WHAT TO DO NOW: Remain generally cautious given that our Cabot Tides are still negative, though you shouldn’t be outright defensive given the encouraging action from so many growth stocks. In the Model Portfolio, we’re going to add a half position in Carvana (CVNA) tonight and restore our Buy rating on Blackstone (BX). That will give us a foothold in a potential new leader, but still leave us with around 33% in cash, providing cushion should this correction deepen.
Current Market Environment
The market finished mixed today in quiet volume, with the Dow up 50 points while the Nasdaq lost 29 points.
Following last Wednesday’s massive 800-point Dow decline, the market has shaped up decently, with most major indexes rallying a bit more than halfway up their month-to-date range. That said, when looking at the overall picture, the market is still doing more chopping than trending—the daily chart of the S&P 500 (below) shows the key index thrashing around in the 2,825 to 2,925 range during the past three weeks. That’s not a total surprise given news-driven environment and tomorrow’s much-awaited speech by Fed Chair Powell.
More important to us is that our Cabot Tides still aren’t positive—all five indexes we track are below their 50-day moving averages. Thus, the intermediate-term trend remains down (or sideways-to-down, if you prefer).
That said, there are some positives out there, led by the peppiness among many individual growth stocks. Not only have a bunch remained resilient, but it’s very encouraging to see most that gapped up on earnings during the past three or four weeks hold up well and, in some cases, push out to new highs.
Beyond that, numerous sentiment measures (indicators and anecdotal) continue to tell us the majority are uneasy at best, and outright bearish at worst, a good sign that plenty of money remains on the sideline.
Overall, we’re still open to this month being one big news-driven shakeout on high-profile headlines (tariffs, Fed, inverted yield curve, etc.), but for that to be the case, we need to see the Tides give a new green light. Until that happens, there’s still a possibility that the market suffers another leg down that could take many leaders with it.
None of this means you should be in your bunker, though. Tonight, in fact, we’re going to do a tiny bit of buying in one of the market’s better-looking names, adding a half-sized position of Carvana (CVNA) to the Model Portfolio. But even with that buy, the Model Portfolio will still be about one-third in cash, and we’re willing to push that higher if any of our current stocks trip mental stops or act abnormally.
Long story short: A little nibbling here or there is fine, but you should remain in a cautious stance until the bulls retake control.
Model Portfolio
We owned a small piece of Carvana (CVNA 80) earlier this year but got out near breakeven when the stock cracked on earnings in May. However, shares embarked on a choppy, but normal, consolidation for the next three months, and now the stock is back in gear thanks to a Q2 report that easily topped expectations—revenues lifted 107%, cars sold boomed 95% and gross profit soared 181% as the company continued to enter new markets (should be in more than 140 by year end, up from 85 at the end of 2018). We think Carvana is upending the used car industry, which is so big ($764 billion as of a couple of years ago) that capturing just a small slice of it will allow the company to grow many-fold; indeed, management has a long-term goal of selling more than two million cars annually, compared to a 2019 forecast of 170,000! We’re starting with a half-sized position (5% of the portfolio) and will look to buy more if the stock moves up and the Tides turn positive. Just as a heads up, CVNA moves around a lot, and we’ll be using a loose initial loss limit (mid- to upper-60s) on this half position. BUY A HALF.
Financial stocks have been hit hard due to falling interest rates, but Blackstone (BX 50) is the exception to the rule—when adjusted for the recent dividend payment, the stock actually tagged new highs today! The company’s been quiet on the news front lately, but with traditional investing avenues (safe government bonds) diving in yield, more money will likely look for alternative assets to try to make a buck. (It doesn’t hurt that BX should be paying solid dividends going forward, which increases its attractiveness given rock-bottom interest rates.) The market is obviously going to have a lot to do with BX’s near-term performance, but at this time BX clearly looks like it wants to continue higher if the market can get out of the way. We’re restoring our Buy rating, though if you don’t own any, try to buy on dips of a point or more. BUY.
Chipotle Mexican Grill (CMG 819) continues to act well, floating to new highs yesterday before today’s dip. The latest upmove has come on very light volume, and a retrenchment toward the 25-day line (now at 796 and rising) or—should the market have another leg down—to the 50-day line (767 and rising) is certainly possible. But the trend here is up and the stock only recently left behind a three-plus-month consolidation. We’ll stay on Buy, though aim for dips if you want in. BUY.
Coupa Software (COUP 141) looks fine overall, having held near its 50-day line during the selloff last week and, yesterday, actually coming within a couple of points of all-time highs. Thus, it acts stronger than the market, but it’s still doing more chopping than trending in recent weeks. We’re hanging on, but looking ahead, the market and the firm’s upcoming quarterly report (due September 5) will probably tell the tale. Right now, we’re sticking with our plan of sitting tight with a stop near our cost (123 area, give or take). HOLD.
Okta (OKTA 134) looks very similar to COUP, with repeated support earlier this month (near the 125 level), a strong pop higher earlier this week, only to give up a chunk of that today. We’ve already taken one-third of our profit off the table, and we’re content to give the rest room to breathe—though next Wednesday’s earnings report (August 28, after the close) will be key. Analysts are looking for revenues of $131 million (up 39%) and a loss of 10 cents per share, though many sub-metrics like same-customer and billings growth will be closely watched. HOLD.
Planet Fitness (PLNT 67) is a great company, and its top and bottom lines should continue to grow for a long time to come. But after a big run in recent years, the stock is looking toppy—shares etched a three-month zone from May through July, broke below it this month and hasn’t shown much ability to bounce since. We’re not predicting PLNT is going to implode, but we think there will be better stocks to own when the market’s next uptrend gets going. We took the rest of our profit last week when the stock tripped its mental stop. SOLD.
ProShares Ultra S&P 500 Fund (SSO 124) is bobbing and weaving with the S&P 500. Our thoughts here haven’t changed: Short to intermediate-term, the trend isn’t up, so we’re advising taking any major positions in a leveraged long index fund. But the vast majority of the longer-term evidence tells us that the market’s next big move is up, so we’re patiently holding on for that payoff. HOLD.
Snap (SNAP 16) hasn’t done anything wrong during the past three weeks (it’s still holding above its 50-day line), but it has lost some momentum—whereas most growth stocks enjoyed a good few days recently, SNAP is still sitting near its correction lows. If the stock cracks support, we’ll switch to a Hold rating, and we still have a mental stop in the 14 range should the sellers show up. But as always, we’re just going with the evidence in front of us, which shows a still-intact uptrend and a powerful fundamental turnaround story. Hold on if you own some, and if you don’t, we’re OK grabbing some shares here. BUY.
Watch List
Guardant Health (GH 99): Admittedly, GH has had a couple of odd-looking wobbles since its earnings gap earlier this month, but the uptrend is intact and the overall story (taking share from tissue biopsies in the testing of many types of cancer) is enormous.
HubSpot (HUBS 203): It’s a bit thin and squirrely, but after sitting around for a few months, HUBS has pushed to new highs on solid volume. The company’s marketing platform is a hit with small- and mid-sized businesses, and it’s even attracting enterprises as well. Growth is rapid and steady.
Inphi (IPHI 64): IPHI is right at the top of our watch list—it just staged 13 weeks up in a row, which, coming off a two-year consolidation, is a major sign of accumulation. It looks like a leader of the next uptrend.
Novocure (NVCR 97): NVCR might come off our watch list soon, but not because we don’t like it—at this point, having run so far, we probably won’t jump in until we see a multi-week rest or pullback, which will eventually happen.
Pinterest (PINS 35): We’re not sure we’re going to go with two social medial outfits (we own SNAP, of course), but PINS has a unique, visual-based offering that’s a hit with users (300 million of them) and merchants alike. The stock just hit new highs after a good-looking post-IPO base.
Roku (ROKU 139): ROKU is clearly a leading glamour stock. Short-term, it’s definitely extended to the upside, but we think its original breakout came in early May, so there should be plenty of upside ahead in the big picture.
Zoom Video (ZM 94): ZM is in a similar position as Carvana was a couple of weeks ago—it’s etched a nice sideways base after a solid advance, so if earnings (due out September 5) cause a breakout, ZM will likely be a solid buy. The firm’s video/web conferencing and phone solutions are cranking out triple-digit growth.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday August 29. As always, we’ll send a Special Bulletin should we have any changes before then.
