the years ahead. (Analysts see next year’s earnings up 42% from this year’s guesstimates.) As for the stock, it broke out of a big consolidation last April, had a solid run into February and then gave it all back during the crash. But the comeback from there has been solid, and the last four weeks have been just what the doctor ordered, allowing BX to catch its breath. If the broad market picks up steam and BX shows some power above 60, we could test the waters again.
ZoomInfo (ZI 45)—ZoomInfo looks like the next big thing in customer relationship management (CRM) solutions for business-to-business sales—old CRMs usually get their data from lead generation activities, but that’s static and quickly becomes out of date as people switch jobs and companies/teams shift priorities. ZoomInfo, on the other hand, has a massive database that is dynamically updated thanks to information sharing among customers and artificial intelligence/machine learning that scans publicly available data and millions of web domains. The result is far more accurate, up-to-date information, which in turn means less wasted time chasing down leads and new contacts and thus a far more efficient and productive sales and marketing effort. The potential market is giant ($24 billion this year), and ZoomInfo has just 2% or so of it; there is some competition (LinkedIn-related sales efforts), but there’s no reason ZoomInfo can’t grow its share in a big way in the years ahead thanks to it having a better mousetrap. Growth has been terrific (sales up 87% in Q1), and while COVID slowed things down temporarily (new customer signups rose “only” 36% in March), April saw business spike (new customer signups leapt 87%), and the company is already profitable on an earnings and especially free cash flow basis (which could total 50 cents or so per share this year). ZI just came public a few weeks ago, had a great first few days and is in the third week of a tightening consolidation. Recent IPOs are always hot potatoes, but this is a great story, with great numbers, and we’re encouraged that ZI is very liquid (north of $80 million per day). It’s worth keeping an eye on.
Livongo Health (LVGO 73)—While a recent new issue (like ZI) or a fresh breakout due to rotation (possible in BX) are worth monitoring, once we’re three months into a new rally (like today), we generally prefer to look for already-established leaders and buy them on corrections (usually three or four weeks of down action toward the 10-week line). Livongo is a fresh leader (original breakout in early April) we’re keeping an eye on, and it has a great story. The firm serves the 140 million-plus Americans that suffer from a chronic condition (including 31 million diabetics and 40 million with hypertension that its products target today), and Livongo is helping them with technology-enabled teaching, 24/7 support, data solutions and even actionable alerts that help members achieve better health results. It’s like having your own health expert and advocate with you at all times (for advice, supplies, data tracking and the like), and the reason growth has been fantastic (revenues up 149% last year and 115% in Q1!) is because it works, with healthier outcomes for members, which in turn saves money for health plans and employers, too. At the end of March, Livongo had more than 328,000 enrolled diabetes members (more than double that of a year ago), while the value of new agreements signed in Q1 was up 85% and the same-customer revenue grow rate was a solid 10%. If management continues to make the right moves, there’s no reason the company can’t grow manyfold from here, especially as it inks deals with more big outfits (about 30% of the Fortune 500 are current customers). The stock has had a huge run, but given that it’s only three months into its overall rally, the next meaningful pullback or shakeout should provide an opportunity.
Liquid Leaders and Double Skyscrapers
Spotify (SPOT)
If you’ve been following us for any length of time, you know we love to hunt for so-called liquid leaders—well-traded stocks with big growth numbers and even better growth stories that can grow into core positions at thousands of funds (mutual, pension, hedge) over time. These stocks are capable of making big moves over time, but because they’re pined after by institutional investors, their movements tend to be a bit less jumpy, which makes them easier to hold onto for the duration of their move.
We think we own a handful of liquid leaders of the current bull move, but we’re always on the lookout for more, and we think Spotify fills the bill. The company is the leading global player in the online music revolution with 163 million free users (supported by ads and with more limited functionality; the free user count is up 32% from a year ago) and 130 million premium paying members (more functionality; up 31% from a year ago). And they love it: 60% of premium users start as free users before upgrading, and 70% of “churned” users come back within 45 days, which is very impressive.
The core music business should remain strong for a long time to come, and now there’s a ton of excitement about podcasts—Spotify was already seeing increasing engagement in this area (one million podcasts available on the platform, listening trends are up at triple-digit rates), and the firm has made some bold moves of late to bolster that further, inking Joe Rogan and Kim Kardashian to huge deals, and even signing a deal with DC Comics and Warner Brothers to produce an original slate of narrated podcasts featuring their superheroes.
Growth has been solid for a while (20% to 30% revenue growth even including currency headwinds; about 70% of users are outside the U.S.), and big investors are thinking these new deals will not just attract more users but also give the firm pricing power (both what it charges subscribers and for ads). Of course, there is competition from Apple and others, but we think Spotify looks a bit like an emerging Netflix of the online music/podcast world, with its dominant position likely to expand in the years ahead.
As for the stock, it came public back in April 2018, had a good couple of months and then fell into the typical post-IPO droop … a droop that lasted well over a year as shares made no headway. That began to change after the market bottom, and SPOT enjoyed a nice reaction to earnings in May.
But it’s the past two weeks that have been really eye-opening, as the stock has flashed a rare, bullish chart occurrence in a big, liquid stock. We call it Double Skyscrapers, and it occurs when (a) the stock posts two straight weeks of big gains on (b) two straight weeks of giant volume and (c) this occurs early in a stock’s advance. SPOT fills the bill on all three, with the latest move finally taking it above its 2018 peak.
We’re not interested in chasing the stock up here, but we’re also not expecting a huge pullback unless the market completely gives up the ghost. Spotify is near the top of our watch list and any cooling off period (possibly a two- to three-week rest that allows some moving averages to catch up) could provide a chance to get in. WATCH.
Big Investors are Still Playing Offense
Given all the headlines about reopening pains and renewed virus worries, combined with a few wobbles among growth stocks, you might think big investors (who must remain heavily invested) would be tilting toward some safer issues in case the market and economy tank. But Cabot’s Aggression Index isn’t seeing any signs of that—so far, growth is easily winning the battle vs safety.
Our Aggression Index is simply a relative performance line of the growth-oriented Nasdaq (chips, biotech, networking) to the defensive, stodgy consumer staples sector (toothpaste, cigarettes, soft drinks). We monitor it carefully on a week-by-week basis, and so far, we’re not seeing any rush to safety; you can see that the Index continues to glide higher, well above both the 10-week and 40-week moving averages. (Heck, on a daily chart, it’s kiting above its 25-day line!)
Like everything, the Aggression Index isn’t perfect, but it’s done a great job in recent years of identifying shifts in sentiment among mutual funds and the like, remaining bullish as growth stocks advanced (last Buy signal was in early April) and turning negative (below the lower of its two moving averages) ahead of or in concert with a general downturn. At this point, the clearly positive stance of this indicator remains a feather in the bulls’ cap.
Cabot Market Timing Indicators
Most of the evidence remains positive, though there remain a few chinks in the armor. As always, if our indicators change or leading stocks take on meaningful water, we’ll pare back more aggressively, but at this point we continue to advice a heavily invested stance.
Cabot Trend Lines: Bullish
Our Cabot Trend Lines remain on a Buy signal, because while the S&P 500 continues to flirt with its 35-week line (closed 0.8% below it last Friday), the Nasdaq remains in great shape (more than 10% above its own 35-week line). The near-term has some potential for potholes, but this bullish indicator tells us the odds strongly favor higher prices when looking out a few months.
Cabot Tides: Bullish
The bifurcated environment pushed our Cabot Tides to the fence earlier this week, when most indexes (including the S&P 500, daily chart shown here) tested their lower (50-day) moving averages. Happily, all have bounced nicely so far this week, giving the indicator 4% or so of daylight. We’re watching closely, but until proven otherwise, the intermediate- and longer-term trends of the market are pointed up.
Cabot Real Money Index: Neutral
There were definitely pockets of enthusiasm that bubbled up last month, but our Real Money Index hasn’t picked up on any broad-based giddiness—the rolling five-week average of money flows into/out of equity funds and ETFs not only remains south of zero (net outflows), but it’s generally in the middle of its range of the past 10 months. It’s currently in the neutral range.
Charts courtesy of StockCharts.com
The next Cabot Growth Investor issue will be published on July 16, 2020.
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