WHAT TO DO NOW: Put a little money to work. Our Cabot Tides turned positive yesterday, so both the intermediate- and longer-term trends of the market are now pointed up. That said, there remain many crosscurrents and growth stocks are generally struggling. We added Martin Marietta (MLM) and Proofpoint (PFPT) to the Model Portfolio on a Special Bulletin last night, leaving us with 40% in cash. Details below.
Current Market Environment
The market finished mixed today, with the Dow losing 55 points while the Nasdaq advanced 19 points.
As we reported in a Special Bulletin last night, our Cabot Tides have turned positive, as most of the five indexes we track are above their lower (25-day) moving average, and those moving averages are now advancing. With the Tides joining the Cabot Trend Lines in positive territory, both of the market’s major trends are pointed up, which definitely argues for a more constructive stance.
That said, there are still tons of crosscurrents out there. Most important to us has been the selloff in big-cap growth stocks, an area in which we frequently traffic. However, we are starting to see more setups among growth stocks outside of the well-known liquid leaders; if they emerge in the days or weeks ahead, it would be a great sign.
As for the broad market, our Two-Second Indicator remains negative, though the overwhelming majority of new lows has been yield-related instruments. That still counts, though it’s fair to note that on the Nasdaq, where there are few preferred stocks and bond funds, the number of new lows has subsided nicely. And, just as important, the number of stocks hitting new highs recently reached its highest level since 2003!
All told, not everything is looking perfect. Despite the big moves during the past week, the S&P 500 and Nasdaq have yet to tag new high ground (though small- and mid-cap indexes have). Even so, there’s no question that the power seen from many stocks, sectors and indexes in recent days has been very impressive.
With our Tides now positive, we added two new stocks to the Model Portfolio on last night’s Special Bulletin, though we’re still holding 40% in cash. Should the market continue to improve (and more leaders get going), we’ll put that cash to work.
Model Portfolio
Martin Marietta (MLM 221) is a cousin to Vulcan Materials (VMC), which we owned earlier this year (we made a modest profit). The company is a leading producer of construction aggregates, which are used in all types of construction. Obviously, the excitement surrounding a potential huge Federal infrastructure bill in the months ahead has helped MLM, but this isn’t a one-time story—after a long down period, demand for aggregates is in the midst of a multi-year recovery that should continue to drive MLM’s earnings and cash flow much higher in the years ahead as residential and commercial building activity rises and Federal and state spending picks up. (Analysts see earnings up 37% next year after a 49% bump in 2016.) MLM exploded to new highs following the election, and today, fell on a valuation-based downgrade, which isn’t unusual following a quick run. We bought today on the downmove, which we think is a solid entry point. BUY.
Proofpoint (PFPT 86) is a new leader in the cybersecurity sector thanks to its top-notch platform that helps protect against many newer cyber threats like business email compromise (hackers take wire transfer money from firms that do business overseas), Dridex (stealing banking credentials) and Ransomware (blocks access to systems until a ransom is paid), not to mention many other new security threats such as social media compliance and monitoring. The company is benefiting from some solid partnerships (including one with Intel McAfee) as well as the move to the cloud-based Office 365, which is increasing demand for additional security. The numbers here are excellent (sales and earnings growth are both accelerating), earnings estimates are strong and free cash flow is exploding (it should tally more than $2 per share next year, about double this year). BUY.
Facebook (FB 116) revealed some more reporting snafus for its advertisers this morning, which took the stock down toward our mental stop in the pre-market. However, buyers took advantage of the dip and pushed the stock up during the day. FB’s overall chart is still iffy—the stock is below its 200-day line by a couple of points, though it’s only 12% off its all-time high. We think the overall story remains outstanding, but if FB is going to lead any coming advance, it should hold up in the 112-114 area. So far it has, so we’re content to hold on. HOLD.
PayPal (PYPL 39) was recommended a few weeks ago, but it might as well be a few months ago given the market’s wild action during the past week. The stock’s action has been disappointing, as it’s given up all of its earnings gains and then some. That said, our loss isn’t out of control (we’re down about three points from our purchase price) and we believe the growth story here—many years of 15% sales growth and 20%-ish earnings growth—is intact. We switched our rating to Hold in last night’s Special Bulletin, and we’ll keep it there tonight. HOLD.
ProShares Ultra S&P 500 Fund (SSO 72) came close to our “uncle” point just before the election, but we’re glad we held on! SSO has soared back toward its August highs. We’d still like to see the fund lift above 63, but given that our Cabot Tides are positive again, we think it’s OK to take a position if you’re not yet in. BUY.
ServiceNow (NOW 86) took some hits right after the election as all growth stocks came under pressure, but shares held support above 80 and are back above our buy price. There’s resistance up near 90 from nearly a year ago, but we think the next big move is up if the market cooperates, as ServiceNow’s one-of-a-kind story and 30% annual growth outlook through 2020 (along with exploding free cash flow) should keep big investors interested. BUY.
Watch List
Celgene (CELG 120): CELG is back on the Watch List after a long correction and bottom-building effort. Shares have popped higher since the election, and management expects many years of 20%-plus earnings growth from here. It’s not going to be a barnburner but it should do well in a bull market.
Inphi (IPHI 45): Inphi is one of the most comprehensive component suppliers in the booming optical networking market. The stock is volatile but is closing in on new highs.
Veeva Systems (VEEV 41): VEEV hasn’t done all that much since we sold it a couple of months ago, but the stock has etched a decent-looking launching pad, and earnings are out next week. A very bullish reaction could result in a new entry point.
XPO Logistics (XPO 42): XPO has broken out powerfully following a tidy base. With cash flow and earnings heading much higher during the next couple of years, we think there’s upside for this new leader in the transportation sector.
Zillow (Z 35): Z has tightened up during the past couple of weeks, which is constructive, though we would like to see the stock rip above the 37-38 zone before getting in. We are a bit curious about the impact of rising mortgage rates on housing activity, though.
