WHAT TO DO NOW: Remain defensive, but stay tuned as we could get a Cabot Tides buy signal as early as tomorrow if the market cooperates. The action of the past month has actually been decent, with most indexes successfully retesting their October lows, some positive secondary measures flashing and a very encouraging rally in recent days. If the major indexes can build on their gains over the next day or two, our Tides could turn positive, which would prompt us to do some buying. But we won’t anticipate—tonight, we’ll stand pat with our huge (90%-plus) cash position, but we’ll send out a bulletin if we get a green light.
Current Market Environment
Dovish words from the Fed Chairman helped stocks rally today, with the Dow exploding 618 points and the Nasdaq galloping ahead by 209 points.
A month ago, the market was in complete disarray, with the major indexes near the end of a mini-crash, leaving basically zero growth stocks in good shape and stunning most investors. We wrote at the time that the odds of a sustained advance launching from there were extremely remote, as bottoms are a process, not an event.
The good news is that, during the past month, we’ve seen a good attempt at a bottoming process play out—the major indexes have rallied and retested their lows, with some positive broad market divergences popping up (fewer new lows, fewer stocks below their 200-day lines, etc.), worsening sentiment (38% of advisors are now bullish, the lowest since mid 2016) and some potential leading growth stocks acting resiliently.
And today’s action was very encouraging, with the major indexes mostly popping above their 25-day lines and many growth stocks showing excellent strength.
Looking at our trend-following indicators, both the intermediate-term Tides and longer-term Trend Lines are still negative. However, because of the action of the past few weeks, a Tides buy signal is possible as early as tomorrow—if the major indexes can hold or build on these gains a bit more, it will likely be enough to produce a green light.
If that signal occurs, we’ll likely add two or three new names to the Model Portfolio, putting some of our giant cash hoard (90%-plus) to work. We’ll take it slowly given the still-negative longer-term trend, as well as the fact that most stocks are still in rough shape. But it would definitely be a step in the right direction.
Tonight, though, we’ll be patient and see if the Tides can officially switch to positive during the next day or two, or whether (as we’ve seen a few times since the start of October) this pop attracts another wave of selling pressures. In the Model Portfolio, we’ll stand pat with our 90%-plus cash position, but we’ll let you know if we have any changes.
Model Portfolio
Five Below (FIVE 106) took a big hit last week, as trade war fears and a string of awful retail-related earnings reports and updates caused the sellers to come around for the stock. Like so many stocks, the chart isn’t pretty, and if you have a good-sized position that is showing you a loss, be sure not to let it get out of hand. That said, the stock is still north of its 200-day line (near 95.5) and there’s a bunch of price support (prior base, round number support, etc.) in this area. Plus, none of this trade war talk has us worried about the firm’s longer-term outlook; it’s always possible earnings growth could get temporarily crimped if tariffs go way up (though management has sounded a confident tone about digesting these moves), but we don’t see that altering the fundamental store economics (and hence, growth plan) in a major way. Plus, of course, we’re already sitting with a gigantic cash position, have taken partial profits a couple of times on the way up and are still sitting on a big profit with our remaining shares. Bottom line: We’re not in a rush to sell our position in FIVE, though next week’s quarterly report (Wednesday, December 5) will certainly have a big say on what comes next. Right here, we advise holding on, and aren’t opposed to nibbling on a few shares if you’re not yet in. BUY.
Watch List
Canada Goose (GOOS 66): GOOS has pulled back since its earnings-induced surge last week, but remains in very good shape. We think this could be the next “hot” high-end brand, similar to Lululemon and Michael Kors in recent years.
Chipotle Mexican Grill (CMG 491): It’s not the young buck it once was, but CMG looks like a solid turnaround play to us, with its food sourcing issues in the past, cost controls in place and improving metrics—analysts see earnings up 40% next year after a 29% rise in 2018. The stock has set up a great-looking base—we think CMG could be a steady performer as business continues to improve.
Ciena (CIEN 33): CIEN was one of many resilient stocks that got whacked during the market’s most recent plunge, but we’re not giving up on it yet—shares are still holding above their 50-day line, and the company’s earnings are set to accelerate with the build out of 5G networks.
Etsy (ETSY 51): Like every recent earnings winner, ETSY gave up a big chunk of its earnings moves, but isn’t far from its old highs. The company should be in line for a big holiday shopping season, and looking beyond that, the firm’s marketplace owns only a small fraction of the huge homemade goods segment.
Exact Sciences (EXAS 76): During our weekend work, we noticed that, since the Pfizer announcement (and rally) in September, EXAS hasn’t suffered one down week on above-average volume, a good sign that few big investors are selling despite the tricky market. The stock is in the middle of its three-month range, a positive sign of relative strength.
MongoDB (MDB 84): Twice MDB has been knocked back from its highs, and twice it’s snapped right back—it’s very volatile, but the resilience is impressive. Earnings are due out next Tuesday.
Tesla (TSLA 348): There’s been further bad news and rumors surrounding Tesla, but the stock has generally held firm. We’re still of the mind that the stock has bottomed and, while it may need more time to consolidate, the next big move is up. Encouragingly, earnings estimates continue to get nudged upwards (now $6.50 per share for 2019).
Trade Desk (TTD 136): The chart still needs a bit of work, but TTD only began its major advance in May (i.e., it’s not late stage) and is the leader in programmatic advertising platform technology, allowing buyers across all avenues to manage their ad campaigns. Growth is rapid and big investors are buying in bunches.
Twilio (TWLO 92): Similar to the way Amazon Web Services is the cloud platform of choice for so many businesses, Twilio is rapidly becoming the communications platform standard for tons of firms around the world. Big investors are piling in (427 funds owned shares at the end of September, up from 338 in June and 272 in March), growth is accelerating, the bottom line has leapt into the black and the stock looks great.
Xilinx (XLNX 91): Chip stocks remain iffy, but XLNX is very resilient despite a huge post-earnings pop in late October and early November. Sales and earnings growth have been accelerating, and while earnings estimates are mundane, our guess is that those are conservative given the company’s position in many newer, fast-growth markets.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Wednesday, and, as always, we’ll send a Special Bulletin should we have any changes before then.
