WHAT TO DO NOW: Pull in your horns a bit. In last night’s Special Bulletin, we cut our loss in Kate Spade and moved our Five Below and Sabre to Hold. Our Cabot Tides are now on the fence, though our Cabot Trend Lines and Two-Second Indicator remain positive. We now have 30% cash in the Model Portfolio, with our next move depending on whether the major indexes can hold support. Details below.
Current Market Environment
The market was volatile today after the Fed’s minutes hinted at a possible rate hike in June. At day’s end, the Dow was down 3 points while the Nasdaq climbed 23 points.
As we wrote in last night’s special bulletin, the market’s near-term outlook is uncertain. After a month of consolidation, our Cabot Tides are on the fence, and there’s no question that many areas of the market have come under pressure. Moreover, as we’ve written ad nauseam since February, few growth stocks lifted to new highs during the February-April rally, so there’s not much leadership to latch onto.
We pulled in our horns a bit last night, selling our weakest stock (Kate Spade) and placing two others on Hold. From here, the game plan is simple—further weakness (and a sell signal from our Cabot Tides) would probably have us taking another step or two out of the market, while a resumption of the rally (and some breakouts from growth stocks) would have us moving toward a fully invested position.
Longer-term, we’re more sanguine for a few reasons. First, the fact that our Two-Second Indicator has recorded just one day of greater than 40 new lows during this pullback is a good sign the bottom isn’t falling out of the market. Second, our longer-term Cabot Trend Lines remain bullish. And third, some secondary indicators (the “blastoff” signals in March and April and a complete lack of bullish sentiment) suggest higher prices are likely down the road.
Still, we live in the here and now, so, as always, we’ll respect what the market and individual stocks are saying. Today, the evidence tells us to pare back a bit and then watch the market’s progress closely.
Model Portfolio
Facebook (FB 118) looks like it wants to head higher, but every time it probes new high ground it gets yanked lower by the market. Short-term, we expect more wiggles based on what the market does, but intermediate- to longer-term, we still think FB is a flag-bearer of any sustained bull move that develops. Fundamentally, recent reports that Facebook will begin helping marketers sell and place video ads on third-party sites (through its ad brokerage platform called Audience Network) could be huge. Audience Network is already a big success, with annual revenues north of $1 billion, and the move into video ads opens up a huge new opportunity. Sit tight if you own FB, and if not, we’re OK buying some around here. BUY.
We placed Five Below (FIVE 37) on Hold in last night’s special bulletin, respecting the stock’s recent slide, which has been caused by the dramatic decline in the retail sector. (The group has dropped 14% since late-March, and that includes many stodgy, big-cap names.) We still love the fundamental story, but we’re keeping our shares on a tight leash—a close in the 36 to 36.5 area (a 9% to 10% loss from our purchase price) will likely have us pulling the plug, but right now we advise giving FIVE a chance to hold up. HOLD.
In the big picture, Kate Spade (KATE 21) probably bottomed at 15 in February, but turnaround situations are tricky, and the non-stop assault on retail stocks (Target’s poor outlook was the sector’s latest knock) pulled KATE into the dirt. It’s likely KATE will have to build a whole new launching pad if it’s to get going again, plus, given the iffy market, we wanted to sell our weakest stock. Add it up, and we advised cutting the loss in KATE in last night’s special bulletin. SOLD.
PayPal (PYPL 39) remains range-bound, trading between 37.5 and 41.5 for the past few weeks. Today the firm hosted an analyst day, though no big news was released. We’re still bullish on the prospects for the company and the stock, but we’ll stay on Hold until the buyers return. HOLD.
ProShares Ultra S&P 500 Fund (SSO 63) has pulled back with the market during the past month, but the overall pattern still looks OK. Of course, with the Tides on the fence, we could go to a Hold rating should the situation worsen. But given that the S&P itself is a reasonable 3.5% off its recent high, SSO offers a decent risk-reward situation—a drop to 58 to 59 would tell us to cut the loss, but right here, we think you can take a stab at the fund if you don’t own any. BUY.
Sabre (SABR 28) hosted its analyst day yesterday; it didn’t make any waves but confirmed a steady long-term vision of greater free cash flow (more than $2 billion expected from 2016 to 2019, with nearly $400 million of that ($1.42 per share) coming this year) as demand for its services increase. The stock, though, continues to tread sideways. We went back to a Hold rating yesterday—a decisive drop below 27 would be a red flag, though we still believe SABR can get going if the market does. HOLD.
Ulta Beauty (ULTA 206) has chopped sideways-to-down this month, but the dip has come on light volume thus far, and the stock remains north of its 50-day line. As we’ve written before, ULTA isn’t a go-go stock, and a longer consolidation is certainly possible. But the main trend is up and we think dips will lead to higher prices over time. BUY.
Vulcan Materials (VMC 116) has taken a little breather in recent days after a solid post-earnings rally. Barring an all-out economic collapse, there doesn’t seem to be much standing in the way of hugely higher earnings for Vulcan in the quarters ahead as construction activity surges. You could nibble here if you don’t own any, though a dip toward the 25-day line (now nearing 112) would be a better entry point. BUY.
Watch List
Adobe Systems (ADBE 97): ADBE is ready to lift off if the market can stabilize. EPS estimates are excellent (37% this year, 33% next). The next quarterly report is out in mid-June.
Amazon (AMZN 697): AMZN is a liquid leader once again and has all the characteristics of a big winner despite its recent run.
Ligand Pharmaceuticals (LGND 120):
LGND is holding its 50-day line despite the market’s wobbles. The biotech sector’s awful action is what’s holding us back from buying.
Monster Beverage (MNST 149): If the benefits from its distribution deal with Coca-Cola are kicking in, the company should see earnings boom for many quarters. The stock is acting well following its earnings gap at the end of April.
Nvidia (NVDA 43): Nvidia reported a dazzling quarter last week that has caused the stock to go ballistic. The firm is at the forefront of some very powerful growth industries. A rest period could offer an entry point.
Salesforce.com (CRM 78): We’ve tried our hand with CRM a few times with mixed results, but shares have set up a nice launching pad ahead of earnings tonight. The story remains outstanding, and a powerful breakout would be enticing.
Zillow (Z 29): Z is a bit thinly traded for our tastes, but we love the major growth story as more real estate advertising and lead generation moves online.
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 | 213% | Buy | |||
| Five Below (FIVE) | 4/7/16 | 40 | 37 | -8% | Hold | |||
| Kate Spade (KATE) | 3/17/16 | 25 | 21 | -15% | Sold | |||
| PayPal (PYPL) | 2/16/16 | 36 | 39 | 8% | Hold | |||
| ProShares Ultra S&P 500 Fund (SSO) | 5/12/16 | 64 | 63 | -2% | Buy | |||
| Sabre (SABR) | 2/26/16 | 27 | 28 | 3% | Hold | |||
| Ulta Beauty (ULTA) | 11/6/14 | 121 | 206 | 70% | Buy | |||
| Vulcan Materials (VMC) | 2/26/16 | 99 | 116 | 17% | Buy |