WHAT TO DO NOW: Remain cautious. The market is doing more chopping than declining in recent weeks, and because of that, a couple of good days on the upside could actually turn the intermediate-term trend up. But we never anticipate, and right now, our Cabot Tides and Two-Second Indicator remain negative and many resilient growth stocks have come under pressure. In a Special Bulletin last night, we sold our position in Shopify (SHOP) and half of our remaining shares of Grubhub (GRUB), lifting our cash position to around 52%.
Current Market Environment
The market fell after the Fed left interest rates unchanged. At day’s end, the Dow was down 174 points and the Nasdaq was down 30 points.
There’s been no change to our market timing indicators over the past week, as our longer-term Cabot Trend Lines remain bullish, but our Cabot Tides and Two-Second Indicator are both negative, telling us to remain cautious and mostly focus on capital preservation.
That said, the market is in a very interesting spot here. Because the major indexes have been holding above their correction lows (from February and late-March), most have actually poked above their 25-day moving averages—and those 25-day lines are starting to perk up, too.
Technically, then, the Cabot Tides could turn positive if things go well for a couple of days. From here, a couple of good up days could do the trick—a move above 2,685 on the S&P 500 and 7,200 on the Nasdaq (give or take) would likely coincide with a Tides buy signal.
That’s something to be aware of, but as always, we won’t anticipate—right now, the intermediate-term trend is down and the broad market is under pressure, so we’re stepping carefully.
Adding to our cautiousness is the action of leading growth stocks. After a bunch held up well during the first couple of months of this correction, we’re beginning to see sellers come around for many resilient stocks, even after good-looking quarterly reports. Many are still in good shape, but there’s no doubt more cracks are starting to appear.
On that note, we raised a bit more cash via last night’s Special Bulletin, selling our small position in Shopify (SHOP) and selling another half of Grubhub (GRUB), both of which were hit hard after earnings. Our cash position is now around 51%, and because of that, we’re not eager to raise a ton more, but we will take things on a stock-by stock basis. If more stocks break down, we’ll cut them loose, but we’re not opposed to doing a little buying (or more, if the Tides turns positive) if the right setup emerges.
Model Portfolio
Five Below (FIVE 71) continues to pull back into its base, which isn’t unusual action given the market and following the stock’s addition to the S&P 400 MidCap index. (You’ll often see a little rush higher ahead of an index addition, followed by a dip in the days after.) Still, big picture, FIVE’s overall trend is up, and this two-steps-forward, one-step-back action isn’t unusual for this stock. Long-term, we still love the story. If you don’t own any, we’re OK buying a small (half to two-thirds of what you’d normally buy) amount around here. BUY.
Grubhub (GRUB 96) had a fine first quarter report, with sales surging 49%, earnings booming 79% and EBITDA up a big 51%. As for the sub-metrics, active diners rose 72%, daily average orders rose 35% and gross food sales were up 39%. The latter two of those figures were a bit shy of estimates, and that was used as a reason to push the stock sharply lower yesterday. As we’ve written numerous times, we still believe GRUB has another leg up left in it, and in our view, the drop was more about a skittish market environment rather than any real worry about the company’s fundamentals. Even so, we can’t ignore the drop—hence, we decided to sell half of our remaining shares on last night’s Special Bulletin, leaving us with a small-ish position (3% to 4% of the portfolio) that we’ll give plenty of wiggle room. SOLD HALF, HOLDING THE REST.
We continue to think Nutanix (NTNX 52) has the makings of a solid winner once the market gets out of its own way. The stock got hit last week after news that the company would delay the launch of a public cloud offering that would rival Amazon and Microsoft. But NTNX held its 50-day line and has bounced back nicely since, probably because of the firm’s already-huge potential in hyperconverged infrastructure (including the fourfold projected increase in billings by 2021) and management’s track record of executing. We’ll stay on Buy, but keep positions small given the market. BUY.
PayPal (PYPL 72) remains a great growth story, and Q1 results confirmed that the company has big potential as payments and money transfers go digital. In the quarter, revenues rose 22% on a currency-neutral basis, gross payment volume rose 27%, earnings were up 30% and free cash flow came in at $733 million (again larger than net income), up 22%. As for customer activity, total customer accounts came in at 237 million total (up 15%) and transactions per account were 34.7 (up 8%). Encouragingly, peer-to-peer volume rose 50% from a year ago, with Venmo itself rising 80%. The 2018 outlook was confirmed, and most analysts continue to see 20% to 25% annual growth for many years to come. The stock didn’t react much to the news, though one fairly recent pressure on the stock is the news that Amazon is developing a peer-to-peer payments system for its digital assistant, Alexa. In any case, we’re content to just follow our plan—as long as PYPL is above support in the 70 to 72 area, we’re content to hold on, but a break below there would call into question the stock’s overall uptrend. If you own some, hang on. HOLD.
Proofpoint (PFPT 119) was another one of our stocks to get dented on earnings, though the results were just fine, with Q1 revenues ramping 40%, billings lifting 35% and earnings advancing 36%. And for the year as a whole, management is still looking for 35% revenue growth and free cash flow of more than $2.50 per share, up 33% from last year. We did move our rating to Hold because of its post-earnings selloff, but we’re not panicking—shares are still holding above their 50-day line and have etched higher highs and lows during the market’s correction. A drop below 110 would change that (and likely have us exiting), but right now, we advise sitting tight, especially if you already have a large cash position. HOLD.
It was a long and generally fun ride with Shopify (SHOP 125), but the combination of the stock’s sharp, big-volume selloff in March, its so-so bounce in April and this week’s earnings selloff was enough for us to sell our remaining shares on last night’s Special Bulletin. Yes, growth was solid, but it also looks like a lot of good news has been baked into the cake. If SHOP eventually rounds into shape a couple of months from now, we could always revisit SHOP. But after a big, yearlong run and the stock’s recent weakness, there are likely to be stronger leaders to latch onto during the market’s next advance. SOLD.
Splunk (SPLK 103) has been building a launching pad mostly between 95 and 110 since the market’s sub-peak in mid-March, which is normal action in our view. The company continues to release new and add-on products, and with CapEx spending on technology and software booming, we think Splunk is doing very well. Earnings are due out May 24. If you own some, hang on. HOLD.
Watch List
Axon Enterprises (AAXN 42): AAXN dipped to its 25-day line recently, which is fine by us. Earnings, which are due out on May 8, could be a catalyst.
Continental Resources (CLR 66) or WPX Energy (WPX 17): We’re still fans of energy stocks, which have been counter-trending the market’s downmove. Both CLR and WPX have been hitting new highs recently, though earnings (tonight for CLR and tomorrow morning for WPX) will be key.
E*Trade (ETFC 61): Higher interest rates and a blowout Q1 report is keeping the buyers active with ETFC—it hit a new high today!
Etsy (ETSY 31): ETSY continues to show very impressive relative strength, giving ground grudgingly during weak market spells and spiking higher when the selling pressure comes off the indexes. Earnings are due out May 8.
Floor & Décor (FND 54): FND has been holding its breakout well during the past few weeks, even as the market has sagged. The quarterly report is due out tomorrow—analysts are looking for 30% sales and 64% earnings growth.
Okta (OKTA 45): Okta’s cloud identity solutions are in big demand (revenues growing in the 50% to 60% range), and the stock is very strong, hitting new peaks today.
Spotify (SPOT 170): SPOT has acted excellently in recent days, surging to new highs on good volume amidst a rash of upgrades. A pullback and a healthier market would be very tempting.
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.
