WHAT TO DO NOW: Remain cautiously optimistic. The market and growth stocks have generally handled themselves well in recent days, holding most of their sharp, quick gains following last Monday’s low. We think the odds favor the next major move being up, however, our Cabot Tides are yet to flash a green light, and thus we’re content to hold our strong, profitable stocks, but also to keep a chunk of cash on the sideline. In the Model Portfolio, our only change tonight is to place Chipotle (CMG) back on Buy. Our cash position stands at 31%.
Current Market Environment
The major indexes closed higher today on light volume, with the Dow rising 102 points and the Nasdaq gaining 44 points.
Following a huge rally off last Monday’s low, stocks have been handling themselves pretty well. There have been a few wobbles, especially on Tuesday, when many leading growth stocks took hits. But the declines seen were reasonable given the prior few days of gains, and for the major indexes, most have basically marked time this week, which is solid action after a nice thrust higher.
As for our indicators, our Cabot Tides remain negative, but they’re right on the edge of a green light—a bit more strength from the major indexes (likely corresponding with a push above 7,900 on the Nasdaq) would probably do the trick. Meanwhile, our Cabot Trend Lines remain bullish and the Real Money Index is deep in positive territory as investors bailed out of the market during May (a good thing).
Overall, then, we’re cautiously optimistic given the totality of the evidence—the longer-term trend never turned down, the correction was “normal” when looking at other post-blastoff environments and leading growth stocks generally held up well and came to life in a big way as soon as the pressure came off the market. That said, the intermediate-term trend still isn’t positive and some secondary measures (lagging small caps, very strong defensive sectors) aren’t exact following the bullish script.
All told, we don’t advise being in your bunker, but we still think our current game plan makes sense. That means holding onto your strong, profitable stocks and doing a little buying here and there of some potential new leaders, but also keeping a chunk of cash on the sideline (we have 31% cash in the Model Portfolio) and waiting patiently for confirmation that the bulls are back in control.
Should the Tides turn positive, we’ll put more money to work, but will likely do so in steps, as we often do. And if the sellers reappear in a major way, we’ll simply take things on a stock-by-stock basis. As mentioned above, we do think it’s more likely we see higher prices than lower, but we prefer waiting for the market to show its hand. Our only change in the Model Portfolio tonight is placing Chipotle (CMG) back on Buy.
Model Portfolio
Array Biopharma (ARRY 29) has been hovering near 29 in recent days following its strong run higher. With solid data in hand for colorectal cancer and better-than-expected sales for certain types of melanoma, there’s little standing in the way of the company’s two drugs (Braftovi and Mektovi) becoming big, big sellers in the years ahead. The stock is extended to the upside, so a pullback of a couple of points isn’t out of the question, especially if the market has further wobbles. But we like the story, the numbers and the recent strength—we’re OK buying a half-sized position here or on dips. BUY A HALF.
Chipotle Mexican Grill (CMG 732) shook out as low as 637 last Monday, dipping below obvious support in the 660 area. But it’s been all up since then, with the stock ripping to new highs before finally hitting some resistance this morning. Fundamentally, the Mexico deal (no tariffs) removes some uncertainty, though we never thought that was a huge deal. The big idea here is the company getting back on track after a couple of years in the doghouse, with a large growth opportunity as customers come back, as new menu initiatives attract new clients and as the store base increases. Given the stock’s strength, we’ll go back to a Buy rating, but given the environment, new buyers should probably start with a smaller-than-normal position and/or look for dips. BUY.
Coupa Software (COUP 121) has been wild of late, with an explosive post-earnings move, a gap up Monday morning as high as 130 after Salesforce bought Tableau Software and then a sharp pullback on Tuesday. Overall, though, the chart looks great, with shares north of their prior high of 115 and well above their 25-day line (112 and rising). More rest and/or some pullback wouldn’t be shocking, but we think COUP has great potential as it becomes the go-to player for business spend management. BUY A HALF.
We were this close to punting our remaining shares of Five Below (FIVE 132) after earnings last week when the stock dipped after earnings. But it’s since found some support and has popped back, raising the prospect that last week’s dip was a shakeout. Of course, the stock is still going to be beholden to China tariff news and rumors, which will likely heat up again next week with the G20 meeting. But the stock’s rebound gives it some breathing room, especially given the encouraging quarterly report that pointed toward some acceleration in the back half of the year thanks to a huge slate of movie-related licensed products (Aladdin, Toy Story, Spider Man, Frozen 2 all out this year) hit the shelves and higher comps from remodeled stores (half of this year’s 50 remodels were finished by early May) help the cause. Long story short, if you own a small position, sit tight. HOLD.
Okta (OKTA 130) gyrated a bit after earnings due to the market, but the stock’s relative strength during the correction was a hint that it wanted higher, so it wasn’t a huge surprise that the stock went vertical as soon as the pressure came off the overall market. We do have a good-sized position in OKTA, so it’s possible we could take partial profits at some point, but right now, with the market trying to come out of a correction, with leading cybersecurity names acting well and with OKTA being one of the strongest growth stocks in the market, we’re hanging on. If you don’t own any, you can start a position here or (preferably) on dips of a few points. BUY.
Planet Fitness (PLNT 80) isn’t showing amazing strength, but it remains above its 50-day line and well within its overall uptrend. Our plan remains the same—a dip below the recent lows of 74 would probably have us going to Hold, but right here we’re OK picking up shares if you don’t own any. On the fundamental side of the equation, one thing that’s proof of Planet’s attractive economics is the demand from franchisees; Planet has about 150 franchise groups it deals with, and when expanding its gym count, it doesn’t deal with any new ones. Said another way, current franchisees are very happy expanding their number of Planet locations, which is good for the brand (experienced operators). Indeed, Planet has 1,000 more gyms under area development agreements already in place, with half of those expected to open in the next three years. BUY.
ProShares Ultra S&P 500 Fund (SSO 122) has perked back above its 50-day line along with the S&P 500, storming back from its lows under 100 early last week. As we wrote in the first section, we’re optimistic the next big move is up and that the overall bull market has room to run, so we advise holding onto your shares. For new buying, we’re not dead set against nibbling here, but we’ll stay on Hold and lean against any major new position until the Tides go positive. HOLD.
Twilio (TWLO 141) is a close call, ratings-wise—the stock’s excellent snap back brought it to new highs last week on solid volume, but the market isn’t out of the woods and we’re not thrilled with the stock’s constant day-to-day gyrations (TWLO’s average daily range is six points during the past couple of weeks). Bigger picture, of course, we remain bullish, and if the market kicks into gear we think this will be one of the leaders. Similar to SSO, then, we’re not going to argue if you want to nibble here, but officially we’ll stay on Hold until the stock settles down a bit and/or the market turns positive. HOLD.
Watch List
Snap (SNAP 14): It’s not as well-sponsored as we’d prefer, but we think SNAP could be a solid turnaround in the making as new management expands the firm’s offerings, driving revenue and user growth.
Roku (ROKU 105): ROKU is probably the one stock we’d most like to own that we don’t. But given that it’s extended, tremendously volatile and the Tides are still negative, we’ll just keep an eye on it.
Shopify (SHOP 307): SHOP remains one of the market’s liquid leaders but isn’t anywhere near a solid entry point. The fact that it hasn’t pulled back in recent weeks is both good (resilient!) and bad (hasn’t shaken out any weak hands).
Zillow (Z 46): Z is still likely to be pushed/pulled by views of the housing market, which we’re not big fans of, but we think the stock may be changing character as big investors believe its new business lines (especially Offers) can drive significant growth going ahead.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, June 20. As always, we’ll send a Special Bulletin should we have any changes before then.
