WHAT TO DO NOW: Put a little money to work. There are still issues with many growth stocks and plenty of crosscurrents, but the overall market is looking good and we have seen some earnings-induced breakouts. We’ll start slow tonight, filling out our position in Inphi (IPHI) and starting a half-sized position in Teladoc (TDOC). Our cash position will still be a large 56%, but we have a bunch of names we could pounce on if things go right in the days ahead. Details below.
Current Market Environment
There was more trick than treat on Wall Street today, with some adverse earnings reactions and negative trade rumors weighing on sentiment. At day’s end, the Dow was down 140 points and the Nasdaq was off 12 points.
That said, we’ve been fairly encouraged by what we’ve seen out there—we don’t think it’s up and away, but the evidence of the overall market (which has been decent anyway) and individual stocks has improved.
As for the market, our trend-following timing indicators remain technically positive. And, after a solid run since early October, most indexes have (thus far) been hesitant to give much back even if you include today’s retreat.
When it comes to individual stocks, we’ve seen more than a few cyclical stocks not only gap up on earnings but show upside for a few days after, and while growth stocks still aren’t tearing up the charts, we’ve seen a few fresher names react well to earnings, with others set up nicely.
Don’t get us wrong—we’re not saying it’s all Reese’s and Kit-Kats for growth investors (couldn’t resist). Most major indexes are still stuck within intermediate- to long-term ranges (albeit near the tops of those ranges), there are still plenty of accidents out there among former leaders (check out TWLO, W and ETSY today) and even with some earnings pops, there aren’t many names in sustained uptrends right now.
Thus, we’re still taking things slowly, but with such a huge cash position and some improved evidence and legitimate breakouts, we’re going to start putting a little money to work tonight—we’ll fill out our position in Inphi (IPHI) by purchasing another half position and starting a new half-sized position in Teladoc (TDOC).
That will still leave us with a huge 56% cash position, but honestly, a bit more good action from the market and/or a handful of stocks could have us putting money to work in a variety of names in short order. But there are still plenty of potholes out there, so we’ll start with these baby steps and watch for upside follow-through.
Model Portfolio
We’ll start with Teladoc (TDOC 77), which broke out on the upside today after releasing a great quarterly report last night. Revenues lifted 24%, including 23% from subscriptions and 31% from visit fees, and all of it was organic (not helped by acquisitions). Meanwhile, sub-metrics also topped expectations (total visits up 45%, total paid membership up 55%) and management said on the call that the pipeline of potential deals remains robust (including a tidbit that it won a deal to provide telehealth services for a Blue Cross outfit’s Medicare Advantage plan). Of course, the bottom line is still drenched in red, but EBITDA (a measure of cash flow) is perking up and the top brass thinks 20% to 30% organic growth for many years is the base case. The risks here are that the stock still has some overhead to chew through (from late 2018) and red ink isn’t ideal (not to mention the still-suspect growth stock environment), but we like the look of the stock’s multi-month consolidation and today’s breakout. We’ll start with a half-sized position (5% of the portfolio) here. BUY A HALF.
Chipotle Mexican Grill (CMG 778) has been hit pretty hard since earnings, diving below some support in the 780 range this week, and we’re sure sour sentiment toward restaurants in general (McDonalds didn’t help sentiment with a poor reaction to earnings) isn’t helping. We’re open to the possibility that CMG’s big run this year will lead to rough sledding for a while; we have a mental stop in the740 to 750 range in case that occurs. But at this point we still think the odds favor this being a “normal” correction following a nice advance—sales, earnings and same-store sales growth are all in great shape, and the continued store expansion plan, the move to greater digital sales and menu innovations mean there should be plenty of growth left in the tank. (Analysts see the bottom line rising 30% next year.) If we get stopped out, we’ll take the rest of our profit and move on, but right here, we’re going to give CMG a chance to find its sea legs. HOLD.
DocuSign (DOCU 66) continues to act well, with reasonable dips in late September (65 to 60) and mid October (68 to 62) and now it’s hanging out a couple of points shy of all-time highs. Another shake (maybe to the 50-day line, near 60?) is always possible, but DOCU still has the look of a leader. Earnings aren’t due out until early December mostly likely. BUY.
Our patience was rewarded by Inphi (IPHI 72), which catapulted out of a good-looking launching pad yesterday following a solid Q3 report. Sales (up 21%) and earnings (up 50%) both topped expectations, leading management to hike their outlook going forward. Encouragingly, these numbers were great despite some push-out from Q3 of some data center-related revenue, as well as the trade restriction involving Huawei. We’ll dive into the results further in next week’s issue, but suffice it to say that demand for Inphi’s various high-speed interconnects is strong across various markets, with 2020 looking like a great year (analysts see earnings up 30%, though that figure could trickle higher from here). Back to the stock, it broke out above 66 on its heaviest volume in over two years; there are never any guarantees but it looks like the path of least resistance has finally turned back up. We’ll fill out our stake buy adding another half-sized position here (5% of the portfolio). BUY ANOTHER HALF.
ProShares Ultra S&P 500 Fund (SSO 134) broke out to new highs earlier this week before pulling back today. The near-term question is whether this move to new highs will finally launch a sustained advance, or whether yet another pullback is in the offing. Nobody knows, though we are optimistic given that each successive attempt at resistance has a better shot at working, though to be fair, short-term sentiment measures have gotten a bit complacent. Either way, our thoughts regarding the next major move remain the same (very likely to be up), which is most important to us. We could average up in SSO if we see a bit more evidence the buyers are flexing their muscle, but for now, we’ll just sit with what we have. If you don’t own any, it’s fine to pick up some shares here or on dips. BUY.
Watch List
Acadia Pharmaceuticals (ACAD 42): It wobbled today following its quarterly report, but business is great (revenue guidance was raised) and investors are discounting a huge new market once its new treatment (for dementia-related psychosis) is approved next year.
Five Below (FIVE 125): FIVE has pulled back again but remains in a tight-ish range following a year-long rest.
Insulet (PODD 145): PODD doesn’t look overly resilient here, but the weekly chart is decent and earnings are due out next week.
KB Home (KBH 36): KBH has finally started to hesitate after a big, persistent run. Another couple of weeks of calm action/pullback would be very tempting.
Pinduoduo (PDD 41): PDD has staged a decisive breakout and, so far, is holding firm. A bit more weakness or consolidation could have us snatching up a half position.
Tempur Sealy (TPX 91): Tempur Sealy isn’t a true growth stock, but growth is picking up thanks to operational improvements, a strong consumer and, importantly, some very meaningful distribution deals that should kick cash flow up a good amount next year. The stock has acted beautifully for months and just broke out on earnings today.
Vertex Pharmaceuticals (VRTX 195): VRTX’s Q3 was fine, and now the focus is on 2020 as the firm’s new triple regimen for CF patients hits the market and causes growth to accelerate. We think VRTX has liquid leader written all over it, but the stock is still futzing near prior highs. A bit more strength (preferably over 200) would have us getting in.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, November 7. As always, we’ll send a Special Bulletin should we have any changes before then.
