WHAT TO DO NOW: Raise some cash. Our Cabot Tides are now on the fence, and more important, individual stocks have been hammered during the past week, with a few showing abnormal action. All is not lost, though, with the longer-term trend still pointed up and many stocks remaining in uptrends. But it’s vital to cut loose any stock that breaks down, while holding the cash for a better environment. In the Model Portfolio, we sold half our Splunk (SPLK) and all of our Alibaba (BABA) on Special Bulletins on Monday, and tonight, we’re selling the rest of our SPLK, leaving us with around 40% in cash. Details below.
Current Market Environment
The market took another big hit today, with the Dow falling 166 points and the Nasdaq losing 117 points.
As for our indicators, while our long-term Cabot Trend Lines are still solidly bullish, our intermediate-term Cabot Tides are now on the fence following a week of heavy selling.
Moreover, there’s no question that individual growth stocks have been hit hard, including many stocks that have cracked key support. And this comes on the heels of the many yellow flags that have appeared in recent weeks, such as the widening divergences among the indexes, the narrow growth stock rally and exuberant sentiment among investors.
All in all, the evidence tells us that the bull market is intact, but there’s no question the sellers are doing some damage and the retreat could go further. Overall, we’re taking things on a stock-by-stock basis—if a position holds up, we’re happy to give it a chance, but should the sellers take control we’ll sell and move on.
In the Model Portfolio, we raised some cash on Monday, selling half of Splunk (on a Monday morning bulletin) and all of our Alibaba position (on a Monday evening bulletin). And tonight, we’re going to sell the rest of our position in Splunk (SPLK), which will boost our cash position to around 40%.
Going forward, nothing would surprise us—a couple of good up days would do a world of good, especially as many stocks are still in fine shape. But at this point we need to see the buyers step up and our Cabot Tides remain positive, or a more defensive stance will be warranted.
We have a couple of other positions in the Model Portfolio on tight leashes here, but tonight, the sale of our remaining shares of SPLK is our only move. As always, we’ll send out a Special Bulletin if we have any changes going forward.
Model Portfolio
Alibaba (BABA 185) looked like it was ready to get going from a multi-month consolidation, but the news from Altaba (effectively a share offering), worries about the U.S.-China trade war and the market selloff hit the stock very hard—BABA plunged below its 50-day line and back into its base on Monday on big volume. The action tells us that, at the very least, BABA is likely to need even more time to reset itself; combined with our small loss, that was enough for us to bail. Eventually, BABA will probably have another sustained leg up, and we’re aiming to be there when it does. But there are still plenty of sellers to wear out before that happens. SOLD.
Five Below (FIVE 101) remains in fine shape, hovering around the 100 level since its earnings gap three weeks ago. Retail looks like the leading growth area of the market now, and FIVE is certainly one of the best of the bunch. The longer the stock can hold its recent big gains, the greater the chance it can continue higher over time. We’ll stay on Buy, but it’s probably best to keep new positions on the small side. BUY.
Grubhub (GRUB 104) staged a nice-looking breakout a couple of weeks ago, but like so many growth stocks, that breakout failed in recent days, with GRUB diving back into its support area near the century mark. It’s disappointing action, and if you bought an initial position higher than here, a mental stop in the upper 90s makes sense. That said, for our position (which is small and bought down in the 50s), we’re continuing to give GRUB plenty of rope. HOLD.
Nutanix (NTNX 50) is another disappointment, lifting to new highs on picture-perfect volume two weeks ago before the market smacked it back down to support near 50. We still have a good amount of conviction in this fundamental story (billings growth should quadruple during the next few years), which, combined with the stock’s giant blastoff in March, should eventually lead to higher prices. However, we have a small loss on our position now, and the stock’s recent weakness is worrisome. We went to Hold earlier this week, and we’ll stay there tonight, but we have a mental stop in the 47 to 48 area. HOLD.
Okta (OKTA 48) took a whack with everything else last week, and it’s now testing its 50-day line. (Shares did catch an upgrade today, but the weak market held it back.) We have only a small loss on our position at this point (we bought in just shy of 50), so we don’t want to be too tight—as with NTNX, we feel OKTA is relatively early stage, as the stock originally broke out just a few months ago (in February). Obviously, that doesn’t guarantee anything, but it’s not as if the stock is overowned or too obvious. Long story short, we’re hanging on, though we’re sticking with a mental stop in the mid-40s or a bit above. HOLD.
PayPal (PYPL 81) has fallen back into its base, though it found a little support near its sideways-moving 50-day line today. Fundamentally, we read this week about Venmo’s (which is PayPal’s peer-to-peer payment service and the most popular in the industry) increasing monetization via online shopping; more than two million merchants, including big boys like Walmart, Target and Lululemon, now accept payments from Venmo accounts—and PayPal gets a cut of each transaction. Venmo also just launched a MasterCard debit card for consumers. Venmo should help PayPal retain its lead in the mega-trend toward online payments and money transfers. We’re going to stay on Buy, though you should keep new positions small. BUY.
Proofpoint (PFPT 115) is testing key support right around here—a close below 114 or so would have us moving on. But to this point, the stock really isn’t that weak (it’s basically just been hovering between 115 and 130 for the past four months), the longer-term trend is up and we see plenty of quick growth ahead for the firm’s security solutions. All told, though, we’ll continue to play it by the book, holding as long as the stock is above our mental stop. HOLD.
Shake Shack (SHAK 68) nearly hit new highs today, which shows you how strong it is. Of course, maybe that means the stock is ready for a correction; during market selloffs, sellers often will eventually come around to the resilient names. But that’s just speculation—right now, most retail stocks are in good shape, and it feels to us like SHAK is a stock big investors are getting into, knowing there are years worth of rapid store expansion ahead. As with our two other buy-rated stocks, keep positions small and try to buy on dips. BUY.
Splunk (SPLK 96) might have another run in it, but we’re very suspicious of the action of the past two months. Shares basically topped out in early May (just as many growth stocks were getting going), reacted negatively to earnings later that month, and could never kick into gear in June. And now not only has SPLK fallen sharply but it’s imploded on huge volume. Sure, it could bounce, but the toppy action for many weeks and the severity of this selloff tells us to take the rest of our profit and look for greener pastures once growth stocks stabilize. SELL.
Watch List
Etsy (ETSY 40): ETSY is still extended to the upside, but after a monstrous gap on raised guidance, the stock has traded tightly. Another week or two of this kind of action could offer a solid entry point.
Ligand Pharmaceuticals (LGND 199): LGND nosed to new highs today after news of another big milestone payment from a customer. More impressive to us, though, is the longer-term royalty story (up 31% this year, more to come).
Spotify (SPOT 172): SPOT is very liquid, has shown some intriguing signs of accumulation (including a recent string of 15 of 17 days up) and is still near its highs despite the growth stock selloff.
Teladoc (TDOC 56): TDOC is the hands-down leader in telemedicine, an industry that should grow massively in the years ahead. Earnings are still in the red, but the stock just got going from a huge consolidation in early May and remains resilient today.
Wayfair (W 111): Wayfair has always been a bit controversial with a huge short position, but the stock is relatively well-sponsored (437 funds own shares), has a great track record of growth (though no earnings) and the stock has been in a persistent advance after a 10 month choppy period.
WPX Energy (WPX 18): Energy stocks have begun to round out their bases after normal consolidations during the past month, and WPX is already back near its highs. It’s not as sexy as a growth stock, but WPX and other explorers sport huge production and cash flow growth.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Tuesday, and, as always, we’ll send a Special Bulletin should we have any changes before then.
