WHAT TO DO NOW:
Remain cautious, but stay flexible. Our Cabot Tides are effectively back on the fence as the upmove of the past few days has been encouraging—a bit more strength could restore the Tides green light. In the meantime, we continue to take things on a stock-by-stock basis—earlier this week, we cut TWLO, ESTC and a portion of SSO, and this morning we sold our half position in Z, which broke down on earnings. That said, we’re still holding many resilient names and will put money to work if last week’s plunge turns out to be a shakeout. We have no further changes tonight, where our cash position now stands at 35%.
Current Market Environment
The major indexes and leading stocks surged today in an encouraging show of strength. At day’s end, the Dow was up 366 points and the Nasdaq had rallied 174 points.
It’s certainly been an interesting past week, with the major indexes nosing to new highs as recently as a week ago before the new China tariff announcement sent stocks into a tailspin—Monday’s plunge was enough to flip our Cabot Tides to negative and crack more than a few uptrends among leading stocks. We followed the usual plan, ditching our worst stock (Twilio) and a couple of small losses (ESTC, our recent stake in SSO). But the rally since Tuesday has been great to see, effectively putting the Tides back on the fence (neutral).
So where do we stand? At this point, the past three days could easily be just a bounce, with most indexes having recouped a bit more than half of their losses (normal bounce-type action). And that means another leg down could still be around the corner, so you should be keeping losers and laggards on tight leashes and holding some cash. Just this morning, we sold Zillow in a special bulletin after it broke down on earnings.
However, it’s important to stay flexible. As solid as the market’s rebound has been, even more impressive is the action of many “fresher” growth stocks that have either held up fairly well during this decline (we own a few) and/or have soared on earnings during the past few days, even when the market was in the dumps. It’s a good sign that many names want to go higher if the market’s uptrend can resume.
Having chopped some dead wood from the Model Portfolio, we’ll hold our cash (around 35% after the sale of Zillow) tonight and will follow the market’s message. If the sellers reappear, we’ll sit tight and honor our mental stops on any laggards. But should the Tides turn positive, we’ll slowly (at first) step back into the market with a couple of fresh buys, likely from our updated watch list (see below).
Last note: As a heads up, we’ll be publishing Cabot Growth Investor next Tuesday (instead of Thursday) as we have our Cabot Wealth Summit going on next Wednesday-Friday.
Model Portfolio
Blackstone (BX 48) fell from new highs to its 50-day line with the market and has bounced nicely since, recouping most of its decline. If the bull market resumes, we think BX will do quite well, especially as investors look toward alternative assets to make some money. That said, if the correction deepens, a Bull Market-type stock like this could easily get caught up in the wash. A break of the recent lows (43-44) would be worrisome, but right here, BX remains in an uptrend and found support where it “should” (near its 50-day line) earlier this week. We’re sitting tight. HOLD.
Chipotle Mexican Grill (CMG 814) is acting fine, with a relatively modest pullback with the market and a quick push back toward its post-earnings highs today. Fundamentally, the company continues to expand its menu; it announced today that’s it’s testing a new queso blanco dip (yum) at 52 restaurants across three markets (Dallas, Detroit and San Diego). Each individual new menu item is small beans, of course, but all together they’re helping to attract new customers. Hold on if you own some, and if you don’t, you could buy here or (preferably) on dips. BUY.
As opposed to the market’s over-the-cliff decline, Coupa Software (COUP 138) retreated in an orderly fashion, found support at its 50-day line on Monday and has rebounded well since. We’re optimistic the stock has further upside ahead of it, but we’ll continue to follow the plan we laid out last week—a drop back to our cost basis (123 or so) would have us selling so a good profit doesn’t turn into a loss. Above there, though, we advise hanging on. HOLD.
Elastic (ESTC 90) was sold in the Monday special bulletin, as the stock’s breakout above 100 failed in a big way. Anything’s possible, but we think shares are going to need some time to repair the damage of late; at the very least we’d rather own something else if/when the market turns up. We sold our half-sized position. SOLD.
Okta (OKTA 136) is another name that took a hit with the market, but found support near its 50-day line and has rallied a bit more than halfway back. Again, if the market rallies from here, we could see OKTA participating—but it’s also possible the stock needs more time to digest its huge April-July upmove, too. Either way, with a good profit and having already sold one-third of our shares late last month, we’re content to give our position room to breathe. HOLD.
Planet Fitness (PLNT 75) released a solid quarterly report on Tuesday evening, though it had some good and bad elements to it. On the positive side, most of the numbers were solid and topped expectations, with total revenue up 29%, earnings per share up 27% and EBITDA (a measure of cash flow) up 31%. Moreover, the firm boosted its expected store openings this year (255 expected, vs. 225 previously). That said, the all-important same-store sales metric (up 8.8%) was a bit less than forecast and the company seemed to lower estimates for that figure going ahead. The result was a bad day for the stock—though PLNT closed above key support in the 70 area and rallied solidly today. Bigger picture, we think the company’s growth story is just fine as it attracts more members (up 16% from a year ago) and opens new locations. But it’s really about how much the stock has discounted with its overall advance during the past couple of years. We’ll just stick with our plan—a close much below 70 or so would tell us the stock is no longer a leader and would likely have us selling. Above there, we advise holding and giving PLNT a chance to resume its longer-term advance. HOLD.
We sold 30% of our ProShares Ultra S&P 500 Fund (SSO 125) on Monday’s special bulletin, which equaled the size of the add-on position we took a month ago. Still, until proven otherwise, we’re assuming this is a bull market that will head higher over time, so we’re holding on tightly to the rest of our shares. Along with the S&P 500, SSO’s rebound has been very encouraging during the past three days. HOLD.
Snap (SNAP 17) has been losing some ground in recent days, first because of the market, and second because of a good-sized ($1.1 billion) convertible note offering. (Those types of offerings attract funds that buy the convertible bond but hedge it by shorting the stock.) Still, the decline has been reasonable given the prior earnings rally and we still think big investors will continue to build positions over time; today’s bounce off the 25-day line was a good sign. If you don’t own any, we’re OK buying some here. BUY.
Twilio (TWLO 132) is a great, great company, and if the stock shapes up in the weeks/months ahead, we could revisit it. But the fact is that it’s lost a lot of steam—shares basically hit a celling in early June, lagged for a few weeks and then suffered intermediate-term abnormal action after earnings. Never say never, but the odds favor TWLO needing plenty of time to repair the damage, so we took the rest of our profit on Monday’s special bulletin. SOLD.
Zillow (Z 42) was a victim of earnings season today—the core business is OK and the prospects for the Offer segment remain bright, but the market wasn’t in the mood to hear about all of the company’s investments (and losses) looking out a few quarters. We’re not saying the stock is going to fall 50% from here, but the action today has broken the uptrend. We sold our small position today via a Special Bulletin this morning. SOLD.
Watch List
Carvana (CVNA 72): CVNA gapped up strongly today after another fantastic quarterly report (revenues up 108%, cars sold up 95%). There’s still some resistance in this area, but if CVNA can hold up through any further market weakness we could take a swing at it.
Guardant Health (GH 110): GH might have as much potential as any stock out there as it attempts to push a blood-first cancer testing paradigm. Growth is out of this world, and the stock gapped up to new highs this week.
Inphi (IPHI 65): IPHI is probably our top potential new buy right now—we love the long-term breakout and growth story. As we wrote in last week’s issue, chip stocks can turn hot/cold in a hurry, but we think Inphi has a bright future.
Novocure (NVCR 87): NVCR is still extended, but it just got going from a 10-month rest in mid June. Translation: The uptrend likely has a ways to go, so the next pullback or rest period should offer an entry point.
Roku (ROKU 122): ROKU remains the best way to play the trend toward cord-cutting, and it gapped up to new highs after reporting earnings last night (platform revenue up 86%, active accounts up 39%). It’s crazy volatile but it’s definitely a leading glamour stock.
Zoom Video (ZM 96): Zoom was a very hot IPO and had a great first couple of months before beginning a consolidation in mid June. That rest is going well so far, and we think the firm’s new-age videoconferencing platform carries monstrous potential.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Tuesday, August 13. As always, we’ll send a Special Bulletin should we have any changes before then.
