WHAT TO DO NOW: Continue to lean bullish. We’ve seen an improvement in the evidence during the past week, with growth stocks acting well and more names hitting new highs. Our trend-following market timing indicators are still positive, but we’re going to stand pat for the moment to see if this improvement continues and if better setups emerge. The only change tonight is that we’re placing Five Below (FIVE) back on Buy. Our cash position stands near 27%.
Current Market Environment
The market did generally well today in the face of some uncertainties, with the Dow 89 points and the Nasdaq up 30 points.
The good news is that we have seen some improvement in the market during the past week. Growth-oriented areas like small- and mid-caps have lifted to new highs (the Nasdaq came close), the number of stocks hitting new highs has expanded (yesterday’s 199 on the Nasdaq was the highest since June 20, a good sign) and we’re seeing more pep from individual growth stocks. Our Cabot Tides and Cabot Trend Lines are both green.
That’s all to the good, and a bit more of this type of action would probably have us putting more of our sidelined cash back to work. But right now, the “positive, not powerful” message of last week’s issue still stands—there’s certainly more good than bad out there, but we’re not seeing a ton of setups just yet, and we want to see if the recent improvement in growth stocks sticks, or, as has happened so often during the past two months, fizzles.
Thus, tonight, we’ll stand pat with our 27% cash position. Happily, most of our stocks are acting well, and we’re not opposed to new buying if the recent improvement continues. Our only change tonight is that we’re placing Five Below back on Buy.
Model Portfolio
DexCom (DXCM 138) is off to a good start for us, picking up a few points (and following through on its earnings gap) during the past week, aided by an analyst’s upgrade today. Yes, the stock is extended to the upside and could easily pull back a few points, but the powerful earnings gap and action since doesn’t imply that big investors are letting go of shares. Just the opposite! It’s fine to start with a smaller-than-normal position here (or on weakness) and build from there, but our main focus is on the intermediate- to longer-term potential, which we believe remains big. BUY.
Five Below (FIVE 113) has pushed out to new highs after a couple of months of rest, and that’s enough for us to restore our Buy rating. We wouldn’t say this is an ideal buy point, and earnings are due out relatively soon (no set date yet, but likely in early September). But the path of least resistance is up, and we’re pleased to see many retail companies release very impressive numbers (Walmart and Target recently reported their fastest same-store sales growth rates in more than a decade!) and their stocks react positively to that news. If you own some FIVE, just sit tight; if you don’t, you can buy some here or on dips, but it’s best to keep new positions at a modest size this close to earnings. BUY.
Grubhub (GRUB 135) has stretched higher in recent days as the tone of growth stocks has improved. Interestingly, a competitor of GRUB named DoorDash (which delivers for some big firms like Chipotle, Cheesecake Factory and Wendy’s) just had another funding round ($250 million worth) that raised its overall valuation to $4 billion, a sure sign money is flowing into this area, which we take as a good sign. (GRUB’s market cap is about $12 billion, FYI.) The stock is still trying to chew through some resistance, but overall, it’s done a nice job holding most of its post-earnings gains. We’ll stay on Buy. BUY.
Ligand Pharmaceuticals (LGND 248) has been choppy in recent days, partly due to news flow (one brokerage house started it with a neutral rating), partly due to its solid prior rally (it’s had a good run since getting going in May) and partly due to its low trading volume (under 400,000 shares per day), which can lead to bigger swings. Overall, though, the stock looks fine, holding most of its earnings pop from earlier this month. A dip to fill that modest earnings gap (back to 230 or so) wouldn’t shock us, but the major trend is up. You can buy some around here or on dips of a few points if you’re not yet in. BUY.
Neurocrine Biosciences (NBIX 117) has pulled back a bit since our initial recommendation, but we think it’s acting fine and is a good Buy around here if you don’t own any. Fundamentally, the outlook continues to brighten—today the firm announced that AbbVie reported that its Orillissa drug had positive Phase III trial results for uterine fibroids (non-cancerous growth in the uterus that’s somewhat common among women during the childbearing years); this is likely another indication Orillissa can be used for (it’s already approved for another uterus condition), with target approval next year. (Neurocrine is set to get huge royalties on Orillissa sales as it’s rolled out.) A break into the low 100s would be a red flag, but right here, NBIX looks fine. BUY.
Okta (OKTA 57) has set up a nice-looking base. After breaking out around 32 and zooming as high as 61 in early June, the stock has corrected a maximum of “only” 23% during the past three months. And, recently, shares have tightened up in the mid 50s, which can be a sign that supply is drying up (a good thing). That said, we’ll just play it by the book—a decisive move above 59 or so (especially on earnings, which are due out September 6), would be bullish, but a move back below 50 or so (give or take) would make the post-June action look like a stop. Hold for now. HOLD.
PayPal (PYPL 87) is about as neutral as you can get when looking at the intermediate-term picture, as the stock is hanging around its 50-day line and is smack dab in the middle of its range from the past few weeks. Our thoughts are unchanged during the past couple of weeks—longer-term, we think the stock has more gas left in its tank, as its position at the forefront of the digital payment and money transfer areas will drive consistent growth. But near-term, the stock is just chopping sideways. HOLD.
Teladoc (TDOC 76) stretched decisively to new highs this month, nearly reaching 77 (well above its July peak of 71) before resting a bit so far this week. The firm will present at a Wells Fargo conference on September 5, and it will host its Investor Day on September 27, which occasionally results in some longer-term guidance. Big picture, we see Teladoc as the leader in a new industry that’s catching on fast, and it’s a good bet institutional investors are looking to build stakes. We’ll stay on Buy, though as always, aim for dips of a couple of points. BUY.
Watch List
Canopy Growth (CGC 40): We’ve long been intrigued by the marijuana movement, as it’s basically an entirely new commercial industry. But there haven’t been any well-traded ways to play it—until now. Canopy has a huge partner in Constellation Brands, which now owns nearly 40% of the firm, and looks like the emerging blue chip of the sector. It’s definitely worth watching.
Carvana (CVNA 58): CVNA has shown tremendous power, zooming from a pullback low of 40 at the end of July to as high as 60 this week! It probably goes higher near-term, but we’re looking for a lower-risk entry, preferably on normal weakness.
Docusign (DOCU 62): DOCU is a new stock with a good story, good numbers and, increasingly, a good chart, as shares are approaching their old highs. A couple more weeks of rest and a decisive breakout could be buyable.
Roku (ROKU 60): It’s a bit hard to grasp, but Roku is the most straightforward way to play the cord-cutting trend. We’d like to see the stock set up, as it’s overall base in recent months was very deep.
Spotify (SPOT 191): SPOT has settled down nicely after some good (big tie-in with Samsung devices) and bad (competition from Tencent Music) news. We still think this is a mass market idea that could prove big.
Stitch Fix (SFIX 35): SFIX has leapt back to new highs after its sharp July dip. With the stock only recently clearing its post-IPO base, we think it has room to run if management executes.
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.
