WHAT TO DO NOW: Put a little money back to work. Our trend-following indicators are still bullish, and we’ve seen the Nasdaq and growth stocks show renewed strength in recent days. The market isn’t completely out of the woods, but there’s enough evidence to do a little new buying. Tonight, we’re adding PayPal (PYPL) to the Model Portfolio and averaging up in Alibaba (BABA), which will leave us with around 20% in cash. Details below.
Current Market Environment
The market took off today after Fed Chairwoman Janet Yellen implied that any further rate hikes would be gradual. At day’s end, the Dow was up 123 points and the Nasdaq had surged 68 points.
The past four trading days have been encouraging, with the Nasdaq recouping lost ground and a few growth stocks punching into new high territory. Combined with our still-bullish Cabot Trend Lines and Cabot Tides, and the odds are rising the market’s June slide is coming to an end.
That said, it’s important not to get too far in front of your skis. The major indexes have all gone nowhere since early June (or longer), and the same can be said for many growth (and other) stocks. Thus, the past few days are great to see, but the vast majority of stocks, sectors and indexes are still in the middle of five- or six-week ranges, and a down day or two from here would have many stocks back near their recent lows.
Throw in the fact that earnings season is coming up (which is always tricky), and there’s good reason to keep your feet on the ground.
Still, the primary evidence (trend of the market and action of leading growth stocks) has definitely improved, and as trend followers, we certainly won’t fight the tape.
We came into today with around 34% in cash, and tonight we’re going to put some of that cash to work in the Model Portfolio. First, we’re going to add PayPal (PYPL), which has just emerged from its first consolidation since breaking out. Second, we’re averaging up in Alibaba (BABA) by purchasing 20% more shares. These moves will leave us with around 20% in cash. Details below.
Model Portfolio
We’ve taken a couple of swings at PayPal (PYPL 57) in the past with little to show for it, but we think the stock has begun a sustained (and possibly long-term) advance, and the stock’s move this week out of a controlled consolidation tells us big investors are in a buying mood. The big-picture story—PayPal is a leader in the move toward digital payments and money transfers—is good enough to keep sales and earnings growing for a long time, but a big reason for the stock’s strength is that the competitive environment continues to ease. Just today, in fact, it was announced that PayPal has been added as a payment method in Apple’s stores (iTunes, App Store, etc.) in another sign that former competitors are now working with PayPal. The stock isn’t at an ideal entry point after today’s surge, and earnings are due out in two weeks (July 26), which is a risk. But we’re putting our emphasis on the long-term chart and stellar fundamentals, thinking PYPL is a relatively fresh institutional-quality leading stock. We’ll buy it for the Model Portfolio tomorrow. BUY.
Alibaba (BABA 149) etched a nice consolidation since early June, including a couple of very tight days near the end of last week, and now it’s pushed ahead to new highs (albeit on so-so volume). We think the firm’s huge guidance boost at its Investor Day in early June changed perception among big investors and analysts, who now see earnings lifting north of 30% annually for many years to come. It’s not a perfect entry point, but given BABA’s resilience in recent weeks, its move to new highs and its position as one of the top liquid leaders in the market, we’re going to add to our position by purchasing 20% more shares (for example, if you own 50 shares, you can buy another 10). BUY.
Facebook (FB 159) has stormed back to new highs during the past few days, bolstered by a couple of analyst upgrades and (importantly in our view) news that the company is starting a global rollout of ads on Messenger, which has 1.2 billion monthly users. The firm also struck a deal today with Papa John’s, which becomes the first national pizza brand to launch Facebook Instant Ordering, allowing users to order right from Papa John’s Facebook page. Earnings are due out in two weeks (July 26), which is a risk, but we can’t ignore the stock’s new price and relative performance (RP) peak today. We’ll go back to Buy, though you should keep new purchases on the small side this close to earnings. BUY.
ProShares Ultra S&P 500 Fund (SSO 91) popped higher today, but it remains in the same range it’s occupied since early June. Thus, the near-term trend remains neutral, but like the S&P 500, the longer-term trend is up and many studies point toward higher prices in the months ahead. BUY.
Shopify (SHOP 95) hit a low of 81 in mid-May (after announcing a share offering), then tested that level in early June (82.5) and again two weeks ago (83). And now the stock is perking up, though volume on this rally has been meek. All told, the action is encouraging (you could nibble if you don’t own any, but SHOP’s latest rise “only” brings it up to the middle of its two-month range, so we’ll stay on Hold. HOLD.
Universal Display (OLED 115) has been dancing just above our stop in the mid-100s, so today’s move higher was good to see. We want to give OLED every chance to hold up because, if the move to organic light emitting diodes is for real (and we believe it is), the company’s earnings power will be enormous. The next quarterly report is due out on August 3. Another good day or two would likely have us going back to Buy, and if you really want in, you could nibble here. But officially, with the stock back to where it was two weeks ago, we’ll stay on Hold. HOLD.
Veeva Systems (VEEV 64) tested its 50-day line during the Nasdaq’s two June downwaves, held it both times, and is now beginning to perk up, with the stock testing four-week highs today. Similar to SHOP and OLED, we’re not opposed to buying a small position if you really want in, but overall, VEEV is in the mid-range of its consolidation and the recent bounce has come on very light volume. That’s not a negative, per se, but we’d rather focus new buying on the strongest situations. HOLD.
XPO Logistics (XPO 63) has been busy on the news front, with the company announcing deals with Nu Skin Enterprises (to be its global lead logistics provider), Sealed Air (warehousing and logistics management) and BrewDog (chilled warehousing for one of the U.K.’s fastest-growing drinks companies) during the past month, highlighting XPO’s organic growth opportunities. The stock has pulled back to the 25-day after a heady run, which looks normal to us. Earnings are due out August 3. BUY.
Watch List
Carvana (CVNA 22): CVNA has a story we really enthuse over as it grabs share in the used car market. The stock is thinly traded and the company is losing money, but sales growth is triple-digit and accelerating, and the stock has shown great strength.
Celgene (CELG 134): CELG is holding firm after its big-volume breakout two weeks ago. We’d prefer to see a bit more strength before concluding the trend has decisively turned up. Earnings are due July 27.
Exelixis (EXEL 27): EXEL shot ahead to new highs today, clearing a choppy four-month pattern. The next pullback could provide a low-risk entry.
ServiceNow (NOW 112): NOW kissed new highs today, though like many stocks, it did so on so-so volume. Earnings are due out July 26.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Wednesday, and, as always, we’ll send a Special Bulletin should we have any changes before then.
