WHAT TO DO NOW: Do a little buying. The market’s trends are still pointed down, so we still think going slow and stepping lightly makes sense. But much of the recent action—including the flashing of a rare blast-off signal today—hints that the worst may be behind us. In the Model Portfolio, we’re restoring Buy ratings on Five Below (FIVE) and Twilio (TWLO) (try to buy on dips), and in a slightly unusual move, we’re going to buy half-sized positions in three stocks—Ciena (CIEN), ProShares Ultra S&P 500 Fund (SSO) and Workday (WDAY), with each position being about 5% of the portfolio to start. Our cash position will now be around 67%. Get all the details below.
Current Market Environment
IMPORTANT NOTE: Due to a variety of scheduling factors (basically a time crunch for me early in some weeks), going forward, all Cabot Growth Investor issues and regular updates will be sent THURSDAY instead of Wednesday. Thus, your next issue will be sent to you next Thursday (January 17). As always, though, you can email me at any time (mike@cabotwealth.com) with questions or comments. Thanks!
The market finished in the plus column again today, with the Dow rising 92 points and the Nasdaq lifting 60 points.
It’s been a very interesting two weeks since the market hit a low on Christmas Eve—the rally in the major indexes and many stocks and sectors has been relatively powerful and persistent.
Moreover, the upmove just produced a rare, bullish blast-off signal: During the past 10 days, advancing stocks on the NYSE have outnumbered declining stocks by more than 2-to-1, a sign of extremely powerful broad-market momentum. (Famed investor Marty Zweig first discovered the indicator.) We’ll do a deeper dive on the indicator in next week’s issue, but suffice it to say that these signals have historically portended excellent gains when looking out three, six and 12 months.
Of course, not every signal leads to immediate gains—the last signal (July 2016, right after the Brexit vote) came before a tedious three-month retreat, though that was followed by a fantastic 15-month post-election run. Overall, it’s a great sign.
However (you knew there’d be a catch, right?), we also aren’t ignoring our key market timing indicators. Even after the recent rally, both our Cabot Tides and Cabot Trend Lines remain firmly negative, telling us the market’s trends remain down. Looking at the charts, the major indexes have recouped only about half (a bit more) of their December declines, and most are bumping up against resistance from their downward-trending 50-day lines.
Thus, on one hand, there’s definitely been some improvement in the overall picture (climactic selloff in December, great-looking bounce since, 2-to-1 signal, etc.), but on the other hand, the primary evidence (market trends) are still against us.
Put it together and we still would step lightly, holding plenty of cash and picking your spots carefully—but we also can’t ignore an improvement in the evidence and our already large (80%-plus) cash hoard. Thus, tonight, we’re going to do a little buying, but we’re doing it in an unusual way (at least for us).
Specifically, we’re going to buy half-sized (about 5% of the total value of the portfolio) positions in three stocks that have been on our Watch List for a while—Ciena (CIEN), ProShares Ultra S&P 500 Fund (SSO), and Workday (WDAY). We’ll also place Five Below (FIVE) and Twilio (TWLO) back on Buy, though buying on dips is preferred (see below for more).
Should our stocks and the market continue to act well, we’ll look to “fill out” the positions (i.e., buy another 5% chunk) going forward; if the sellers again come out of the woodwork, we’ll hold off (or, if things really unravel, cut our losses). Right now, though, these baby steps will bring the Model Portfolio up to five stocks, though we’re still holding a good-sized 67% cash position.
Model Portfolio
We’ll start with Ciena (CIEN 37), which we’ve written about many times in recent weeks. The company went through a heavy investment phase in recent years, but those investments are now paying off, with some best-in-class offerings in a variety of fast-growth end markets (5G, webscale data center, more fiber closer to consumers to increase performance). They’re not just riding the growth in these areas, but taking market share, too, as the competitive landscape eases, thanks in part to one of its peers being under the microscope due to some dealings with a Chinese outfit. As for the numbers, the top brass has an encouraging three-year outlook (7% sales growth, 20% earnings growth per annum), though Wall Street thinks it’s being conservative—analysts see earnings rising 35% this fiscal year (ends in October) and 25% next. (In terms of current trends, Ciena is showing accelerating sales growth, up 21% in the latest quarter, and earnings growth, up 66%.) The stock lifted from a three-year range in September, held up well throughout the market’s implosion and has pushed to new highs in recent days. Like most strong stocks, a pullback wouldn’t surprise us, but the action is excellent. We’ll start with a half position (5% of the Model Portfolio). BUY A HALF.
Next up is ProShares Ultra S&P 500 Fund (SSO 98), which moves approximately twice the S&P 500 on a daily basis. Frankly, we weren’t planning on adding until the market’s trends turned up, but the climactic panic readings seen in December, the persistent advance since Christmas and the rare 2-to-1 signal prompts us to start a position here. Like just about everything else, a retreat of a few percent isn’t out of the question, which is why we’re starting with a half-sized position. But we also wouldn’t be shocked if any retrenchment is tamer than expected and, most importantly, many indicators are pointing to a nice ride higher for the market when looking out six to 12 months. BUY A HALF.
Workday (WDAY 166) has always been a solid company, but it really hasn’t been a powerful leader since early 2014—don’t get us wrong, the stock has done well, but there have been few persistent, market-beating advances during the past few years. But we think that’s now changing as the stock has shown excellent relative strength since late October. Fundamentally, the firm continues to grab tons of share for its human capital management (HCM) cloud software products, and its newer Financial Management offering is booming, with subscription revenue lifting 50% in the most recent quarter. As we’ve written before, WDAY isn’t likely to double in a month, but it’s in position to be a liquid leader of one of the strongest growth areas in the market today. As with the other two new additions, we’ll start with a half-sized position (5% of the portfolio’s total value) and look to fill it out in the days or weeks ahead. BUY A HALF.
Five Below (FIVE 120) has stormed back in recent days, helped along by some buoyant general economic news (the huge jobs report last Friday bolstered a lot of retail names), some analyst love (Morgan Stanley and Jeffries each had soothing words about the firm’s future), rumors of progress in U.S.-China trade talks and, we think, a general view that the company offers one of the most foreseeable growth stories out there with a long runway ahead of it. After correcting a total of 33% on a closing basis, FIVE has ripped back into the low 120s, including three excellent volume days starting last Friday. As with the market, we can’t say the stock is free and clear at this point—in fact, there’s resistance right around here from its November peak, so short-term weakness wouldn’t be shocking. But the power of this snapback is a positive sign, telling us FIVE has hit bottom. Expect some wiggles and shakeouts going forward (we wouldn’t be surprised to see a sell-the-news reaction to any trade deal that gets agreed to, for instance), but the combination of the story, the action of the stock and the blast-off signal from the general market has us placing FIVE back on Buy. Try to buy on dips. BUY.
Twilio (TWLO 96) has also ripped higher in recent days; the stock was testing its November lows two weeks ago in the low 70s, but yesterday, shares actually briefly nosed to new highs above 100 before pulling in. Obviously, the volatility remains extreme, which isn’t the ideal situation, but we’re putting most of our focus on the stock’s relative strength during the market downturn. As with FIVE, we think the action is bullish when looking out a bit (the stock has likely bottomed, is primed to be a leader, etc.), though shorter-term, dips are more likely than not. Thus, we’ll restore our Buy rating, but either keep it small or try to get in on dips of a few points. BUY.
Watch List
Alteryx (AYX 66): With TWLO and WDAY, we have two software stocks, so we’re not sure we’ll add another, but AYX remains worth watching due to its excellent action and growth prospects.
Etsy (ETSY 53): ETSY has pushed back to within 7% or so of its old high. This is a unique retail story that could go far.
Exact Sciences (EXAS 78): EXAS has popped after announcing bullish Q4 guidance; it still has some work to do, and the guidance for 2019 as a whole during the next earnings report will be key, but the reaction action is great to see. The Cologuard story remains intact.
MongoDB (MDB 87): We still like MDB’s story, but we’re also still waiting for the stock to calm down—right now it’s swinging 6% or so every day between high and low.
Okta (OKTA 69): OKTA is set up nicely; there’s still some resistance to chew through, but our guess is that most of the weak hands are out after the past four-plus months of correcting and consolidating. We’re watching it closely.
PayPal (PYPL 90): PYPL pushed out to three-month highs today on so-so volume. Earnings are due out January 30.
Planet Fitness (PLNT 58): PLNT has shown nice power in recent days, with solid volume driving the stock to its old highs. It’s another fine-looking retail play with a long, foreseeable growth path ahead of it.
Xilinx (XLNX 89): XLNX remains in fine shape; if CIEN doesn’t work out, we could still take a swing at XLNX to get exposure to many of the same fast-growing end markets.
Zscaler (ZS 45): ZS is at its highest level since early September, which is a great sign, though volume’s been just OK on its latest push higher. We like the story.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, and, as always, we’ll send a Special Bulletin should we have any changes before then.
