WHAT TO DO NOW: Remain cautious, but hold your strong performers and stay flexible. The overall market is still in a corrective phase, but the action of growth stocks has been extremely encouraging, with many pushing higher on big volume during the past couple of weeks. We’re not opposed to doing some buying here or there, but until the market gets going, it’s best to hold some cash on the sideline and go slow. Tonight, we’ll stand pat in the Model Portfolio, which has nine stocks and a cash position of 35%.
Current Market Environment
Stocks opened lower today after a key resignation at the White House, but the market shrugged off the worries, closing mixed on the day. At the close, the Dow fell 82 points while the Nasdaq rose 25 points.
This is without a doubt one of the more unusual markets we can remember. From a top-down perspective, not much has changed from last week—our Cabot Tides are still negative (three the of the five indexes we track are in intermediate-term downtrends) and our Two-Second Indicator is still unhealthy (telling us the broad market is ill).
Our longer-term Cabot Trend Lines are still solidly positive, but in total, the market’s evidence tells us the correction that started in late-January remains in place.
On the flip side are individual growth stocks, which are acting very well. And it’s not just a few stocks that, say, have reacted well to earnings—it’s a few dozen that pushed nicely higher during the past few weeks, usually on repeated days of heavy volume buying.
Of course, one of our mottos is that good-looking stocks can go bad in a hurry in bad markets, so if the market is starting another leg down, some resilient growth stocks could easily crack. But just looking at the charts, the picture is encouraging.
Given the mixed evidence, we think the Model Portfolio is in a proper stance, with about one-third in cash, but also holding onto a bunch of attractive stocks that could be leaders of the next upturn. If you’re holding a huge cash position (50% to 60% or more), we’re not against nibbling on a couple of strong growth stocks (preferably on dips), and frankly, we could even do a little nibbling in the portfolio if we see the right setup.
But tonight, we’ll stand pat and see what comes—a significant leg down in the market that drags down growth stocks could have us raising more cash, but a confirmation of a new uptrend would likely have us jumping on a couple of stocks on our Watch List. For now, we’re waiting patiently.
Model Portfolio
Alibaba (BABA 189) has been up, down and all around in recent weeks, but we don’t think it’s done anything wrong—BABA has basically been range-bound since early October after a big prior advance. A move back above 195 (especially after the stock found support above its 40-week line twice in recent weeks) would be bullish, but right now, with the sideways trend intact, we’ll stay on Hold. HOLD.
Facebook (FB 184) remains sloppy and beneath resistance in the 182 to 185 area; bigger picture, shares haven’t made much progress since July, but we’re not counting the stock out unless or until it cracks long-term support in the high 160s. There’s been a bunch of “negative” news lately, including reports the EU wants to tax a piece of Facebook’s (and other tech giants) revenues and BlackBerry is moving forward with a patent-infringement suit against Facebook. Still, the stock didn’t move much on either piece of news, and we think the real key is simply whether business continues to crank ahead (which will eventually push FB higher) or whether growth decelerates (which is always tough for a growth stock). With the stock holding support, we’re happy to hang on. HOLD.
Five Below (FIVE 69) took a hit today as Dollar Tree (DLTR – not recommended) was clobbered after a sub-par earnings report. This sector action happens occasionally, but besides low prices, the merchandise and target customer for Five Below is far different than the big dollar stores like Dollar Tree. Back to the stock, FIVE had been perking up before today, albeit on light volume, as it rounds out a nine-week launching pad. Five Below’s own quarterly report is likely out in a couple of weeks, which will tell the tale. Overall, we’re optimistic, but with the Tides negative and FIVE still base-building, Hold is the appropriate rating. HOLD.
We decided to sell half our shares of Grubhub (GRUB 104) last week because (a) our Cabot Tides’ brief buy signal fell by the wayside, (b) the stock was clearly extended to the upside in both the short- and intermediate-term and (c) we had a huge position (nearly 15% of the total portfolio). In other words, it was mostly a portfolio management decision—we’re still very bullish on the stock’s longer-term prospects as the online takeout ordering industry expands, with Grubhub being the main beneficiary. We moved the stock to Hold given that we just sold some; if you don’t own any, we’re not opposed to grabbing a few shares around here. But officially, we’ll stick with our Hold rating and look for a lower-risk entry for new buyers. HOLD.
HubSpot (HUBS 120) is off to a good start for us, as it’s one of the leaders of the super-strong cloud software group, which is surging. Fundamentally, the company’s inbound marketing platform is helping thousands of companies improve their sales and name collection, resulting in slightly accelerating revenue growth and earnings that are just lifting off. HUBS’ action since the early-February market low has been very powerful, with big volume driving the stock higher. It’s extended, but we’re OK buying a small (half-sized) position around here if you don’t own any. BUY.
PayPal (PYPL 80) made a few waves yesterday, filing for a patent on a virtual currency transaction system that will likely speed up bitcoin-related settlements. That’s said, big investors are more focused on the firm’s core payment systems, including Venmo, which is just starting to be monetized. As for the stock, PYPL is starting to tighten up a bit after more than three months of ups and downs, which is constructive. HOLD.
ProShares Ultra S&P 500 Fund (SSO 113) moved back to Hold last week because the Tides buy signal was reversed. Short- to intermediate-term, the trend here is mostly neutral—SSO remains below its 50-day line and is sitting halfway between its January high and February low. Longer-term, we’re still anticipating higher prices from this bull market, but it’s best to wait for a resumption of the uptrend before putting a ton of money to work. HOLD.
Shopify (SHOP 144) continues to act very well, even in the wake of its share offering a couple of weeks ago. The company just named a new CFO, but that didn’t seem to cause any great cheers or jeers. After what amounted to a six-month rest period (no progress from mid-June through year-end), SHOP is a leading stock again. We bought more shares last week, adding a 3% position (that is, 3% of the total portfolio). If you don’t own any, we’re OK buying some here or on dips of a few points. BUY.
(Editor’s note: There was some confusion about what that “buy a 3% position” meant. Whenever we quote a percentage figure—such as “we’re going to buy a 10% position”—that figure refers to the entire portfolio. Thus, if you have a $50,000 portfolio, and we say to buy a 10% position, that would mean $5,000 should be invested in the stock. In SHOP’s case, we already owned a small position and wanted to boost it, hence the 3% figure. Sorry to hit you with some math, but just wanted to clear up any confusion—you can email me directly with any questions on the topic.)
Splunk (SPLK 106) has surged to new highs in recent days after a fantastic quarterly report last week that topped expectations—sales grew 37% (the third straight quarter of accelerating growth), earnings rose 76% (second straight quarter), while billings were up 44%, free cash flow totaled nearly $1 per share (vs. 37 cents of earnings) and 570 new clients signed up in the quarter. And there’s much more where that came from, as enterprises are looking to Splunk to make the most from their machine data. Like many growth stocks, SPLK is extended in the short-term, but given that it just got going last November (just over three months ago), we think there’s plenty of upside ahead. Try to buy on dips. BUY.
Watch List
TD Ameritrade (AMTD 60): We got out at breakeven with E*Trade, but are still interested in owning a Bull Market Stock once the bull market resumes. AMTD is the best looking of the brokers, and its recent acquisition of Scottrade should goose growth in the quarters ahead.
Nutanix (NTNX 46): Its story is a bit of an ice cream headache, but Nutanix’s hyperconverged infrastructure software is a huge hit among big enterprises, allowing them to run all their storage, computing, networking and security systems from one place, without specialized servers and hardware. Sales and bookings are surging and the stock just exploded higher following earnings.
Palo Alto Networks (PANW 186) or Proofpoint (PFPT 119): Cybersecurity stocks have come to life, and PANW (more like the blue chip of the group) and PFPT (smaller and faster growing, but also thinner) are our two favorites. Pullbacks in either one would be tempting.
Planet Fitness (PLNT 39): From 1,518 stores today to 4,000 in the years ahead, PLNT’s cookie-cutter business has a ton of potential, though we wouldn’t say growth is overly rapid (mid-teens cash flow growth this year).
Veeva Systems (VEEV 78): We’re a bit hesitant to jump on another software firm (we already own HUBS and SPLK), but we’ve always loved Veeva’s story and the stock has decisively broken out from an eight-month structure.
Warrior Met Coal (HCC 31): Coal stocks remain intriguing to us, and not just because the likely steel tariffs will keep demand and prices elevated—earnings have been huge for HCC for many quarters, and the stock remains very strong despite a sloppy overall market.
