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Cabot Growth Investor Bi-weekly Update

Remain cautious on the buy side, but continue to hold your top performers. Our Cabot Tides and Two-Second Indicator are both negative, which tells us to hold some cash and cut back on new buying. At the same time, many growth stocks (including a few we own) continue to act well, so we’re also sitting tight with our strong, profitable stocks.

WHAT TO DO NOW: Remain cautious on the buy side, but continue to hold your top performers. Our Cabot Tides and Two-Second Indicator are both negative, which tells us to hold some cash and cut back on new buying. At the same time, many growth stocks (including a few we own) continue to act well, so we’re also sitting tight with our strong, profitable stocks. We have no changes in the Model Portfolio tonight; our cash position stands at 32%.

Current Market Environment

Stocks finished lower today on light volume, with the Dow losing 88 points and the Nasdaq fading 19 points.

While it’s not a horror show, the weight of the market’s evidence remains tilted to the down side, which continues to argue for a cautious stance. Our Cabot Tides remain negative, as most indexes we track are still below their 50-day lines, and the Two-Second Indicator tells us the broad market is quite weak—today was the 16th straight trading day with greater than 40 new lows (including seven readings of more than 100 new lows).

Meanwhile, our Cabot Trend Lines are still bullish, and we’re encouraged by the action of liquid growth stocks, many of which have held support and perked up in recent days.

All told, then, the market is in something of a middle ground—it’s not 2008 out there, of course, but the intermediate-term trend is tilted down and not much money is being made outside of a handful of leading stocks. Given that, we’re happy to hold on to our top performers, but we’re also not pushing the envelope on the buy side, because the precarious broad market and action of the major indexes tell us risk is high.

Right now, the Model Portfolio has just over 30% in cash, and we have a couple of stocks on relatively tight leashes (OLED and VEEV, the latter of which reports earnings tomorrow) in case the market weakens further. As for new buying, we want to see the Tides turn positive and more stocks hit new highs—despite the ups and downs, the 10-day moving average of new highs on the Nasdaq is the lowest since May of last year!

Thus, we’re prepared for whatever comes, but for now, we’re watching and waiting for the market to show its hand.

Model Portfolio

Alibaba (BABA 176) has gone bananas since releasing a blowout earnings report last Thursday morning. Sales (up 53%) and earnings (up 60%) easily topped expectations, and other metrics like its cloud computing revenue (up 96%) and clients (up 75% from a year ago), annual active customers (now 466 million, up 7%) and free cash flow (nearly $3.3 billion in the quarter) all impressed. Analysts now see the bottom line soaring 44% this fiscal year (ending next March) and 31% next. As for the stock, it’s hard not to love the action, but BABA hasn’t had a meaningful pullback all year and is now lifting out of trend on the upside. Bottom line: If you own some, keep your feet on the ground, and if you don’t, you can consider a small position, but aim for pullbacks of a few points. BUY.

Facebook (FB 169) looks fine, as it continues to wedge slightly lower in recent weeks. A pullback toward the 50-day line (now near 161) is certainly possible if the market has another leg down, but at this point, big investors aren’t in a hurry to sell, which is encouraging. The firm announced today it will stream 15 mid-level college football games in an effort to attract more eyeballs. BUY.

PayPal (PYPL 60) is another liquid growth leading stock that’s taken the market’s recent wobbles in stride; shares reached a new closing high yesterday, in fact, before retreating today. As with FB, a dip to the 50-day line (now nearing 57) or a bit below wouldn’t be uncalled for if the market moves lower, but the action so far is a sign that institutions think higher prices are coming. Sit tight if you own some, and if not, you can start a position here or on dips of a point or so. BUY.

ProShares Ultra S&P 500 Fund (SSO 91) has moved from 94.5 to 90.5 to 93.4 to 89.1 back to around 91—all in the past two and a half weeks! On its own, SSO’s chart isn’t bad, especially given its big advance in recent months—long-term, we still think SSO (and the overall market) will go higher. But with our Cabot Tides and Two-Second Indicator both negative, there’s clearly downside risk here, so it’s prudent to stick with a Hold rating. HOLD.

Shopify’s (SHOP 102) action recently has certainly been encouraging—SHOP has been inching higher and today lifted nicely above the century mark on a pickup in volume. The odds favor that SHOP, which just got going in early January, has another leg up in its future, as big winners rarely top after just five months up (as SHOP experienced) because it takes time for big investors to build positions. (A total of 414 mutual funds owned SHOP at the end of June, up from 315 at year-end.) So the action since early June appears to be a normal consolidation phase. Further strength and a healthier market environment would tell us the next leg up has begun, but until then, we’ll stay on Hold and practice patience. HOLD.

Universal Display’s (OLED 112) tested support in the 106-108 range earlier this week before bouncing. As we’ve written before, we’re trying to give the stock every chance to hold up because the earnings potential is out of this world should things go Universal’s way. But a decisive drop below support would make the past few months look like a topping area, which would indicate the company or the market (or both) are having issues. We’ll stay on Hold and let the stock tell us what to do. HOLD.

Veeva Systems (VEEV 64) has chopped around for nearly three months, but while the action has been sloppy at times, the sellers haven’t taken control (the stock has pulled back 16% from high to low during its consolidation). But now it’s all about the firm’s earnings report, which is due out tomorrow after the market close; one analyst believes it was another very good quarter for Veeva, led by adoption of the firm’s Vault suite of products (especially those that help with regulatory matters), but as always, the reaction in the days ahead will be key. A drop below the 57 to 58 area would be bearish, but any decisive leap over 68 would be very encouraging. HOLD.

Watch List

Autodesk (ADSK 111): ADSK looks like the next Adobe (which has had a monster run in recent years) as the firm dominates its industry and is shifting to a subscription, cloud-based business model that’s driving up cash flow. Earnings are due out tomorrow.

Exact Sciences (EXAS 40): EXAS has had a lot thrown at it in recent months, but the stock has held up well and we believe its lone product (ColoGuard) could take huge share in the colon cancer screening business.

GrubHub (GRUB 55): GRUB has been calm, cool and collected since its big, earnings-induced breakout from a multi-year base. As we wrote last week, we think perception is changing for the better, and the recent tight action is constructive.

ServiceNow (NOW 110) and Workday (WDAY 104): NOW is approaching its peak, as is WDAY, which will report earnings on August 30. Both have great sales and earnings growth and huge opportunities in front of them—powerful breakouts (and a healthier market) could have us adding one of them.