WHAT TO DO NOW: Remain bullish, but take things on a stock-by-stock basis. The market has begun to pull back after a great couple of months, and stocks could easily correct and consolidate further. That said, to this point, the market’s evidence remains bullish, and even the growth stocks that have been dented are so far holding key support. Thus, we’re sticking with our collection of stocks, though we’re watching the situation closely. In the Model Portfolio tonight, we’re placing Ciena (CIEN) on Hold but restoring our Buy rating on Planet Fitness (PLNT). Our cash position is around 9%.
Current Market Environment
The market took a big hit today, with the Dow losing 201 points and the Nasdaq fading 84 points, though encouragingly, most growth stocks, while lower, didn’t unravel.
The long-awaited pullback has begun, starting with some selling on good news in select leading stocks last week, then with an across-the-board distribution day in growth stocks on Monday, and now we’re seeing the major indexes weaken, too—the big-cap indexes are down 3% or so just since this Monday’s high, while the S&P 600 SmallCap Index (the worst performer) is already 6% or so off its peak of two weeks ago.
We’re open to anything, but when examining the evidence, the recent dip in the market appears normal. Our Cabot Trend Lines and Cabot Tides are both positive, and looking at the charts, the amount of giveback so far (especially in the big-cap indexes) is more than reasonable compared to the prior couple of months.
That’s not to say, however, that the pullback can’t go on for a while longer. In fact, given that stocks raced ahead for nine-plus weeks, it wouldn’t be surprising at all if the market needed more than just a few days to correct, consolidate and make investors uneasy. The next big move is likely up, but near term, don’t be surprised to see further wobbles.
Individual growth stocks have been more challenging, with many quickly giving up ground (even after positive quarterly reports and outlooks) and falling to support levels. The swiftness of some of these declines does have our antenna up; on a Special Bulletin Monday evening, we placed Five Below, Okta and Workday on Hold.
That said, to this point, just about every leading stock we follow or own has held up where it’s “supposed” to—i.e., while there’s been profit taking, breakdowns have been few and far between.
Put it together, and we remain bullish, but as always, are watchful. Should a stock or two we own give up the ghost, we’ll dump it and look for greener pastures. But at this point we’re practicing some patience and following the lead of the market and our stocks.
In the Model Portfolio, we have two changes tonight—we’re restoring our Buy rating on Planet Fitness, but downgrading Ciena to a Hold rating. Our cash position remains around 9%.
Model Portfolio
Chipotle Mexican Grill (CMG 609) has hung in there just fine during the past week, pushing up to 620 or so before pulling back. We’re not ruling out a dip of a few percent should the market continue to retreat, but CMG’s lack of any giveback following its pre- and post-earnings rally (especially considering the market’s recent dip) is a good sign. We’ll stay on Buy. BUY.
Ciena (CIEN 39) released a solid earnings report earlier this week—sales (up 20%) and earnings (up 120%) both topped expectations, as did the firm’s outlook for the current quarter. (Analysts have nudged up their forecasts, now looking for 38% earnings growth this fiscal year and another 26% next.) Even so, the stock slid sharply after the report. So where do we stand? CIEN remains above its 50-day line (now at 38.3) and is back into its prior range of late January/early February, which should offer support. But the sharp, big-volume three-day decline right off its highs is obviously a yellow flag. We remain optimistic CIEN can hold support and resume its major advance, but the recent selling prompts us to switch our rating to Hold. HOLD.
Exact Sciences (EXAS 85) has been all over the place during the past month, with a dip to 81, a post-earnings spike to 97 and then a pullback to 84 yesterday. Part of the reason for the recent dip may have been revealed yesterday; Exact Sciences sold $650 million of convertible notes, which, in the short term, pressures the stock (funds that buy the convert usually short the stock as a hedge). Whatever the reason, EXAS looks like a lot of growth stocks—it’s been a bit sloppy recently, but the quarterly report was solid and this dip hasn’t broken any key support. A drop below 80 would be a yellow flag, but right here, we’re comfortable with our Buy rating. BUY.
Five Below (FIVE 116) has had a tedious correction, moving more or less straight down from 132 to 115 during the past couple of weeks before an analyst upgrade helped shares bounce today. (The analyst sees the company continuing to shrug off unfavorable trends, with the long-term growth potential remaining bright.) We’re not giving up on the stock by any means; FIVE could simply be building a sounder launching pad, which isn’t uncalled for after the off-the-bottom rally. However, we’re not whistling past the graveyard either—there’s important support in the wide 100 to 110 area, and it’s possible the stock needs a prolonged rest after last year’s huge run. We moved the stock to Hold earlier this week and will stay there tonight. The next big event will come March 27, when Q4 earnings are released. HOLD.
Okta (OKTA 81) flashed a bit of abnormal action earlier this week, falling straight down from its all-time high to its 50-day line all in one day and prompting us to place our half-sized position on Hold. The stock has been bouncing a bit since, and frankly, isn’t far from new high ground; we’re still hopeful this dip is a shakeout on its way to higher prices. That said, it’s all going to come down to earnings tonight—analysts are looking for revenues of around $108 million (up 39%) and a loss of $0.08 per share, though the outlook and many sub-metrics will also be key. A decisive drop below 74 or so would be a red flag and would likely have us cutting loose this small position and moving on. Conversely, a powerful gap up to new highs could actually prompt us to average up. Right now, we’ll stick with our Hold rating and see what comes. HOLD.
Planet Fitness (PLNT 64) had us worried last week, with repeated failures on the upside (including a big reversal on earnings) raising the odds that the stock was going to run into trouble. But since then, the buyers have arrived! PLNT has shot ahead to new price and relative performance (RP) peaks, and on many days of huge volume to boot. Analysts now see earnings up 26% this year and another 22% next; management sees EBITDA (a measure of cash flow and probably a better measure of profitability than earnings for Planet Fitness) to rise about 20% this year, though it frequently lowballs these figures. It’s not going to be a go-go stock, so some backing-and-filling is possible, but after a few shakeouts, the stock’s uptrend has resumed. We’ll go back to Buy, though given the market right now, try to buy on a dip of a couple of points if you’re not yet in. BUY.
ProShares Ultra S&P 500 Fund (SSO 111) has slipped a bit with the market, and looking at the chart, further weakness toward the rising 50-day line (now at 105 and rising) is possible if the sellers turn up the heat. But with our trend-following market timing indicators bullish, with the blastoff indicators having flashed in January and February and with a reasonable pullback so far, the odds continue to favor nicely higher prices down the road. BUY.
Twilio (TWLO 115) got whacked on Monday, but the damage wasn’t that bad, with the stock falling to (and finding support around) its 25-day line. As with most growth stocks, further dips are possible, but at this point the uptrend looks good. BUY.
Workday (WDAY 182) was another growth stock that recently reported a very solid quarter (revenues up 35%, earnings up 48%, both beating estimates) while some other sub-metrics (subscription backlog that will be earned over the next two years, up 29%; operating cash flow up 30%) also looked good. But the stock thought otherwise—it found resistance right near 200 and in two days plunged to its 50-day line (near 175) before stabilizing. We’d like to hold onto WDAY, as it has looked like a liquid leader of this advance, but we’ll leave it up to the stock—a break into the low 170s would be an intermediate-term breakdown and could have us moving on. Hold for now. HOLD.
Watch List
Coupa Software (COUP 91): COUP’s wobbles have been well contained around the 25-day line. Earnings are due out March 12.
Cronos Group (CRON 22): CRON continues to look like one of (if not the) leading marijuana stock. If we bought, we’d start (and maybe stick with) a half-sized position given the stock’s wild nature and the fact that earnings (out March 26) are on the horizon. Still, if things go right, there’s huge potential here.
Shopify (SHOP 187): SHOP has re-emerged as a leader after months of choppy-to-down action last year. We like the story, and the stock’s persistent advance—a shakeout could provide a nice entry point.
Trade Desk (TTD 189): TTD has had a big run since last May, which isn’t ideal, but after a long, deep base, shares catapulted to new highs on earnings two weeks ago and have held most of those gains since.
Xilinx (XLNX 120): XLNX has finally begun to pull in with everything else over the past week, but is still above its 25-day line. We’re not opposed to nibbling here, but for the portfolio, we’ll be looking for another week or two of rest to provide a lower-risk entry.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, March 14. As always, we’ll send a Special Bulletin should we have any changes before then.
