WHAT TO DO NOW: While we’re growing more optimistic that the next big move will be up, we continue to advise a cautious stance as the market’s numerous crosscurrents continue—the indexes are still range bound, there’s rotation under the surface and relatively few stocks are hitting new highs. On Monday’s special bulletin, we cut our loss in Snap (SNAP) but added another half position in DocuSign (DOCU) and initiated a half position in RingCentral (RNG). Our cash position remains elevated, near 53%.
Current Market Environment
The major indexes rose modestly today, though growth stocks saw selling pressure for the second day in a row. At day’s end, the Dow was up 24 points and the Nasdaq rose 33 points.
Bigger picture, we are growing more encouraged that the next big move is up—whether it’s the third leg down in the market this month, the horrid sentiment readings, an increasing number of setups or the spate of uncertainties that are already well known (impeachment, China trade, Brexit vote, recession), there’s a decent backdrop for a sustained upmove if a few things go right.
And, indeed, the evidence has improved a touch during the past week. By the letter of the law, our Cabot Tides are now positive, with the major indexes north of their intermediate-term moving averages, and we’re seeing a good number of growth-oriented stocks set up in multi-week (sometimes multi-month) consolidations. Because of that, we’re not anxious to get fully defensive.
But we’re still not seeing the type of consistent buying power (there are very few stocks in sustained intermediate-term uptrends) to get us interested in doing anything more than a small buy here or there. Indeed, this week has seen renewed rotation (especially out of anything software or cybersecurity), with many growth stocks getting hit even as the indexes and broad market levitate. Don’t get us wrong, growth stocks could kick into gear soon—we’re always keeping our eyes open—but it hasn’t quite happened yet.
Thus, we remain cautious, dumping anything that breaks down or trips a loss limit, though given our already-large cash position, we’re OK putting some of any sale back to work in potential leaders of the next advance. (We think we own a handful of those leaders but time will tell.)
On Monday’s special bulletin, we cut our loss in Snap (SNAP) and reinvested the proceeds in DocuSign (DOCU) and RingCentral (RNG) (half position each), but that still leaves us with a good-sized cash position of around 53%. From here, the plan remains simple—some upside breakouts among individual growth stocks (possibly on earnings) would get us to extend our line, but further chop and/or weakness from growth stocks will keep us close to shore.
Model Portfolio
Chipotle Mexican Grill (CMG 829) continues to chop around in a six-week range, which is good, though it’s been repeatedly rejected at resistance near 850. Still, unlike most every other stock that’s had a good run, CMG is acting resiliently, which is obviously a good thing. Of course, as with many names, a lot will come down to earnings, which are due out next Tuesday (October 22) after the close; analysts are looking for sales of $1.38 billion and earnings of $3.18 per share (up 47% from a year ago), but a lot will depend on same-store sales and digital sales growth. Having already sold a chunk, we’re OK giving the stock room to pull back sharply if need be, but we’ll see how shares react to the quarterly report. HOLD.
Coupa Software (COUP 137) has given its all in the face of horrid cloud software sector performance during the past three months. But it hasn’t been able to avoid the latest dump in the group—after surging to new highs on good volume, the stock has come down sharply on even larger turnover during the past couple of days. Right here, we have mixed emotions. On one hand, we do think yesterday’s massive-volume decline is a red flag, especially after some investors were likely “sucked in” by the recent move to new highs. On the flip side, the group’s woes are now well known (this is the third leg down since the stocks topped in August), and at the end of the day, COUP is unchanged from early August, which is near-heroic compared to most growth stocks. Since we already have a ton of cash, have booked partial profits and are in the black on the rest (cost basis near 123), we’re going to hold our remaining shares tonight—but we’re also going to hike our mental stop into the low 130s (130-132 area), so if COUP doesn’t find support right quick we’ll take the rest of our profit off the table. HOLD.
DocuSign (DOCU 67) continues to act very well, with buyers jumping all over its modest late-September pullback, driving the stock to new highs on a few days of solid volume. Given the market environment, a pullback of a few points is always possible, but the stock has all the qualities of a new leader. One analyst upgraded the stock this week, saying that the firm has become the go-to vendor among firms of all sizes for its e-signature and other “agreement cloud” offerings, including for complex agreements like mortgages and the like. We filled out our position earlier this week. We’ll stay on Buy, though if you’re just getting started, you might consider starting small. BUY.
Inphi (IPHI 63) tested its July highs earlier this week, though not surprisingly, it was quickly rejected, which is a hallmark of iffy market environments. Bigger picture, we continue to think the stock has etched a good-looking launching pad during the past two and a half months. That said, earnings, which are due out October 29, will also be key. But fundamentally (leader in high-speed interconnects) and chart-wise, IPHI is positioned to be a leader down the road if things go right. HOLD.
ProShares Ultra S&P 500 Fund (SSO 130) has rebounded nicely with the market during the past few days, bounding back above its 50-day line. We’ll follow along and place the stock back on Buy after a quick trip to Hold, but let’s be clear: While the S&P 500 is the best looking of the major indexes we track, it remains stuck within a multi-month range and the action, of course, remains very choppy. Thus, if you want in, buy carefully, preferably on dips and shakeouts. On a more positive note, though, we continue to see evidence that the past few months is more of a frustrating consolidation that will lead to a new sustained upmove (rather than a major top), which would obviously be a boon for SSO. All in all, we’ll go back to Buy here, but (a) if you already own some, it’s fine to sit tight, and (b) if you don’t, you can buy, but considering starting with a smaller-than-normal position or look for dips. BUY.
Our timing/luck with RingCentral (RNG 170) was poor when adding it earlier this week. Yesterday, a combination of a poorly received analyst day by Workday and a couple of bearish downgrades on ServiceNow and Adobe caused another round of fierce selling in anything cloud-related, including RNG. (We wouldn’t put this firm directly in the software group but all of these companies are tied to business spending.) That said, while it’s never fun to get off to a poor start, we think the chart looks fine—it’s unlikely that the massive-volume buying power seen after the Avaya deal (as well as the fundamental upside that went along with it) was announced will disappear overnight. Don’t get us wrong, we’re not complacent, and if the stock collapses in a broad sector move and trips our loose stop (we’re using around a 15% loss limit, just under 150, which correlates to a 7.5% stop on a “full” position), we’ll certainly get out. But at this point, we’re hanging on tight and, if you don’t own any, we’re fine grabbing a half-sized position here or on further dips. BUY A HALF.
Snap (SNAP 14) was kicked to the curb on Monday afternoon’s special bulletin, as it couldn’t hold the 14 level or bounce with growth stocks last week. Could the stock eventually get going again? Sure, it’s possible, and earnings next week (October 22) could change the landscape. That said, the competitive fires from Facebook aren’t going to help perception, and chart-wise, there’s a ton of resistance in the 16 area, so even a decent rally wouldn’t put it in pole position to lead the next advance. SOLD.
Watch List
Five Below (FIVE 133): Old friend FIVE has tightened up in recent weeks, part of a 13-month long consolidation. The story remains solid, though like most names, we’re waiting for a decisive show of strength.
Insulet (PODD 156): PODD has been cool as a cucumber, hanging around its 50-day line and not far from its highs during the past couple of weeks. Earnings are due out November 5.
MasTec (MTZ 68): It’s not going to win any beauty contests, but MTZ continues to act just fine, recently extending to new highs after bouncing off its 50-day line. Earnings are due out on Halloween.
Pinduoduo (PDD 34): PDD has been gaining ground during the past week. It’s more speculative given its ties to China, but if the market environment improves, we think a half position here is worth a shot.
Shake Shack (SHAK 92): SHAK dipped from 105 to around 90, which seems normal after its prior advance, and has now begun to bounce. We still think there’s great potential here after a very long post-IPO base given the aggressive store expansion plan and improving same-store sales metrics. Earnings are due November 4.
Teladoc (TDOC 70): We were whipped out of our half position in TDOC earlier this month, but it turns out the reasons for that selling (Amazon is actually using Teladoc for its in-house service; United Healthcare is still tightening its bonds with Teladoc) were untrue. While buying higher than we sold isn’t ideal, we still think a real breakout (above 73) could lead to a sustained run.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, October 24. As always, we’ll send a Special Bulletin should we have any changes before then.
