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Growth Investor
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Cabot Growth Investor Bi-weekly Update

Our market timing indicators remain bullish, and while a short-term pullback is always possible, the odds favor higher prices down the road. For individual stocks, the goal is to hold your winning stocks while rotating out of any stocks that crack support.

WHAT TO DO NOW: Remain bullish. Our market timing indicators remain bullish, and while a short-term pullback is always possible, the odds favor higher prices down the road. For individual stocks, the goal is to hold your winning stocks while rotating out of any stocks that crack support. In the Model Portfolio, we sold Freeport-McMoRan (FCX) on a Special Bulletin mid-day yesterday and replaced it with Texas Capital Bancshares (TCBI) after the close. That still leaves us with eight stocks and a cash position near 18%.

Current Market Environment

The major indexes closed mixed today, with most stocks finishing in the red. The Dow rising 33 points, while the Nasdaq lost 5 points.

Looking at the big picture, just about everything we see points to a continuing bull market, with all three of our key market timing indicators still clearly positive.

Moreover, examining the charts, we see a powerful breakout from the major indexes (and many sectors) in November, a tight, two-month consolidation (usually a sign of accumulation when it happens soon after a breakout) and, in February, a resumption of the uptrend. All of it is classic bullish action.

The short-term is a bit trickier. Obviously, the market has had a good run in recent days, as have many individual stocks; yesterday, in fact, brought the largest number of stocks hitting new highs on the Nasdaq since December. Plus, we’re starting to see money pour into the market (about $20 billion over the past three weeks) while other sentiment surveys are showing complacency.

None of those short-term measures would cause us to turn cautious or advise you to sell your top-performing stocks. But they do tell you to (a) be prepared for some out-of-the-blue shakeouts in your holdings, and (b) be selective when buying, really searching for a stock that’s either showing extreme power out of a consolidation or one that’s in a calm, steady uptrend.

In the Model Portfolio, we sold one stock (FCX) and replaced it with another (TCBI) via two separate Special Bulletins yesterday. That leaves us with eight stocks out of a possible 10 and a cash position near 18%. There are many stocks we’re watching closely that are reporting earnings this week (including a couple on our Watch List), and we could pull the trigger on one or two if things go right. Tonight, though, we’ll sit tight.

Model Portfolio

Texas Capital Bancshares (TCBI 89) was added last night, replacing FCX. The story here is simple—financial stocks are resuming their major upmove after a two-month rest. We think the group has lots of upside potential over time, especially if some favorable fundamental developments (Fed rate hikes, deregulation, tax cuts) occur. Texas Capital offers a range of lending services to middle-market firms and public entities, as well as private wealth services and asset-backed lending, and it has some of the best growth numbers in the sector. Analysts see earnings up 30% this year and another 20% next, the stock has been in a solid uptrend since last July and it’s tagged new closing highs recently. We added the stock in last night’s Special Bulletin and think it’s buyable here with an initial loss limit in the mid-70s. BUY.

Charles Schwab (SCHW 42) is hovering just south of its old highs after its shakeout and snapback action in recent weeks. While the commission cut will hurt near-term revenues, analysts still believe 20% to 25% earnings growth is likely for each of the next couple of years, and frankly, that’s probably conservative if the Fed hikes rates a few times (boosting Schwab’s interest income) and the bulls remain in control of the market. BUY.

Facebook (FB 136) tightened up during the past couple of weeks between 132 and 135 before pushing higher today on nice volume. The company is in discussions to live-stream one major league baseball game per week, which would make Facebook an even more popular destination for users. The firm also copied some popular features of Snapchat and incorporated them into its WhatsApp messaging subsidiary, which has 1.2 billion monthly users. With the stock acting well and the fundamentals in great shape, we’ll stay on Buy. BUY.

The macro story is playing out as we thought it would with Freeport-McMoRan (FCX 14), as copper prices have nudged out to new highs and leading economic indicators point toward accelerating global growth. But company-specific issues surrounding Freeport’s Indonesian mine have taken over; the battle between the company and Indonesia’s government (combined with a so-so fourth-quarter report) has dented perception of the firm’s earnings power. The issues caused the stock to fall below our buy price yesterday, and we issued a mid-day sell bulletin, taking our tiny loss and moving on. SOLD.

Lumentum (LITE 50) pulled back sharply today as peer Oclaro (OCLR) plunged more than 10%, much of it in the afternoon. We’ll definitely be watching, but LITE just exploded out of a multi-month consolidation over many days on huge volume, and today’s decline isn’t overwhelming compared to the recent advance. A drop into the low 40s would be a red flag, but right now we think this dip provides a good entry point. BUY.

Similar to Facebook, Netflix (NFLX 145) has also quieted down within its uptrend during the past couple of weeks. A dip below 133 would be a red flag, but right here we think the stock’s calm action is normal and will lead to higher prices. BUY.

ProShares Ultra S&P 500 Fund (SSO 85) remains in a firm uptrend, so we’ll stay on Buy. As we wrote in the first section, there are some signs that a short-term pullback is on the horizon, but trying to predict every market wiggle is impossible and usually counterproductive. Thus, sit tight if you own some, and if you don’t, you can buy here (but consider buying a smaller-than-normal position) or aim to grab shares on a dip of two or three points. BUY.

Shopify (SHOP 64) remains super strong, with shares reaching new highs nearly every day in the past couple of weeks. Obviously, SHOP is extended to the upside (the 25-day moving average is down around 54) and is due for a pullback, but we also think the stock’s powerful breakout and follow-through action could be the start of a big longer-term move. Similar to SSO, we’ll stay on Buy, but we think keeping new positions small right here makes sense, or try to buy on a dip of two or three points. BUY.

XPO Logistics (XPO 49) reported a fine fourth quarter last night, as both revenue (up 10%) and earnings (24 cents per share) topped estimates, as did free cash flow, which totaled $216 million for the year (about $1.75 per share). Management reiterated its outlook for this year and next, and included a bullish free cash flow forecast—the top brass sees at least $350 million of free cash flow this year (likely around $2.70 per share) and a cumulative total of $900 million in 2017 and 2018 combined. The stock tailed off during the day but still managed to close up on the day—it’s not ideal action, but we continue to think XPO’s two-month rest period is over and the next big move is up. BUY.

Watch List

Alibaba (BABA 104): BABA continues to work on its long consolidation—we’re waiting for a decisive show of upside before jumping in. If it does get going, it should enjoy a sustained run.

Nevro (NVRO 96): We’ve been watching NVRO on and off for about a year because of its revolutionary spinal cord stimulation technology. Growth is insane, and the stock is crawling back toward its old highs ahead of earnings tomorrow.

ServiceNow (NOW 93): NOW’s price chart looks good, but the RP line has yet to punch out new highs. Fundamentally, we think the firm is an emerging blue chip in the enterprise software space with huge cash flow growth ahead.

Splunk (SPLK 65): Splunk is the King of Big Data, but despite steady sales and earnings growth, the stock hasn’t made much progress for years. Now it’s finally set up ahead of earnings tomorrow. It’s worth watching.

Tesla Motors (TSLA 274): TSLA has hit some resistance near its all-time highs in the 280 to 290 range, which isn’t surprising given its recent run. Earnings, due out tonight, will be key.