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Cabot Growth Investor Bi-weekly Update

Continue to put money to work. The market and individual stocks are acting very well, and while there are some short-term yellow flags out there (complacency, overbought, etc.), the fact that stocks haven’t given up much ground is encouraging.


WHAT TO DO NOW: Continue to put money to work. The market and individual stocks are acting very well, and while there are some short-term yellow flags out there (complacency, overbought, etc.), the fact that stocks haven’t given up much ground is encouraging. Because of that we’re putting some more money to work tonight: We’re buying another half-sized position of Teladoc (TDOC), starting a new half position in Dexcom (DXCM) and buying a full-sized position in MasTec (MTZ). That will leave us with around 24% in cash.

Current Market Environment

The major indexes were quiet again today, with the Dow closing nearly unchanged and the Nasdaq slipping three points.

Stepping back, the market’s evidence continues to improve, with the major indexes remaining in solid uptrends and, to this point, refusing to give back much ground despite heady runs. Individual stocks, too, have kicked into gear, with a bunch of good-looking breakouts and (importantly) some upside follow through.

In the short-term, there are a few yellow flags, with some measures that look at sentiment (showing complacency has set in), breadth (advance-decline lines have sagged in recent days) or “overbought-ness” all saying the market could easily enjoy a breather in the next week or two.

That said, we’re impressed with the fact that the market and its leadership haven’t responded to these readings. Over the past few months, similar complacency led to quick, tedious pullbacks, so recent action marks an encouraging change in character. Moreover, we continue to think bigger-picture background measures (horrid long-term money flows, positive studies) look good, as do our trend-following timing indicators (Tides and Trend Lines are solidly bullish).

All in all, picking your spots remains important, but with the market and our stocks acting well we’re putting some more money to work tonight. First, we’re going to fill out our position in Teladoc (TDOC) by adding another half-sized position (5% of the portfolio); second, we’re going to start a new half-sized position in Dexcom (DXCM); and third, we’re going to add a full position in MasTec (MTZ), which isn’t as volatile as the other two.

Even after these moves, we’ll still have around 24% cash in the Model Portfolio, which will provide a little cushion (and buying power) if the market does take a breather.

Model Portfolio

We’ll start with the two new additions. First is Dexcom (DXCM 203), which is a stock we owned for a bit last year but were forced out of during the market’s late-year collapse, and the stock never really got going after that, dogged by a so-so broad market and incessant fears of competition. But growth has remained brisk thanks to big adoption of its G6 continuous glucose monitoring system, and the stock soared out of a 14-month consolidation after its Q3 report blew away expectations. Sales were up 49%, earnings more than tripled and analysts tripped over themselves to hike estimates for 2020. While there is competition from Abbott and others, Dexcom is one of the leaders, and besides, the big idea here is that more and more diabetics are moving away from finger sticks and multiple daily injections, moving to CGMs and insulin pumps (where Dexcom is often integrated)—a plenty-for-everyone type of situation. The stock’s earnings gap was powerful, and DXCM has tacked on a few points since then. We’re going to start with a half-sized position (5% of the portfolio) here and look to average up going forward. BUY A HALF.

MasTec (MTZ 71) is an infrastructure play, and thus, not our typical kind of recommendation. But we think it has great potential as the firm isn’t just building office space or something completely cyclical—but is highly leveraged to the buildout of oil and gas pipelines and other facilities, construction of new alternative energy facilities, and, starting in a big way next year, the 5G rollout, which will be larger than prior upgrades (3G, 4G, etc.) and should have a longer “tail” of demand as these networks will require increased maintenance. In the near-term, there are also some potential catalysts (resolution on the T-Mobile and Sprint merger should unleash telecom spending), too. It’s not a rapid growth outfit, but we think big investors are beginning to discount what is looking more and more like a multi-year growth wave for the sector and MasTec in particular. After a nice shakeout, MTZ reacted well to earnings at the start of the month and has calmed down since. BUY.

DocuSign (DOCU 68) is now eight weeks into its three-steps-forward, two-steps-back advance following its coming out party on earnings. It’s always possible the stock stalls out, but volume has dried up in a big way and the prior blastoff tells us the next big move is likely up. Earnings will likely be released in early December. BUY.

Inphi (IPHI 74) continues to act well, pushing a bit higher following earnings before today’s low-volume retrenchment. The big news this week was that Inphi acquired eSilicon. Not only will the move expand its addressable market in data center and telecom applications, management sees it as highly accretive starting next year. (For 2021, the top brass expects the acquisition to boost earnings per share by a whopping 60 cents, compared to recent estimates of $2.60!) Given the stock’s recent run, IPHI’s pop on that news brought in some sellers, but the action looks normal and the path of least resistance is up. We’ll stay on Buy. BUY.

As we wrote above, we’re impressed that, so far at least, the major indexes—and thus, the ProShares Ultra S&P 500 Fund (SSO 139)— have been unwilling to give up any of their gains from the past month despite some near-term worries and the occasional blowup (like Cisco (CSCO) today). That could obviously change at any time, and frankly, a shakeout of a couple percent in the major indexes wouldn’t be the worst thing, but the resilience so far is a positive when looking down the road. We bought a bit more SSO last week and remain positive on it today. If you don’t own any, starting a small position here is fine by us. BUY.

We have high hopes that Qorvo (QRVO 104), a name few investors know much about (a good thing in our book), is a new glamour leader, with the likelihood of sharply accelerating growth in the quarters ahead as the 5G smartphone boom takes hold. Despite a massive rally since earnings and an analyst downgrade yesterday, the stock has shown no desire to pull in, a promising sign. We’re aiming to average up if we develop a little profit cushion; right now, though, we’ll stick with our Buy a Half rating. BUY A HALF.

Teladoc (TDOC 79) looks like most other leaders, with a powerful breakout on earnings, some strong upside follow-through over the next couple of days, and a very low-volume rest since then. Fundamentally, we think there’s big potential for growth just as the company increases usage from its recently onboarded members (pay-per-visit members were up 100% in Q3 vs. a year ago), and the firm’s recent investor presentation revealed year-to-date bookings are up 30% and request for proposals (pipeline) up 25% from 2018. There’s a bit of old overhead to chew through in the 80s, but we’re going to go ahead and fill out our position here, and use a loss limit in the upper 60s. BUY ANOTHER HALF.

Vertex Pharmaceuticals (VRTX 205) was a bit sloppy today, but this comes after a big run during the past two-plus weeks, including a sizable move in the past few days. (Bigger biotech names as a whole were weak today, too.) As with most names and the market as a whole, further weakness could easily come, but we’re thinking pullbacks will provide solid buying opportunities. BUY.

Watch List

Axon Enterprises (AAXN 67): It still needs some seasoning, but after a year in the woodshed, AAXN is getting its act together, and its new business model (far more recurring revenue from its video platform for evidence storing and analysis, as well as from training/cartridge/weapon bundles for its Tasers) should attract more big fish as it delivers dependable growth.

Peloton (PTON 26): We’re not huge on buying recent IPOs, as any uptrends that get going can flame out quickly. But as we wrote in last week’s issue, we think Peloton’s story is unique, and the stock is liquid and has etched a nice IPO base.

Pinduoduo (PDD 41): We think PDD is acting just fine, with a modest pullback on tame volume after a big run in late October. If you want to roll the dice with a small position, that’s fine, but we’re going to hold off until after earnings (due out next Wednesday, November 20).

Sea (SE 37): Among Asian online names, we prefer PDD to SE at this point for a couple of reasons (SE hasn’t broken out yet and PDD should be profitable next year), but SE has a lot going for it (triple-digit revenue growth) and just reacted well to earnings, too.

Tesla (TSLA 349): TSLA has certainly changed character since its two-day earnings-induced leap a couple of weeks ago. We’re optimistic the stock has turned a corner and, while it will never be the darling it was back in 2013, it could emerge as a liquid leader.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, November 21. As always, we’ll send a Special Bulletin should we have any changes before then.

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