WHAT TO DO NOW: Continue to lean bullish, but keep some powder dry. Selling pressures remain light, but we still want to see more strength among growth stocks before getting heavily invested. There are no changes in the Model Portfolio tonight; we own six stocks and hold a cash position near 40%.
Current Market Environment
The market finally pulled back today, with the Dow losing 80 points and the Nasdaq falling 53 points.
Overall, though, the market continues to handle itself very well—despite the strong rally of the past few weeks, the sellers haven’t been able to make much of a dent in the major indexes or most stocks, even in the extended off-the-bottom sectors (coal, steel, oil, etc.), which have had huge moves since early February.
As for our indicators, our Cabot Tides and Two-Second Indicator remain clearly positive (now 16 straight days of fewer than 20 new lows, including just 12 today), which keeps us optimistic and leaning bullish.
That said, the two factors we wrote about in last week’s issue remain—our long-term Cabot Trend Lines are still negative, and growth stocks, while improving some during the past week, still haven’t kicked into gear.
Those aren’t bearish signs—in fact, you could argue that the rally for growth stocks is still very early, given that most are still base-building—but it does tell us not to get too far in front our skis. Plus, while we’re not big on “overbought” readings, many indexes are running into resistance around here after a great run in recent weeks.
Put it all together and we’re standing pat tonight with our six stocks and a cash position of around 40%. We do have our eyes on many stocks that we could pull the trigger on if the environment continues to improve, but for now, we think it’s best to continue going slow.
Model Portfolio
Facebook (FB 113) continues to crawl higher, now within about five points of its all-time high. Fundamentally, all signs point toward enormous growth in the quarters and years ahead as the firm’s online advertising booms, thanks to better ad targeting capabilities (which hikes the prices each ad fetches). The CEO also met with China recently; while few expect the company to be allowed there (China is notorious for censorship), even limited access to that country would be a massive, massive boost to the company. In the meantime, there are plenty of growth drivers, and the stock’s action is acceptable. If you don’t own any, you could buy some here or on dips of a couple of points. BUY.
Kate Spade (KATE 24) was added to the Model Portfolio last week, and so far it’s acting just fine—shares have refused to give ground despite its huge rally, a positive sign. We have high hopes for KATE, as the company’s transformation is complete and its expansion into new countries and new product categories should drive big earnings growth for at least the next couple of years. BUY.
PayPal (PYPL 41) has pushed to new recovery highs this week, bolstered by some positive analyst commentary, including one analyst who believes PayPal could soon team up with one of the big credit card companies, which would obviously be a huge deal. On a smaller note, PayPal will allow money transfers to Cuba within a few months; $2 billion is transferred from the U.S. to Cuba annually and that figure should grow with the move toward normalized relations with the U.S. Sit tight if you own some, and if you don’t, you can buy some on the current dip. BUY.
Sabre (SABR 28) remains very, very quiet, hovering the 27-28 range on extremely light volume. We believe it’s constructive action as it finishes its launching pad. The fact that SABR didn’t budge yesterday after the horrible Brussels attacks is a positive sign. We’ll stay on buy, but will be looking for a powerful rally through 28.5 or 29 as a sign the buyers are taking control. Fundamentally, analysts see earnings up more than 30% this year, and a 13-cent per share dividend will be paid out March 30 (if you owned the stock prior to March 17). BUY.
Ulta Beauty (ULTA 192) is acting well in the wake of its terrific fourth-quarter report. Some are worried about Ulta’s lofty valuation (38 times trailing earnings), but leading cookie-cutter retail stocks often trade at big valuations because institutional investors have confidence the growth (in this case, 20% to 25%) can continue for many years. At some point, the stock will top out, but Ulta’s latest quarterly report dispelled notions that its sales momentum is slowing. BUY.
Vulcan Materials (VMC 105) is another stock that has been trading calm, cool and collectedly in recent weeks, hitting slightly higher highs and higher lows along the way. The stock is just shy of its old peak, so like most everything else, VMC could pull back a bit here, especially if the market takes a breather. But the odds continue to favor a major uptick in earnings going forward (analysts see the bottom line up 69% this year and 36% next year), which should eventually drive the stock to new highs. BUY.
Watch List
Adobe Systems (ADBE 92): Adobe’s shift to a subscription-based business model (where customers get automatic updates but pay monthly or quarterly fees) has been a hit, with recurring revenue and earnings soaring. The stock is strong, though it could use some quiet time to set up a low-risk entry.
Ellie Mae (ELLI 82):
ELLI’s pullback is tempting; the question here is exactly how reliant the firm’s business is on mortgage activity (and thus how tied the stock would be to the housing market and interest rates). Still, overall, the story, numbers and chart here look solid.
Five Below (FIVE 42):
FIVE reported a solid quarter last night and reaffirmed its long-term plan (20% sales and over 20% annual earnings growth through 2020). Shares surged on the news; pullbacks look buyable.
Market Vectors Gold Miners Fund (GDX 19):
A big drop in gold yanked GDX lower today; a meet-up with the 50-day line (now at 17.3 but rising quickly) in a week or two could present a nice entry point.
ProShares Ultra S&P 500 (SSO 62)
or other leveraged long funds: We’ve had success with leveraged long funds in the past, and if this is the start of a new bull phase, SSO or UWM (leveraged long fund for the Russell 2000) should do very well.
Sprouts Farmers Market (SFM 29): We’ve always liked the potential of Sprouts, a new-age organic grocery store that has reasonable prices, focuses on produce and has the feel of a farmers market. The long-term potential is huge, as the store count should grow 14% annually for many years (it eventually thinks it can expand its current store count five-fold!), while same-store sales crank up in the 4% to 8% range every year. The stock is coming to life after a big decline in 2015.
Steel Dynamics (STLD 22):
We’re not big on turnarounds, but steel stocks are acting better, and STLD is by far the best in class. Earnings estimates for this year and next are huge, the company has been solidly profitable throughout the downturn, and the stock has turned very strong. It’s an intriguing situation.
Wynn Resorts (WYNN 92): The Macau gaming sector has turned the corner, and Wynn’s new resort opening later this year has a chance to boost earnings in a big way. After a powerful off-the-bottom rally, a few weeks of calm trading would be encouraging.
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 | 113 | 199% | Buy | |||
| Kate Spade (KATE) | 3/17/16 | 25 | 24 | -1% | Buy | |||
| PayPal (PYPL) | 2/16/16 | 36 | 41 | 13% | Buy | |||
| Sabre (SABR) | 2/26/16 | 27 | 28 | 1% | Buy | |||
| Ulta Beauty (ULTA) | 11/6/14 | 121 | 192 | 59% | Buy | |||
| Vulcan Materials (VMC) | 2/26/16 | 99 | 105 | 6% | Buy |