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Growth Investor
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Cabot Growth Investor Bi-weekly Update

Remain mostly bullish as our trend-following indicators are still positive and most leading stocks are in solid uptrends. We have no changes in the Model Portfolio tonight as we are keeping some cash (17%) on the sidelines.


WHAT TO DO NOW: Remain mostly bullish. Today was a bad day for growth stocks, but after such a big run during the past three weeks, some hiccups are to be expected. Our trend-following indicators are still positive and most leading stocks are in solid uptrends. If we see another couple of days of sharp selling, we could pare back some, but right here, we remain positive, though we’re also keeping some cash (17% position) on the sideline. We have no changes in the Model Portfolio tonight.

Current Market Environment

The market was mixed today, with the Dow up 23 points but the Nasdaq losing a big 96 points and growth stocks selling off sharply across the board.

We’ve seen some sharp rotations this year, and today was definitely one of those days, where the broad market was actually mixed but growth stocks were hit very hard. Many are looking for reasons for the action—the continuing plunge in emerging market stocks is one being bandied about—we think the reason is simpler: Growth stocks have had huge runs during the past month, leaving them extended.

Short-term, then, we wouldn’t be surprised if growth stocks saw further retrenchment. Some stocks, in fact, look out of trend on the upside on their weekly charts, which is often an intermediate-term red flag, while sentiment measures (put-call ratios, etc.) have become extended.

Intermediate- to longer-term, though, the evidence remains bullish. Our Cabot Trend Lines and Cabot Tides are positive, and most leaders, despite sharp declines today, remain in solid uptrends; we only spotted one or two stocks (like Spotify) that broke intermediate-term support, with the rest simply giving up some of their big gains of the past month.

We’re certainly not complacent, and another couple of days of sharp selling in the leaders could have us trimming a bit, depending on how our stocks perform. But we always go with the evidence in front of us, and despite today’s shot across the bow, the trends of the indexes and most leading stocks are up.

Thus, we remain bullish and have no changes tonight in the Model Portfolio, though we are holding on to our 17% cash position as we wait to see how growth stocks handle themselves in the days ahead.

Model Portfolio

Autodesk (ADSK 149) has pulled back since our recommendation, including a drop of a few points today. It’s always possible the stock’s earnings-induced breakout will fail if growth stocks enter a correction. But at this point, the retreat looks normal and the firm’s business (and cash flow) will continue to pick up steam in the months ahead. If you don’t own any, we’re OK buying some here. BUY.

DexCom (DXCM 142) looks like a lot of leading stocks, as it had a huge run in August (even after its earnings gap the stock ran more than 20 points from our buy price) before sliding a few points today on modest volume. Of course, with the 25-day line at 131 and the 50-day line way down near 116, the stock could easily pull back further, or simply rest a bit. But with the story, numbers and chart all lined up, we think dips will prove buyable. BUY.

Five Below (FIVE 115) spent most of June, July and the first half of August consolidating between 97 and 107, so the stock continues to look fine even after today’s drop (which was exacerbated by an analyst downgrade). That said, the stock’s intermediate-term path will likely come down to earnings, which are due out tomorrow (September 6) after the closing bell (analysts are looking for $335 million of revenue (up 18%) and earnings of 38 cents per share (up 27%). Big picture, it’s certainly possible FIVE needs more of a rest after its dramatic jump in June (the 200-day line is down around 80). Yet the fact the stock broke out of a five-year base less than a year ago and that the company has an excellent and predictable multi-year growth outlook tells us higher prices are ahead. We’ll stay on Buy, but keep any positions ahead of the report small. BUY.

Grubhub (GRUB 138) looks fine overall (today’s sharp decline didn’t even bring the stock down to its 25-day line) but we are keeping an eye on it given the recent low-volume move to new highs—a slide back toward the top of its prior base (near 120) would be an intermediate-term yellow flag. Still, there’s a long way between here and there, and like most growth stocks, today looks more like a trend knockout/shakeout than anything abnormal. BUY.

Ligand Pharmaceuticals (LGND 254) has suffered some distribution this week, with volume picking up (nothing crazy) as shares have pulled in, but pricewise, the stock is basically around where it closed after popping on earnings last month, so the uptrend looks fine. The company presented at an investor conference today; it didn’t break any new ground, but did talk about a couple of its drugs under development and reiterated the breadth of its pipeline. It has more than 100 partners that have signed deals for 170 fully funded programs, 55% of which are in clinical trials and 11% are on the market or soon will be. And this year alone, Ligand expects its partners to spend $2 billion (!) on R&D on these programs! Back to the stock, another day or two of big-volume selling could have us moving to Hold, but given the evidence in front of us, we think the dip is buyable. BUY.

Neurocrine Biosciences (NBIX 121) popped to a new high on good volume yesterday but gave that back today; net-net, we’re near breakeven (up a smidge) on our purchase from a month ago. Still, like most of our stocks, we remain optimistic, as the chart is in fine shape (the 25-day line is around 118) and analysts continue to nudge up their earnings estimates (now $1.79 per share next year) as they anticipate big sales and royalty growth. Like most stocks, another round of big-volume selling could have us at least moving to Hold, but right now, we’re OK picking up shares on this dip if you’re not yet in. BUY.

Okta (OKTA 60) had a nice rally during August, but its move to new highs came on very light volume, which, along with the upcoming earnings report (due out tomorrow night, September 6), was the reason we stayed on Hold. Today’s move isn’t the end of the world—ideally it’s the final shakeout before OKTA resumes its longer-term advance. But we’re just following the plan at this point—a well-received earnings report could be a buying opportunity, but any decisive breakdown toward its lows (lower 50s) would be a red flag. HOLD.

PayPal (PYPL 89) is another stock that nosed to new highs on low volume and was pulled lower today. Overall, we continue to think PYPL will be fine, but want to see more constructive action (that could include some tight trading or big-volume strength) before putting new money to work. Fundamentally, the firm announced today that it has more than 250 million active accounts, up six million or so from June 30 and continuing the steady mid-teens growth in that metric that’s been in place for a while. All told, if you own some, continue to sit tight. HOLD.

Teladoc (TDOC 77) remains in a firm uptrend, though after a big push from 60 to 80 during the past few weeks, a deeper correction (or longer rest) is certainly possible. The company presented today at a Wells Fargo conference, though our focus is on the company’s Investor Day on September 27, where the company is likely to do a deeper dive into its business strategy (and possibly reveal some intermediate-term growth targets, too). Hold on if you own some, and if you don’t, you can buy here or (preferably) on dips of another couple of points. BUY.

Watch List

Canopy Growth (CGC 52): CGC continues to act well, and we think the stock’s first multi-week rest will probably provide an opportunity to get in.

Carvana (CVNA 62): CVNA remains extended. A few weeks of calm trading or pullbacks toward the 50-day line (way down near 50, though rising quickly) could provide an opportunity.

Docusign (DOCU 63): DOCU has a good story, great growth numbers and a nice post-IPO base. Now let’s see how earnings (due out tonight) are received.

Palo Alto Networks (PANW 222): PANW tested its breakout level today and held. Earnings are due out tomorrow.

Pure Storage (PSTG 27): PSTG’s all-flash storage systems are proving to be a huge hit in the cloud and data-intensive world. Mutual fund sponsorship is up sharply in recent quarters, and the stock looks to have changed character after gapping up on earnings a couple of weeks ago.

Roku (ROKU 61): ROKU is super volatile, but it’s held up well in the face of news that Amazon might be launching a competing product and the growth potential is outstanding.

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.