WHAT TO DO NOW: Continue to play things halfway. The market has made solid progress during the past two weeks, increasing the odds that a low has been formed. That said, few growth stocks have kicked into gear, and the longer-term trend is still down. We continue to fine-tune our watch list, but tonight, we’re standing pat in the Model Portfolio with five stocks and a cash position near 52%.
Current Market Environment
The markets were up and down today, but stayed mostly on the upside and completed a rebound from yesterday’s correction. At the close, the Dow was virtually flat, up just 18 points, and the Nasdaq showed more strength by tacking on 22 points.
It’s been a solid two weeks for the market. Both our Cabot Tides (intermediate-term trend) and Two-Second Indicator (health of the broad market) are now positive. This is the first time both have been green for a few months, and it’s definitely an encouraging sign that the market may have turned the corner.
That said, there are still headwinds out there. Our Cabot Trend Lines (longer-term trend) remain negative, and few stocks are hitting new highs (fewer than 40 nearly every day on the Nasdaq, for instance). Not that we need to see 200 stocks hitting new highs before turning bullish, but there’s a definite lack of leadership, especially among growth stocks.
The real question on everyone’s mind is whether the rally of the past three weeks has put in a sustained bottom to this multi-month correction, or whether this rebound is more like the October-November upmove, which led to another leg down.
If forced to choose, we’d favor the “bottom is in” scenario, based on the extremes we saw in late-January/early-February in breadth and sentiment, and the improvement in the broad market—we’ve finally seen the beaten-down groups build some decent-looking bottoms and thrust higher in a significant way. (Getting the worst groups to find a low is important for overall market health.)
As usual, though, what counts to us most aren’t predictions but current conditions. Right now, we’ve seen enough evidence to begin putting money to work, but we haven’t seen enough to continue the buying spree. We’re looking for more individual growth stocks to lift off to “pull” us into a more heavily invested position, along with further market strength.
Thus, for now, we’ll stand pat with our five stocks and a cash position of around 52%. We continue to fine-tune our watch list and we are ready to pounce if growth stocks kick into gear—but for now, we advise you to continue to go slow and see how the market handles itself following its recent rally.
Model Portfolio
Facebook (FB 108) crawled into resistance near 110 last week and has since fallen a few points. We can’t say the stock is strong overall, but nothing much has changed—it’s still etched higher highs and higher lows in recent months (unlike most growth stocks) and remains above key moving averages. Fundamentally, a couple of news items caught our eye—first, Facebook is looking to stream Thursday night NFL games, and second, it looks like 2017 will see digital ad spending overtake TV ad spending for the first time. Both items show just how pervasive the company’s business can be in the years ahead. If you own FB, sit tight. If you don’t, you can buy some around here. BUY.
PayPal (PYPL 39) has pulled back a bit in recent days after hitting resistance around 40, but the bigger chart picture (a nice IPO base and many bullish volume clues) remains intact. There remains growing excitement surrounding not just the company’s traditional payment platform, but also its Venmo app, which is likely to allow payments through apps to many businesses in the months ahead. Whether it’s PayPal or Venmo, we think this company is in great position to dominate digital payments as the industry booms in the years ahead. If you don’t own any, we think PYPL is buyable around here. BUY.
Sabre (SABR 28)
has been bumping up against resistance in the mid-28s for a few days; overall, we think the action is fine, especially given its recent 20-million-share offering. While there’s some old overhead to chew through, the path of least resistance is up, and with earnings expected to grow more than 30% this year (with much more upside in the years ahead as online travel bookings increase and profit margins bulge), we expect big investors to remain on the buy side. BUY.
Ulta Beauty (ULTA 159)
is bobbing around in no man’s land, holding nicely above its February lows near 147, but sitting below resistance in the 180-190 area. The big event is tomorrow’s earnings release, due out after the close. Investors will be closely watching not just the top-line numbers (19% sales growth and earnings up 16% to $1.55 per share), but same-store sales growth and traffic indications for the current quarter (which started February 1). We’re optimistic that the major growth story has many years to run, but we’ll let the stock tell us what to do with our remaining shares in the days ahead. HOLD.
Vulcan Materials (VMC 103) continues to act well, bolstered by both the recent resurgence in industrial stocks and anticipation of another strong year of earnings gains, on rising demand for (and rising prices of) construction aggregates. With VMC bumping up against its all-time highs and having had a good run since late-January, some backing off here wouldn’t be unusual. But we think the main trend is up, and if the market’s nascent uptrend continues, VMC can do very well. BUY.
Watch List
Ellie Mae (ELLI 83): ELLI has refused to give back much ground after a huge-volume ramp to new highs, a great show of resilience. While earnings are officially expected to rise just 11% this year, we think that will prove extremely conservative, as fourth-quarter earnings more than doubled estimates.
Five Below (FIVE 38):
FIVE is hovering in the 37 to 40 area, awaiting its quarterly report, which is likely out within a couple of weeks.
Kate Spade (KATE 38):
Through many spinoffs and sales, KATE has transitioned to a focused, stand-alone outfit, and 2016 and beyond should show excellent growth. The stock has come to life in a big way following a great quarterly report.
Ligand Pharmaceuticals (LGND 99): LGND has formed a decent double-bottom base, though the weak action of biotech stocks remains a big headwind.
Market Vectors Gold Miners Fund (GDX 20):
GDX is finally pulling back after a heady run. A few days of consolidation could provide an entry point.
ProShares Ultra S&P 500 (SSO 60) or other leveraged long funds: A controlled dip in the major indexes followed by a thrust higher could provide an opportunity to buy into a leveraged long fund. For now, though, with the longer-term trend still down, we’ll wait.
SolarEdge (SEDG 27):
We’re still worried about the stock’s lack of sponsorship, but the base-building action has been solid and the growth potential for its solar inverter system appears huge.
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 | 108 | 186% | Buy | |||
| PayPal (PYPL) | 2/16/16 | 36 | 39 | 7% | Buy | |||
| Sabre (SABR) | 2/26/16 | 27 | 28 | 3% | Buy | |||
| Ulta Beauty (ULTA) | 11/6/14 | 121 | 159 | 32% | Hold | |||
| Vulcan (VMC) | 2/26/16 | 99 | 103 | 3% | Buy |