WHAT TO DO NOW: Remain mostly bullish, but keep your eyes open. Growth stocks snapped back today after yesterday’s blood bath, and our trend-following market timing indicators remain positive. Thus, we’re sticking with a heavily invested position, though are keeping a close eye on growth stocks and their reactions to earnings during the next couple of weeks. In the Model Portfolio, we sold one-third of our shares of Five Below (FIVE) and placed Shake Shack (SHAK) on Hold on last night’s Special Bulletin; tonight, we’re restoring our Buy rating on Grubhub (GRUB). Our cash position stands around 23%.
Current Market Environment
The market rallied and growth stocks snapped back nicely today after yesterday’s broad-based selling thanks in part to news of a trade deal with Europe. When the closing bell rang, the Dow rose 172 points and the Nasdaq was up 91 points.
From a top-down perspective, the overall market remains in good shape. Granted, it’s not a raging bull market and there are plenty of crosscurrents, but both our Cabot Tides and Cabot Trend Lines remain bullish. And, even among growth stocks, most are in the same boat—yesterday’s vicious selloff in “glamour” stocks was painful, but very few broke key support.
That said, there’s no question it’s a tricky environment. First, we’re seeing a decent amount of rotation, as strong indexes (small- and mid-caps) and stocks (growth stocks) stagnate and take on some water, while lagging areas (NYSE Composite, financial stocks) and some defensive sectors (consumer staples) pick up steam. That’s contributed to a narrow advance—today, for instance, there were more stocks hitting new lows than new highs on the Nasdaq.
Second, earnings season is underway in earnest—something like 40% of the S&P 500 is reporting earnings this week, and we’ve already seen a bunch of dramatic moves, up and down. Three of our own recommended stocks release results this week (GRUB this morning, PYPL tonight, PFPT tomorrow night) with another couple set for next week.
And third, we have news and rumors pushing and pulling the market on an hourly basis. Trade war talk is all over the place, with threats of auto tariffs and reports of higher materials costs eating into certain firm’s earnings (GM made that claim today), though the late-day announcement of a possible deal with the EU helped the cause. As usual, though, you should just stick with the evidence in front of you.
Most of that evidence remains bullish, but as we wrote in last night’s Special Bulletin, the action of growth stocks during the past few weeks is something to keep an eye on. We haven’t made any major moves (we sold one-third of our shares in Five Below (FIVE) last night and placed Shake Shack (SHAK) on Hold), but our antennae are up—the action of growth stocks over the next few days (and in reaction to earnings) will probably tell us a lot about the intermediate-term.
Tonight, our only change in the Model Portfolio is to place Grubhub back on Buy after a fantastic earnings-induced breakout. Try to buy on dips.
Model Portfolio
Five Below (FIVE 99) pushed to new highs last week, but that move out of its brief consolidation has been erased after a string of down days, possibly due to trade worries as the firm’s costs could rise if tariffs get out of control. We’ll let others figure out the exact reason, but we’re just focused on the action itself. To us, the stock’s big run and failed breakout is a short-term negative, so we decided to take partial profits on last night’s Special Bulletin, selling one-third of our shares, and changing our rating to Hold. That said, our longer-term conviction here is unchanged—the odds still favor higher prices down the road, but near-term, some further consolidation and push/pull from trade rumors is possible. HOLD.
Grubhub (GRUB 135) released a terrific second-quarter report this morning, with sales (up 51%), EBITDA (up 61%) and earnings (up 92%) all topping expectations. The sub-metrics were also very strong, with active diners surging 70%, daily average orders up 35% and gross food sales up 39%. Throw in an across-the-board hike in guidance, and GRUB went ballistic today on the upside. Another plus is that today’s move came after a choppy four-month consolidation that let the stock digest its big October-March gains. Bottom line: This breakout should result in higher prices—we’ll go back to Buy, though near-term dips wouldn’t surprise. BUY.
Ligand Pharmaceuticals (LGND 230) continues to act just fine, and was one of the few growth stocks that didn’t budge during yesterday’s selling. The firm’s quarterly report is due out August 6 after the close, though it’s already preannounced those numbers, so more emphasis will be placed on the future outlook, royalty figures and, of course, the state of the market. Beyond the quarterly report, we continue to see evidence Ligand’s platform is gaining popularity—the firm inked a deal with J&J earlier this month to jointly develop a new version of Ligand’s OmniChicken research platform, which could eventually lead to milestone payments. Back to the stock, LGND looks great, and we’re optimistic the stock just began a new advance in May. We’ll stay on Buy, ideally on dips. BUY.
Nutanix (NTNX 54) looks like a lot of growth stocks, with a mid-June peak (near 65), a sharp drop at the end of that month (to 50), a decent rally (to 58) and now some renewed weakness. Net-net, NTNX is still in a base-building phase, so we’re practicing patience—albeit with a mental stop in the upper 40s. HOLD.
Okta’s (OKTA 57) action is impressive though not quite conclusive—today’s snapback was great to see and the overall rebound since its late-June lows is solid, but there’s been a lack of volume during the past few weeks, too. Don’t get us wrong, we’re encouraged, and given that OKTA just broke out from a good-sized post-IPO launching pad in February (it only ran for four months), there’s a good chance there’s more upside down the road. We’re close to going back to Buy, but we’ll stick with our current rating for now and see how the stock acts around its old peak. HOLD.
PayPal (PYPL 91) has been very strong, bolstered by increasing perception that the firm’s growth prospects are both strong and long lasting. Ace investor Dan Loeb of Three Point Funds revealed a new position in PYPL and wrote a lengthy piece about the firm’s prospect, which has helped the cause. One interesting prediction: Loeb believes Venmo, the firm’s peer-to-peer payment system that’s just beginning to be monetized, could contribute $1 billion in revenue within three years. Projections aside, though, what will count most is tonight’s quarterly report—analysts expect revenues of $3.81 billion and earnings of 57 cents, but the outlook, free cash flow and any other nuggets will be key. A pullback after the recent spike wouldn’t be shocking, but we’ll stay on Buy here and will be in touch if we have any change in advice in the days ahead. BUY.
Proofpoint (PFPT 124) got hit over the past few days, but nothing has really changed—shares are in the middle of a four-month consolidation and are awaiting earnings tomorrow night. We think the story has huge potential, and the stock only really got going at the beginning of the year, so if the report is well received it could kick off a sustained run. That said, a decisive break into the low 110s would be a red flag. We’re optimistic but will see what comes. HOLD.
We switched Shake Shack (SHAK 65) to hold on last night’s Special Bulletin not because it’s terribly weak (still above its 50-day line) but because it’s found resistance near 70 for the past few weeks and earnings are coming up a week from tomorrow (August 2). All the things we’ve written about the stock still hold true—odds favor it having kicked off a major advance in May—but we think it’s prudent to move to Hold and see what comes on earnings. HOLD.
Teladoc (TDOC 67) has been a wild child lately, pushing higher right after our initial recommendation two weeks ago, then skidding sharply yesterday because of the growth stock selloff and the firm’s own secondary offering of five million shares (partly to pay for the acquisition of Advanced Medical, which was announced in June). That offering could put in a high for the stock in the near-term, but so far, the action hasn’t been unusual—TDOC “only” fell to its 25-day line yesterday and bounced nicely today. We’ll be watching closely, but with the uptrend intact, we’ll stick with our Buy rating, though it’s best to keep newer positions on the small side given that earnings are out next Wednesday (August 1). BUY.
Watch List
Carvana (CVNA 45): CVNA continues to rest on low volume, which is the action you like to see after a big run. Frankly, the stock looks like a decent buy here, but earnings are due out in two weeks (August 8) so we’re waiting.
Diamondback Energy (FANG 135): We know oil stocks aren’t as exciting as growth stocks, but many continue to set up, and old favorite FANG looks like one of the leaders after the company cleared up some worries a couple of weeks ago. Earnings are likely out the second week of August.
Spotify (SPOT 188): SPOT looks like a winner and is acting well. With daily trading volume north of $300 million, it’s clear big investors are involved and that the stock could morph into a liquid leader. Earnings are due out tomorrow.
Wayfair (W 126): Wayfair remains unusually strong, holding above its 25-day line since early May despite lots of short sellers being involved. Earnings are due out August 2.
Vertex Pharmaceuticals (VRTX 177): VRTX flashed a major volume clue in late June and marched to marginal new highs before pulling back a bit in recent days. Earnings are due out tonight—a solid gap up could be buyable, though a big drop would take the stock off our list.
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.
