WHAT TO DO NOW: Remain bullish, but keep your feet on the ground. The market has been extremely resilient despite many worries this year (including the recent China virus), and while the risk of a retreat is still elevated, we’re content to ride our winners and follow the plan. Our only change tonight is that we’re adding another half-sized position to Sea (SE), which has decisively gotten going this week. That will leave us with around 12% in cash.
Current Market Environment
Stocks stayed firm in the face of increasing uncertainties surrounding the spreading Chinese coronavirus. Despite a morning dip, the Dow closed down just 26 points and the Nasdaq actually finished up 19 points.
The market has wobbled just a bit in recent days as the virus spreading around China has caused some quarantines in that country (up to four cities at last check), and a few isolated infections have been reported in North America. Even so, the big-cap indexes continue to hold very close to their highs, and while small- and mid-cap indexes have taken a few modest hits, the selling has overall been light.
Thus, the environment hasn’t changed. It’s a very strong bull trend in the major indexes and most stocks, with our trend-following measures solidly positive. Moreover, we love the huge number of longer-term breakouts (from indexes, sectors and stocks) we’ve seen during the past couple of months, which tells us many names are still early-ish in big-picture uptrends.
That said, the risk of a meaningful near-term pullback or multi-week rest period remains elevated. Last Friday, for instance, 394 stocks hit new highs on the Nasdaq, the largest figure in nearly two years—that’s another sign of power (bullish longer-term), but it’s also telling us things are giddy at the moment, which usually leads to potholes.
Long story short, we’re still bullish, and the odds strongly favor the market’s next pullback or consolidation (which could go on for a few weeks) eventually leading to higher prices. However, we’re also not eager to dive into a bunch of stocks with both feet right now, as very few are at decent entry points.
That said, we are making one move today—following our plan, we’re averaging up on Sea Ltd. (SE) with another half-sized position due to its recent strength—which will leave us with around 12% in cash.
Model Portfolio
Dexcom (DXCM 236) has stabilized after a post-conference wobble last week, finding support near its December highs (around 230) and bouncing a bit since. We have high hopes that DXCM is a liquid leader of this market, with a long and dependable runway of growth thanks to its G6 (and, later this year, G7) continuous glucose monitoring systems. The next big event will be earnings, which are due out February 13. We’re OK starting a position here or on dips of a few points. BUY.
DocuSign (DOCU 74) remains tedious, but shares are only three points from new high ground and successfully tested their 50-day line last week. A drop toward 70 would almost surely have us going to Hold, but it’s possible DOCU’s month-long rest and shakeout to support is setting the stage for another leg up—we’re OK grabbing some shares here. The next earnings release, by the way, won’t be released until early March (quarter doesn’t end until January 31). BUY.
Inphi (IPHI 84) remains in good shape, as it continues to act well following its solid breakout two weeks ago. Like most everything else, the stock is extended to the upside, so we advise aiming for dips of two or three points to enter. Bigger picture, though, IPHI broke out of a two-plus-year base last July, so while pullbacks can (and eventually will) occur, the odds favor the stock having more longer-term upside, especially as the ramp in demand for its high-speed network interconnects is just beginning to surge. BUY.
ProShares Ultra S&P 500 Fund (SSO 160) is now around 7.5% above its 50-day line, which is a good-sized spread even for a leveraged long index fund. We don’t have any brand new thoughts here—in our view, 2020 is looking like a bullish year, and we’re aiming to play all or most of this position out for a larger, longer-term gain. That said, we’re not opposed to booking some profit on a portion of your position if you want to, thinking that a pullback is growing more likely. If you own some, then, you can hang on (which is what we’re doing) or sell a small chunk; if you don’t own any, aim for a dip of a few points to enter. BUY.
Qorvo (QRVO 119) is now about a month into a shallow consolidation, though shares actually toyed with new highs today. All in all, QRVO looks good both on the chart and fundamentally, and we’ll stay on Buy here. That said, earnings are out next week (January 29), so we advise keeping new buys on the small side. BUY.
Sea Ltd. (SE 45) boomed to new highs yesterday, helped by a major upgrade (put on the “conviction list” at Goldman), as the analyst sees the firm’s e-commerce division posting big growth in 2020 and showing a path to profitability. While SE is now stretched to the upside, we’re going to follow our plan and average up now that the stock is showing some power—adding another half-sized (5%) position here. Combined, our cost basis should be around 41.5 or so, and we’ll use a loss limit of 10% or so from that (37-ish, which is below the 50-day line) to keep risk in check. But if the market hangs in here, we think SE can do well. BUY ANOTHER HALF.
Teladoc (TDOC 103) has gone bananas during the past week and a half, mostly thanks to its acquisition of InTouch and its hike in Q4 guidance, both of which have caused a rash of positive Wall Street commentary. Shares are obviously extended to the upside in the near-term (the 50-day line is down around 84!), but the recent rally came after a six-week rest and just kicked TDOC out to all-time highs (after a 15-month launching pad). Bottom line: If you own some, hang on, but if not, consider starting with a smaller-than-normal position or look for dips of two or three points. BUY.
Vertex Pharmaceuticals (VRTX 234) isn’t the sexiest name, but it continues to act fine, hitting a new closing high last Friday. Earnings are due out next week (January 30), and updates on Trikafta will be key. The short-term reaction is anyone’s guess, but until something changes, we’re going with the view that the stock’s multi-year breakout late last year and its tremendous earnings growth profile will keep buyers interested. BUY.
Watch List
Alibaba (BABA 219): BABA has pulled back over the past week with most Chinese stocks—a few more points (and days) down from here could have us starting a half position at least.
Axon Enterprises (AAXN 79): AAXN looked to be toast a few weeks ago but it’s rebounded nicely. We’re more interested in seeing the stock decisively break out before putting money to work.
Coupa Software (COUP 165): COUP isn’t showing tremendous power yet, with a good-not-great breakout during the past couple of weeks. Still, the story is top notch, the group has come back to life and shares are actually tightening up.
Zillow (Z 48): Housing-related stocks have turned very strong, and Zillow has a great growth story in the group thanks to its Offers (home buying, renovating and re-selling) business. Z has some resistance in this area, but the persistent advance of the past few months is bullish.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, January 30. As always, we’ll send a Special Bulletin should we have any changes before then.
