WHAT TO DO NOW: Stand pat. The market has been pulling back for the past two weeks, but our market timing indicators are still bullish and most of our stocks are acting well. That said, there’s not enough evidence for us to put more money to work, so except for two small changes (we’re switching Sabre (SABR) to a Hold rating and putting Facebook (FB) back on Buy), we’ll keep our seven stocks (and a cash position of 30%) and watch how things unfold.
Current Market Environment
The market pulled back again today, extending its two-week slide. At day’s end, the Dow was off 100 points and the Nasdaq had fallen 38 points.
If we had to label our current thought on the market, it would be “optimistic but watchful.”
We’re optimistic because of the evidence. While the S&P 500 has pulled back about 2.4% from its closing highs, and the Nasdaq has dipped 4.5%, all of our key market timing indicators remain positive.
Our Cabot Tides are probably the closest to flashing a sell signal, but that would take a decline of 2% or so from here—certainly possible, but we never anticipate signals. Right now, four of the five indexes we track are above their respective 50-day lines.
Our longer-term Cabot Trend Lines are clearly positive, and our Two-Second Indicator has yet to record a single day of greater than 40 new lows, despite two weeks of falling prices (new lows on the Nasdaq have also remained tame). Thus, the odds continue to favor higher prices in the weeks and months ahead. If you’re underinvested (say, 50% in cash or more), you could buy a stock or two that’s pulling back to support.
All that said, if your portfolio is similar to ours (70% invested), you should mostly watch how things unfold from here. Most of our stocks are acting well enough, but few of our stocks or ones we’re watching have been able to really kick into gear on the upside. That can always change—a renewed market rally could help some recent earnings winners kick into gear—but we’d like to be “pulled” by strength in individual stocks into a fully invested position.
In the Model Portfolio, we’re sitting tight with our seven stocks tonight, though we are switching Sabre to a Hold rating.
Model Portfolio
Facebook (FB 118) is truly a one-of-a-kind company, which its first-quarter report revealed. Sales (up 52%) and earnings (up 83%) crushed expectations, and every other metric was jaw-dropping as well: advertising revenues rose 63% excluding currency movements; daily active users for Facebook alone totaled 1.09 billion (!), up 16% from a year ago; three million businesses advertise on Facebook every month and 200,000 now advertise on Instagram. The stock reacted well to the news, though it’s been held in check in recent days due to the market. Analysts now see earnings up 55% this year and another 29% in 2017. We’ll go back to Buy, thinking higher prices are ahead if the market holds its ground. BUY.
Five Below (FIVE 41) remains very wiggly on a day-to-day basis, but the trend remains up. The company is opening its first Wisconsin store this weekend, giving it more than 450 stores in 28 states. With the average new store paying back its investment in less than a year, this company should be a lot larger and more profitable in the quarters ahead. BUY.
Kate Spade (KATE 25) reported earnings this morning, and they were just fine: first-quarter figures met expectations and some stats (like its whopping 19% hike in comparable store sales, which includes e-commerce sales) were very encouraging. The outlook for the year was in line with estimates (looking for around 50% earnings growth this year). The stock held firm for most of the day, but the pressure on the market eventually dragged it down toward its 50-day line. We’ll be watching the action from here, but the path of least resistance remains up. BUY.
PayPal’s (PYPL 38) report last week was very solid—first-quarter revenues were up 19% (23% when excluding currency movements) and earnings grew 23%, while total payment volume expanded 31% and transactions per customer increased 12%. (Active customer accounts also grew to 184 million, up 2.5% from the prior quarter.) All of that was great, but the stock fell following news that the Federal Trade Commission is investigating whether PayPal engaged in deceptive practices with its Venmo service. We doubt it’s a big deal, but there’s no telling if some fines or punishment could be forthcoming. Either way, we’ll just play it by the book—if PYPL closes below 37 or so, we’ll likely sell. But right here, we’re holding on, as the stock isn’t broken and the company has a very long runway of growth. HOLD.
Sabre’s (SABR 29) first-quarter results, reported last week, were also stellar. Overall revenues were up 21%, with the firm’s travel network revenue up 23% (driven mostly by the firm’s acquisition of Abacus last year, the leading network in Asia) and its IT segment for hotels and airlines seeing a 16% revenue bump. Earnings were up 48%, slightly ahead of expectations, and management reiterated its prior forecast for 2016. However, the stock hasn’t been able to get out of its own way, treading mostly sideways in recent weeks. Because of that, we’re going to switch our rating to Hold; a break of 26.5 would likely have us bailing. HOLD.
There’s been nothing new from Ulta Beauty (ULTA 210), which continues to act well. We think a pullback is likely as ULTA is not a go-go stock, so if you don’t own any, try to buy on dips below 205 (and preferably toward 200). BUY.
Vulcan Materials (VMC 112) reported excellent results yesterday morning, with revenues and earnings topping expectations and management slightly boosting its forecast for sales of aggregates in 2016. The stock popped on the news, though it gave back some of those gains today. That’s not ideal, but the stock’s main trend is still up, and all indications are that demand for the firm’s construction aggregates will increase steadily for many quarters. We’ll stay on Buy. BUY.
Watch List
Adobe Systems (ADBE 93): ADBE remains in a tight trading range (92 to 98) following a solid earnings gap more than a month ago. With the firm’s various creative and marketing software at the heart of the digital movement, a breakout above 98 would be tempting.
Amazon (AMZN 671): It’s not a new story, but it’s hard not to be impressed with AMZN’s comeback from its big early-year drop, and the tremendous earnings growth expected in the years ahead. We’d like to see the stock tighten up for a while around here.
Ligand Pharmaceuticals (LGND 120): LGND just reported earnings this morning, and everything appears on track for rapid (60%) revenue growth this year, with earnings advancing at a similar pace.
ProShares Ultra S&P 500 (SSO 63) or other leveraged long funds: The market’s recent dip could be providing a nice opportunity.
Steel Dynamics (STLD 25): STLD is acting well, though after a big run, we’d like to see at least two or three weeks of consolidation before entering.
Tesla Motors (TSLA 223): TSLA’s tight consolidation has turned a bit ugly, but earnings are out tonight. We’ll see how the stock reacts.
Zillow (Z 28): Zillow is the hands-down leader in online real estate, and that was shown in its excellent first-quarter report last night—revenues grew 25% from a year ago in the first quarter, while traffic to its sites expanded 22%. Long-term, the earnings potential is huge, and the stock soared today on the news. We’re intrigued.
That’s it for now. Your next issue of Cabot Growth Investor will be sent to you next Wednesday, and, as always, we’ll send a Special Bulletin should we have any changes before then.
| Stock | Date Bought | Price Bought | Current Price | Profit | Rating | |||
| Facebook (FB) | 8/1/13 | 38 | 118 | 214% | Buy | |||
| Five Below (FIVE) | 4/7/16 | 40 | 41 | 3% | Buy | |||
| Kate Spade (KATE) | 3/17/16 | 25 | 25 | 0% | Buy | |||
| PayPal (PYPL) | 2/16/16 | 36 | 38 | 6% | Hold | |||
| Sabre (SABR) | 2/26/16 | 27 | 29 | 5% | Hold | |||
| Ulta Beauty (ULTA) | 11/6/14 | 121 | 210 | 74% | Buy | |||
| Vulcan Materials (VMC) | 2/26/16 | 99 | 112 | 13% | Buy |