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Growth Investor
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Cabot Growth Investor Bi-weekly Update

Following last week’s big decline, the market has shown some resilience, and we continue to see a growing number of stocks showing great resilience. Even so, our Cabot Tides green light from two weeks ago has disappeared and the longer-term Cabot Trend Lines remain down, so we continue to advise a cash-heavy posture as we patiently wait for confirmation the buyers have taken control. We have no changes in the Model Portfolio tonight.


WHAT TO DO NOW: Remain defensive, but keep an open mind. Following last week’s big decline, the market has shown some resilience, and we continue to see a growing number of stocks showing great resilience. Even so, our Cabot Tides green light from two weeks ago has disappeared and the longer-term Cabot Trend Lines remain down, so we continue to advise a cash-heavy posture as we patiently wait for confirmation the buyers have taken control. We have no changes in the Model Portfolio tonight.

Current Market Environment

Stocks had a good day today, though sellers again popped up in the afternoon. Even so, at day’s end, the Dow was up 157 points and the Nasdaq had risen 66 points.

Last week’s sharp selloff (after the G20-inspired rally on Monday) was enough to wipe out our Cabot Tides buy signal, though if you want to argue that the intermediate-term trend is mostly sideways, we’re OK with that—most major indexes have been thrashing around in wide ranges since late October, as opposed to making meaningfully lower lows.

Still, what’s definitely true is that the intermediate-term trend isn’t pointed up; all major indexes are still below their 25-day moving averages, even after today’s bounce. And, longer-term, our Cabot Trend Lines remain clearly negative. Throw in the fact that few stocks are hitting new highs (less than 20 today on the Nasdaq!), and it’s a good reason to hold plenty of cash and, if you buy, to pick your spots (and stocks) carefully.

However, that’s not to say there aren’t some encouraging signs out there. By far the biggest ray of light we’re seeing is among individual growth stocks. A fair number of them hit higher lows in November even as the market retested its October low, and now we’re seeing a bunch more that are miles above their November lows, even as the major indexes have (again) tested their lows. Throw in some positive volume clues along the way, and we think there’s a decent chance that the best growth stocks have already hit their lows for this correction—i.e., new leadership is forming.

That said, until the market confirms a new uptrend, good-looking stocks can go bad in a hurry. We’ve seen plenty of that during the past couple of months, where this week’s resilient stock becomes next week’s roadkill.

Given the encouraging action in growth stocks, we’re OK doing a little buying here or there—if you happen to be 100% out the market, you can consider picking up a stock or two (preferably on dips). For the Model Portfolio, we’re not ruling out another addition even before we get buy signals from market timing, given our huge 74% cash position coming into this week.

But overall, it’s best to stay generally defensive until the market can prove it has more in it than a three- or four-day bounce, and to see whether some growth stocks can actually move out to new highs and stay there. We have no changes in the Model Portfolio tonight.

Model Portfolio

Exact Sciences (EXAS 72) got dented a bit more than we’d have preferred during last week’s market plunge, even tickling support we had identified in last week’s issue (in the upper 60s). But we’re trying to be lenient with the stock since we already have bales of cash on the sidelines and, in the case of EXAS, it’s still showing a top-notch pattern on its chart. Yes, the “breakout” last week failed (as most do in weak markets), but the stock hit a low of 60 in October, 62 and November and (so far) 68 in December, all while the major indexes are hitting lower lows. Throw in the excellent story and we still think the stock has a chance to do well once the market truly kicks into gear. Because we entered at higher prices, we might sell half our position if the stock penetrates its low near 68 this week, giving the rest of the shares a few more points of wiggle room. But right here, we’re still OK grabbing some shares if you’re not yet in and have plenty of cash already on the sideline. BUY.

Five Below (FIVE 101) remains sloppy, but we’re remaining patient for now, partly because business continues to hum. In the quarter ending Halloween, the company’s sales and earnings both rose 22%, and same-store sales (up 4.8%) came in more than a percentage point above expectations. Management also raised guidance for the key fourth quarter; analysts now see the holiday period resulting in 33% earnings growth, and next year’s figures (19% gain forecast to $3.14 per share) is up a few percent in recent weeks. And it was great to see that new store productivity remained best in class, with payback less than a year. Of course, one of the big topics on the conference call was tariffs, but management said it’s been able to cut costs and rejigger things so that margins wouldn’t be affected with a permanent 10% tariff on Chinese imports; they were a bit less clear about a 25% tariff, but continued to emphasize they have many levers to pull (including even raising prices above $5 on certain items, stop selling some that would be unprofitable or, longer-term, moving production to other countries) to combat the higher costs. Yes, there’s risk, but the stock has clearly discounted some of that, and there’s nothing wrong with the underlying business. We’re still watching support in the mid 90s closely—a decisive break of that would call into the question the stock’s longer-term uptrend. But at this point, we’re willing to give the stock the benefit of the doubt. In fact, if you don’t own any, we’re OK buying a small position here, but just know that a decisive close below 95 would probably have us selling some or all of our remaining shares. BUY.

Twilio (TWLO 97) is acting like it could be the glamour stock leader of any market advance that develops. While shares took a hit last week, they never even touched their rising 25-day line, and today, the stock popped to new highs on massive volume. Obviously, there are no sure things, especially with the major indexes still in overall downtrends, but our hopes are high that TWLO is morphing into a new institutional money magnet (the stock trades around $470 million per day!) due to its unique, pervasive communications platform. If you don’t own any, you can buy some here or (preferably) on dips. BUY.

Watch List

Ciena (CIEN 32): CIEN has been a bit sloppy since mid November, but earnings are due out this week, and we’re intrigued by the 5G buildout theme, which we think could create a few market leaders during the next advance. Let’s see how CIEN reacts to earnings and go from there.

Etsy (ETSY 57): ETSY has etched a beautiful pattern of higher lows (38 in October, 42 in November, and 52 (!) so far in December) even as the major indexes struggle. Our only two rubs here are (a) retail stocks are generally under pressure, and (b) ETSY has already had a big run during the past 18 months or so. But the story and relative strength make it worth watching.

MongoDB (MDB 89): MDB is one of a handful of growth stocks that popped to new highs last week (thanks to earnings), and even after a pothole, is back above its prior base today. The firm’s database platform looks like the new standard for thousands of businesses.

Shopify (SHOP 160): As we wrote last week, SHOP’s long, bumpy decline and consolidation has likely worn out most weak hands. The stock is showing renewed strength, many well-performing funds own shares and we think the firm’s e-commerce platform should continue to lead to healthy top- and bottom-line growth.

Tesla (TSLA 367): We’re not ruling out a short-term shakeout in TSLA given that it’s testing resistance and is so well followed. But overall, the stock’s action looks great—it’s working on its eighth up week out of nine, a rare show of strength in this environment.

Trade Desk (TTD 143): TTD has set up a nice 11-week base at this point, and while we wouldn’t argue with another couple of weeks of rest, it certainly acts as if the next big move is up. (November low was 105, December low so far was 128!) The company looks like the pure way to play the big shift toward programmatic advertising.

Xilinx (XLNX 90): It’s not making many headlines, but XLNX continues to act very well, and while earnings estimates (up just 9% in the fiscal year that starts next April) are mundane, the accelerating sales (up 5%, 14% and 19% past three quarters) and earnings (-2%, 27%, 30%) growth tell a more bullish tale.

Zscaler (ZS 41): Traditional cybersecurity stocks still don’t look great, but we’re seeing some new-age security plays, like Zscaler, pop up on our screens. The company’s offerings create fast, secure connections between users and apps, regardless of device, location or network. Last week’s earnings report gapped the stock into the middle of its launching pad—let’s see if it can continue to find buyers.

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.