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Cabot Growth Investor Bi-weekly Update

All of our market timing indicators are now positive, and yesterday brought yet another “blastoff” signal, so the odds strongly favor higher prices during the next few months. In the Model Portfolio, we’re adding Ligand Pharmaceuticals (LGND) and averaging up on ProShares Ultra S&P 500 Fund (SSO) tonight. Combined with Monday morning’s new buys, that will leave us with about 8% in cash.

WHAT TO DO NOW: All of our market timing indicators are now positive, and yesterday brought yet another “blastoff” signal, so the odds strongly favor higher prices during the next few months. In the Model Portfolio, we’re adding Ligand Pharmaceuticals (LGND) and averaging up on ProShares Ultra S&P 500 Fund (SSO) tonight. Combined with Monday morning’s new buys, that will leave us with about 8% in cash. Details below.

Current Market Environment

The market finally took a breather after an amazing two-week run, with the Dow gaining 25 points today but the Nasdaq dipping 17 points and most growth stocks finishing lower.

The market’s recent rally has been astounding, not just in terms of the size of the rally, but the breadth and power behind it. In last week’s issue, we wrote about the back-to-back 90% up-volume days coming off the Brexit low. It was yet another blastoff signal and portends much higher prices down the road.

And yesterday we saw another very rare blastoff signal flash—over the prior 10 days, advancing stocks on the NYSE outnumbered declining stocks by 2-to-1. That’s only happened 10 other times since 1960 (including just five times since 1980; the last signal was in March 2009). On average, the S&P 500 was up 11% three months later, 15% six months later and 22% a year later.

When you combine the many blastoff signals with the fact that all of our market timing indicators are clearly positive, the message is clear: The odds strongly favor higher prices in the months ahead.

Now, with that said, we’re not implying that the ride will be smooth, either for the market or leading stocks. Near-term, a pullback in the major indexes is certainly possible after the recent run, and earnings season, which is just starting to get underway, almost always creates a few potholes.

But while proper portfolio management is always a must, the evidence tells us that the market is leaving behind the 18-plus-month chop period and beginning a new uptrend.

We added two new stocks to the Model Portfolio in Monday morning’s special bulletin (ABMD and PLAY), and tonight we’re going to add Ligand Pharmaceuticals (LGND), while also averaging up on our position in ProShares Ultra S&P 500 Fund (SSO). Altogether, we’ll now have nine out of a possible 10 stocks and a cash position of around 8%.

Model Portfolio

Abiomed (ABMD 118) was added on Monday morning, as it was one of the first growth stocks to lift above resistance when the market turned around. Of course, it’s not just about the chart—ABMD’s Impella heart pump is potentially revolutionary and is just starting to capture market share. The stock’s had a good run, but we view that as a sign of strength this early in the advance. Earnings are due out July 28, which is a risk, but we have to go with the evidence in front of us—and ABMD’s story, numbers and chart all suggest it should be a winner. BUY.

Dave & Buster’s (PLAY 48) was also added on Monday. While the stock is a bit thinly traded (which can lead to some outsized daily moves), we see great potential in its unique retail concept (about half its revenues come from games, and new stores pay back nearly half their initial investment in the first year), and management has an excellent history of outperforming expectations. Expect some wiggles (like we saw yesterday) but PLAY’s main trend is up. BUY.

Facebook (FB 117) has snapped back nicely and is within just a few points of all-time highs. We’re optimistic that the next big move is up, but objectively, FB right now isn’t as strong as some other stocks and earnings are due out July 27. We’ll stick with a Hold rating for now. HOLD.

Five Below (FIVE 47) ran pretty much straight up from its May low near 37 to nearly 49 yesterday, ignoring even the brief Brexit selloff. So it wasn’t shocking to see the stock pull back today; this isn’t a runaway-type of stock, so there will be dips and shakeouts along the way. While further dips are possible near-term, we think FIVE is buyable around here. BUY.

Ligand Pharmaceuticals (LGND 125) is a stock we’ve thought highly of for many months, but the market, the sector or the stock itself never quite set-up properly. But we think LGND is worth a shot around here, as shares rose toward their highs as the pressure came off the overall market. Fundamentally, the company’s royalty-based business model is as strong as ever; earnings are expected to rise 75% this year and nearly 50% next year, with much more growth beyond that as partners’ drugs hit the market. The stock is a bit thinly traded, so try not to place buy orders overnight. (Frankly, it’s always best to avoid placing buy orders overnight so the market makers don’t take advantage of you.) There is some resistance to get through at 130, but we think the next big move is up. BUY.

ProShares Ultra S&P 500 Fund (SSO 70) looks fantastic, zooming to new highs along with the S&P 500. Because of the many blastoff indications that we’ve seen, we’ll average up in SSO today, adding 20% more shares (for example, if you own 100 shares, buy another 20). While near-term pullbacks are possible, we think a leveraged long fund will do very well in the months ahead. BUY.

Ulta Beauty (ULTA 250) has glided to new highs above 250 as the market has lifted. If you own some, sit tight. As for buying, ULTA has had an uninterrupted run since mid-March and the 50-day line (down near 229) will be tested at some point. So if you don’t own any, try to get in on dips of a few points. BUY.

Veeva Systems (VEEV 36) has pulled back the past couple of days, but the chart remains in fine shape. We think the firm’s recent move into other industry groups (selling its Vault content management software outside of life sciences) will greatly expand its potential market and keep sales and cash flow growth rapid. BUY.

Vulcan Materials (VMC 126) is among the many stocks lifting to new highs this week. Lower interest rates should only help infrastructure spending, as governments (federal, state or local) and companies will have more cash flow to invest. Earnings are likely out in early August. BUY.

Watch List

Activision Blizzard (ATVI 42): The stock has pushed to new highs on excitement over its various gaming titles. Projected growth is good, not great, but the movement toward digital games on all devices is for real.

Amazon (AMZN 743): The company’s Prime Day yesterday was a big success. Earnings are likely out in a couple of weeks.

Mobileye (MBLY 47): Competition (including from Nvidia) in the semi- and fully-autonomous vehicle market is intense, which is our biggest reservation about the stock. But there’s no doubting Mobileye’s excellent sales and earnings growth, and the stock is acting well. Earnings are out July 26.

Nvidia (NVDA 53): NVDA is definitely a leader, but after a huge run in recent months a rest period is needed for a solid entry point.

Zillow (Z 36): We’re very high on Z. Not only has it hit new highs in recent days (a good thing), it’s up 10 weeks in a row. A pullback is likely.

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.

Abiomed (ABMD)7/11/16116118 2%Buy
Dave & Busters (PLAY)7/11/16 4948-3%Buy
Facebook (FB)8/1/1338117211%Hold
Five Below (FIVE)4/7/1640 4717%Buy
ProShares Ultra S&P 500 Fund (SSO)5/12/1664 709%Buy
Ulta Beauty (ULTA)11/6/14121250107%Buy
Veeva (VEEV) 7/7/1636 36 1%Buy
Vulcan Materials (VMC)2/26/169912627%Buy