WHAT TO DO NOW: Do a little buying, but continue to keep a good chunk of cash on the sideline. The market’s evidence has definitely improved recently, though our Cabot Tides have yet to turn positive—in essence, the overall trend is neutral, though many growth stocks are setting up well. Altogether, we’re going to add Nutanix (NTNX) to the Model Portfolio tonight and place Splunk back on Buy. But even after these moves, the portfolio will still be about 35% in cash, which we’ll hold onto until we see more confirmation that the bulls are back in control.
Current Market Environment
Stocks finished mixed today on light volume. At day’s end, the Dow was off 39 points and the Nasdaq had risen 14 points.
The market’s action during the past week and a half has been encouraging and constructive, first with the successful retest of the market’s lows and positive broad market divergences, and now, with the major indexes popping back above their 50-day lines. Throw in some other positives from secondary indicators (the NYSE Advance-Decline Line for common stocks hit a new high yesterday) and there’s no question the evidence is improving.
That said, we’ve yet to get a green light from our Cabot Tides. For them to turn positive, we’ll need to see the 25-day lines of most indexes turn up (meaning the indexes have to be above where they were 25 trading days ago). So far, that hasn’t happened, with just the S&P 600 SmallCap managing the feat. In essence, the trend has gone from down to neutral, but not yet up.
Backing up that view is that most indexes are sitting right in the middle of their year-to-date ranges (give or take). That’s an improvement from a couple of weeks ago but no sign the bulls are running rampant.
Individual growth stocks are in a similar boat: Many are acting well, and a few have even popped to new highs, but most that we’ve been following are still sitting on their launching pads.
Don’t get us wrong—while we don’t advise jumping into the market with both feet without the market’s intermediate-term trend pointing up, there’s no doubt things have improved and many growth stocks are perking up.
Thus, tonight, we’ll put a little money to work by adding one new stock—Nutanix (NTNX), which has already lifted to new highs—but we’ll still retain about 35% in cash as we await further signs that the correction is over.
Model Portfolio
We’ll start with Nutanix (NTNX 56), our new addition tonight. We’ve been following it for a few weeks and think it has all the makings of a big winner thanks to its great growth story (the leader in hyperconverged infrastructure, which looks like the next big thing when it comes to corporate IT trends), excellent numbers (management expects billings to growth five-fold by 2021!) and powerful chart (a massive breakout and rally in February/March, a reasonable dip and now a push back to new highs). We can’t say NTNX is at a great entry point, and the stock is also very volatile (it moves about 4% per day from high to low). Thus, if you want to start with a smaller position, you can. But we’re going to keep it simple—we’ll add a 10% position (10% of the portfolio’s value) in NTNX tomorrow, and with use a loose initial loss limit in the 45 to 46 area. BUY.
Five Below (FIVE 76) remains in good shape, tacking on a couple of points since its breakout above 74 last week, with this morning’s pop due to some positive analyst commentary. If the market rally kicks into gear, we think retail can be a leading sector, especially given the many solid growth stories in the group and the fact that most have built solid launching pads during the past three months. We’ll keep FIVE rated Buy, though a dip of a couple of points would mark a better entry point. BUY.
Grubhub (GRUB 103) finally flashed some accumulation yesterday, bouncing off its 50-day line on solid volume, but dipped back today after a valuation-based downgrade. Big picture, the stock looks fine, but we’re staying on Hold because we haven’t seen enough buying to conclude the stock’s correction is over. Shares may also need more time to consolidate after their huge run in recent months and earnings are out relatively soon (May 1). HOLD.
HubSpot (HUBS 117) hasn’t staged the most powerful bounce, but it’s within five points of its all-time closing highs and held above 50-day line during the market’s recent leg down. We still have high hopes for HUBS and many cloud software stocks, especially as evidence grows that business investment spending is picking up. There’s no set date for earnings, but they’re likely to be released in early May. We’ll stay on Buy, but it’s probably best to keep new positions on the small side. BUY.
PayPal (PYPL 80) looks almost exactly like the overall market, with a “W” looking pattern since its high in late-January. We remain fans of the company’s longer-term story, and the stock’s overall consolidation (its relative performance line has been sideways since Thanksgiving) provides a decent base for further gains. Still, PYPL’s intermediate-term future will likely come down to earnings, which are due out April 25 after the close—analysts are expecting revenues to rise 21% and earnings of 54 cents per share (up 23%), but equally important will be membership growth, free cash flow and the outlook. We’re sitting tight and will see how investors react to earnings. HOLD.
Proofpoint (PFPT 126) continues to act very well, lifting to new price and relative performance highs in recent days as it helps to lead the cybersecurity group higher. Like many stocks, though, the upcoming earnings report will be key—PFPT’s numbers will be released April 26 after the closing bell. Given that the stock (and sector) started major advances in February, we’re optimistic that shares will handle their report well. We’ll stay on Buy, but you should try to buy on dips and keep new positions small this close to earnings. BUY.
We were pretty close to cutting loose our remaining shares of Shopify (SHOP 128), but the stock stormed back yesterday on above-average volume. The stock clearly isn’t out of the woods, but the fact that it held above its 200-day line and has found buyers is enough for us to hold on. Earnings are out May 1. HOLD.
Splunk (SPLK 107) fell from 110 to 96 (closing prices) in March, but has now rebounded all the way back to 108, a very solid show of strength. That doesn’t mean the stock can’t pull back a bit (especially if the market relaxes), but the overall action is enough for us to go back to Buy, with the idea that the major uptrend that began in November is set to resume. Earnings aren’t due out until late May or early June. BUY.
Watch List
Axon Enterprises (AAXN 43): AAXN is in great shape, holding up in new high ground in recent days and even tightening up a bit. The company continues to announce new department wins for its electrical weapons, body and in-car cameras and digital evidence management system.
Continental Resources (CLR 63) or Energen (EGN 68): Energy stocks started to get going late last year, but the market’s correction interrupted that run. Now, though, the sector is strong, with CLR (earnings due May 2) and EGN (earnings due May 8) two rapidly growing producers that are hitting new highs.
E*Trade (ETFC 58): Financial stocks are struggling, but a few Bull Market stocks are doing well, including old friend ETFC, which is back near its highs. Earnings are due out tomorrow.
Etsy (ETSY 30): We still like the Etsy story a lot, but we’re not seeing a great entry point around here. It’s worth watching though.
Floor & Décor (FND 57): FND has a cookie-cutter story that’s easy to enthuse about and the stock remains in great shape. Earnings are due out May 3.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Wednesday, and, as always, we’ll send a Special Bulletin should we have any changes before then.
