WHAT TO DO NOW: The overall market and most growth stocks have stabilized in recent days, though the environment remains tricky and narrow, with relatively few stocks hitting new highs. That said, while there remain some yellow flags, most of the evidence remains positive, so our 50%-plus cash position (driven by stock action, not a major market call) is too high. We’re still going to pick our spots, though, and look to add some exposure as opportunities present themselves. Tonight, we’re adding Neurocrine Biosciences (NBIX) and buying a bit more of Grubhub (GRUB), leaving us with around 38% cash. We’re also placing Teladoc (TDOC) back on Buy. Details below.
Current Market Environment
Stocks were relatively quiet today, with the major indexes mixed and most growth stocks finishing slightly lower. At day’s end, the Dow was off 45 points and the Nasdaq was up 5 points.
The major indexes have firmed up in recent days, with the Nasdaq bouncing off its 50-day line and most other indexes nosing out to new all-time or recovery highs. The intermediate-term trend, which was on the fence, has perked back up, and of course the longer-term trend continues its bullish ways, so both of our trend-following market timing indicators are green.
Of course, we wouldn’t classify this as a powerful uptrend, with growth-oriented indexes (small- and mid-caps, as well as the Nasdaq) not making much progress since mid June. And individual growth stocks remain a mixed bag, with as many stocks getting hit on earnings as gapping up, and many of those that do gap up have tended to pull back afterwards.
More broadly, we’re still seeing relatively few stocks hit new highs, even as the Nasdaq approaches virgin turf—as the Nasdaq approached all-time highs yesterday, 131 Nasdaq stocks hit new 52-week highs, but that’s a bit less than the 150-ish levels seen during the July rally and far less than the 300-plus seen during June’s moonshot.
Thus, the market (at least for growth stocks) remains tricky and relatively narrow, which is a good reason to go slow, pick your spots and, of course, limit losses if you own a stock that gets nailed.
But with all of that said, we still see more positive evidence than negative evidence—the trends of the major indexes are up, and, while there have been plenty of potholes, growth stocks that have gotten through earnings unscathed are acting well. We’ve also seen sentiment cool off, which is a secondary plus.
If we had 20% to 30% in cash, we’d probably be content to sit tight and see if the advance broadens out. But given our large 50%-ish cash position (due to sales of earnings losers and other names that have broken down), we’re going to slowly put some money to work.
Tonight, then, we’re going to add a regular-sized (10% of the portfolio) position in Neurocrine Biosciences (NBIX) to the Model Portfolio, and we’re also going to add a 3% position (3% of the total value of your portfolio) to GrubHub, which looks like it’s begun the next leg of its advance. We’re also placing Teladoc back on Buy. That will leave us with around 38% in cash. Details inside.
Model Portfolio
We’re not huge on piling into biotech stocks, but Ligand is off to a good start for us (more on that below), and Neurocrine Biosciences (NBIX 117), which is successfully making the transition from a speculative, development-stage company to a commercial-stage operation with huge revenue and earnings growth, is our new addition. The firm focuses on psychological- and endocrine-related (glands that release hormones) disorders, with its first marketed product (dubbed Ingrezza) being the first U.S. approved medication that treats a side effect of certain antipsychotic medications; sales growth has been huge, and market penetration and label expansions should keep that going. And now there’s Orillissa, which was just approved by the FDA to treat a uterus growth abnormality; it’s been licensed to AbbVie, and it looks like Neurocrine will get a 20%-plus royalty on sales. Some analysts think Orillissa can be a $1 billion drug within a few years! After a fantastic Q2 report, analysts ratcheted up their earnings outlooks to a small profit this year and $1.50 in earnings next. The stock’s a bit extended to the upside, but we like the pre-earnings shakeout and powerful move after results were released. We’ll use an initial loss limit down in the 100 area, give or take. BUY.
Five Below (FIVE 104) has bounced in recent days, with help from an analyst who yesterday bumped up his expectations and reaffirmed his belief in the firm’s long-term outlook. Overall, FIVE remains in this post-earnings trading range, which is fine by us. We’ll stay on Hold for now, but we’re not opposed to nibbling here if you don’t own any—we still believe the next major move is up. HOLD.
GrubHub (GRUB 128) has stabilized north of its prior high (near 120), and while the near-term could easily see some more wiggles depending on the market, the bigger chart picture remains very encouraging. Plus, of course, the business potential is as big as it gets, with $245 billion of U.S. takeout and delivery orders every year compared to GRUB’s $4.8 billion run rate of orders in the latest quarter. Since we have a small position, we’ll buy some more tonight, adding another 3% to our stake. (In other words, if your portfolio is $100,000, buy $3,000 more GRUB.) BUY.
Ligand Pharmaceuticals (LGND 238) reacted nicely to earnings yesterday, as the company topped its pre-announced results; it bumped up its royalty guidance for the rest of the year thanks mainly to better-than-expected sales of its two main licensed drugs (one being solid by Novartis, the other by Amgen) and believes it will earn around $6.30 per share this year (though that’s partly because of a big one-time milestone payment received last month). There were no major new developments on the conference call, just affirmation that it has a ton of irons in the fire and its royalty business should grow nicely in the years ahead. LGND did pull back today, giving up about half of its earnings move, something that’s been common among growth stocks during this tedious earnings season. Even so, while a further rest is possible, but the path of least resistance is clearly up. We’ll stay on Buy. BUY.
Okta’s (OKTA 55) has done a solid job recovering from its horrid two-day, 10-point slide during the growth stock selloff, quickly getting back about 70% of that slide. The intermediate-term trend here is basically sideways, with the stock still consolidating after its wild earnings reversal in early June. But given that OKTA initially broke out just in February, and that its identity solutions are still being rapidly adopted by all sorts of companies, we’re optimistic shares can eventually get going. The next earnings report will be released September 6. HOLD.
PayPal (PYPL 87) ran up sharply into earnings, fell sharply after the report (due in part to the growth stock selloff) and has bounced decently since. All told, our thoughts here are unchanged: Intermediate-term, the stock (like many growth stocks) probably needs some more time to shape up, but longer-term, the trend remains up, and the fundamental story is unique and should continue to attract big investors, especially on dips. A bit more strength could have us restoring our Buy rating, but right here, we’ll stay on Hold. HOLD.
We sold Shake Shack (SHAK 56) on a Special Bulletin on Monday morning, after the firm’s quarterly report last Thursday evening led to a wave of selling on Friday. Given that the stock just got going in May, SHAK could eventually shape up, but one of our rules is to avoid letting what was a decent gain morph into a meaningful loss. SHAK’s poor earnings release did that, and besides, at best the stock is likely to need time to build a new, proper launching pad. We sold on Monday. SOLD.
Teladoc (TDOC 69) reported a fine quarter a week ago, with sales and EBITDA topping expectations, and with the firm’s raised outlook outpacing analysts’ estimates. But possibly even more important came news this morning, when MinuteClinic (which is CVS’ retail medical clinic) announced that it’s rolling out a virtual care offering in collaboration with Teladoc (and using Teladoc’s technology platform, too). Anyone over the age of two can get care, with patients filling out a questionnaire and being matched to a board-certified health care provider in their state; visits will cost $59, payable by credit or debit card, though insurance coverage will be added in the months ahead. Financial terms weren’t included (we’d assume TDOC will get a cut of each virtual visit), but more important than the money is that a deal like this for Teladoc cements the view that (a) it’s the clear leader in virtual care, (b) the industry itself is set to boom as big companies get behind it and (c) instead of trying to build their own full-fledged offering, many will find that it’s better to simply piggyback off Teladoc’s infrastructure. The stock reacted well to the news on excellent volume, continuing its rebound off its 50-day line from last week. Short-term, some further wobbles wouldn’t shock us, but both the fundamentals and the chart are very encouraging. BUY.
Watch List
Carvana (CVNA 47): CVNA acts terrifically, but earnings are due out tonight. This is one we’re very interested in buying, but given its volatility, getting the buy price right is important.
Dexcom (DXCM 124): Dexcom has the best-in-class continuous glucose monitor (CGM for short), with accuracy on a par with finger sticks for diabetics. Its latest device, the G6, is so popular Dexcom is having trouble keeping up with demand, though that didn’t stop the firm from blowing away all estimates and gapping up on Q2 results. It’s had a big run the past few months; a rest could provide a nice opportunity to get in.
Diamondback Energy (FANG 134): Few people love oil stocks, but we see a bunch of tight consolidations in the sector, with huge earnings growth projections during the next few quarters for FANG (and others like WPX). Earnings are due out tonight.
Docusign (DOCU 61): DOCU is the leader in eSignatures and is expanding its offerings to help firms do away with paper-based agreements, replacing them with faster and easier digital approvals and agreements. Growth is solid, the firm has just turned profitable and the stock is etching its first base since coming public in April.
HealthEquity (HQY 82): HQY is the leading non-bank custodian of health savings accounts, which continue to grow in popularity. Growth is both rapid and steady, and the stock is resting after a nice run-up earlier this year (which came after a 13-month base). Earnings are likely out in late August.
Vertex Pharmaceuticals (VRTX 175): We still think VRTX is set up well, though with both LGND and now NBIX in the Model Portfolio, we’re unlikely to add a third biotech-related name. But a move above 184 would be tempting!
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.
