WHAT TO DO NOW: Remain bullish. We’ve seen some wiggles from individual stocks during the past two weeks, and more are likely as earnings season progresses. But the major trends of the market and most stocks are up, so we advise you to remain heavily invested. There are no changes in the Model Portfolio tonight.
Current Market Environment
Stocks were mixed today after the Fed decided to leave interest rates unchanged, but signaled hikes could be coming within a couple of months. At day’s end, the Dow was off two points and the Nasdaq rose 30 points.
All of our key market timing measures remain bullish. The market’s intermediate- (Cabot Tides) and longer-term (Cabot Trend Lines) trends are positive, and the broad market is acting great, with our Two-Second Indicator having now recorded 14 straight trading days of single-digit new lows—a sign of robust health.
Moreover, we’re impressed that after a strong post-Brexit run (about 8.6% for the S&P 500 and even more for some other indexes), the market has refused to yield any ground. The Nasdaq has actually been crawling higher during the past couple of weeks, while most other indexes have traded very tightly.
Of course, that doesn’t mean the market can’t suffer a little profit taking at any time, but the fact that stocks haven’t retreated after such a big run is a positive sign.
If we were to quibble with the market, we’d say that there haven’t been many big-cap growth stocks (liquid leaders) that have gotten going yet—most are either more thinly traded (making them harder to hold onto) or have slow growth. That could always change going forward, but we’d prefer to see some institutional favorites join the party.
For most individual stocks, it’s all about earnings at this time; some stocks are reacting well while a few have fallen apart. Many of our stocks are reporting during the next couple of weeks, and as always, we’ll take what comes, holding our strong performers but ditching stocks that break support (and hopefully replacing them with new leaders).
In the Model Portfolio, we’re standing pat tonight, holding nine out of a possible 10 slots with a cash position near 8%.
Model Portfolio
Abiomed (ABMD 116) has retreated normally following its straight-up move earlier this month. The stock’s next major move will depend on the company’s quarterly report tomorrow morning; analysts are looking for 23 cents per share of earnings on revenues of $97.3 million, but more attention will be paid to the outlook (as analysts expect accelerating bottom-line growth going forward). A plunge to the 102-104 area (below the breakout level and the 50-day line) would likely have us cutting the loss, but we’re optimistic the stock’s best days are ahead of it. We’ll stay on Buy but will send you a special bulletin if needed. BUY.
Dave & Buster’s (PLAY 45) has taken a hit during the past two days after one analyst slashed expectations for all restaurant stocks, claiming a recession is coming that will hit the sector’s bottom line. The action hasn’t been pleasant, but so far PLAY has dipped to its 50-day line, which isn’t abnormal. We are watching the 43-44 level closely on a closing basis; a drop down there would be worrisome. But right here, with PLAY’s intermediate-term trend still up, we’ll stick with a Buy rating and watch for buyers to step in. BUY.
Facebook (FB 123) has been toying with new price highs in recent days, but its relative performance (RP) line remains just so-so. That’s not a great combination, but let’s see what the stock does in the days ahead—earnings are being released today after the close, and the reaction will be key. (Early after hours indication is up a few points, but we’ll see how it goes.) A major gap up would obviously be positive, though a big drop into the mid 100s could be a sign the longer-term uptrend is faltering. We’ll stick with our Hold rating and see what comes on earnings. HOLD.
Five Below (FIVE 52) continues to impress, zooming higher nine of the past 10 days. After a two-year wipeout, the stock is clearly in a major uptrend now, and the long-term earnings power here remains big. Short-term, though, there’s no doubt FIVE is extended to the upside (the 25-day line is back at 48, while the 50-day is just above 45), so try to buy on dips of a couple of points. BUY.
Ligand Pharmaceuticals (LGND 136) is also acting well, having lifted to new highs last week and holding those gains ever since. Earnings are due out next Thursday (August 4), which will be key for the stock; we expect solid results and a great outlook (earnings of $5 per share next year look possible), but the stock’s reaction is always key. If you want in, you can buy around here, but keep the position small (half your normal size, dollar wise) with the quarterly report just a few days away. BUY.
ProShares Ultra S&P 500 Fund (SSO 71) looks just fine, consolidating quietly after its big late June/early July advance. With the odds strongly favoring higher prices for the general market in the months ahead, we think SSO is a good buy around here or (preferably) on a dip of a couple of points. BUY.
Ulta Beauty (ULTA 258) remains in a firm uptrend. As we’ve been writing for a while, a pullback is likely at some point, because the stock really hasn’t suffered any dip since its March earnings gap. Long-term, though, business looks good—the latest report showed that unique visitors to Ulta’s website in June grew a strong 60% from a year ago, bouncing back from “only” 26% growth in May. We’ll stay on Buy, though look for dips of a few points to enter. BUY.
Veeva Systems (VEEV 37) continues to act constructively, building a tight, three-week shelf near its highs. We’re optimistic VEEV can be a new leading stock thanks to big potential with both its core CRM and compliance cloud-based software for the life sciences industry, as well as its content management offering for many different sectors. BUY.
Vulcan Materials (VMC 126) has been chopping sideways in a tight range during the past two weeks, much like the overall market. There are a few fears that wet weather in the southern U.S. may have dampened construction activity a bit. That’s something to watch, but we doubt that it has any bearing on the major uptrend in demand for construction aggregates in the quarters ahead. Earnings are due out next Monday—we’ll stay on Buy but new positions should be kept small this close to the report. BUY.
Watch List
Activision Blizzard (ATVI 41): The stock was one of the first growth stocks to hit new highs and now it’s pulling back normally. Earnings are due out tomorrow.
Alibaba (BABA 83): We’re still keeping an eye on BABA, which is just below multi-month resistance at 86. Earnings are due out August 11—a decisive breakout could prove to be the start of a major advance.
Amazon (AMZN 737): Could AMZN resume its role as a big liquid leader following its earnings report tomorrow night? A big gap up could present a solid entry point.
Nvidia (NVDA 56): NVDA remains in great shape but is extended to the upside. Earnings are likely out in two weeks.
Splunk (SPLK 60): Splunk was one of the hot cloud stocks back in 2014 (its Big Data software is a leader in its field), and after a two-year, 70% decline, the stock is on the comeback trail, with solid sales and earnings growth likely for many years.
Twilio (TWLO 43): TWLO’s communications software platform is very pervasive and its usage-based business model means its top line will only grow as its customers do. It’s a new stock, but a brief IPO base could set up a decent entry point.
Zillow (Z 39): Z’s earnings are due out August 4. We’re looking for some pause or consolidation to jump on board this new leader. Accelerating home sales should only help the firm’s growth going forward.
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 | |||
| Abiomed (ABMD) | 7/11/16 | 116 | 118 | 2% | Buy | |||
| Dave & Busters (PLAY) | 7/11/16 | 45 | 48 | -4% | Buy | |||
| Facebook (FB) | 8/1/13 | 38 | 123 | 213% | Hold | |||
| Five Below (FIVE) | 4/7/16 | 40 | 52 | 19% | Buy | |||
| ProShares Ultra S&P 500 Fund (SSO) | 5/12/16 | 64 | 71 | 9% | Buy | |||
| Ulta Beauty (ULTA) | 11/6/14 | 121 | 258 | 109% | Buy | |||
| Veeva (VEEV) | 7/7/16 | 36 | 37 | 1% | Buy | |||
| Vulcan Materials (VMC) | 2/26/16 | 99 | 126 | 27% | Buy |