WHAT TO DO NOW: Remain bullish, but keep your eyes open. Our indicators and most of our stocks are still trending up, though we’re seeing some funky action that’s worth monitoring. In the Model Portfolio, we sold one-third of our shares of Twilio (TWLO) on a special bulletin this morning, and we have no other changes tonight. Our cash position now stands around 21%.
Current Market Environment
Stocks fell again today despite an early morning rally, with the Dow closing down 122 points and the Nasdaq easing 13 points.
From a top-down viewpoint, the market remains in the same position it’s been for months—our Cabot Trend Lines and Cabot Tides remain bullish, and our Real Money Index is still stuck in neutral territory, with a bit of money continuing to come out of the market. In a nutshell, the odds still strongly favor meaningfully higher prices when looking months down the road, and when it comes to individual growth names, we like the look of our and many other stocks out there.
That said, we are again seeing some short-term things to keep an eye on. First, earnings season has been tough for many leading stocks—plenty of poor reactions and very few solid gaps higher. Second, sentiment has turned complacent (though far from exuberant) according to a few measures.
Third, upside momentum has been waning in general, with three of the five major indexes less than 2% above their 50-day lines. And fourth, the market hasn’t had a pullback of any substance all year, which raises the odds of a 5%-type of retreat.
To be clear, most of this is secondary or even anecdotal evidence—more than a hunch, but not as meaningful as the still-bullish price/volume/trend action that our system is based on. In other words, it’s still a bull market, but the evidence is growing more mixed. All told, we remain mostly bullish (around 80% invested), but we’re watching things closely to see if the recent dip is another shakeout or if widespread profit taking finally takes hold.
In the Model Portfolio, we sold one-third of Twilio (TWLO) on a special bulletin this morning because of stock-specific factors, leaving us with around 21% in cash. Going forward, we’ll just play things by the book—any buying support will probably offer up some potential entry points in leading stocks, but a breakdown in the market and/or growth stocks could have us trimming a bit more.
Tonight, though, we have no changes.
Model Portfolio
Carvana (CVNA 70) is off to a good start for us, with shares racing into the low 70s before dipping a bit. Normally, we’d probably fill out our position here, but the trick is that earnings are due out next Wednesday (May 8)—analysts see revenues rising 89% and a loss of $0.47 per share. Having “only” a half-sized position in a strong stock is a good problem to have, of course, and we still think CVNA has a chance to be a big winner. But we never like to plow in right ahead of earnings, so we’ll simply sit tight with our shares. If you don’t own any and are willing to buy ahead of earnings, we’re OK buying a half-sized position, preferably on dips of two or three points. BUY A HALF.
Chipotle Mexican Grill (CMG 708) wobbled after its earnings report last week, but was able to hold support and has snapped back above the 700 level. And that makes sense given that the fundamental turnaround story is very much intact—analysts have bumped up this year’s earnings estimate from $12.55 per share to $13.03 (up 44% from a year ago), while 2020’s figure has risen $0.84 to $16.75 (up 29%). As with most leading stocks out there, we remain bullish about the months ahead; the question is whether, after a great multi-month run, CMG is due for a correction and consolidation of a few weeks or longer. If the stock dips decisively below its recent low (660 or so), we’ll likely move to Hold in anticipation of a longer rest period. But so far, CMG’s test of its 50-day line last week (its first since getting going earlier this year) has held, so we’re OK picking up shares if you’re not yet in. BUY.
Five Below (FIVE 144) has finally pulled back a bit following its straight-up move after earnings. Obviously, if the market gets hairy, there’s nothing that says the stock can’t retrace a bigger chunk of its recent run, but at this point the dip looks like a shakeout rather than a change in character. With solid support likely in the 130 to 135 range, we’re fine picking up shares here if you don’t own any. BUY.
Okta (OKTA 104) had a great April, breaking out early in the month above 88 or so and, despite a couple of quick, sharp pullbacks, racing into the mid 100s in recent days. With the 25-day line down near 94, some backing and filling is possible, but we like the fact that shares effectively took six weeks to rest (mid February through March). Big picture, OKTA is one of a couple of institutional-quality leaders among new-age cybersecurity firms, so we think the future is bright. Hold on if you’re in, and if not, you can start a position here or (preferably) on dips to 100. BUY.
From 60 at the start of March to 76 this week, it’s been a solid, persistent run for Planet Fitness (PLNT 75) since it broke out after its last (Q4) earnings report. Now we’ll see what happens from here—the firm will report its Q1 results after the close tonight, with revenues expected to be up 26%, while earnings of $0.34 per share (also up 26%). Given the stock’s run and the spate of earnings-induced retreats we’ve seen recently from growth stocks, a dip of a few points isn’t out of the question. But that’s just guesswork—PLNT’s major trends (both business-wise and the stock) are pointed up, so we remain bullish, but we’ll reevaluate if need be after the report. Right here, we’ll stick with our buy rating. BUY.
The ProShares Ultra S&P 500 Fund (SSO 125) remains in great shape, hitting new highs just yesterday before pulling back to its 25-day line today. As we wrote about in the first section, there are some short-term yellow flags out there, and it’s always possible the major indexes are ready for their first multi-week correction of this advance. Even if that comes, though, the odds favor it being reasonable (5%-ish) and not devastating (10% to 15%); obviously no one knows for sure, but that’s what history tells us. Should a Cabot Tides sell signal emerge in the weeks ahead, we’ll probably go to Hold (and maybe, if we’re craving cash, sell a portion of our large position). But we’re still keeping most of our focus on the big picture, with the odds favoring nicely higher prices down the road. Right here, we’re holding on tightly to our shares—and if you don’t own any, we’re OK picking up a position on this dip. BUY.
In our special bulletin this morning, we booked partial profits in Twilio (TWLO 132), partially due to the stock’s ugly post-earnings reversal lower, but also because of waning momentum (not much price progress or upside buying power) in recent weeks. Longer-term, we still believe this story has legs, and the Q1 report backs that up—revenue growth accelerated to 81% (even taking out the benefit of the SendGrid acquisition, organic growth was about 60%), with same-customer growth remaining at ridiculous heights (46% in the quarter). And going forward, the SendGrid merger will not just add email capabilities to its communications platform but will also offer Twilio cross-sell opportunities into a whopping 84,000 new customers! If you didn’t sell any and want to hold on to all your shares after today’s modest rebound, there’s nothing wrong with that. But we generally like to take some off after a good run (we bought in at 93), not just to put some profit in our pocket, but to allow us to give our remaining position plenty of leeway for what will hopefully turn into a long-term advance. SOLD ONE THIRD, HOLDING THE REST.
Workday (WDAY 199) has been acting better, nosing above its all-time high of 200 in recent days. That said, the breakout wasn’t exactly powerful (low volume and the relative performance (RP) line never made it to new highs), and now shares have turtled back below the 200 area. We’re encouraged in general, and if you really want in, we’re not going to call the cops if you start a small position here, but officially we’ll stay on Hold until we see the RP line move out to new highs. HOLD.
Watch List
Coupa Software (COUP 103): We’re not sure about adding another software play, but we’ve always loved this story, and like many of its peers, COUP looks to be getting going after a multi-week rest.
DocuSign (DOCU 55): DOCU is now in the seventh week of a tight base, which came after a persistent (10 weeks up in a row) advance to start the year. A clear breakout would be very enticing.
Invitae (NVTA 24): We still enthuse about Invitae’s story and wouldn’t mind starting a half position here near the 50-day line—but with earnings due out next Tuesday (May 7) we’ll hold off.
Qualcomm (QCOM 87): We’re not that into mega-caps, but QCOM looks like a special situation in the wake of its settlement with AAPL—the stock now appears to be a leading 5G play for big investors, with big earnings estimates and a reasonable valuation to boot. The trick is spotting a solid entry point.
Shopify (SHOP 256): SHOP boomed after earnings and continues to look great. It’s extended here, though, so we’ll keep watching for a pullback or a few weeks of tightness.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, May 9. As always, we’ll send a Special Bulletin should we have any changes before then.
