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Growth Investor
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Cabot Growth Investor Bi-weekly Update

Stocks rallied early in the day but then skidded after that, closing not that far from where they started. The environment remains mixed, with the market looking fine but growth stocks a bit sluggish.


WHAT TO DO NOW: The environment remains mixed, with the market looking fine but growth stocks a bit sluggish. Thus, we prefer to play things a bit cautiously here, but with a substantial amount of cash on the sideline, tonight we’re going to add another half position in a potential leader—Teladoc (TDOC)—which will leave us with around 34% on the sideline. Details below.

Current Market Environment

Stocks rallied early in the day but then skidded after that, closing not that far from where they started. At day’s end, the Dow was down 53 points while the Nasdaq was up 5 points.

Taking a step back, the environment remains mostly mixed. From a top-down perspective, things are looking good—both of our trend-following indicators are positive, sentiment remains neutral-ish and, so far this week, we’re pleased to see the major indexes hold last week’s gains despite some reasons to take profits (especially the Saudi oil attack).

Moreover, looking at the broad market, we’re very impressed with the fact that the number of stocks hitting new 52-week lows on both the NYSE and Nasdaq have dried up markedly, a great sign that the selling pressures are light despite the myriad uncertainties out there.

That said, when it comes to individual growth titles, the action is less convincing. The number of stocks hitting new highs on the Nasdaq, for instance, is averaging just 75 or so, far below the 120 to 130 seen in June and July (and it’s not as if those were exactly high times). Moreover, just looking at stocks we own and are monitoring, almost all of them are doing more chopping than trending, with not a lot of progress (up or down) during the past few weeks.

Overall, then, we remain optimistic that the market’s path of least resistance is up. But, while we are seeing more solid setups, it’s hard to put a lot money to work when few growth stocks are in solid uptrends.

Thus, we still think it’s best to step carefully, but we also think, given all the evidence, that the Model Portfolio’s cash position (around 39%) is too high. So tonight we’re going to do a little more buying—but just a little. We’ll add a half-sized position in Teladoc (TDOC), which will leave us with 34% in cash and a handful of resilient growth stocks that look ready for sustained advances if the environment can improve.

Model Portfolio

We’ll start with Teladoc (TDOC 69), a stock we dated for a while last year but ended up dropping when the market (and stock) began to implode in October. Now we’re stepping back into it, albeit with a half-sized position (5% of the portfolio), as we’ve been doing with our most recent buys. The company is the hands-down leader in virtual care (getting money from both subscription fees and per-visit fees), allowing consumers to get in touch with doctors in a variety of specialties and, often, obtain common prescriptions (antibiotics and such). General medicine is still the most common use, but behavioral health, dermatology and other lines are growing in popularity. The stock has been consolidating since February but seems to have changed character over the past couple of weeks. Why? The firm inked an expanded deal with giant United Health, which could boost its paid subscriber base by 15% to 20% with millions more potentially paying on a per-visit basis. Beyond the money is the confirmation that (a) Teladoc is the leader in the field and (b) insurance firms aren’t likely to challenge them. We could be jumping the gun here, as there’s resistance in the 70 to 72 area, but we like the recent string of eight-straight up days on above-average volume. We’ll buy a half position here, use a loose-ish loss limit in the 61 to 62 range and look to fill out the position on a strong push here. BUY A HALF.

Blackstone (BX 53) enjoyed a nice move to new highs late last week and on Monday, though it got a bit out of trend on the upside, short-term, and has backed off a bit since. Overall, BX remains in a solid uptrend and we continue to have high hopes for it as the bull market matures. A couple of interesting nuggets we saw from a recent analyst report: First, most are expecting double-digit annual growth in fee-based assets, which will provide more steadiness and predictability to Blackstone’s cash flow (and dividends), and second, because it used to be a partnership, just 1% of BX’s float is owned by index funds—a potential source of buying should the stock be added to some major indexes. We’ll stay on Buy, though with the 25-day line down around 50, try to get in on dips of a point or two. BUY.

Carvana (CVNA 77) has taken a hit during the past couple of days on no obvious news; we think it’s simply follow-on selling in a growth stock that remained near its peak. As we noted when we got in, CVNA can be extremely volatile, and yesterday proved that, as the stock tested its 50-day line at its lows, where it found support. It’s possible the growth stock selling we saw last week will continue, and if CVNA falls into the upper 60s, we’ll cut the loss on our half position. But at this point, the stock hasn’t done anything wrong, especially considering the environment, so we’re hanging on—and if you don’t own any, we’re OK buying a half-sized position here, albeit with a tight stop in the 68 to 69 area. BUY A HALF.

Chipotle Mexican Grill (CMG 832) took a hit last week, but its rebound has been as good as you could have hoped for, with shares ratcheting back toward their highs on three straight days of above-average volume. On the news front, the company officially launched its Carne Asada menu item today, albeit for a limited time, with the firm stating that “This premium protein is cut into tender slices, seasoned with fresh squeezed lime and finished with hand-chopped cilantro and a blend of signature spices. Chipotle’s Carne Asada has been officially approved for the Whole30® program and is compliant with a Paleo diet.” We like the action, but with most resilient stocks finding sellers, let’s see if CMG can hold its snapback in the days ahead. HOLD.

Coupa Software’s (COUP 138) situation hasn’t changed much—cloud software stocks remain mostly in the doldrums (though a few have begun to find short-term support), but COUP is among the most resilient of the bunch (it’s right at its 50-day line, which is a rarity in the sector). Analysts haven’t been jumping off the bandwagon; in fact, three have offered reassuring words over the past week or so, mentioning the big potential of Coupa Pay and the overall momentum in the business. Whether all of this is enough for the stock to hold up, we can’t say—but we’re content to hold on and find out, thinking the downside risk from here (we have a mental stop in the 123 area, near our cost) is small compared to the potential upside given the best-in-class fundamentals. HOLD.

We bought a half-sized position last week in DocuSign (DOCU 63), and so far, the stock continues to act just fine. Fundamentally, the company has the “three R’s” that we look for—rapid, reliable and a long runway of growth—that are key to attracting big investors. Near-term, some wobbles wouldn’t shock us given the market environment, but we think the two huge-volume weeks of buying after earnings have likely kicked off a new advance. BUY A HALF.

Inphi (IPHI 62) has now been consolidating for about five weeks and found solid support after a brief dip below its 50-day line during the growth stock maelstrom. There are never any sure things in the market, but playing the odds, the company is riding some very strong trends (upgrade cycles inside data centers and accelerating demand for long-haul and metro speed from telecom firms) and the chart (breakout from two-plus-year range, 13 weeks in a row, calm digestion since) tells us the buyer are still generally in control. Further wiggles are certainly possible (even likely), but we’re OK snagging a half position here if you don’t own any. BUY A HALF.

ProShares Ultra S&P 500 Fund (SSO 131) continues to look good, testing its prior July peak along with the S&P 500. There is some overhead resistance right around here, so some retrenchment wouldn’t be shocking. But the new Tides buy signal is looking good, and factors like a very low level of new lows and tame sentiment both back up the fact that the market’s next big move is likely up. If you own some SSO, hang on, and if not, we’re fine buying some here or (preferably) on dips. BUY.

Snap (SNAP 17) is now eight weeks into constructing a new launching pad, and it’s shown some decent pep since dipping near 14.5 when growth stocks came unglued. One analyst upgraded the stock this week, citing solid user addition and ad forecast trends, while reports are that Snap is in discussions to create a dedicated news section within Snapchat. We’re close to restoring our Buy rating, and if you wanted to nibble we’re not going to argue with you. But officially we’ll stay on Hold a little longer and see if the recent pop can hold/follow-through. HOLD.

Watch List

Elastic (ESTC 94): Like most growth stocks, ESTC is still within its six-plus-month base, but we like the story (the next Big Data stock winner?) and the massive buying volume seen over the past three weeks.

Floor & Décor (FND 49): We’re not sure we want to dabble in a stock that’s so tied to the housing market, but FND has a solid cookie-cutter story and is tightening up nicely.

MasTec (MTZ 65): Admittedly, it’s hard to get excited about MasTec, but it’s an old-world play on a bunch of strong growth trends.

Novocure (NVCR 80): NVCR probably needs time, but it’s in the fifth week of a new launching pad and the overall correction (27% from high to low) wasn’t abnormal. The firm’s Optune cancer treatment system has massive potential.

Shake Shack (SHAK 103): SHAK is one of the few high relative strength growth stocks that’s come through the rotation (so far) in great shape. The latest earnings report (early August) seemed to mark a change in perception, with investors thinking the firm could be the next big cookie-cutter winner.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, September 26. As always, we’ll send a Special Bulletin should we have any changes before then.