WHAT TO DO NOW: Remain bullish. Our stance hasn’t changed since last week, as our trend-following indicators are bullish and growth stocks are acting very well in general. Short-term, there are some signs that stocks could take a breather, so it’s probably a good idea to be choosy on the buy side, but the path of least resistance remains up. In the Model Portfolio, our only change is that we’re putting PayPal back on Buy. Our cash position remains at 20%, though we could do new buying if we see a proper setup.
Current Market Environment
The market was mixed today on light volume, though growth stocks performed very well. At day’s end, the Nasdaq was up 0.57%, while the Dow was essentially flat.
In the short-term, last Thursday was a pothole, with many growth stocks getting whacked after good overall runs since mid-May. That drop coincided with a few near-term extremes—the number of stocks hitting news highs on the Nasdaq spiked to 336 last Wednesday, which is in the top 10 largest readings since the start of 2017. Over time, that’s likely a bullish thing (great breadth!) but in the very short-term it could lead to a little digestion.
Sentiment is also a bit bubbly by many measures. The 10-day average of the equity put-call ratio, for instance, is at its lowest (most complacent) level since January and one of its lowest readings going back a couple of years.
But, of course, our main focus is on the intermediate- and longer-term outlook, and on that front the primary evidence continues to look just fine, with our Cabot Trend Lines and Cabot Tides both solidly positive. As for individual stocks, we did see a bit of abnormal action here and there last week (Okta’s earnings reversal certainly got our attention), but the vast majority of leading growth stocks we own and monitor are still in fine shape.
Thus, we remain mostly bullish, though given some of the secondary evidence, it makes sense to be a little choosy on the buy side (assuming you’re already mostly invested). If you have a leading stock that’s getting going on big volume, by all means grab some shares, but chasing something that’s sticking straight up in the air might not work out.
After adding Alibaba last week, the Model Portfolio is holding 20% in cash. Our only changes tonight are placing PayPal (PYPL) and Five Below (FIVE) back on Buy, though we could add a new stock at any time if we see the right setup.
Model Portfolio
Alibaba (BABA 209) took a hit last Thursday mostly because Altaba (formerly Yahoo) has begun a huge share repurchase tender offer—but instead of paying cash, it’s paying shareholders in BABA shares! For the purposes of BABA, this is basically like a big sale of closely held shares; it doesn’t dilute earnings, but it could have a short-term supply/demand impact on the stock. That could be the case as Altaba’s program moves forward (the offer expires July 11), but bigger picture, we don’t see this news derailing the uptrend given that many weak hands already likely bailed during the prior multi-month consolidation. Indeed, the stock itself found support around 200 and bounced nicely. Long story short: Hold on if you own some, and if you don’t, you can grab shares around here. BUY.
Five Below (FIVE 102) had a stunning week—after being sleepy for the past five months, shares spiked ahead of earnings and then catapulted after the report, rising 42% for the week! As for the quarterly report, it was excellent, with sales (up 27%), earnings (up 160%, bolstered in part by the tax cut) and same-store sales (up 3.2% despite the spike last year due to the fidget spinner craze) all topping expectations, and management raised guidance and sounded a bullish tone on the conference call. Fundamentally, then, the major story of rapid, steady store growth with excellent store economics (payback in less than a year) is still intact. But what about the stock? We can’t say it’s at an ideal entry point, of course, and FIVE has historically not been a “go-go” stock. With that said, we learned long ago not to argue when we see such upside power, especially after a multi-month consolidation. If you own some, hang on. If you don’t own any, we’re going back to Buy, though it’s best to keep new positions on the small side and use a loose loss limit should the stock pull in. BUY.
We placed Grubhub (GRUB 113) on Hold last Thursday because the stock tested its March highs and was quickly rejected, raising the possibility of a double top. That said, GRUB has snapped back nicely, so from today’s perspective going to Hold was a mistake. All in all, we’re still big believers in the stock’s longer-term outlook, but we want to see a decisive breakout before concluding the stock’s rest period is over. We’re not opposed to nibbling, but we’ll stay on Hold and see if the stock can build on its snapback. HOLD.
Nutanix (NTNX 61) has had its share of ups and down since we bought the stock two months ago, but today the stock surged higher after some investors liked what they heard at two conferences (one in London, another in Boston) the company was presenting at today. NTNX remains volatile, but the fundamental story has enormous potential and this move could finally kick-start a sustained move. You can buy some here if you’re not yet in. BUY.
Fundamentally, all systems are go at Okta (OKTA 53). Last week’s quarterly report saw revenues and billings both rise 60%, customer count up 40% (customers with over $100,000 of annual recurring revenue rose 52%) and cash flow measures, while in the red, came in better that forecasts. Even better its net dollar retention rate (how much customers who were with them a year ago spent this year) came in at 121%, which is very bullish. However, after rallying a bit at the open, OKTA suffered a wild, high-volume (largest in the stock’s history!) decline last Thursday. To us, such action could be a sign that institutional investors are moving on, which is why we moved the stock to Hold last Thursday. That said, we’re not giving up on it just yet—we still have a small profit, and OKTA is actually above its 25-day line, so the damage isn’t that horrible. Bottom line, we’re holding, but with a mental stop in the 45 to 46 area. HOLD.
PayPal (PYPL 85) continues to act well, taking aim at its high from late January. There’s some resistance around here, and after a sharp move off its lows, PYPL could chop around for a bit. But we think the path of least resistance is up, so we’re restoring our Buy rating. BUY.
Proofpoint (PFPT 126) is another stock that’s been tedious to hold onto during the past couple of months (three sharp pullbacks since early March), but hasn’t done anything wrong and is starting to perk up. We still view PFPT in particular and the cybersecurity sector in general as early in their overall advances (they were mostly out of favor in 2015 and 2016), so once the buyers return they could stick around for a while. Given that the chart is still mostly sideways, we’ll stay on Hold, but we’re encouraged. HOLD.
Shake Shack (SHAK 64) was dented yesterday when the company filed a shelf registration, including the potential to sell up to 12.3 million shares (some closely held) over time. Still, the stock snapped back today and remains in good shape overall. A pullback to support in the upper 50s is possible if a slug of shares hits the market and the market retreats, but right now the buyers are in control. BUY.
Splunk (SPLK 118) tested new-high ground (in the 118 area) for the third time in six trading days, and so far each time has led to some selling. It’s possible that churning action could lead to something; our plan is to take partial profits in SPLK should it break its recent low near 107. But right now these wiggles are just short-term noise--with the buyers still in control and the story as good as ever, we’ll stick to a Buy rating. BUY.
Watch List
Etsy (ETSY 33): ETSY acts well, though it’s not as vibrant as some other stocks we’re following and we wonder whether its lack of a shakeout during the past few months could catch up to it.
Ligand Pharmaceuticals (LGND 192): LGND looks fine, effectively consolidating its strong upmove in early May.
Spotify (SPOT 170): SPOT has shown some intriguing persistence lately, rising 13 of 14 days before today’s dip. It’s still tussling with its old peak, but it’s certainly tempting around here.
Tesla (TSLA 343): It’s been a very, very long time in the wilderness for TSLA, but after a massive shakeout in April, the stock has improved its standing and has recently been under strong accumulation. Worth watching.
Twilio (TWLO 60): TWLO remains extended to the upside, which is great for owners, but we’re patiently waiting for a better entry point.
Wildhorse Resources (WRD 27): Energy stocks aren’t where it’s at, but we’re keeping our eyes on WRD, which has remained resilient during the sector’s three-week rest, just in case the group revs up.
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.
