WHAT TO DO NOW:
Lean bullish. The market’s evidence remains mostly positive, though the action of growth stocks over the past two weeks has been less than stellar. Overall, we’re taking things on a stock-by-stock basis, selling names that act abnormally but are willing to put money to work in stocks that look like “fresher” leaders. In the Model Portfolio, we sold half of Planet Fitness (PLNT) and all of our remaining Five Below (FIVE) on a special bulletin Tuesday evening. Tonight, though, we’re going to fill out our position in Coupa Software (COUP), adding another half-sized position. Our cash position will now be around 28%.
Current Market Environment
First off, a quick note: Next week’s Cabot Growth Investor will be published on Wednesday (July 3), a day ahead of schedule due to Independence Day.
The market rebounded decently today—the Dow finished off 10 points, but most other indexes were higher, including a 58-point gain from the Nasdaq.
When looking at the overall market, we see more positive vibes than negative ones. Both of our trend-following indicators are positive, and we’re glad to see sentiment remain generally subdued even though the big-cap indexes are near their highs. (One example: There have now been seven straight weeks of more bears than bulls among individual investors, something that usually appears near bottoms, not tops.)
Granted, the major indexes aren’t looking perfect—the market’s action in the wake of last week’s Cabot Tides buy signal has been mundane (Tuesday’s big decline wiped away last week’s solid follow-through), and we’re not forgetting about the continued sluggishness of the broad market, as small- and mid-cap indexes remain well shy of their prior peaks.
Even so, the market hasn’t done anything “wrong” at this point, and there remains far more positive evidence than the other way around. Thus, for the general market, the odds favor the next major move being up.
However, the evidence with leading growth stocks isn’t as good. Most sat out the party last week when the major indexes kissed new high ground, and over the past few days we’ve seen some fairly strong selling pressure on them (especially those that haven’t had any “real” correction this year), including a few that flashed abnormal action.
One week of tedious action, though, isn’t enough to change the entire picture, and most stocks (while not racing higher) are still in uptrends. Plus, while we don’t want to make excuses, it’s possible that the end of the quarter and this weekend’s G20 summit has caused some short-term “risk-off” behavior.
Put it together and we’re still leaning bullish, but we’re mostly taking things on a stock-by-stock basis—selling (or partial selling) if something flashes abnormal intermediate-term action, but open to buying some “fresher” names that are early in their runs and showing accumulation.
On Tuesday evening’s special bulletin, we sold our small-ish remaining position in Five Below (FIVE) and sold half our shares in Planet Fitness (PLNT), which left the Model Portfolio with one-third in cash. Tonight, we’re going to put a bit of that back to work by filling out our position in Coupa Software (COUP), adding another 5% stake. That will still leave the Model Portfolio with around 28% in cash. Details below.
Model Portfolio
Blackstone (BX 44) has been trading relatively tightly in the 44 to 45 area in recent days, refusing to give back any of its big-volume advance from early June. On the news front, the firm remains very active, selling a specialty finance company for $600 million, buying an eight-story office building in India for $360 million and, according to reports, is close to raising the largest ever total for a new private equity fund ($25 billion!). As a Bull Market stock, BX could get tossed around with the market, but there’s little doubt buying pressures are picking up as (a) the longer-term trend of asset values remains up and (b) the firm’s conversion to a C-Corp will go through next week. BUY.
Chipotle Mexican Grill (CMG 724) has stalled out under the 750 level for the past couple of weeks, but this comes on the heels of a very sharp seven-day romp to new highs after the recent market low. (Some of this might be due to a recent ramp in the price of avocados, though we don’t think that’s a huge factor.) The company has been quiet on the news front, though it has set a date (July 23) for its Q2 earnings report. All in all, the stock is acting fine, and we think CMG’s fundamental turnaround is likely to take it higher over time. BUY.
Many software stocks have taken some hits lately, but Coupa Software (COUP 127) remains in good shape, with the stock holding above its 25-day line during the latest dip and, today, pushing ahead. The catalyst: A big expansion of its Coupa Pay offering, which should allow customers to pay invoices in a one-step process. It also teamed up with Citi Commercial (largest provider of corporate credit cards) and PayPal, boosting payment options (and, hence, attractiveness to customers). Analysts responded with a bevy of price target hikes, and after some wobbles yesterday, COUP rebounded on solid volume. We have a modest initial profit, and we’re going to fill out our position here, as the story continues to improve and the stock looks ready to continue its advance should the market hold together. On our combined position, we’ll be using a stop in the mid 100s. BUY ANOTHER HALF.
It was a great run with Five Below (FIVE 121) during the past 20-ish months, but the stock hasn’t been able to regain its leadership status all year, and its recent dive below its 200-day line put an exclamation point on that fact. To be clear, we’re not expecting a the stock to implode, and if FIVE sets up again in the months ahead (and the story remains intact), we could always take another swing at it. But right now, even the stock’s longer-term trend is questionable. We sold on Tuesday’s special bulletin. SOLD.
Okta (OKTA 123) has had a big run and, starting on Friday, suffered three straight selloffs on above-average volume, which is a short-term yellow flag. If the selling continues, we could book partial profits, as we have a solid gain and a good-sized position in the portfolio. However, we’re not going there quite yet—even after the selling, OKTA had only fallen to its 25-day line, which is more than reasonable given the recent run. Some consolidation is probably in order, but we’re still holding all of our shares. And if you’re not yet in, you can start a position (consider starting small) here. BUY.
We took half our chips off the table in Planet Fitness (PLNT 73) on Tuesday’s special bulletin, as the stock (a) suffered some heavy-volume selling in mid-May, (b) rebounded on weak volume and could never really get out to new highs, and then (c) sold off sharply on four days of huge volume, diving below its 50-day line in the process. To us, that looks like intermediate-term abnormal action. Longer-term, we’ll see how it goes—it’s possible this is just a normal consolidation after a good run, but we’re open to anything given that PLNT has been running higher for a couple of years. Right now, we’re content to hold our remaining shares with a stop in the mid 60s. SOLD HALF, HOLD THE REST.
The S&P 500 is the strongest of the major indexes we track, which is keeping ProShares Ultra S&P 500 Fund (SSO 125) in good shape—even after four straight down days, SSO isn’t far from its highs and remains above support in the 120 area. If the evidence changes, then we’ll change our stance, but right now the trends are pointed up and lots of secondary factors (sentiment, etc.) hint toward higher prices down the road. Sit tight if you own some, and if you don’t, we’re OK grabbing some shares of SSO around here. BUY.
Twilio (TWLO 137) has pulled in relatively sharply in recent days, dipping back to its 50-day line and toward the center of its slightly-uptrending range of the past few months. There’s risk if the selling in growth stocks continues, but right now, TWLO hasn’t really changed character (it’s been a four steps forward, three steps back stock over the past few months), and compared to many growth stocks, volume has been tame on the decline. Fundamentally, of course, there are few stories more pervasive with larger potential. Long story short, we’re OK grabbing shares here if you don’t own any. BUY.
This week has seen some negative news on the housing front, with worse-than-expected new home sales for May and some Fed members suggesting a half-point rate cut in July (which the market was hoping for) was unlikely. That was the main reason Zillow (Z 45) and many housing-related stocks took a big hit on Tuesday. Even so, volume was very light on the decline, which did no damage to the stock’s nascent uptrend, and this story is much bigger than just the month-to-month gyrations in the housing market. We started with a half-sized position in Z, which allows us to give it plenty of rope (down to 40 to 41); we believe any near-term volatility will eventually give way to a continued advance. If you don’t own any, we’re OK taking a half position here. BUY A HALF.
Watch List
Carvana (CVNA 62): Not surprisingly, CVNA backed off from resistance in the 70 area—more time is likely needed for the stock to digest its big early-year rebound. But the fundamental story is as good as it gets, and the stock remains within the confines of a reasonable launching pad.
Guardant Health (GH 84): Guardant is a rapidly-growing (triple-digit revenue growth in Q1) provider of blood tests (as opposed to tissue biopsies) for cancer detection in high-risk populations, including those who’ve previous suffered the disease. If the testing market grows as it could, this could be a $30 billion industry down the road, and GH is positioned as one of the leaders. After a huge post-IPO boomlet, the stock cooled off and is now tracing out a good-looking base.
Snap (SNAP 15): SNAP continues to act very well—it’s a bit extended in the near-term, but we’re not as concerned with that given that it looks to be starting a new advance.
Roku (ROKU 93): ROKU has finally pulled back, and while the decline has been sharp (107 to 93!), the stock’s volatility and big recent run means the fall looks normal so far. It probably needs a bit more time, but we’re close to starting a position.
Universal Display (OLED 188): The stock can be pushed around by U.S.-China trade arguments, but the big picture of increasing OLED usage (which boosts the firm’s business) is back on track.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Wednesday, July 3. As always, we’ll send a Special Bulletin should we have any changes before then.
