WHAT TO DO NOW: Remain defensive. The market has finally gotten off its knees, but our two main trend-following indicators are bearish and most stocks are still in rough shape. We have no preconceived notions, and we’re continuing to overhaul our Watch List (see below). Should the market power ahead, we could nibble on a stock given our high cash position (78% on the sideline). But two days up doesn’t change the trend—we advise you to remain patient and defensive. We sold our remaining position in Grubhub (GRUB) on Monday’s special bulletin and have no further changes in the Model Portfolio tonight.
Current Market Environment
The market is staging another solid rally today, with the Dow rising 435 points and the Nasdaq up 193 points about an hour before the market close.
It’s great to see the market finally show a little life after what’s basically been a rolling crash for all of October—from high to low, the S&P fell 11.4% and the Nasdaq fell a whopping 14.6% this month, and we read today that the S&P hasn’t risen two straight sessions in 28 trading days, the longest dry spell since the Great Depression! (That streak ended today FYI.)
The rebound since the Monday lows has recouped a bit more than one-third of that wipeout, which is a good start to the rally. Even so, all the major indexes we track are still well below their key moving averages (25-day, 50-day and 200-day lines), which keeps both our Cabot Tides and Cabot Trend Lines negative. Hence, we’re sticking with a defensive stance.
Could we have hit bottom and could this waterfall decline reverse into a sharp V-shaped recovery? Of course—anything is possible in the market, and we’re open to any possibility, especially given some of the historic “oversold” readings seen. But the market is an odds game, and while this rally could easily continue, the odds favor some bottom building (which would present some firm launching pads among new leading stocks) or, more bearishly, another leg down in the weeks ahead. As always, we’ll take it as it comes.
In the near-term, given our massive cash position, we might consider adding one more position (or half position) if the market stabilizes and we see a good set-up in a stock (maybe some tightness following a positive earnings reaction, for instance). Our Watch List is growing as we’re seeing a few names resist the decline.
But tonight, we’re content to stand pat and see how this latest rally attempt progresses. We sold our remaining small-ish position in Grubhub on a Special Bulletin Monday evening, leaving us with three positions.
Model Portfolio
Five Below (FIVE 114) has been pulling back with everything else, but the decline has been mostly orderly and has held support above the top of its prior (June through mid August) consolidation. There’s still a chance the stock could fall further if the market remains weak, and reports that the U.S. is considering even more tariffs on Chinese goods next year add some uncertainty. That said, we continue to think FIVE offers one of the best and most dependable growth stories out there, which should keep big investors supporting shares on weakness. We’ll stay on buy, but keep new positions on the small side, and only buy if you already have plenty of cash. BUY.
Grubhub (GRUB 94) continues to have a great story, but the stock’s action speaks for itself—last week, GRUB imploded below its long-term 200-day line on enormous volume following earnings, and while it’s bounced a bit since, the damage is done. Maybe a few months from now the stock will shape up again, and if so, we could always reconsider it. But after a big advance during the past year, the uptrend has been broken. SOLD.
Okta (OKTA 58) has caught a bid this week, partly thanks to the market but also thanks to IBM’s buyout of Red Hat, which (along with other buyouts this year, such as Salesforce.com’s purchase of Mulesoft) boosted perception for many software names. While Okta’s valuation is elevated, it wouldn’t be a shock to see a big firm consider gobbling them up given Okta’s leading position in the identity solutions industry, which is a must-have function as applications move to the cloud. That said, we don’t play the buyout game, so we’ll just follow the plan—OKTA held within its prior base and above its 200-day line before its recent rebound, which is good enough for us to hold our remaining shares (we sold one-third in early October). HOLD.
Teladoc (TDOC 70) has also bounced nicely this week after basically holding its lows (on a closing basis) from mid October. Like everything else, it’s not out of the woods, but it is showing a bit of relative resilience in recent weeks. That said, the big key will be if the stock can hold up following its quarterly report, which is due out tomorrow (November 1) evening; analysts are looking for 60% revenue growth and a loss of 36 cents per share (but cash flow to be slightly positive). Given that the firm updated some numbers at its late-September Investor Day, more important will be any updated outlook for the rest of the year (or first look at 2019). We’ll be watching. HOLD.
Watch List
Axon Enterprises (AAXN 62): It’s still near its lows, but we’re keeping a close eye on AAXN because (a) the story has huge potential, especially with its digital evidence platform Evidence.com, (b) the stock ran for just four months (February to June), so it’s not over-owned, and (c) the stock has shown some near-term relative strength above its 200-day line. Earnings are due out November 6—a strong gap up would be intriguing.
Ciena (CIEN 32): Networking stocks can be hit or miss, but the impressive resilience of CIEN in recent weeks (following a breakout from a three-year base in September) tells us that big investors think the firm is well positioned to benefit from some major trends like 5G, data center and webscale bandwidth demand.
Dexcom (DXCM 135): Just looking at DXCM’s chart, you wouldn’t know the market has been in freefall, as the stock is building a tidy base. The firm just got earlier-than-expected approval for a new continuous glucose monitoring system that targets a segment of Type 2 diabetics; it won’t be a huge growth driver but is the company’s first step into that market. Earnings are due out November 6.
Exact Sciences (EXAS 71): EXAS soared today after its Q3 report easily topped expectations. Not only did Cologuard test volume rise 49%, but revenues leapt 63% (revenue per test was up 9%; cost per test fell 3%) and management sees the Pfizer partnership, which is just ramping up, helping the top line boom 60% in 2019. Bigger picture, the company could grow for years as Cologuard use surges, thanks in part to the fact that 92% of patients can take the test with no out-of-pocket costs. Keep this one near the top of your watch list.
HealthEquity (HQY 92): HQY continues to consolidate normally given the market environment. The mega-trend of increasing numbers of health savings accounts (HSAs) is in place (and could be bolstered by some legislation in the months ahead), and HQY is the leader in that space.
MongoDB (MDB 82): MongoDB (the name is short for “humongous database”) offers a new-age database platform that’s document based (instead of rows and columns), can work with unstructured and machine data and can be edited by anyone, at any time in the cloud. It’s been a hit, with huge revenue and customer growth, and the stock is perched near its all-time highs.
Tesla (TSLA 339): TSLA hasn’t made any net progress for a very long time, and there lots of controversy surrounding the stock. But beyond the dramatic headlines, business may have turned a corner in Q3—gross margins surged, costs were kept in check and the company blew away expectations for deliveries and earnings. (Analysts now see 2019 bringing nearly $6 per share.) While the stock has shown very, very impressive accumulation since then, the chart still needs work.
Twilio (TWLO 75): After a monstrous move from February through September (24 to 88!), TWLO’s correction to as low as 62 this month has been sharp but reasonable. Just as important, of course, is the business—the firm’s messaging and communication platform looks like a gold standard, being adopted by big and small firms alike, and its acquisition of Sendgrid (a leader in email delivery) adds to the attractiveness. Earnings are out November 6.
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.
