Note: We’re publishing this a day earlier than normal (Tuesday evening) partly because we’re expecting yet another Nor’easter snowstorm tomorrow (our fourth in four weeks—ugh), so we wanted to get you our latest advice in case the office loses power.
WHAT TO DO NOW: The market’s slide this week has put our Cabot Tides back on the fence. That said, most leading growth stocks continue to act very well. All together, we’re holding our strong, profitable stocks and looking at new buys, while honoring our stops and keeping a bit of cash on the sideline. Tonight, we’re bidding adieu to Facebook (FB), one of our biggest winners ever, as the stock has plunged through our mental stop. We’re also going back to Hold with ProShares Ultra S&P 500 Fund (SSO). Our cash position will now be around 27%.
Current Market Environment
The market was volatile today but finished modestly higher, with the Dow rising 116 points and the Nasdaq lifting 20 points.
The market’s longer-term uptrend remains firmly intact, but the slippage we’ve seen so far this week has put our intermediate-term Cabot Tides back on the fence—most of the indexes we track are a bit above or below their lower (25-day in most cases) moving averages.
Stepping back a bit, the major indexes haven’t made any net progress for two to three months (depending on the index). Thus, from a top-down perspective, it remains a tricky environment, with some divergences and lots of stops and starts.
Growth stocks, though, continue to act very well on the whole, with many pulling back normally, if at all. And the fact that so many of these resilient names only recently blasted off powerfully from launching pads also bodes well.
So what’s the best way to play this environment? Pretty much the same way we’ve been playing it during the past couple of weeks: Hold some cash given the market’s wobbles and honor your stops and loss limits, but also hang onto your strong, profitable stocks and consider doing a little buying as opportunities arise.
Should the market drag growth stocks down from here, we’ll raise more cash and cut back on new buying. But right now, you should basically take things on a stock-by-stock basis.
In the Model Portfolio, we remain pleased with the action of most of our stocks. Of course, the big downer this week has been Facebook, which has plunged on high-profile bad news and tripped our mental stop. Thus, we’re going to sell our long-time winner, which leaves us with 27% in cash.
Model Portfolio
As we wrote last week, Alibaba (BABA 199) seems to be gathering strength. On the day after our issue last week, the stock popped to the 200 area after reports that it could pursue a share listing in China, which might boost demand for shares. Whatever the reason, we think that’s just an excuse as BABA has been shaping up for weeks and could be ready to get going. That said, given the tricky market, we’ll stay on Hold right now—if you don’t own any and want to nibble, that’s fine, but we want to see the market shape up before diving in. HOLD.
Facebook (FB 168) has a great winner for us, and also one of the longest-held stocks (we originally bought back in July 2013) in our history. But we think it’s now time to say goodbye. The reason isn’t just this week’s big-volume decline—as we’ve been writing, FB has been stalling out since last July, even as the bull market has been strong during that time. Plus, fundamentally, we’ve been worried about an anticipated earnings slowdown (up 18% this year, up 22% next) going forward, which is often poison for big growth stocks.
Do we think FB is going to plunge 30% or 40% from here? We doubt it. In fact, we wouldn’t be shocked if, short-term, FB rallies a bit given how obvious and high-profile the selloff has been. However, we’ve been holding our remaining shares (we’ve taken partial profits multiple times over the years) with a mental stop in just under 170 for many weeks, a level that’s below the long-term 200-day moving average and support of the past few months, and today, the stock closed below that. If you want to hang on for a bounce, that’s fine, but at the very least, we don’t see FB as the vibrant leader it was during the past few years. Following our system, we’ll sell and take the rest of our long-term profit. SELL.
Five Below (FIVE 69) has formed a very nice launching pad during the past 10-plus weeks, and we’re encouraged to see better action among some growth-oriented retail stocks. That said, for FIVE, it’s all about earnings (and the outlook), which are due out Wednesday after the closing bell. We sold a chunk of FIVE a few weeks ago, and we’re using a mental stop in the upper 50s for the rest of our position. A decisive push above 73 or so would be very bullish and likely kick start a new uptrend. We’ll be watching. HOLD.
Grubhub (GRUB 110) caught a valuation-based downgrade on Monday, but the stock hasn’t budged much yet. As for the company, it announced the completion of its technology integration with Yelp (as part of its acquisition of Eat24), which should keep growth humming. A pullback from here would likely set up a lower-risk entry; for now, we’ll stay on Hold. HOLD.
HubSpot (HUBS 118) ripped from 90 in early February to 120 in early March, and is now catching its breath. Cloud software stocks remain very strong, and we think this firm’s inbound marketing platform has huge potential as small- and mid-sized businesses open their wallets. We’ll stay on Buy—dips toward the 25-day line (near 113 and rising) would be very attractive. BUY.
PayPal (PYPL 81) tested its January highs last week before pulling back with the market in recent days. We restored our Buy rating on the stock last week, and we’ll stick to our guns this week—while we might have been quick on the trigger, the odds continue to favor PYPL’s longer-term uptrend resuming, and the recent dip has brought shares down to support. Fundamentally, CEO Dan Schulman recently talked up the firm’s potential overseas (already half of PayPal’s revenue comes from outside the U.S.), seeing big opportunities in emerging markets, where some digital payment solutions are leapfrogging traditional checking accounts. BUY.
Proofpoint (PFPT 120) pulled back a handful of points recently but remains perched near its highs. We don’t have much to add to our write-up of Proofpoint and the cybersecurity sector in last week’s issue—the group and PFPT (and other peers) appear to be in the early stages of a new advance. A dip of a few points wouldn’t be shocking if the market fell from here, but we’re OK taking a position here or on weakness. BUY.
ProShares Ultra S&P 500 Fund (SSO 112) has snookered us a couple of times during the past month. Over time, the bull market is likely to take SSO higher, but at this point, the fund hasn’t gone anywhere since the beginning of the year and is in a neutral intermediate-term trend. If you own it, we advise holding on, but there are stronger situations to consider buying. HOLD.
Shopify (SHOP 153) zoomed to new highs today on a pickup in volume after a brief, tight consolidation during the past week. The company has announced two big advancements to its platform this week, integrating with Google Pay to allow consumers another easy checkout option, and going global with its “shopping on Instagram” feature, allowing businesses to tag products in Instagram posts and (importantly) letting customers buy them right from the Instagram app. We’ll stay on Buy, but try to get in on dips of a few points given the iffy market. BUY.
Splunk (SPLK 110) remains in fine shape, treading water in the 105 to 110 range during the past couple of weeks after its earnings-induced rally. Interestingly, analysts’ estimates continue to edge higher, with 63% earnings growth now expected for this year and 45% next. BUY.
Watch List
Etsy (ETSY 28): Etsy is the leading online marketplace for unique, homemade goods, a growing niche market (1.9 million sellers, 33.4 million active buyers). Growth is solid and accelerating, and the stock is super strong.
Nutanix (NTNX 54): NTNX showed jaw-dropping power after earnings two weeks ago. We feel this is a potential blue chip in the making, one that institutions are likely to gobble up. The firm’s software platform is in huge demand by clients of all sizes who want a more efficient way to manage their infrastructure.
TD Ameritrade (AMTD 61): AMTD continues to act well, holding above its January highs. The acquisition of Scottrade, along with the overall bull market, should help earnings explode 70% this year.
Veeva Systems (VEEV 77): VEEV has remained very tight after its pre- and post-earnings explosion, which bodes well. Fundamentally, the story is very solid, though growth isn’t as rapid as some other companies we’re considering.
Zillow (Z 57): While higher interest rates have dented home building stocks, Z has lifted off after a huge consolidation, with investors thinking the mega-trend of agents and advertising from offline to online is going to pick up steam. Sales, earnings and cash flow trends are all strong.
