WHAT TO DO NOW: Remain bullish, but keep your wits about you. The market remains very strong, and we’re glad to see many of our stocks that consolidated during December come to life in recent days. That said, the indexes are very stretched, so while you should hang onto your strong, profitable performers, it also makes sense to remain choosy on the buy side. In the Model Portfolio, we’re pleased with what we own, but we’re going to again sit on our current cash position (17%) as there aren’t many good-looking entry points among growth stocks right here.
Current Market Environment
Growth stocks were mixed today, but the indexes did well, with the Dow rising 212 points and the Nasdaq lifting 74 points.
The market continues to impress, basically shrugging off the brief uncertainty surrounding the Iran situation and bolting to new highs on some indexes (though it’s worth noting small- and mid-cap indexes have not yet confirmed new high ground). Overall, though, our trend-following indicators (Cabot Trend Lines and Cabot Tides) remain clearly positive, and in our mind, the powerful action is just more evidence that this post-October run is a kickoff to a sustained advance following 20 months of ups and downs (and many worries, too).
That said, it’s important to keep your feet on the ground. After such a big intermediate-term run, the odds are growing that the market and individual stocks will see some potholes. Of course, not everything looks stretched (money flows remain in the dumps, with few investors putting money to work), and we wouldn’t focus too much on the short-term—if you did that you would have sold out of everything a month ago!—but it makes sense to be choosy on the buy side here.
The good news is that many growth stocks took December and early January off, etching four- or five-week zones, and just recently have emerged to new high ground; those are likely solid buys here or on modest dips. And if you already own them, we’d continue to hold on tight.
However, other stocks are sticking straight up in the air, and if they haven’t already begun to pull in, they probably will soon. Either way, try to refrain from chasing things that are three-plus months into their advance and are very extended, and if you can’t help yourself, keep the position on the very small side.
Long story short, we remain bullish, and still believe that many stocks (especially those that just got going from one- or two-year consolidations late last year) are relatively early in their overall runs. But the action of the next few weeks is likely to be trickier than the past few weeks, which means being prepared for some wobbles (earnings season is coming up soon!), rotation and the like makes sense.
In the Model Portfolio, we’re glad to see many of our stocks push higher, in some cases breaking out of tight ranges. However, given the environment, we’ll hold onto our modest cash position (17%) for now as we fine-tune our watch list and look for more advantageous entry points.
Model Portfolio
Dexcom (DXCM 239) has moved to new highs in recent days, with some good volume behind the buying on Tuesday. As we touched on in last week’s issue, the company will present at a very popular healthcare conference next Monday (January 13), and the firm usually offers guidance for the coming year at the event. However, they usually guide conservatively, so it wouldn’t shock us to see some profit taking before/during the presentation. Overall, though, we remain optimistic, as the firm has all of the characteristics (strong growth, great story, plenty of potential, early-stage chart) of a stock that can help lead the bull market higher. BUY.
DocuSign (DOCU 76) isn’t the most powerful chart (it hasn’t outperformed the market by much in recent weeks), but shares continue to push higher above their rising 50-day line. DocuSign will be presenting at a conference next Wednesday (January 15) morning, though that one isn’t known as a news maker. As with everything else, a pullback is possible for DOCU, with a dip below the 50-day line (now around 71) will likely have us going to Hold. But so far, there’s little sign the sellers are stepping up. BUY.
Last week, we highlighted some encouraging chart action we saw in Inphi (IPHI 81) despite the fact that it hadn’t done much during the prior two months. And this week those factors have proven out—IPHI leapt to new highs on a couple of days of heavy volume. The company announced today a sales milestone for its COLORZ data center interconnect system, which is being sold with the help of Microsoft. If you own some, sit tight, and if not, we’re OK buying here or (preferably) on dips of a couple of points. BUY.
ProShares Ultra S&P 500 Fund (SSO 155) continues to amaze, with a couple of minor wobbles being all the bears could muster when the Iran-related uncertainties/attacks were in the headlines. It’s not out of the question that we could book a little partial profit in SSO if the uptrend extends further; if you want to ring the register a bit, we don’t see anything wrong with that. But at this point we’re still aiming to play out most (if not all) of our position for what we think can be a larger, longer-term upmove. BUY.
Qorvo (QRVO 112) and some other 5G smartphone-related chip stocks have softened of late, with QRVO suffering some selling on elevated volume in recent days. We obviously have our eyes open, as chip stocks often come and go quickly, but so far, the action is normal—some type of retreat was likely after the stock’s huge post-earnings run, after all. A drop below the 50-day line (now nearing 107) would probably have us going to Hold, but given what we see now, we’re sticking with our Buy rating. BUY.
Sea Ltd. (SE 41) has been doing OK, generally crawling higher in recent days—not super powerful, but nothing to complain about. The company’s been quiet on the news front of late, and we’re playing it by the book when it comes to the stock: Some acceleration to the upside would have us filling out our position, while a break below support in the 36 to 37 area would likely cause us to pull the plug. At this point, we’re just sitting tight, and if you’re not yet in, you can start a half position here or on dips. BUY A HALF.
Teladoc (TDOC 85) has had a decent week so far, though the stock’s move just about the top of its month-long range came on low volume, so it could need more time to consolidate. Like Dexcom, the firm is presenting at a key healthcare conference next Monday morning, which could go along with an early glimpse into the firm’s 2020 expectations. We’re sticking with our Buy rating, but like most names, we prefer you enter on weakness if possible. BUY.
Vertex Pharmaceuticals (VRTX 230) is the third of our medical-related stocks that will present next Monday, which could be key, especially if they provide any updates on Q4 (or expected 2020) sales of Trikafta, its new triple-combination treatment for cystic fibrosis. In the meantime, we like the action—VRTX’s modest, month-long retreat found support last Friday and the stock has lifted to higher highs on good volume this week. It’s not likely to be the fastest horse, but we continue to think the stock is relatively early in a new advance after two years in the wilderness. BUY.
Watch List
Alibaba (BABA 222): BABA’s long-term advance was interrupted for nearly two years as the U.S.-China trade war escalated, but now it’s gotten going again and the growth prospects remain excellent. It has liquid leader written all over it.
Coupa Software (COUP 171): We still see some risks with cloud software names, as they’re not early in their overall runs. But COUP held up the best among the group during the past few months and has recently pushed to new highs on solid volume.
Floor & Décor (FND 50): Housing stocks are still so-so, but we love FND’s cookie-cutter story and its long launching pad—a powerful breakout would be tempting.
Splunk (SPLK 155): Splunk looks solid, as it came out of a big base late last year. It’s the hands-down leader in Big Data offerings.
Tesla (TSLA 481): TSLA has gone bananas recently, but we’re viewing this as the first real “thrust” after many years in the doldrums. The next meaningful pullback (its first after breaking out), should provide a solid opportunity.
United Rentals (URI 163): Many cyclical stocks have gone sideways in recent weeks, though we have a hunch that they’re just playing possum. URI will be a direct beneficiary of any pickup in economic growth in 2020.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, January 16. As always, we’ll send a Special Bulletin should we have any changes before then.
