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Growth Investor
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Cabot Growth Investor Bi-weekly Update

Remain bullish, but keep your antennae up. We’ve seen repeated bouts of selling in leading growth stock so far this month, but a few yellow flags have appeared. We’re holding our 16% cash position and placing two positions on Hold tonight.


WHAT TO DO NOW: Remain bullish, but keep your antennae up. We’ve seen repeated bouts of selling in leading growth stock so far this month, and while most evidence remains bullish, a few yellow flags have appeared. In tonight’s issue, we have no major changes, but we’re holding our 16% cash position and placing Grubhub (GRUB) and Neurocrine Biosciences (NBIX) on Hold, as well as tightening a couple of mental stops.

Current Market Environment

The market saw some sharp rotation, with the Dow up 159 points but the Nasdaq down 6 points and many growth stocks getting hit hard.

It’s been a tricky September thus far, with a few waves of selling in growth stocks and some rotation into other areas of the market (especially today). While it’s not conclusive yet, it’s fair to say the evidence has worsened—we’re seeing a bit more funky action among individual stocks (failing to hold earnings gaps, lots of volatility after a big run, etc.) and our Cabot Tides, while still positive, are approaching the fence.

That’s not a reason to run out and sell a bunch of stuff, especially if you’re already holding a modest-sized cash position (we have 16% in the Model Portfolio) and most of your stocks are in overall uptrends (like ours and most growth stocks).

But it’s best to keep your antennae up—another bad day or two could crack some leaders and possibly lead to a Tides sell signal, a combination that would have us paring back. But, of course, we always go with the evidence in front of us, and while September has been tedious, most of the evidence is still pointed up, so we’re sticking with a mostly bullish stance (though we are placing a couple of stocks on Hold tonight).

Bigger picture, our main conviction is that the overall bull market remains intact and is likely to continue down the road. Shorter-term, though, we’re open to anything: Does the market suffer a September/October correction? Do we see rotation out of growth and into cyclical areas? Or do stocks just kite higher from here?

As always, we’ll bend with the wind, but we’re sticking with our heavily invested position until more evidence emerges the sellers are taking control.

Given the choppy conditions, though, it’s probably a good idea to cool it a little on the buy side, and if you do put some money to work, focus on real leaders that are likely early in their overall runs. Frankly, there are a couple of stocks we’re tempted by right here, but we’re content to hold our modest cash position (16%) and see how things play out. In the Model Portfolio, we’re placing Grubhub (GRUB) and Neurocrine Biosciences (NBIX) on Hold tonight. Details below.

Model Portfolio

Most stocks that gapped up on earnings in late August or early September have, for the most part, stalled out and pulled back, and Autodesk (ADSK 148) is a perfect example—it hasn’t done anything wrong, but has dipped back to its 25-day line on modest volume. A dip below the 140 area (below the 50-day line and back into the prior base) would be abnormal in our view, but at this point, we’re OK picking up a few shares if you don’t own any. BUY.

DexCom (DXCM 139) has finally suffered a little selling pressure, pulling back about 10 points during the past few days (including some decent-volume selling yesterday). If growth stocks continue to struggle, a dip toward the rising 50-day line) now near 125) is possible, but we think DXCM is holding well and its digestion phase this month likely offers a solid entry. BUY.

Five Below (FIVE 126) has eased back a couple of points (net-net) since its earnings gap two weeks ago; it remains extended to the upside (25-day line, now near 120 and rising), but is in great shape. While FIVE is obviously a growth stock, it’s not the kind of glamour name that’s been under pressure at various times this month. Short-term, shares could easily pull back further, but the odds favor dips leading to higher prices. BUY.

Grubhub (GRUB 137) is one of a few stocks that, after a good run, has begun to gyrate wildly this month, which is often a sign of distribution—and today, the stock broke its 25-day line for the first time in a couple of months on heavy volume. Longer-term, we’re not panicking, but given the choppy environment and GRUB’s own action, we think it prudent to go to Hold and look for the stock to either calm down or show some decisive strength. HOLD.

Ligand Pharmaceuticals (LGND 264) popped to new highs yesterday after a licensee (Viking Therapeutics) released great mid-stage trial results for its potential treatment of non-alcoholic fatty liver disease (and a couple other related indicators), a market that could eventually be worth billions of dollars. Looking at Ligand’s latest presentation, it could get $75 million in develop milestones (per indicator at approval), up to $150 million of commercial milestones and a royalty between 3.5% and 7.5%. Approval for the treatment is still a ways off and there’s competition, too, but the results bode well that Viking will be a major player, and that Ligand will get a nice cut eventually. The stock looks great, but try to buy on dips of a few points. BUY.

We’re also going to place Neurocrine Biosciences (NBIX 117) on Hold tonight. Why? Simply because, since our initial recommendation back in early August, the stock hasn’t made any progress. As we’ve seen with numerous stocks, patience has generally paid off this year, so we’re not in a hurry to dump shares; our mental stop in the upper 100s. But the choppiness and lack of progress tell us to go to Hold and see if buyers reappear. HOLD.

Similar to ADSK, Okta (OKTA 70) gapped up on earnings, rallied for a couple of days, and has since pulled back normally. Most cybersecurity-related stocks remain in decent shape, too, which is encouraging. As with everything, a further slide (into the lower 60s) is possible if rotation continues out of growth stocks, but big picture, we think this name has only recently emerged from a nice three-month rest, so the odds favor higher prices down the road. BUY.

We’ve been very patient with PayPal (PYPL 89), and it’s not like the stock has acted terribly, nosing to new highs a couple of times during the past three months. But our antennae are up—the stock has rallied to the 92 to 94 area three times since mid July, and each time it’s suffered some very large volume selling (including five day s in a row in late July and three days in a row last week). Given the liquidity of the stock, that’s usually a sign that more than few big investors are cutting positions. Fundamentally, there’s nothing wrong with the business, and the stock is still sitting around its 50-day line, so we’re not freaking out. But we’re bumping up our mental stop into the mid 80s, and could raise it further if we see another round of big-volume selling. Hold for now. HOLD.

Teladoc (TDOC 75) has been chopping around all month with most other growth titles. The next dip to its 50-day line (now around 71) or thereabouts will be its second since blasting off in May—often providing a good support level. The next fundamental catalyst could come in reaction to its Investor Day a week from tomorrow (September 27). In the meantime, with the action well-controlled, we’ll stay on Buy. BUY.

Watch List

Canopy Growth (CGC 49): CGC has finally begun to consolidate (in a very volatile manner)—our take continues to be that the stock’s (and group’s) first four-plus week correction will likely set up a solid entry point.

Carvana (CVNA 59): CVNA is showing some distribution for the first time in weeks, though it’s nothing abnormal. Let’s see how the stock pulls back/consolidates. We still think it’s early in the overall move, but the stock needs time to set up.

PetIQ (PETQ 40): We’re still high on PETQ, though it’s a bit thinly traded. A pullback of a couple of points (its first since breaking out in August) would probably be buyable.

Pure Storage (PSTG 28): PSTG looks like the new leader in storage, with the best all-flash arrays (an industry that’s expected to grow 20% annually for many years). The stock is one of the few earnings gappers in August to have followed-through on the upside.

Roku (ROKU 71): ROKU is one of the top glamour stocks in the market, with a mass market story that has huge potential. A shakeout of a few points would be intriguing.

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.