WHAT TO DO NOW: Remain cautious, but stay open minded. We’re encouraged by the recent action from the market, including some of the power and breadth of the rally. However, our Cabot Tides are not yet positive (could happen in a couple of days, but nothing yet) and growth stocks have been hit or miss, with investors rotating into beaten-down areas. We’re optimistic, but still advise being choosy until we see more positive evidence. Tonight, though, we are doing a little buying—we’ll add a half position in Inphi (IPHI), which will leave us with around 31% in cash.
Current Market Environment
News that the U.S.-China trade talks are back on gapped the indexes up at the open and they held those gains for the rest of the day. When the closing bell rang, the Dow was up 373 points and the Nasdaq had surged 140 points.
It’s really been a tale of two markets recently. When looking at things from a top-down perspective, it’s hard not to be encouraged—today’s rally took some indexes above their August ranges, with all of them now above their lower 25-day lines. Our Cabot Tides are effectively neutral at this point; should the indexes hold these gains (or build on them), we could get a green light within a couple of trading days.
Throw in some positive secondary indicators (sentiment remains awful, for instance) and some broad market power in the latest upmove (three days where 80%-plus of NYSE volume was on the upside, which is relatively rare and bullish) and there are reasons for optimism when it comes to the overall market.
However, the other “market” right now is growth stocks, which are looking more mixed. The past week has seen a rotation out of many leaders and into beaten-down areas like financials, transports, energy and industrials. It’s not a horror show, and there remain many stocks that are acting just fine, but a lot of winners have seen more selling than buying recently.
Given the above, where does it leave us? Frankly, our overall thoughts haven’t changed that much—we’re not opposed to a little new buying here or there, but with the Tides still not yet positive and with growth stocks acting a bit funky, we think going slow and being cautious makes sense.
We came into today with 36% in cash, and while a couple of our stocks are wobbling, we’re giving them a bit more rope. On the flip side, we are going to do a small bit of new buying today, adding a half position (5% of the portfolio) in Inphi (IPHI), leaving us with around 31% in cash.
Model Portfolio
We’ll start with Inphi (IPHI 61), which we’ve written about a couple of times in recent issues. We’re not generally huge fans of chip and networking stocks, as investor perception can change in a hurry. But we think Inphi is in the right place at the right time, with best-in-class high-speed data interconnects that are in big demand from data center customers (Google and Amazon are upgrading networks within and between their facilities) and telecom outfits, where demand for faster speeds all along the networks (including 5G next year) is increasing. The stock broke out of a two-year zone in July, ran as high as 66.5 and has since pulled back to its 50-day line. We think it’s a solid risk-reward situation here—if IPHI breaks down from here (into the mid 50s), we’ll take a modest loss on a half position, but it’s more likely this dip to support (its first since breaking out) marks a solid entry for the next leg up. BUY A HALF.
Blackstone (BX 50) is scuffling a bit with resistance near 50, but overall, the stock remains in a solid uptrend and any resumption of the bull market will surely help the firm’s results. There hasn’t been much news, though there are reports that Blackstone is one of two bidders for a mid-sized medical outfit in Britain. A drop into the 44 area would be a red flag, but right there, BX’s path of least resistance remains up. BUY.
Carvana (CVNA 85) is off to a decent start for us, holding up well during the market’s gyrations and during the recent growth stock weakness. The company presented at a conference this week and relayed some interesting nuggets—in Q2, Carvana had a total of 0.4% of the used car market, so just getting to 1% or 2% in the years ahead would represent massive growth. Moreover, management also talked about how gross margin per unit has ramped from about $1,000 in 2016 to $3,175 in Q2 thanks to quicker car sales, monetizing their finance platform and buying more cars directly from customers (better margins on those), and sees even higher margins down the road. All in all, the story is intact and the stock acts well. We’re OK buying a half-sized position here; should the Tides turn positive and CVNA continues higher, we’ll look to fill out our position. BUY A HALF.
Chipotle Mexican Grill (CMG 838) has met with some selling near 840, but is still in good shape, riding its 25-day line higher. The company is offering free delivery for online purchases during the next few Sundays, which should help boost business and exposure to the company’s digital platform. After a big run so far this year, we’re not complacent—if the sellers show up, we could book partial profits, but at this point every dip is being bought. We’ll stay on Buy, though aim for dips toward the 25-day line (now near 817). BUY.
Fundamentally, Coupa Software (COUP 153) is firing on all cylinders, with its recent quarterly report crushing expectations—revenue growth accelerated again to 54% (subscription revenues up 51%), deferred revenue was up 47%, billings rose 50% and the outlook was hiked. The stock initially gapped up yesterday, was yanked lower by the market’s rotation but then found buyers this afternoon; net-net, the stock is now sitting near new highs, which is obviously a good thing. Bigger picture, if the market and growth stocks truly kick into gear, we think COUP will be one of the leaders—the stock has all the makings of an emerging blue chip that big investors will accumulate over time, so if you don’t own any and want to take a small position, we won’t argue with it. That said, we’re going to stick with a Hold rating for the moment and see how things progress over the next few days. HOLD.
Okta (OKTA 124) is still struggling in the wake of its good (but not good enough) quarterly report last week, with the rotation out of growth and a $1 billion dilutive convertible bond offering this week not helping the cause. Looking at the weekly chart, the stock’s recent wobbles don’t look so bad—OKTA basically doubled from the start of the year to its recent high and has been consolidating in a reasonable range (120 to 140, ballpark) since early June. That’s not to say we’re whistling past the graveyard, but we’re going to give our relatively small remaining position a few more points (probably into the mid 110s) of wiggle room. HOLD.
ProShares Ultra S&P 500 Fund (SSO 128) is benefiting from the market’s rotation, popping back above its 50-day line along with the S&P 500. If the market is beginning a new run, SSO will be an “easy” way to play it, though we’re not going there quite yet given that our Cabot Tides are effectively neutral. We’re not going to quibble with a small purchase here if you don’t own any, but officially we’ll stay on Hold and see if this rally sticks. HOLD.
Snap (SNAP 16) continues to sit around its 50-day line, which isn’t bad (reasonable correction/consolidation after a good run in recent months) but not great either (hasn’t been able to bounce despite its 3.5-point drop since earnings). Interestingly, my colleague Jacob Mintz of Cabot Options Trader continues to pick up on sizable call buying in the stock, which is usually a sign that some big investors are building positions. Another positive: One analyst talked very bullishly earlier this week, saying Snap’s push into games could be a $350 million opportunity by 2022, while the firm’s overall fundamentals are currently extremely positive. We’re content to give SNAP some time and room to kick into gear. HOLD.
Watch List
HubSpot (HUBS 196): HUBS was hit hard this morning before finding some support; overall, the stock’s pattern of higher highs and lows is intact, and it’s a “fresher” name in the cloud software sector.
Insulet (PODD 159): Insulet’s Omnipod insulin pump is a hit, and the stock is acting like a new leader, with an initial breakout in June and a good run since. A couple of weeks of pulling in (possibly spurred on by a dilutive offering this week) or consolidation could provide an opportunity.
Novocure (NVCR 87): NVCR broke out in June and had a huge run—so big that we removed it from our watch list for a time. But now it’s pulling back toward its 10-week line, which could mark a solid entry point in the days ahead.
Zoom Video (ZM 93): ZM was written up in last week’s issue and reports earnings tonight. Given the way growth stocks are acting, it would be surprising to see a massive gap up—but we don’t anticipate these things. The story and numbers are great, and if the stock kicks into gear we’d be interested in starting a position.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, September 12. As always, we’ll send a Special Bulletin should we have any changes before then.
