WHAT TO DO NOW: Continue to lean bullish. The market’s rebound today after yesterday’s Italy-induced selloff was very encouraging, and both of our trend-following indicators remain bullish. Thus, we’re optimistic, but we still want to see more strength before putting more money to work. In the Model Portfolio, our only change is that we’ve moving Grubhub (GRUB) back to Buy. Our cash position is still 30%.
Current Market Environment
The market snapped back very nicely today from yesterday’s geopolitical jitters, with the Dow rallying 306 points and the Nasdaq surging 66 points.
The market took a big, high-profile hit yesterday on fears that Italy could eventually leave the euro (as well as some renewed fears about a U.S.-China trade war), but most growth stocks held up well, and today, the market and growth stocks bounced nicely.
What we liked most about today’s action is that the Nasdaq briefly poked above the 7,450 level, which had contained it during the past couple of weeks. And even better, we began to see a few growth stocks begin to pop out of their tight ranges. It’s encouraging.
But, broadly speaking, even after today’s gains, stocks are still in the same place they were three weeks ago, and it’s a similar story with our overall market stance. There’s been no real change in our market timing indicators, where the trend-following measures (Cabot Trend Lines and Cabot Tides) remain positive but the Two-Second Indicator is still negative. And leading growth stocks are also in the same spot, with many setting up nicely, but some hitting potholes and few motoring consistently higher.
Thus, we’re still holding on to our stocks, but we’re also holding around 30% in cash on the sideline and waiting for decisive upside follow-through after the early May rally. Because of our indicators and the many setups among leading stocks, we remain optimistic the next big move is up—but, as always, we’ll let the market tell us what to do.
In the Model Portfolio, we got hit with a couple of earnings duds last week (NTNX and SPLK), but nothing has cracked key support. Our only change tonight is that we’re putting GRUB back on Buy—details below.
Model Portfolio
Five Below (FIVE 72) will report earnings on June 6 (after the close), which will probably obviously be key. Analysts are looking for revenues of $262 million (up 25%) and earnings of 33 cents per share (up 120%), though same-store sales will be just as important, as will any further guidance on the “slow” mid-year period (tough comparisons, higher spending) management talked about in the Q4 conference call. Still, we’re trying to keep the longer-term outlook in mind, as FIVE broke out from a five-year base late last year and, fundamentally, should see 20%-plus growth for many years to come. That said, we placed the stock on Hold last week because it’s been drifting sideways, and that’s where we’ll stay until we see the buyers show up. HOLD.
Grubhub (GRUB 107) had been tightening up during the past couple of weeks, which, following a couple of months of base-building and shakeouts (which the stock flashed on May 1 after earnings), is usually a sign the weak hands have abandoned ship. Sure enough, as the market lifted today, GRUB stormed ahead on good (not amazing) volume. There’s still some overhead to chew through on the upside, but the stock’s encouraging resilience (it only dipped a maximum of 20% during the past three months after more than doubling from November through early March), tremendous fundamental story and recent strength have us going back to Buy. If you don’t own any, you can start a position around here. BUY.
Nutanix (NTNX 54) had a terrific quarterly report last week that confirmed its business is continuing to surge. Q1 revenues rose 41%, but the more important billings metric (an indicator of future business) surged 50%, including software and support billings that rose 67%, crushing expectations. (Deferred revenue basically mirrored those gains, rising 62% from a year ago.) On the conference call, the top brass said it’s gaining increasing traction from large customers, with a handful of $5 million-plus orders. The bugaboo came on the spending side, where management said it’s going on a hiring spree that should affect profits in the near-term; that likely served to dent the stock after the report. But today shares found good support, snapping back above their 50-day line (near 53.5). Big picture, we think Nutanix is in the early stages of its growth phase (billings should grow at 40% rates each of the next few years), and we’d be surprised if the stock keeled over given that it just got going in March. Long story short, NTNX could need some time, but right now, we’re sticking with our Buy rating. BUY.
Okta (OKTA 55) has been very strong, lifting to new highs each of the past few days. The company made a couple of product announcements last week, but other than that, it’s been quiet on the news front. The next big event is earnings, which are due out June 6 after the market close; all signs point toward another quarter of rapid growth. (Salesforce.com, which is the blue chip among cloud software stocks, released a solid report last night, which is a good sign for the sector.) A pullback is clearly possible, but OKTA’s action of the past few months— from its huge run into early March to its straight-sideways action during the market plunge to its recent strength—indicates the stock is a new leader. We’ll stay on Buy, but advise keeping new positions small with earnings next week. BUY.
PayPal (PYPL 82) is looking like it may have turned the corner, with the Amazon-related selling back in early May (which briefly took the stock down to its 200-day line) looking like the final shakeout. Encouragingly, the company nudged up its long-term growth outlook at last week’s investor day, now expecting 17% to 18% annual revenue and cash flow growth during the next three- to five-years, with earnings growing faster than that. We also read a great data point this morning—according to a JP Morgan study, PayPal operates the dominant peer-to-peer money transfer apps, with PayPal used by 58% of respondents and Venmo at 12%. Even among millennials, PayPal is number one at 37% and Venmo is second at 26%. (Square Cash and Google Pay are tied in third place at just 9%.) We’ll stay on Hold for now, but could go to Buy with a bit more strength from the stock and the overall market. HOLD.
Proofpoint (PFPT 119) hasn’t done anything wrong, but it remains sluggish as it flops around in the 120 area (give or take a couple of points). Its larger peer Palo Alto Networks will report earnings next week, which will likely affect the group, including PFPT. We’re still optimistic the path of least resistance is up, but we’ll stick with a Hold rating given the action. HOLD.
Shake Shack (SHAK 62) really couldn’t act any better. After its monstrous earnings gap up, shares tightened up beautifully for three weeks, and today SHAK romped to new recovery highs on excellent volume. Yes, it’s extended to the upside, but our thinking is that SHAK has just begun a new sustained uptrend, so barring a market collapse, the odds favor dips and shakeouts being bought. We’ll stay on Buy, though obviously try to buy on weakness. BUY.
Splunk (SPLK 112) is our second stock that’s taken on some water after reporting earnings last week, but hasn’t broken down. Fundamentally, all looks fine with the company—revenues rose 37% from a year ago, including a 43% hike in license and cloud revenue, all of which topped expectations. Earnings were in the red, but free cash flow came in around 50 cents per share, and management bumped up its guidance for the quarters ahead in most metrics. So why the selling? Supposedly because billings growth (up 28%) was light, but we think it had more to do with the grumpy market and the fact that SPLK hasn’t had much of a pullback in six months. Theories aside, the stock did fall sharply, but never fell below its 50-day line and bounced today. Should SPLK fall a few points from here, we could take partial profits, but right now, we’re actually staying on Buy, as the stock’s uptrend is intact and the story is as good as ever. BUY.
Watch List
Alibaba (BABA 198): BABA continues to battle with resistance around 200. As with most stocks, we’re optimistic higher prices are in the offing, but we prefer to wait for a decisive show of strength.
Continental Resources (CLR 68), WPX Energy (WPX 18) or Wildhorse Resources (WRD 27): Energy stocks suffered some knockout-type moves in recent days. Given the strong uptrend before hand, our guess is that this dip will eventually lead to higher prices. Indeed, the group bounced nicely today.
Etsy (ETSY 32): ETSY has perked up on OK volume in recent days. We’d like to see a bit more conviction from the buyers before jumping in.
Ligand Pharmaceuticals (LGND 192): LGND continues to act well after exploding out of its double-bottom base three weeks ago.
Spotify (SPOT 156): SPOT continues to etch its IPO base—the longer it goes, the better in our view, as it sets a firmer foundation for an eventual advance. That said, we’re in no rush to buy until we see a strong breakout.
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.
