WHAT TO DO NOW: Do some more buying. Our Cabot Tides has flashed a new buy signal, and while the near term could easily see some retrenchment, the evidence is building that the worst of the market’s downturn is over and that another bull phase could be starting. Tonight we’re buying a 10% position (i.e., full-sized initial position) in Planet Fitness (PLNT) and buying another 5% position in both Ciena (CIEN) and ProShares Ultra S&P Fund (SSO), bringing us up to “full” positions in each. Our cash position will now be around 45%.
Current Market Environment
The market finished mixed today in a relatively quiet session. At day’s end, the Dow was off 22 points while the Nasdaq had risen 48 points.
The sellers have finally made a bit of a stand so far this week, with the indexes sliding sharply on Tuesday, wobbling a bit on Wednesday, and bouncing a bit today. All told, the major indexes are down 1% so far this week, which is totally reasonable given the post-Christmas rally.
The good news is that our Cabot Tides have now turned positive, with all five of the indexes we track (a) above their lower (25-day) moving averages and (b) those 25-day lines are themselves now advancing. The Tides green light is another piece of evidence—along with the historic oversold readings in December and the 2-to-1 Blastoff Indicator two weeks ago—that the worst of the downturn is over and the next major move is likely up.
The short term, though, is more of a coin flip. We wouldn’t be shocked if the market simply continued higher; however, given the recent big move (1,000 points on the Nasdaq!), earnings season (always tricky) and the fact that our long-term Cabot Trend Lines are still bearish, it’s very possible some bottom building and choppy/sloppy action could be on tap over the next few weeks, even including a full or partial retest of the December lows.
So what to do? As usual, we’ll just go with the evidence in front of us—with the Tides turning positive, we’re putting more money to work tonight, but we’re taking steps instead of diving in feet first.
Tonight we’re going to buy a 10% position in Planet Fitness (PLNT), a steadily-growing retailer with a unique story that we think can grow rapidly for years to come. We’re also going to be an additional 5% positions in both Ciena (CIEN) and ProShares Ultra S&P 500 Fund (SSO), which brings us up to a “full-sized” (i.e., 10%) positions in both.
Tonight’s moves will leave us with around 45% in cash (give or take), and from here we’ll follow the usual plan. If the market starts pulling back, we’ll hang on to the cash, but should stocks consolidate and push higher we’ll continue to put money to work.
Model Portfolio
We just wrote about Planet Fitness (PLNT 58), tonight’s new addition, in last week’s issue, so we won’t repeat that here. Suffice it to say that we see Planet Fitness as having a unique story—creating a national gym brand—that appeals to a huge variety of people and has many advantages over traditional gyms. Management has showed it can pull all the right levers, and we think the overall growth story will persist for years thanks to both greater same-store revenue and a long runway of store growth (more than 600 new openings over the next three years, compared to 1,646 locations open at the end of September). As for the stock, it held up great during the market correction and, in January, rallied back to its old highs on a few days in a row of big volume before settling down in recent days. It’s not going to double overnight but we think PLNT can do very well. Earnings are likely out in mid- to late-February. BUY.
Ciena (CIEN 39) continues to act well, pushing to new closing highs today and, thus far, refusing to give up any of its recent gains. Chip stock Xilinx (XLNX) reported a great quarter last night; while it’s a different kind of company (chips vs networking), Xilinx saw strength in many of the same themes that Ciena is benefiting from (5G, data center, etc.), which is a plus. We’re going to fill out the position tonight by purchasing another 5% stake and use a loss limit for the combined position in the 32 to 33 area. BUY ANOTHER HALF.
Five Below (FIVE 124) continues to act fine, though like many stocks, it’s butting up against some resistance (in the 125 range), so some further wiggles because of the market (or U.S.-China trade rumors) are possible. But we think the stock has turned the corner and the next big move is likely up. BUY.
We’re going to fill out our position in ProShares Ultra S&P 500 Fund (SSO 103) tonight, as the Tides buy signal and the 2-to-1 Blastoff Indicator put the odds in favor of a general bull trend when looking out a few months (or longer). As written above, it’s possible we get some correction/retest in the near term, but we have greater confidence that the next many months will be fruitful, so we’re buying an additional 5% stake in SSO tonight. If you don’t own any, you can go ahead and buy a full position here or on any weakness. BUY.
Twilio (TWLO 102) has stalled out a tiny bit in recent days, with repeated bouts of selling in and around the 100 level. That said, we’re not reading too much into that because (a) many stocks near new highs are fidgeting around, which isn’t unusual in the early stages of a rally following a punishing market decline, and (b) this is short-term stuff—TWLO actually notched new highs last Friday. Long story short, yes, there’s always a chance that the stock is “too obvious” and won’t be a leader, but the vast majority of evidence to this point—from the stock’s resilient action in Q4 to the fundamentals to the increase in fund sponsorship—all points to good things. We’ll stay on Buy. BUY.
Workday (WDAY 171) looks like a lot of potential leading stocks—it’s made solid progress in recent days and weeks, though as it approaches new highs, it’s seen some resistance (more a lack of buying than a wave of selling), too. BUY A HALF.
Watch List
Alteryx (AYX 70): There are so many strong software stocks that you could probably fill an entire portfolio with them, but we’ll be very selective given that we already added Workday. AYX remains resilient and its advanced analytics offerings are meeting with huge demand. Earnings are likely out in mid-February.
Coupa Software (COUP 78): Again, we’re not sure we want to dive too deeply into software-oriented stocks for diversification purposes, but COUP has a fantastic story (could be the Salesforce.com of business spend management) and just saw massive-volume buying last week.
Etsy (ETSY 54): ETSY is still worth watching, but we’d like to see it settle down—the wild daily moves may be a sign the stock is “too obvious” right now. Big picture, though, the stock is holding up well and the fundamentals are pristine.
Exact Sciences (EXAS 79): EXAS is in the midst of a breakout attempt from its four-month launching pad. All signs point toward rapid growth for many quarters to come as Pfizer helps goose sales.
LendingTree (TREE 289): As the largest online lending marketplace (mortgages, personal loans, insurance, credit cards, etc.), LendingTree has a big, big story. And after a prolonged decline (on shrinking mortgage revenues), the stock looks to have turned the corner. Our only beef is that, at times, the stock can be very thinly traded. Earnings are likely out in mid-February.
Okta (OKTA 79): OKTA is extremely strong, clearly pushing out to new highs in recent weeks. Any shakeout or pullback (barring a market collapse) would likely be buyable.
PayPal (PYPL 92): PYPL has quieted down nicely near the top of its base, which is just what you want to see. That said, it probably makes sense to wait and see what it does after earnings, which are due out January 30.
Zscaler (ZS 45): OKTA currently looks like the strongest play among the “new” cybersecurity stocks, but we’re still keeping an eye on ZS to see if it gains momentum.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, January 31. As always, we’ll send a Special Bulletin should we have any changes before then.
