WHAT TO DO NOW: Remain bullish. While things are a bit giddy in the short-term and we’re still in the midst of earnings season (three of our stocks release their numbers tonight or tomorrow), our trend-following indicators bullish and growth stocks are acting great. Thus, you should keep your optimist’s hat on. In the Model Portfolio tonight, we’re buying a 10% position in Autodesk (ADSK) and putting GrubHub (GRUB) back on Buy, leaving us with around 4% in cash.
Current Market Environment
The market kicked off November on a mixed note, with the Dow gaining 58 points but the Nasdaq pulling back 11 points.
The overall environment continues to look good, with the major indexes all trending nicely higher. In fact, all five of the indexes we track are at or very close to their 25-day moving averages, which keeps our intermediate-term Cabot Tides and longer-term Cabot Trend Lines solidly in the bull camp.
All told, when looking at the market’s primary evidence (price/volume/trend of the major indexes and leading stocks and sectors), it’s positive, so we’re bullish.
In the short-term, though, things have gotten a bit giddy according to several measures. And we have seen the broad market come under some pressure during the past week and a half, with the number of stocks hitting new lows expanding. That’s not a reason to be bearish, but it does open the door to some sharp reversals and declines, similar to what we saw today on the Nasdaq.
In the Model Portfolio, most of our holdings are acting well, though earnings season is injecting its usual dose of volatility. We have three more stocks (Facebook, Alibaba and Universal Display) reporting earnings either tonight or tomorrow; as always, we’ll see how the stocks react in the days following their reports as a clue and make any changes that are necessary.
In the meantime, though, we are adding one new stock tonight—it’s Autodesk (ADSK), which we think has the potential to be a steady liquid leader if management continues to execute. The new buy will leave us with just 4% in cash, though, again, we’ll see how things play out with our holdings as earnings season progresses.
Model Portfolio
We’ll start with Autodesk (ADSK 125), which, as we’ve written before, is following in the footsteps of Adobe by taking a dominant position in a big market (in Autodesk’s case, 2D and 3D design software) and switching to a cloud- and subscription-based business model, which hurts revenues in the short run (ADSK’s earnings have been negative each of the past four quarters as sales have shrunk each quarter!) but boosts per-user value to the company over time. Indeed, the firm’s “new model” subscriptions have leapt to 1.59 million at the end of July (up 20% from the prior quarter), while annualized recurring revenue was $1.83 billion (up 23% from a year ago on a currency-neutral basis). And there’s still a bunch of legacy subscriptions to convert in the quarters ahead. As management has executed on its plan, the stock has responded, and the top brass believes it has a huge opportunity—its long-term plan calls for more than $6 per share of free cash flow in 2020 and more than $11 in 2023, and note that both of those estimates were hiked meaningfully last year (so they could prove conservative). The stock took a breather from May through early October, and ADSK just hit new RP peaks this week. A dip back into the high 100s would be a red flag, but right here, we think ADSK is early in a new upmove. Earnings are due out on November 28. We’re going to take a 10% position in the stock—i.e., will put 10% of the portfolio’s value in ADSK. BUY.
Alibaba’s (BABA 186) action is very encouraging—after two months of no net progress that included a dip below the 50-day line last week, shares have surged to life on great volume, even kissing new highs today. (This looks like a “shake-and-snap” pattern, which happens when a stock shakes out below the 50-day and immediately roars back.) It’s great to see, but earnings are due out tomorrow morning—a solid rally would confirm last week’s dip was a solid low, but a big dip would tell us the stock needs an intermediate-term rest. We’ll stay on Hold given that earnings are tomorrow. HOLD.
Exact Sciences (EXAS 53) reported another great quarter on Monday as Cologuard gains in popularity. In Q3, Exact’s revenues soared 156% while Cologuard tests numbered 161,000, up 19% from the prior quarter. Moreover, it was good to see that revenue per test ($428, up $5 from last quarter) and cost per test ($129, down $4) both continued to head in the right direction. Management hinted that some seasonality could rear its head in the holiday quarter (fewer people return tests on time due to the holidays), but investors are focused on the big picture, with the top brass believing the company can increase its share of the colon cancer screening market to 40% in the long term (from just 2% to 3% today). EXAS popped to new highs on the news, and though it did pull back today after a downgrade, the overall chart looks fine. BUY.
Five Below (FIVE 55) hasn’t done much in recent weeks, but that’s acceptable to us—in fact, the stock appears to forming a solid base (in the 54 to 58 area) for further advances. A break into the 51 to 52 area would be abnormal, but right here, we think FIVE is presenting a solid entry point. BUY.
GrubHub (GRUB 61) has come to life following earnings last week—sales (up 32%), earnings (up 22%) and EBITDA (up 21%) all topped estimates, and the company impressed investors with a solid 28% growth in the number of active diners. More important, GrubHub’s Q4 outlook easily topped estimates, allaying any fears of competition. GRUB has spiked to new highs on excellent volume in recent days, and this comes after a month of solid support despite lots of “bad” news on the competition front. We’ll go back to Buy. BUY.
Facebook (FB 183) looks very similar to BABA, with no net progress for two and a half months, a shakeout last week and a straight-up advance starting last Friday on very heavy volume. Also like Alibaba, Facebook will report earnings tonight, which will tell the tale; beyond the sales and earnings figures, analysts will be listening for any hints about 2018 capital spending, which has occasionally spooked investors in the past. We’ll stay on Hold for now and see what earnings brings. HOLD.
PayPal (PYPL 72) remains in fine shape, pushing up another point or two since its earnings rally nearly two weeks ago. The stock remains a bit out of trend on the upside, so try to get in on dips of a point or two. BUY.
ProShares Ultra S&P 500 Fund (SSO 101) tagged new high ground today along with the S&P 500. As we wrote above, the market itself is extended to the upside and there hasn’t been a good-sized shakeout or pullback in a while, so some retrenchment is possible. But the intermediate- and longer-term outlook remain in good shape, so you should hang on if you own some, and if you don’t, pullbacks of a couple of points should be buyable. BUY.
ServiceNow (NOW 124) has been choppy since reporting earnings a week ago, and hasn’t made much progress in either direction. As for the quarterly report, it was excellent, both in terms of the headline numbers (sales rose 39%, earnings rose 65% and free cash flow totaled $95 million, or 55 cents per share) and many sub-metrics (815 Global 2000 clients, up 15% from a year ago; 436 clients ordering $1 million or more, up 42%). The stock initially sold off on the news before closing higher that day, though it’s chopped around in the mid-120s since. We’d like to see NOW calm down a bit, but given that the stock is still above its 25-day line, we see no reason to change our Buy rating. BUY.
Shopify’s (SHOP 96) third-quarter results were excellent, but they failed to satisfy the skeptics, at least to this point. Revenues grew 72% from last year, well above expectations, and the company turned a profit of five cents per share, above the one cent per share loss analysts were modeling. As usual, the other numbers looked great, too, with monthly recurring revenue rising 65%, gross merchandise volume up 69% and Shopify Capital issuing $44 million of merchant cash advances, nearly five times the amount a year ago. Despite the news, the stock sold off sharply, with some pointing to a lack of data regarding merchant churn as the reason. Really, though, we believe that, after its vicious plunge in early October, SHOP needs time to consolidate. If, like us, you have a small position and a big profit, we advise holding on as long as SHOP holds above its 40-week moving average (near 87)—if it can do so, we still think shares have a chance to resume their longer-term uptrend. HOLD.
Universal Display (OLED 143) boomed to new highs on excellent volume yesterday, which is always fun to see. Like many growth stocks, OLED really didn’t do much of anything on a net-net basis during the past few months (OLED made no progress from early June through mid-October) before coming to life. The next big event will be earnings, which are due out tomorrow (November 2) after the close. And note that Apple also reports tomorrow evening, with any hints on iPhone X supply possibly affecting OLED. All told, we like the chart and the story, so we’ll stay on Buy, but we’ll be in touch post-earnings if need be. BUY.
Watch List
AbbVie (ABBV 92): We still like ABBV, but the horrid recent action from the biotech sector is a red flag—until that changes it will be hard for the stock to make much progress.
Atlassian (TEAM 49): TEAM is handling itself well since its giant gap up on earnings two weeks ago, though it hasn’t build on its gains yet. It’s not a bad entry point at all, though we’re debating whether we want to own two cloud software stocks (NOW being the other).
Pulte Homes (PHM 30): Homebuilders have come to life recently, and PHM looks like one of the leaders. It’s reacted well to earnings, is cheap (for whatever that’s worth) and is expected to grow earnings 37% next year.
